Form 10-Q

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10-Q 1 d553861d10q.htm FORM 10-Q Form 10-Q

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 June 30, 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):

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 August 5, 2013, there were 58,769,044 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 June 30, 2013 (unaudited) and December 31, 2012		4
Consolidated statements of operations (unaudited) for the three and six months ended June 30, 2013 and 2012		5
Consolidated statements of comprehensive income (loss) (unaudited) for the three and six months ended June 30, 2013 and 2012		6
Consolidated statements of cash flows (unaudited) for the six months ended June 30, 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		56
Item 4. Controls and Procedures		57

Part II: Other Information

Item 1. Legal Proceedings		58
Item 1A. Risk Factors		58
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		58
Item 3. Defaults Upon Senior Securities		58
Item 4. Mine Safety Disclosures		58
Item 5. Other Information		58
Item 6. Exhibits		59
Signatures

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Certain factors that could cause actual results to differ materially from the Company’s expectations include changes in general or regional economic conditions; the 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; 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.

FIRST POTOMAC REALTY TRUST

Consolidated Balance Sheets

(Amounts in thousands, except per share amounts)


	June 30, 2013			December 31, 2012
	(unaudited)
Assets:
Rental property, net	$	1,219,207		$	1,450,679
Assets held-for-sale		2,784			—
Cash and cash equivalents		64,649			9,374
Escrows and reserves		39,002			13,421
Accounts and other receivables, net of allowance for doubtful accounts of $1,689 and $1,799, respectively		13,413			15,271
Accrued straight-line rents, net of allowance for doubtful accounts of $198 and $530, respectively		27,975			28,133
Notes receivable, net		54,740			54,730
Investment in affiliates		49,651			50,596
Deferred costs, net		39,413			40,370
Prepaid expenses and other assets		7,095			8,597
Intangible assets, net		39,737			46,577

Total assets	$	1,557,666		$	1,717,748

Liabilities:
Mortgage loans	$	338,046		$	418,864
Secured term loan		—			10,000
Unsecured term loan		300,000			300,000
Unsecured revolving credit facility		50,000			205,000
Accounts payable and other liabilities		50,254			64,920
Accrued interest		1,906			2,653
Rents received in advance		6,218			9,948
Tenant security deposits		5,248			5,968
Deferred market rent, net		1,880			3,535

Total liabilities		753,552			1,020,888

Noncontrolling interests in the Operating Partnership		34,786			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; 58,764 and 51,047 shares issued and outstanding, respectively		59			51
Additional paid-in capital		910,206			804,584
Noncontrolling interests in consolidated partnerships		3,715			3,728
Accumulated other comprehensive loss		(4,186	)		(10,917	)
Dividends in excess of accumulated earnings		(300,466	)		(294,953	)

Total equity		769,328			662,493

Total liabilities, noncontrolling interests and equity	$	1,557,666		$	1,717,748

See accompanying notes to condensed consolidated financial statements.

FIRST POTOMAC REALTY TRUST

Consolidated Statements of Operations

(unaudited)

(Amounts in thousands, except per share amounts)


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Revenues:
Rental	$	32,551		$	31,370		$	64,697		$	62,604
Tenant reimbursements and other		8,106			8,891			16,994			16,473

Total revenues		40,657			40,261			81,691			79,077

Operating expenses:
Property operating		9,947			8,623			20,916			18,474
Real estate taxes and insurance		4,204			4,027			8,935			7,955
General and administrative		4,985			7,245			10,252			12,142
Acquisition costs		—			23			—			41
Depreciation and amortization		14,739			13,738			29,244			27,289
Impairment of real estate assets		1,446			—			1,446			1,949
Contingent consideration related to acquisition of property		75			—			75			—

Total operating expenses		35,396			33,656			70,868			67,850

Operating income		5,261			6,605			10,823			11,227

Other expenses, net:
Interest expense		9,353			10,358			19,310			21,022
Interest and other income		(1,574	)		(1,499	)		(3,105	)		(3,007	)
Equity in (earnings) losses of affiliates		(7	)		(24	)		(35	)		22
Loss on debt extinguishment		201			13,221			201			13,221

Total other expenses, net		7,973			22,056			16,371			31,258

Loss from continuing operations before income taxes		(2,712	)		(15,451	)		(5,548	)		(20,031	)

Provision for income taxes		—			(101	)		—			(162	)

Loss from continuing operations		(2,712	)		(15,552	)		(5,548	)		(20,193	)

Discontinued operations:
Income from operations		2,655			2,172			7,454			3,338
Loss on debt extinguishment		(4,414	)		—			(4,414	)		—
Gain on sale of real estate property		18,947			161			18,947			161

Income from discontinued operations		17,188			2,333			21,987			3,499

Net income (loss)		14,476			(13,219	)		16,439			(16,694	)

Less: Net (income) loss attributable to noncontrolling interests		(466	)		789			(406	)		1,108

Net income (loss) attributable to First Potomac Realty Trust		14,010			(12,430	)		16,033			(15,586	)

Less: Dividends on preferred shares		(3,100	)		(3,100	)		(6,200	)		(5,764	)

Net income (loss) attributable to common shareholders	$	10,910		$	(15,530	)	$	9,833		$	(21,350	)

Basic and diluted earnings per common share:
Loss from continuing operations	$	(0.11	)	$	(0.35	)	$	(0.21	)	$	(0.50	)
Income from discontinued operations		0.31			0.04			0.40			0.07

Net income (loss)	$	0.20		$	(0.31	)	$	0.19		$	(0.43	)

Weighted average common shares outstanding:
Basic and diluted		53,586			50,098			52,004			49,940

See accompanying notes to condensed consolidated financial statements.

FIRST POTOMAC REALTY TRUST

Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

(Amounts in thousands)


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Net income (loss)	$	14,476		$	(13,219	)	$	16,439		$	(16,694	)
Unrealized gain on derivative instruments		5,965			87			7,058			73
Unrealized loss on derivative instruments		—			(4,831	)		—			(4,089	)

Total comprehensive income (loss)		20,441			(17,963	)		23,497			(20,710	)
Net (income) loss attributable to noncontrolling interests		(466	)		789			(406	)		1,108
Net unrealized (gain) loss from derivative instruments attributable to noncontrolling interests		(274	)		242			(327	)		202

Comprehensive income (loss) attributable to First Potomac Realty Trust	$	19,701		$	(16,932	)	$	22,764		$	(19,400	)

See accompanying notes to condensed consolidated financial statements.

FIRST POTOMAC REALTY TRUST

Consolidated Statements of Cash Flows

(Unaudited, amounts in thousands)


	Six Months Ended June 30,
	2013			2012
Cash flows from operating activities:
Net income (loss)	$	16,439		$	(16,694	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Discontinued operations:
Gain on sale of real estate property		(18,947	)		(161	)
Loss on debt extinguishment		4,414			—
Depreciation and amortization		3,659			5,053
Impairment of real estate assets		—			1,072
Depreciation and amortization		29,626			27,289
Stock based compensation		1,663			1,445
Bad debt expense		388			248
Deferred income taxes		—			(240	)
Amortization of deferred market rent		(21	)		40
Amortization of financing costs and discounts		1,470			1,013
Equity in (earnings) losses of affiliates		(35	)		22
Distributions from investments in affiliates		1,277			770
Contingent consideration related to acquisition of property		75			—
Loss on debt extinguishment		201			2,379
Impairment of real estate assets		1,446			1,949
Changes in assets and liabilities:
Escrows and reserves		2,894			5,237
Accounts and other receivables		1,172			493
Accrued straight-line rents		(4,319	)		(4,367	)
Prepaid expenses and other assets		2,999			2,200
Tenant security deposits		367			350
Accounts payable and accrued expenses		(587	)		3,948
Accrued interest		(747	)		(316	)
Rents received in advance		(3,699	)		(1,346	)
Deferred costs		(6,034	)		(7,702	)

Total adjustments		17,262			39,376

Net cash provided by operating activities		33,701			22,682

Cash flows from investing activities:
Proceeds from sale of real estate assets		207,203			10,838
Principal payments from note receivable		25			—
Change in escrow and reserve accounts		(28,175	)		(10	)
Additions to rental property and furniture, fixtures and equipment		(23,670	)		(31,904	)
Additions to construction in progress		(11,450	)		(3,085	)
Investment in affiliates		(297	)		(1,639	)

Net cash provided by (used in) investing activities		143,636			(25,800	)

Cash flows from financing activities:
Financing costs		(1,795	)		(2,005	)
Issuance of preferred shares, net		—			43,518
Issuance of common shares, net		105,085			3,599
Issuance of debt		99,157			267,000
Repayments of debt		(302,237	)		(282,881	)
Dividends to common shareholders		(15,329	)		(20,301	)
Dividends to preferred shareholders		(6,200	)		(5,328	)
Distributions to noncontrolling interests		(780	)		(1,120	)
Operating partnership unit redemption		(84	)		—
Stock option exercises		121			27

Net cash (used in) provided by financing activities		(122,062	)		2,509

Net increase (decrease) in cash and cash equivalents		55,275			(609	)
Cash and cash equivalents, beginning of period		9,374			16,749

Cash and cash equivalents, end of period	$	64,649		$	16,140

See accompanying notes to condensed consolidated financial statements.

FIRST POTOMAC REALTY TRUST

Consolidated Statements of Cash Flows – Continued

(unaudited)

Supplemental disclosure of cash flow information for the six months ended June 30 is as follows (amounts in thousands):


	2013			2012
Cash paid for interest, net	$	19,452		$	21,086
Cash paid for income based franchise taxes		—			714
Non-cash investing and financing activities:
Settlements of common shares		537			602
Change in fair value of the outstanding common Operating Partnership units		498			1,797
Conversion of common Operating Partnership units into common shares		—			3,042
Changes in accruals:
Additions to rental property and furniture, fixtures and equipment		(5,135	)		365
Additions to development and redevelopment		(3,885	)		(2,740	)

Cash paid for interest on indebtedness is net of capitalized interest of $0.7 million and $1.5 million for the six months ended June 30, 2013 and 2012, respectively.

During the six months ended June 30, 2013 and 2012, certain of the Company’s employees surrendered common shares owned by them valued at $0.5 million and $0.6 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 June 30, 2013 and 2012, the Company recorded adjustments of $4.0 million and $3.3 million, respectively, to present certain common Operating Partnership units at the greater of their carrying value or redemption value.

No common Operating Partnership units were redeemed for an equivalent number of the Company’s common shares during the six months ended June 30, 2013. During the six months ended June 30, 2012, 243,757 common Operating Partnership units were redeemed for an equivalent number of the Company’s common shares.

During the six months ended June 30, 2013 and 2012, the Company had accrued $7.3 million and $9.1 million, respectively, of capital expenditures related to rental property and furniture, fixtures and equipment in accounts payable. During the six months ended June 30, 2013 and 2012, the Company had accrued $0.7 million and $0.9 million, respectively, of capital expenditures related to development and redevelopment in accounts payable.

FIRST POTOMAC REALTY TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Description of Business

First Potomac Realty Trust (the “Company”) is a leader in the ownership, management, development and redevelopment of office and business park 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 primarily contains a mix of single-tenant and multi-tenant office properties and business parks. Office properties are single-story and multi-story buildings that are used primarily for office use; and business parks contain buildings with office features combined with some industrial property space.

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 June 30, 2013, owned a 95.8% 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 June 30, 2013, the Company wholly-owned or had a controlling interest in properties totaling 9.3 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 1.5 million square feet of additional development. The Company’s consolidated properties were 84.0% occupied by 574 tenants at June 30, 2013. The Company did not include square footage that was in development or redevelopment, which totaled 0.1 million square feet at June 30, 2013, in its occupancy calculation. The Company derives substantially all of its revenue from leases of space within its properties. As of June 30, 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 27% of the Company’s outstanding accounts receivable at June 30, 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 June 30, 2013, the results of its operations and its comprehensive income (loss) for the three and six months ended June 30, 2013 and 2012 and its cash flows for the six months ended June 30, 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.

(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.

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 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 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.

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 and six months ended June 30, 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 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 and six months ended June 30, 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 footnotes thereto.

(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.

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 June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Numerator for basic and diluted earnings per common share:
Loss from continuing operations	$	(2,712	)	$	(15,552	)	$	(5,548	)	$	(20,193	)
Income from discontinued operations		17,188			2,333			21,987			3,499

Net income (loss)		14,476			(13,219	)		16,439			(16,694	)
Less: Net loss from continuing operations attributable to noncontrolling interests		259			908			551			1,286
Less: Net income from discontinued operations attributable to noncontrolling interests		(725	)		(119	)		(957	)		(178	)

Net income (loss) attributable to First Potomac Realty Trust		14,010			(12,430	)		16,033			(15,586	)
Less: Dividends on preferred shares		(3,100	)		(3,100	)		(6,200	)		(5,764	)

Net income (loss) attributable to common shareholders		10,910			(15,530	)		9,833			(21,350	)
Less: Allocation to participating securities		(106	)		(165	)		(206	)		(306	)

Net income (loss) attributable to common shareholders	$	10,804		$	(15,695	)	$	9,627		$	(21,656	)

Denominator for basic and diluted earnings per common share:
Weighted average common shares outstanding – basic and diluted		53,586			50,098			52,004			49,940
Basic and diluted earnings per common share:
Loss from continuing operations	$	(0.11	)	$	(0.35	)	$	(0.21	)	$	(0.50	)
Income from discontinued operations		0.31			0.04			0.40			0.07

Net income (loss)	$	0.20		$	(0.31	)	$	0.19		$	(0.43	)

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 June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Stock option awards		1,473		1,495		1,484		1,478
Non-vested share awards		510		504		533		526
Series A Preferred Shares⁽¹⁾		11,015		13,122		11,319		11,186

		12,998		15,121		13,336		13,190

⁽¹⁾	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.

(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):


	June 30, 2013			December 31, 2012
Land and land improvements	$	339,828		$	387,047
Buildings and improvements		884,100			1,086,694
Construction in process		52,888			56,614
Tenant improvements		140,197			145,910
Furniture, fixtures and equipment		5,274			5,498

		1,422,287			1,681,763
Less: accumulated depreciation		(203,080	)		(231,084	)

	$	1,219,207		$	1,450,679

Development and Redevelopment Activity

The Company constructs office buildings and/or business parks on a build-to-suit basis or with the intent to lease upon completion of construction. Also, the Company owns developable land that can accommodate 1.5 million square feet of additional building space, of which, 0.7 million is located in the Washington D.C reporting segment, 0.1 million in the Maryland reporting segment, 0.6 million in the Northern Virginia reporting segment and 0.1 million in the Southern Virginia reporting segment. During the second quarter of 2013, the Company sold the majority of its industrial portfolio, which included 0.9 million square feet of developable land and a parcel of land that was under development.

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 anticipates completing the redevelopment of the 138,000 square foot property in the third quarter of 2013. At June 30, 2013, the Company’s total investment in the redevelopment project was $47.3 million, which included the original cost basis of the property of $23.6 million.

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

(5) Notes Receivable

Below is a summary of the Company’s notes receivable at June 30, 2013 (dollars in thousands):


	Balance at June 30, 2013
Issued	Face Amount		Unamortized Origination Fees			Balance		Interest Rate			Property
December 2010	$	25,000	$	(150	)	$	24,850		12.5	%		950 F Street, NW
April 2011		29,975		(85	)		29,890		9.0	%		America’s Square

	$	54,975	$	(235	)	$	54,740


	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

The Company recorded interest income of $1.5 million for both the three months ended June 30, 2013 and June 30, 2012 and $2.9 million for both the six months ended June 30, 2013 and 2012 related to its notes receivable, which is included within “Interest and other income” in the Company’s consolidated statements of oeprations.

The $25.0 million subordinated loan provided to the owners of 950 F Street, NW requires monthly interest-only payments to the Company. The loan matures on April 1, 2017; however, it is repayable in full on or after December 21, 2013. 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. The America’s Square loan matures on May 1, 2016 and required monthly interest-only payments until May 2013, at which time the loan began requiring principal and interest payments through its maturity date. The interest rate on the loan is constant throughout the life of the loan. The Company recorded income from the amortization of origination fees of $17 thousand for both the three months ended June 30, 2013 and 2012 and $35 thousand for both the six months ended June 30, 2013 and 2012. The amortization of origination fees are recorded within “Interest and other income” in the Company’s 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 unaudited condensed 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			June 30, 2013		December 31, 2012
Prosperity Metro Plaza	Northern Virginia		51	%	$	25,625	$	26,679
1750 H Street, NW	Washington, D.C.		50	%		16,322		16,130
Aviation Business Park	Maryland		50	%		4,950		4,713
RiversPark I and II	Maryland		25	%		2,754		3,074

					$	49,651	$	50,596

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


	June 30, 2013		December 31, 2012
Assets:
Rental property, net	$	196,147	$	198,411
Cash and cash equivalents		5,712		6,224
Other assets		16,041		17,377

Total assets		217,900		222,012

Liabilities:
Mortgage loans⁽¹⁾		107,914		109,427
Other liabilities		6,574		6,687

Total liabilities		114,488		116,114

Net assets	$	103,412	$	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						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
Total revenues	$	5,959		$	6,241		$	12,011		$	12,321
Total operating expenses		(1,905	)		(1,808	)		(3,770	)		(3,576	)

Net operating income		4,054			4,433			8,241			8,745
Depreciation and amortization		(2,854	)		(3,168	)		(5,793	)		(6,336	)
Other expenses, net		(1,090	)		(1,083	)		(2,164	)		(2,165	)

Net income	$	110		$	182		$	284		$	244

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 fees from its unconsolidated joint ventures of $0.2 million and $0.3 million for the three and six months ended June 30, 2013, respectively, and $0.1 million and $0.2 million for the three and six months ended June 30, 2012, respectively, which are reflected within “Tenant reimbursements and other revenues” in its consolidated statements of operations.

(7) Discontinued Operations

During the second quarter of 2013, the Company sold 24 industrial properties, which comprised the majority of the Company’s industrial portfolio and consisted of approximately 4.3 million square feet. The aggregate sales price of the dispositions of the 24 industrial properties, which consisted of two separate transactions, was $259.0 million. Specifically, on May 7, 2013, the Company sold I-66 Commerce Center, a 0.2 million square foot industrial property in Haymarket, Virginia, for $17.5 million. On June 18, 2013, the Company completed the sale of the remaining 23 industrial properties for $241.5 million. The industrial properties sold on June 18, 2013 consisted of 1.2 million square feet in the Company’s Maryland reporting segment, 0.3 million square feet in the Northern Virginia reporting segment and 2.6 million square feet in the Southern Virginia reporting segment.

Proceeds from the sale were partially utilized to repay $42.7 million of mortgage and other indebtedness secured by the properties and to pay the associated prepayment penalties and closing costs. In addition, the Company used a portion of the net proceeds from the sale to prepay a $16.4 million mortgage loan that encumbered Cloverleaf Center and to repay $121.0 million of the outstanding balance under its unsecured revolving credit facility. For tax planning purposes, the Company also placed $28.2 million of the net proceeds, which is located in “Escrows and reserves” in the consolidated balance sheets, with a qualified intermediary in order to facilitate a potential tax-free exchange. At the time of this filing, the Company has identified several potential acquisitions that would meet the requirements for a tax-free exchange; however, the Company can provide no assurances that it will be able to complete any of the potential acquisitions, as a tax-free exchange, or at all. The Company reported a gain on the sale of the portfolio of $18.7 million in its second quarter results, and recorded an aggregate loss on debt extinguishment of $4.4 million within discontinued operations that was associated with the repayment of debt related to the industrial properties sold in the second quarter.

On June 5, 2013, the Company sold a 32,000 square foot building at Lafayette Business Center, a six-building, 254,000 square foot office park located in Chantilly, Virginia, for net proceeds of $2.5 million. The Company reported a gain on the sale of the property of $0.2 million in its second quarter results. The Company used the net proceeds from the sale to repay a portion of the outstanding balance under its unsecured revolving credit facility.

On June 14, 2013, the Company entered into a contract to sell an additional 34,000 square foot building at Lafayette Business Center. The sale is expected to be completed in the third quarter of 2013. At June 30, 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 operating results of the building are reflected as discontinued operations in the Company’s consolidated statements of operations for the periods presented. The Company did not record any impairment charges for the building classified as held-for-sale.

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

Industrial Portfolio

Various

6/18/2013

Industrial

4,044,903

I-66 Commerce Center

Northern Virginia

5/7/2013

Industrial

236,082

Lafayette Business Center⁽¹⁾

Northern Virginia

August 2013

Office

33,875

Lafayette Business Center⁽¹⁾

Northern Virginia

6/5/2013

Office

32,055

Airpark Place Business Center

Maryland

3/22/2012

Business Park

82,429

Goldenrod Lane

Maryland

5/31/2012

Office

23,518

Owings Mills Business Park⁽²⁾

Maryland

11/7/2012

Business Park

38,779

Woodlands Business Center

Maryland

5/8/2012

Office

37,887

⁽¹⁾

The Company is anticipating selling one building at Lafayette Business Center in August 2013, which was classified as held-for-sale at June 30, 2013; however, the Company can provide no assurances regarding the timing or pricing of the sale of the building, or that such sale will occur at all. The Company previously sold a separate building at Lafayette Business Center in June 2013. After the anticipated sale of the building in August 2013, the Company will own four remaining buildings at Lafayette Business Center.

⁽²⁾	In November 2012, the Company sold two of the six buildings at Owings Mills Business Park.

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 six months ended June 30, 2013 and 2012.

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


	Three Months Ended June 30,					Six Months Ended June 30,
	2013			2012		2013		2012
Revenues	$	6,051		$	7,812	$	16,474	$	15,977
Net (loss) income, before taxes		(1,759	)		2,172		3,040		3,338
Gain on sale of real estate property		18,947			161		18,947		161

(8) Debt

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


	June 30, 2013		December 31, 2012
Mortgage loans, effective interest rates ranging from 4.40% to 6.63%, maturing at various dates through July 2022	$	338,046	$	418,864
Secured term loan, effective interest rate of LIBOR plus 5.50%⁽¹⁾		—		10,000
Unsecured term loan, effective interest rates ranging from LIBOR plus 2.40% to LIBOR plus 2.55%, with staggered maturity dates ranging from July 2016 to July 2018⁽²⁾⁽³⁾		300,000		300,000
Unsecured revolving credit facility, effective interest rate of LIBOR plus 2.75%, maturing January 2015^(2)(3)(4)		50,000		205,000

	$	688,046	$	933,864

⁽¹⁾	The Company repaid its $10 million secured term loan and its $37.5 million senior secured multi-tranche term loan facility, which was entered into in February 2013, with proceeds from its May 2013 equity offering. For more information, see footnote 11, Equity.

⁽²⁾	At June 30, 2013, LIBOR was 0.19%.

⁽³⁾	As a result of the Company’s leverage ratio at June 30, 2013, the interest rate spread on the unsecured term loan and the unsecured revolving credit facility decreased by 25 basis points and 50 basis points, respectively, on August 1, 2013.

⁽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.

(a) Mortgage Loans

The following table provides a summary of the Company’s mortgage debt at June 30, 2013 and December 31, 2012 (dollars in thousands):


Encumbered Property	Contractual Interest Rate	Effective Interest Rate			Maturity Date		June 30, 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
10320 Little Patuxent Parkway⁽²⁾ (Merrill Lynch Bldg)	6.00%		7.29	%		February 2013		—			13,291
1434 Crossways Blvd Building I⁽²⁾	6.25%		5.38	%		March 2013		—			7,650
Cloverleaf Center⁽³⁾	6.75%		6.75	%		October 2014		—			16,595
Mercedes Center– Note 1⁽³⁾	4.67%		6.04	%		January 2016		—			4,677
Mercedes Center – Note 2⁽³⁾	6.57%		6.30	%		January 2016		—			9,498
Linden Business Center	6.01%		5.58	%		October 2013		6,657			6,747
840 First Street, NE	5.18%		6.05	%		October 2013		54,150			54,704
Annapolis Business Center	5.74%		6.25	%		June 2014		8,150			8,223
1005 First Street, NE⁽⁴⁾⁽⁵⁾	LIBOR + 2.75%		5.80	%		October 2014		22,000			22,000
Jackson National Life Loan⁽⁶⁾	5.19%		5.19	%		August 2015		66,680			96,132
Hanover Business Center Building D	8.88%		6.63	%		August 2015		323			391
Chesterfield Business Center Buildings C,D,G and H	8.50%		6.63	%		August 2015		862			1,036
440 First Street, NW Construction Loan⁽⁵⁾⁽⁷⁾	LIBOR + 2.50%		5.00	%		May 2016		21,657			—
Gateway Centre Manassas Building I	7.35%		5.88	%		November 2016		737			833
Hillside Center	5.75%		4.62	%		December 2016		13,545			13,741
Redland Corporate Center	4.20%		4.64	%		November 2017		67,630			68,209
Hanover Business Center Building C	7.88%		6.63	%		December 2017		723			791
500 First Street, NW	5.72%		5.79	%		July 2020		37,444			37,730
Battlefield Corporate Center	4.26%		4.40	%		November 2020		3,928			4,003
Chesterfield Business Center Buildings A,B,E and F	7.45%		6.63	%		June 2021		1,968			2,060
Airpark Business Center	7.45%		6.63	%		June 2021		1,073			1,123
1211 Connecticut Avenue, NW	4.22%		4.47	%		July 2022		30,519			30,784

			5.27	%⁽⁸⁾				338,046			418,864
Unamortized fair value adjustments								(698	)		(696	)

Total contractual principal balance							$	337,348		$	418,168

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

⁽²⁾

The loans were repaid in February 2013 with borrowings under a $37.5 million senior secured multi-tranche term loan facility, which was subsequently repaid in May 2013 with proceeds from the Company’s May 2013 equity offering. 10320 Little Patuxent Parkway was previously referred to as the Merrill Lynch Building.

⁽³⁾

In June 2013, the Company sold the majority of its industrial portfolio, which included Mercedes Center. The debt instrument that encumbered Mercedes Center was repaid at the time of sale. In addition, the Company used a portion of the net proceeds received from the sale of its industrial portfolio to repay the mortgage loan that encumbered Cloverleaf Center.

⁽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.

⁽⁵⁾	At June 30, 2013, LIBOR was 0.19%.

⁽⁶⁾

At June 30, 2013, the loan was secured by the following properties: Plaza 500, Van Buren Office Park, Rumsey Center, Snowden Center, Greenbrier Technology Center II and Norfolk Business Center. As part of the sale of the Company’s industrial portfolio, the Company sold I-66 Commerce Center in May 2013 and Northridge in June 2013 both of which had previously collateralized the Jackson National Life Loan. In connection with the sales, the Company repaid the portion of the loan that was secured by the properties and $2.7 million of additional principal as specified in the loan agreement. 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.

⁽⁷⁾	At June 30, 2013, the principal balance and the unpaid accrued interest on the 440 First Street, NW Construction Loan were recourse to the Company.

⁽⁸⁾	Weighted average interest rate on total mortgage debt.

Construction Loan

On June 5, 2013, the Company entered into a construction loan (the “Construction Loan”) that is collateralized by the Company’s 440 First Street, NW property, which has undergone a major redevelopment since its acquisition. The Construction Loan has a borrowing capacity of up to $43.5 million, of which the Company borrowed $21.7 million in the second quarter. The Construction Loan has a variable interest rate of LIBOR plus a spread of 2.50% and matures in May 2016, with two one-year extension options at the Company’s discretion. The Company can repay all or a portion of the Construction Loan, without penalty, at any time during the term of the loan. At June 30, 2013, per the terms of the loan agreement, the entire outstanding principal balance and all of the outstanding accrued interest is recourse to the Company. The percentage of outstanding principal balance that is recourse to the Company can be reduced upon the property achieving certain operating thresholds. As of June 30, 2013, the Company was in compliance with all the financial covenants of the Construction Loan.

(b) 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 June 30, 2013 (dollars in thousands):


	Maturity Date		Amount		Interest Rate⁽¹⁾
Tranche A		July 2016	$	60,000	LIBOR, plus 240 basis points
Tranche B		July 2017		147,500	LIBOR, plus 250 basis points
Tranche C		July 2018		92,500	LIBOR, plus 255 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.

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 June 30, 2013, the Company was in compliance with all the financial covenants of the unsecured term loan.

(c) Unsecured Revolving Credit Facility

During the second quarter of 2013, the outstanding balance under the Company’s unsecured revolving credit facility decreased by $180.0 million as the Company used proceeds from the sale of the majority of its industrial portfolio and proceeds from a public equity offering to pay down a portion of the outstanding balance. For the three and six months ended June 30, 2013, the Company’s weighted average borrowings under the unsecured revolving credit facility were $194.2 million and $208.0 million, respectively, with a weighted average interest rate of 2.8% for both periods compared with weighted average borrowings of $133.5 million and $147.2 million with a weighted average interest rate of 3.0% and 2.9% for the three and six months ended June 30, 2012, respectively. At June 30, 2013, outstanding borrowings under the unsecured revolving credit facility were $50.0 million with a weighted average interest rate of 2.9%. 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 June 30, 2013, the available capacity under the unsecured revolving credit facility was $65.9 million. In July 2013, the Company added five additional properties to the borrowing base that collateralizes the unsecured revolving credit facility and, as a result, the available capacity under the unsecured revolving credit facility was $173.0 million as of the date of this filing. The Company’s ability to borrow under the credit facility is subject to its satisfaction of certain financial and restrictive covenants. At June 30, 2013, LIBOR was 0.19% and the applicable spread on the Company’s unsecured revolving credit facility was 275 basis points. Based on the Company’s leverage ratio at June 30, 2013, the applicable interest rate spread decreased by 50 basis points on August 1, 2013. As of June 30, 2013, the Company was in compliance with all the financial covenants of the unsecured revolving credit facility.

(d) Interest Rate Swap Agreements

At June 30, 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 June 30, 2013, the Company was in compliance with the covenants of its unsecured term loan and unsecured revolving credit facility and any such financial covenants of its mortgage debt (including the Construction Loan).

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 revolving credit facility and unsecured term loan are subject to interest rate spreads that float based on the quarterly measurement of the Company’s maximum consolidated total indebtedness ratio. As a result of the Company’s leverage ratio at March 31, 2013, the applicable interest rate spread on the Company’s unsecured revolving credit facility and unsecured term loan increased by 25 basis points on June 1, 2013. Based on the Company’s leverage ratio at June 30, 2013, the applicable interest rate spread of the unsecured revolving credit facility and the unsecured term loan decreased by 50 basis points and 25 basis points, respectively, on August 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 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.

At June 30, 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				1.5004	%

The Company’s interest rate swap agreements are designated as cash flow hedges and the Company records the effective portion of 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 the effective portion of 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 material ineffectiveness associated with its cash flow hedges during the three and six months ended June 30, 2013 and 2012.

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 $1.2 million and $1.0 million for the three months ended June 30, 2013 and 2012, respectively, and $2.3 million and $1.9 million for the six months ended June 30, 2013 and 2012, respectively. As of June 30, 2013, the Company estimates that $4.0 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.

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 June 30, 2013 and December 31, 2012 (amounts in thousands):


	Balance at June 30, 2013		Level 1		Level 2		Level 3
Non-recurring Measurements:
Impaired real estate assets	$	2,716	$	—	$	2,716	$	—
Recurring Measurements:
Derivative instrument-swap assets		700		—		700		—
Derivative instrument-swap liabilities		5,085		—		5,085		—


	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 $2.4 million and $2.3 million at June 30, 2013 and December 31, 2012, respectively, 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 and six months ended June 30, 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 six months ended June 30, 2013 and 2012.

Impairment of Real Estate Assets

During the second quarter of 2013, the Company was in negotiations with a buyer to sell its Triangle Business Center property, which is located in its Maryland reporting segment. Based on the anticipated sales price, the Company recorded an impairment charge of $1.4 million in the second quarter of 2013. The Company signed a contract to sell the property in July 2013 and anticipates the property will be sold in the third quarter of 2013. However, the Company can provide no assurances regarding the timing or pricing of the sale of the Triangle Business Center property, or that such sale will occur at all.

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.

The carrying amount and estimated fair value of the Company’s notes receivable and debt instruments at June 30, 2013 and December 31, 2012 are as follows (amounts in thousands):


	June 30, 2013				December 31, 2012
	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial Assets:
Notes receivable⁽¹⁾	$	54,740	$	54,975	$	54,730	$	55,000

Financial Liabilities:
Mortgage debt	$	338,046	$	341,071	$	418,864	$	427,851
Secured term loan⁽²⁾		—		—		10,000		10,000
Unsecured term loan		300,000		300,000		300,000		300,000
Unsecured revolving credit facility		50,000		50,000		205,000		205,000

Total	$	688,046	$	691,071	$	933,864	$	942,851

⁽¹⁾	The face value of the Company’s notes receivable was $55.0 million at June 30, 2013 and December 31, 2012.

⁽²⁾	The Company repaid its $10.0 million secured term loan and its $37.5 million secured bridge loan in May 2013 with net proceeds from an equity offering.

(11) Equity

On May 24, 2013, the Company completed the public offering of 7,475,000 common shares at a public offering price of $14.70 per share, which generated net proceeds of $105.1 million, after deducting the underwriting discount and offering costs. The Company used a portion of the net proceeds to repay its $10.0 million secured term loan and its $37.5 million secured bridge loan and to pay down $53.0 million of the outstanding balance under its unsecured revolving credit facility. The remaining net proceeds were utilized for general corporate purposes.

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 was 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 was paid on May 15, 2013 to preferred shareholders of record as of May 6, 2013. On July 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 August 15, 2013 to common shareholders of record as of August 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 August 15, 2013 to preferred shareholders of record as of August 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 the Construction 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.

As a result of the redemption feature of the Operating Partnership units, the noncontrolling interests associated with the Operating Partnership 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)		16,033			(13	)		16,020			419
Changes in ownership, net		105,613			—			105,613			452
Distributions to owners		(21,529	)		—			(21,529	)		(779	)
Other comprehensive income		6,731			—			6,731			327

Balance at June 30, 2013	$	765,613		$	3,715		$	769,328		$	34,786


	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 income (loss)		(15,586	)		44		(15,542	)		(1,152	)
Changes in ownership, net		49,457			9		49,466			(1,945	)
Distributions to owners		(25,629	)		—		(25,629	)		(1,119	)
Other comprehensive income		(3,814	)		—		(3,814	)		(202	)

Balance at June 30, 2012	$	676,674		$	4,298	$	680,972		$	35,563

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 unrealized gain (loss) on derivative instruments		7,058			(4,016	)
Net (gain) loss attributable to noncontrolling interests		(327	)		202

Ending balance at June 30,	$	(4,186	)	$	(9,663	)

(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 June 30, 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 $33.9 million. At June 30, 2013, the Company recorded an adjustment of $4.0 million to present certain common Operating Partnership units at the greater of their carrying value or redemption value.

At December 31, 2012, 2,598,259 of the total common Operating Partnership units, or 4.8%, were not owned by the Company. In May 2013, the Company issued 7,475,000 common shares, which resulted in the Operating Partnership issuing an equivalent number of Operating Partnership units. During the six months ended June 30, 2013, 5,900 common Operating Partnership units were redeemed with available cash. As a result, 2,592,359 of the total common Operating Partnership units, or 4.2%, were not owned by the Company at June 30, 2013. There were no common Operating Partnership units redeemed for common shares during the six months ended June 30, 2013.

(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 (income) loss attributable to noncontrolling interests” in the Company’s consolidated statements of operations.

At June 30, 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.

30,414

⁽¹⁾

Redland Corporate Center

November 2010

Maryland

349,267

⁽¹⁾	The site is leased to Greyhound Lines, Inc., which has moved to Union Station and whose lease is scheduled to terminate on August 31, 2013. The Company anticipates placing the property into development upon the expiration of the lease.

(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.

Non-Vested Share Awards

The Company issues non-vested common 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 common shares, subject to restrictions, upon each grant of non-vested common share awards. On May 22, 2013, the Company granted 22,662 non-vested common shares to its non-employee trustees, all of which will vest on the first anniversary of the award date, subject to continued service by the trustee until that date. The fair value of the awards was determined based on the share price of the underlying common shares on the date of issuance.

The Company recognized $0.7 million $1.4 million of compensation expense associated with its non-vested share awards during the three and six months ended June 30, 2013, respectively, and $0.6 million and $1.2 million during the three and six months ended June 30, 2012, respectively. 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 income (loss) attributable to common shareholders in the Company’s computation of EPS.

A summary of the Company’s non-vested share awards at June 30, 2013 is as follows:


	Non-vested Shares			Weighted Average Grant Date Fair Value
Non-vested at March 31, 2013		820,766		$	12.56
Granted		22,662			14.56
Vested		(46,067	)		11.27

Non-vested at June 30, 2013		797,361			13.31

As of June 30, 2013, the Company had $7.2 million of unrecognized compensation cost related to non-vested shares. The Company anticipates this cost will be recognized over a weighted-average period of 3.2 years.

(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 and six months ended June 30, 2013 and 2012 are as follows (dollars in thousands):


	Three Months Ended June 30, 2013
	Maryland			Washington, D.C.			Northern Virginia			Southern Virginia			Consolidated
Number of buildings		57			4	⁽¹⁾		52			38			151
Square feet		2,617,677			531,714	⁽¹⁾		3,125,229			2,858,124			9,271,096
Total revenues	$	11,839		$	7,540		$	12,641		$	8,637		$	40,657
Property operating expense		(2,738	)		(1,736	)		(2,891	)		(2,582	)		(9,947	)
Real estate taxes and insurance		(1,056	)		(1,247	)		(1,240	)		(661	)		(4,204	)

Total property operating income	$	8,045		$	4,557		$	8,510		$	5,394			26,506

Depreciation and amortization expense														(14,739	)
General and administrative														(4,985	)
Impairment of real estate assets														(1,446	)
Contingent consideration related to acquisition of property														(75	)
Other expenses, net														(7,973	)
Income from discontinued operations														17,188

Net income													$	14,476

Capital expenditures⁽²⁾	$	5,112		$	6,816		$	4,685		$	2,571		$	19,350


	Three Months Ended June 30, 2012
	Maryland			Washington, D.C.			Northern Virginia			Southern Virginia			Consolidated
Number of buildings		64			4	⁽¹⁾		55			57			180
Square feet		3,816,137			531,714	⁽¹⁾		3,655,043			5,648,491			13,786,385
Total revenues	$	13,066		$	7,165		$	11,578		$	8,452		$	40,261
Property operating expense		(2,670	)		(1,119	)		(2,553	)		(2,281	)		(8,623	)
Real estate taxes and insurance		(1,054	)		(1,115	)		(1,190	)		(668	)		(4,027	)

Total property operating income	$	9,342		$	4,931		$	7,835		$	5,503			27,611

Depreciation and amortization expense														(13,738	)
General and administrative														(7,245	)
Acquisition costs														(23	)
Other expenses, net														(22,056	)
Provision for income taxes														(101	)
Income from discontinued operations														2,333

Net loss													$	(13,219	)

Capital expenditures⁽²⁾	$	4,979		$	842		$	6,019		$	3,824		$	16,000


	Six Months Ended June 30, 2013
	Maryland			Washington, D.C.			Northern Virginia			Southern Virginia			Consolidated
Total revenues	$	23,932		$	15,156		$	25,358		$	17,245		$	81,691
Property operating expense		(5,882	)		(3,629	)		(6,133	)		(5,272	)		(20,916	)
Real estate taxes and insurance		(2,085	)		(2,595	)		(2,930	)		(1,325	)		(8,935	)

Total property operating income	$	15,965		$	8,932		$	16,295		$	10,648			51,840

Depreciation and amortization expense														(29,244	)
General and administrative														(10,252	)
Impairment of real estate assets														(1,446	)
Contingent consideration related to acquisition of property														(75	)
Other expenses, net														(16,371	)
Income from discontinued operations														21,987

Net income													$	16,439

Total assets⁽³⁾⁽⁴⁾	$	408,246		$	328,581		$	429,781		$	231,393		$	1,557,666

Capital expenditures⁽²⁾	$	7,935		$	12,785		$	8,302		$	5,534		$	35,120


	Six Months Ended June 30, 2012
	Maryland			Washington, D.C.			Northern Virginia			Southern Virginia			Consolidated
Total revenues	$	25,191		$	13,991		$	23,387		$	16,508		$	79,077
Property operating expense		(5,966	)		(2,454	)		(5,402	)		(4,652	)		(18,474	)
Real estate taxes and insurance		(2,060	)		(2,010	)		(2,530	)		(1,355	)		(7,955	)

Total property operating income	$	17,165		$	9,527		$	15,455		$	10,501			52,648

Depreciation and amortization expense														(27,289	)
General and administrative														(12,142	)
Acquisition costs														(41	)
Impairment of real estate assets														(1,949	)
Other expenses, net														(31,258	)
Provision for income taxes														(162	)
Income from discontinued operations														3,499

Net loss													$	(16,694	)

Total assets⁽³⁾⁽⁴⁾	$	490,788		$	333,345		$	455,675		$	367,528		$	1,728,479

Capital expenditures⁽²⁾	$	13,031		$	1,705		$	12,477		$	6,836		$	34,989

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

⁽²⁾	Capital expenditures for corporate assets not allocated to any of our reportable segments totaled $166 and $336 for the three months ended June 30, 2013 and 2012, respectively, and $564 and $940 for the six months ended June 30, 2013 and 2012, respectively.

⁽³⁾

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.

⁽⁴⁾	Corporate assets not allocated to any of our reportable segments totaled $159,665 and $81,143 at June 30, 2013 and 2012, respectively.

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

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

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 June 30, 2013, owned a 95.8% 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 June 30, 2013, the Company wholly-owned or had a controlling interest in properties totaling 9.3 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 1.5 million square feet of additional development. The Company’s consolidated properties were 84.0% occupied by 574 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 June 30, 2013. The Company derives substantially all of its revenue from leases of space within its properties. As of June 30, 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;

•

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

•

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

•

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

Executive Summary

For the three and six months ended June 30, 2013, the Company had net income of $14.5 million and $16.4 million, respectively, compared with a net loss of $13.2 million and $16.7 million during the three and six months ended June 30, 2012, respectively.

Funds From Operations (“FFO”) increased for the three and six months ended June 30, 2013 compared with the same periods in 2012 primarily due to a reduction in loss on debt extinguishment and reduced legal and accounting fees. During the second quarter of 2013, the Company sold the majority of its industrial portfolio (including I-66 Commerce Center), which is explained in greater detail below, for aggregate gross proceeds of $259.0 million. In connection with the sale, the Company prepaid $42.7 million of debt associated with the sold properties and used a portion of the proceeds from the sale to prepay a $16.4 million mortgage loan that encumbered Cloverleaf Center, which resulted in an aggregate $4.6 million loss on debt extinguishment for the three months ended June 30, 2013. During the second quarter of 2012, the Company recorded $13.2 million of debt extinguishment charges from the prepayment of its senior notes, and $2.5 million of legal and accounting fees associated with the Company’s completed internal investigation.

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 on the industrial portfolio sale, a key component of the updated strategic and capital plan, which generated total gross proceeds of $259.0 million.

•

Successfully completed the public offering of 7,475,000 common shares, the proceeds of which were largely utilized to pay down debt.

•

Executed 540,000 square feet of leases, including 234,000 square feet of new leases.

•

Brought Redland Corporate Center, a 349,000 square foot office property in Rockville, Maryland, from 44% leased at acquisition to 100% leased.

•

Signed first office lease at 440 First Street, NW on Capitol Hill with Associated Builders and Contractors, Inc. for approximately 20,000 square feet.

Industrial Portfolio Sale

Consistent with the updated strategic and capital plan announced in January, during the second quarter of 2013, the Company sold 24 industrial properties, which comprised the majority of the Company’s industrial portfolio and consisted of approximately 4.3 million square feet, 2.6 million square feet of which are located in Southern Virginia (the “Industrial Portfolio Sale”). The aggregate sales price of the Industrial Portfolio Sale, which consisted of two separate transactions, was $259.0 million. Specifically, on May 7, 2013, the Company sold I-66 Commerce Center, a 236,000 square foot industrial property in Haymarket, Virginia, for $17.5 million. On June 18, 2013, the Company completed the sale of the remaining 23 industrial properties to an affiliate of Blackstone Real Estate Partners VII for $241.5 million.

Proceeds from the Industrial Portfolio Sale were partially utilized to repay $42.7 million of mortgage and other indebtedness secured by the properties and to pay associated prepayment penalties and closing costs. In addition, the Company used a portion of the net proceeds from the sale to prepay a $16.4 million mortgage loan that encumbered Cloverleaf Center and to repay $121.0 million of the outstanding balance under its unsecured revolving credit facility. For tax planning purposes, the Company also placed $28.2 million of the net proceeds with a qualified intermediary in order to facilitate a potential tax-free exchange. At the time of this filing, the Company has identified several potential acquisitions that would meet the requirements for a tax-free exchange; however, the Company can provide no assurances that it will be able to complete any of the potential acquisitions, as a tax-free exchange, or at all. The Company reported a gain on the sale of the portfolio of $18.7 million in its second quarter results, and recorded an aggregate loss on debt extinguishment of $4.4 million that was associated with the repayment of debt related to the industrial properties sold in the second quarter.

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.

Properties:

The following sets forth certain information for the Company’s consolidated properties by reporting segment as of June 30, 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 June 30, 2013⁽³⁾			Occupied at June 30, 2013⁽³⁾
*Downtown DC-Office*
500 First Street, NW	1	Capitol Hill		129,035	$	4,522		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		3,513		97.1	%		97.1	%

Total/Weighted Average	4			531,714		17,542		99.3	%		99.3	%

Redevelopment
440 First Street, NW	1	Capitol Hill		138,352		—
Unconsolidated Joint Venture
1750 H Street, NW	1	CBD		112,269		3,993		100.0	%		93.8	%

Region Total/Weighted Average	6			782,335	$	21,535		99.4	%		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.

MARYLAND REGION


Property	Buildings	Location	Square Feet		Annualized Cash Basis Rent⁽¹⁾		Leased at June 30, 2013			Occupied at June 30, 2013
*Business Park*
Ammendale Business Park⁽²⁾	7	Beltsville		312,846	$	4,083		100.0	%		97.0	%
Gateway 270 West	6	Clarksburg		255,917		2,493		70.9	%		67.6	%
Girard Business Center⁽³⁾	7	Gaithersburg		297,422		2,775		79.9	%		78.9	%
Owings Mills Business Park⁽⁴⁾	4	Owings Mills		180,475		1,493		53.7	%		51.7	%
Rumsey Center	4	Columbia		134,689		1,380		94.9	%		92.3	%
Snowden Center	5	Columbia		145,180		2,144		98.9	%		98.9	%
Triangle Business Center⁽⁵⁾	4	Baltimore		74,429		362		50.2	%		50.2	%

Total Business Park	37			1,400,958		14,730		81.2	%		79.2	%
*Office*
Annapolis Business Center	2	Annapolis		102,374		1,689		98.8	%		98.8	%
Campus at Metro Park North	4	Rockville		190,720		3,709		100.0	%		89.6	%
Cloverleaf Center	4	Germantown		173,766		2,065		74.1	%		74.1	%
Gateway Center	2	Gaithersburg		44,010		510		67.1	%		67.1	%
Hillside Center	2	Columbia		85,631		908		74.4	%		74.4	%
10320 Little Patuxent Parkway⁽⁶⁾	1	Columbia		136,193		1,706		81.4	%		81.0	%
Patrick Center	1	Frederick		66,269		968		77.1	%		77.1	%
Redland Corporate Center	2	Rockville		349,267		7,878		100.0	%		87.8	%
West Park	1	Frederick		28,390		267		81.7	%		81.7	%
Worman’s Mill Court	1	Frederick		40,099		381		87.6	%		87.6	%

Total Office	20			1,216,719		20,081		89.0	%		83.9	%

Total Consolidated	57			2,617,677		34,811		84.8	%		81.4	%

Unconsolidated Joint Ventures
Aviation Business Park	3	Glen Burnie		120,285		778		44.3	%		41.0	%
Rivers Park I and II	6	Columbia		307,747		3,963		92.9	%		89.1	%

Total Joint Ventures	9			428,032		4,741		79.2	%		75.6	%

Region Total/Weighted Average	66			3,045,709	$	39,552		84.1	%		80.6	%

⁽¹⁾

⁽²⁾	Ammendale Business Park consists of the following properties: Ammendale Commerce Center and Indian Creek Court.

⁽³⁾	Girard Business Center consists of the following properties: Girard Business Center and Girard Place.

⁽⁴⁾	Owings Mills Business Park consists of the following properties: Owings Mills Business Center and Owings Mills Commerce Center.

⁽⁵⁾	On July 15, 2013, the Company entered into a contract to sell Triangle Business Center. The sale is expected to be completed in the third quarter of 2013. However, the Company can provide no assurances regarding the timing or pricing of the sale, or that such sale will occur at all.

⁽⁶⁾	Previously referred to as the Merrill Lynch Building.

NORTHERN VIRGINIA REGION


Property	Buildings	Location	Square Feet		Annualized Cash Basis Rent⁽¹⁾		Leased at June 30, 2013			Occupied at June 30, 2013
*Business Park*
Corporate Campus at Ashburn Center	3	Ashburn		194,184	$	2,562		100.0	%		100.0	%
Gateway Centre Manassas	3	Manassas		102,579		639		60.4	%		60.4	%
Linden Business Center	3	Manassas		109,787		1,058		97.4	%		70.5	%
Prosperity Business Center	1	Merrifield		71,343		914		100.0	%		100.0	%
Sterling Park Business Center⁽²⁾	7	Sterling		474,808		4,417		94.9	%		91.8	%

Total Business Park	17			952,701		9,590		92.9	%		88.2	%
*Office*
Atlantic Corporate Park	2	Sterling		219,526		1,511		40.6	%		35.3	%
Cedar Hill	2	Tyson’s Corner		102,632		2,174		100.0	%		100.0	%
Herndon Corporate Center	4	Herndon		128,084		1,514		82.6	%		82.6	%
Lafayette Business Center⁽³⁾	5	Chantilly		221,585		3,324		85.3	%		85.3	%
One Fair Oaks	1	Fairfax		214,214		5,284		100.0	%		100.0	%
Reston Business Campus	4	Reston		82,372		1,075		83.2	%		76.8	%
Three Flint Hill	1	Oakton		180,714		2,700		84.7	%		84.7	%
Van Buren Office Park	5	Herndon		107,409		1,330		93.9	%		79.5	%
Windsor at Battlefield	2	Manassas		155,511		1,996		90.3	%		90.3	%

Total Office	26			1,412,047		20,908		82.4	%		80.1	%
*Industrial*
Newington Business Park Center	7	Lorton		255,431		2,319		82.2	%		80.4	%
Plaza 500	2	Alexandria		505,050		4,929		74.6	%		74.6	%

Total Industrial	9			760,481		7,248		77.1	%		76.5	%

Total Consolidated	52			3,125,229		37,746		84.3	%		81.7	%

Unconsolidated Joint Venture
Prosperity Metro Plaza	2	Merrifield		325,987		5,933		86.0	%		86.0	%

Region Total/Weighted Average	54			3,451,216	$	43,679		84.5	%		82.1	%

⁽¹⁾

⁽²⁾	Sterling Park Business Center consists of the following properties: 403/405 Glenn Drive, Davis Drive, and Sterling Park Business Center.

⁽³⁾

Lafayette Business Center consists of the following properties: Enterprise Center and Tech Court. On June 5, 2013, the Company sold a 32,000 square foot building at the property. The Company expects to sell an additional 34,000 square foot building at the property in the third quarter of 2013; however, the Company can provide no assurances regarding the timing or pricing of the sale of the building, or that such sale will occur at all.

SOUTHERN VIRGINIA REGION


Property	Buildings	Location	Square Feet		Annualized Cash Basis Rent⁽¹⁾		Leased at June 30, 2013			Occupied at June 30, 2013
RICHMOND
*Business Park*
Chesterfield Business Center⁽²⁾	11	Richmond		320,321	$	1,830		85.2	%		85.2	%
Hanover Business Center	4	Ashland		183,670		844		68.0	%		68.0	%
Park Central	3	Richmond		204,755		2,133		91.9	%		91.9	%
Virginia Center Technology Park	1	Glen Allen		118,436		1,251		85.6	%		85.6	%

Total Richmond	19			827,182		6,058		83.1	%		83.1	%

NORFOLK
*Business Park*
Battlefield Corporate Center	1	Chesapeake		96,720		795		100.0	%		100.0	%
Crossways Commerce Center⁽³⁾	9	Chesapeake		1,087,239		11,252		94.2	%		94.2	%
Greenbrier Business Park⁽⁴⁾	4	Chesapeake		412,526		3,921		79.7	%		74.5	%
Norfolk Commerce Park⁽⁵⁾	3	Norfolk		261,848		2,492		89.6	%		78.4	%

Total Business Park	17			1,858,333		18,460		90.6	%		87.9	%
*Office*
Greenbrier Towers	2	Chesapeake		172,609		1,685		83.1	%		82.0	%

Total Office	2			172,609		1,685		83.1	%		82.0	%

Total Norfolk	19			2,030,942		20,145		90.0	%		87.4	%

Region Total/Weighted Average	38			2,858,124	$	26,203		88.0	%		86.1	%

⁽¹⁾

⁽²⁾	Chesterfield Business Center consists of the following properties: Airpark Business Center, Chesterfield Business Center, and Pine Glen.

⁽³⁾	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.

⁽⁴⁾	Greenbrier Business Park consists of the following properties: Greenbrier Technology Center I, Greenbrier Technology Center II, and Greenbrier Circle Corporate Center.

⁽⁵⁾	Norfolk Commerce Park consists of the following properties: Norfolk Business Center, Norfolk Commerce Park II, and Gateway II.

Development and Redevelopment Activity

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

Lease Expirations

Approximately 6.2% of the Company’s annualized cash basis rent, excluding month-to-month leases (which represent 0.4% 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. Excluding the properties sold during the second quarter of 2013, the Company achieved a tenant retention rate of 79% and achieved positive net absorption of approximately 69,000 square feet during the second quarter. Including the properties sold during the second quarter of 2013, the Company achieved a tenant retention rate of 50% and negative net absorption of 167,000 square feet during the second quarter of 2013. 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 decreased 1.7% for the three months ended June 30, 2013 and increased 1.0% for the six months ended June 30, 2013, compared with the expiring leases. During the second 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.

The following table sets forth a summary schedule of the lease expirations at the Company’s consolidated properties for leases in place as of June 30, 2013 (dollars in thousands, except per square foot data):


Year of Lease Expiration⁽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		6		35,565		0.5	%	$	444		0.4	%	$	12.47
2013		49		337,263		4.3	%		7,347		6.2	%		15.81	⁽⁴⁾
2014		125		749,682		9.5	%		10,349		9.0	%		13.80
2015		117		785,624		9.9	%		9,915		8.5	%		12.62
2016		96		749,707		9.5	%		12,139		10.4	%		16.19
2017		91		1,206,813		15.3	%		18,178		15.6	%		15.06
2018		78		879,506		11.1	%		9,618		8.3	%		10.94
2019		63		902,380		11.4	%		11,916		10.2	%		13.21
2020		45		738,651		9.4	%		11,589		10.0	%		15.69
2021		21		327,423		4.1	%		3,886		3.3	%		11.87
2022		20		229,361		2.9	%		3,097		2.7	%		13.50
Thereafter		29		957,192		12.1	%		17,824		15.4	%		18.62

Total / Weighted Average		740		7,899,167		100.0	%	$	116,302		100.0	%	$	14.46

⁽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 June 30, 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 on August 31, 2013, as the terms of the lease were negotiated as part of the Company’s acquisition 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 properties. 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.

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 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.

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 and six months ended June 30, 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

•

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 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 and Six Months Ended June 30, 2013 with the Three and Six Months Ended June 30, 2012

As of June 30, 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 are 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 the second quarter of 2013, the Company sold 24 industrial properties (including I-66 Commerce Center), which comprised the majority of its industrial properties. The operating results of the sold properties are reflected in discontinued operations for all the periods presented.

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

Total Revenues

Total revenues are summarized as follows:


	Three Months Ended				Six Months Ended				Three Months						Six Months
	June 30,				June 30,							Percent					Percent
(dollars in thousands)	2013		2012		2013		2012		Change			Change			Change		Change
Rental	$	32,551	$	31,370	$	64,697	$	62,604	$	1,181			4	%	$	2,093		3	%
Tenant reimbursements and other	$	8,106	$	8,891	$	16,994	$	16,473	$	(785	)		(9	)%	$	521		3	%

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 $1.2 million and $2.1 million for the three and six months ended June 30, 2013, respectively, compared with the same periods in 2012. The Comparable Portfolio contributed $0.5 million and $0.8 million of additional rental revenue during the three and six months ended June 30, 2013, respectively, compared with the same periods in 2012, primarily due to an increase in occupancy. The weighted average occupancy of the Comparable Portfolio was 84.2% at June 30, 2013 compared with 83.4% at June 30, 2012. Rental revenue for the Non-comparable Properties increased $0.7 million and $1.3 million for the three and six months ended June 30, 2013, respectively, compared with the same periods in 2012 primarily due to an increase in occupancy at Three Flint Hill. The Company anticipates rental revenues to be flat for the full-year 2013 compared with 2012 as increases in occupancy will be offset by a decline in rental revenue from 1005 First Street, NE as its current tenant’s lease is expiring at the end of August 2013, at which time, the property will be placed into development.

The increase in rental revenue for the three and six months ended June 30, 2013 compared with the same periods in 2012 includes $1.2 million and $1.7 million, respectively, for Northern Virginia and $0.1 million and $0.5 million, respectively, for Southern Virginia. Rental revenue decreased $0.1 million for both the three and six months ended June 30, 2013 for Maryland and remained flat for the both the three and six months ended June 30, 2013 for Washington, D.C.

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 decreased $0.8 million for the three months ended June 30, 2013 compared with the same period in 2012 and increased $0.5 million for the six months ended June 30, 2013 compared with the same period in 2012. The decrease in tenant reimbursements and other revenues for the three months ended June 30, 2013 compared with 2012 is due to a $0.8 million decrease by the Comparable Portfolio, which was primarily due to a decrease in termination fees as the Company recognized a $1.1 million termination fee from a tenant at Ammendale Business Park, located in the Maryland reporting segment, during the three months ended June 30, 2012. For the three months ended June 30, 2013, the Non-comparable Properties contributed a slight increase in tenant reimbursements and other revenues compared with the same period in 2012. For the six months ended June 30, 2013, tenant reimbursements and other revenues increased due to the Comparable Portfolio, which contributed an additional $0.4 million in revenue 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 revenues of $0.1 million for the six months ended June 30, 2013 compared with the same period in 2012. The Company anticipates tenant reimbursements and other revenues will increase for full-year 2013 compared with 2012 due to higher recoverable operating expenses as the results of higher occupancy.

The decrease in tenant reimbursements and other revenues for the three months ended June 30, 2013 compared with the same period in 2012 includes $1.1 million for Maryland and $0.1 million for Northern Virginia, respectively. Tenant reimbursement and other revenue increased by $0.4 million for Washington, D.C. and remained flat for Southern Virginia. The increase in tenant reimbursements and other revenues for the six months ended June 30, 2013 compared with the same period in 2012 includes $1.2 million for Washington, D.C., $0.2 million for Northern Virginia and $0.3 million for Southern Virginia. For Maryland, tenant reimbursements and other revenues decreased $1.2 million for the six months ended June 30, 2013 compared with the same period in 2012.

Total Expenses

Property Operating Expenses

Property operating expenses are summarized as follows:


	Three Months Ended				Six Months Ended				Three Months					Six Months
	June 30,				June 30,						Percent					Percent
(dollars in thousands)	2013		2012		2013		2012		Change		Change			Change		Change
Property operating	$	9,947	$	8,623	$	20,916	$	18,474	$	1,324		15	%	$	2,442		13	%
Real estate taxes and insurance	$	4,204	$	4,027	$	8,935	$	7,955	$	177		4	%	$	980		12	%

Property operating expenses increased $1.3 million and $2.4 million for the three and six months ended June 30, 2013, respectively, compared with the same periods in 2012. For the Comparable Portfolio, property operating expenses increased $1.1 million and $2.0 million for the three and six months ended June 30, 2013, respectively, compared with the same periods in 2012, primarily due to an increase in both occupancy, which resulted in higher variable operating expenses, and reserves for anticipated bad debt expense. Property operating expenses also increase for the six months ended June 30, 2013 compared with the same period in 2012 due to an increase in snow and ice removal costs. The Non-comparable Properties contributed an increase in property operating expenses of $0.2 million and $0.4 million for the three and six months ended June 30, 2013, respectively, compared with the same periods in 2012. The Company anticipates an increase in property operating expenses for full-year 2013 compared with 2012 due to an increase in occupancy during 2013.

The increase in property operating expenses for the three and six months ended June 30, 2013 compared with the same periods in 2012 includes $0.6 million and $1.2 million, respectively, for Washington D.C., $0.3 million and $0.7 million, respectively, for Northern Virginia and $0.3 million and $0.6 million, respectively, for Southern Virginia. Property operating expenses in Maryland increased $0.1 million for the three months ended June 30, 2013 and decreased $0.1 million for the six months ended June 30, 2013, compared with the same periods in 2012.

Real estate taxes and insurance expense increased $0.2 million and $1.0 million for the three and six months ended June 30, 2013, respectively, compared with the same periods in 2012. For the Comparable Portfolio, real estate taxes and insurance expense increased $0.1 million and $0.9 million for the three and six months ended June 30, 2013, respectively, compared with the same periods 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 both the three and six months ended June 30, 2013 compared with the same periods in 2012. The Company anticipates an increase in real estate taxes and insurance expense for full-year 2013 compared with 2012 due to higher real estate tax assessments.

The increase in real estate taxes and insurance expense for the three and six months ended June 30, 2013 compared with the same periods in 2012 includes $0.1 million and $0.6 million, respectively, for Washington D.C. and $0.1 million and $0.4 million, respectively, for Northern Virginia. Both Maryland and Southern Virginia remained flat for the three and six months ended June 30, 2013 compared with the same periods in 2012.

Other Operating Expenses

General and administrative expenses are summarized as follows:


	Three Months Ended				Six Months Ended				Three Months						Six Months
	June 30,				June 30,							Percent						Percent
(dollars in thousands)	2013		2012		2013		2012		Change			Change			Change			Change
	$	4,985	$	7,245	$	10,252	$	12,142	$	(2,260	)		(31	)%	$	(1,890	)		(16	)%

General and administrative expenses decreased $2.3 million and $1.9 million for the three and six months ended June 30, 2013, respectively, compared with the same periods in 2012, primarily due to $2.5 million of legal and accounting fees associated with the Company’s completed internal investigation, which were incurred in the second quarter of 2012. The Company anticipates general and administrative expenses will continue to 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 a full year impact of the expansion of the Company’s corporate offices.

Acquisition costs are summarized as follows:


	Three Months Ended				Six Months Ended				Three Months						Six Months
	June 30,				June 30,							Percent						Percent
(dollars in thousands)	2013		2012		2013		2012		Change			Change			Change			Change
	$	—	$	23	$	—	$	41	$	(23	)		(100	)%	$	(41	)		(100	)%

The Company did not acquire any properties during the three and six months ended June 30, 2013 or 2012.

Depreciation and amortization expense is summarized as follows:


	Three Months Ended				Six Months Ended				Three Months					Six Months
	June 30,				June 30,						Percent					Percent
(dollars in thousands)	2013		2012		2013		2012		Change		Change			Change		Change
	$	14,739	$	13,738	$	29,244	$	27,289	$	1,001		7	%	$	1,955		7	%

Depreciation and amortization expense includes depreciation of real estate assets and amortization of intangible assets and leasing commissions. Depreciation and amortization expense increased $1.0 million and $2.0 million for the three and six months ended June 30, 2013, respectively, compared with the same periods in 2012. The Non-comparable Properties contributed additional depreciation and amortization expense of $0.5 million and $1.1 million for the three and six months ended June 30, 2013, respectively, compared with the same periods in 2012 as redevelopment projects as Three Flint Hill and Sterling Park Business Center were place in-service during the third quarter of 2012. Depreciation and amortization expense attributable to the Comparable Portfolio increased $0.5 million and $0.9 million for the three and six months ended June 30, 2013, respectively, compared with the same periods in 2012 primarily due to additional leasing costs incurred plus the placing in service of additional tenant and construction improvements. The Company anticipates depreciation and amortization expense to increase for the full-year 2013 compared with 2012 due to the redeveloped space at Three Flint Hill and Sterling Park Business Center that was placed in-service during the third quarter of 2012.

Impairment of real estate assets are summarized as follows:


	Three Months Ended				Six Months Ended				Three Months				Six Months
	June 30,				June 30,						Percent					Percent
(dollars in thousands)	2013		2012		2013		2012		Change		Change		Change			Change
	$	1,446	$	—	$	1,446	$	1,949	$	1,446		—	$	(503	)		(26	)%

During the second quarter of 2013, the Company was in negotiations with a potential buyer to sell its Triangle Business Center property. Based on the anticipated sales price, the Company recorded an impairment charge of $1.4 million in the second quarter of 2013. During the first quarter of 2012, the Company reduced the holding period for its Owings Mills Business Park property and recorded an impairment charge of $2.8 million. In November 2012, the Company sold two of the six buildings at Owings Mills Business Park. The impairment charge related to the two sold buildings is reflected within discontinued operations on the Company’s consolidated statements of operations. The Company did not record any other impairment charges within continuing operations for the three and six months ended June 30, 2013 and 2012.

Contingent consideration related to acquisition of property is summarized as follows:


	Three Months Ended				Six Months Ended				Three Months				Six Months
	June 30,				June 30,						Percent				Percent
(dollars in thousands)	2013		2012		2013		2012		Change		Change		Change		Change
	$	75	$	—	$	75	$	—	$	75		—	$	75		—

As part of the consideration for the Company’s 2009 acquisition of Ashburn Center, the Company recorded a contingent consideration obligation arising from a fee agreement entered into with the seller pursuant to which the Company will be obligated to pay additional consideration if certain returns are achieved over the five-year term of the agreement or if the property is sold within the term of the five-year agreement. During June 2013, the Company achieved the specified returns and increased its liability to the seller. The Company anticipates paying the seller $1.7 million during the third quarter of 2013 to satisfy the obligation.

Other Expenses, net

Interest expense is summarized as follows:


	Three Months Ended				Six Months Ended				Three Months						Six Months
	June 30,				June 30,							Percent						Percent
(dollars in thousands)	2013		2012		2013		2012		Change			Change			Change			Change
	$	9,353	$	10,358	$	19,310	$	21,022	$	(1,005	)		(10	)%	$	(1,712	)		(8	)%

During 2013, the Company made significant progress executing its updated strategic and capital plan, which resulted in an improvement in the Company’s balance sheet metrics through a reduction in outstanding debt. During the second quarter of 2013, the Company repaid over $250 million in outstanding debt, primarily with proceeds from the Industrial Portfolio Sale and from its May public equity offering.

At June 30, 2013, the Company had $688.0 million of debt outstanding with a weighted average interest rate of 4.9% compared with $928.8 million of debt outstanding with a weighted average interest rate of 4.6% at June 30, 2012.

For the three and six months ended June 30, 2013, interest expense decreased $1.0 million and $1.7 million, respectively, compared with the same periods in 2012, primarily as a result of the Company paying down debt and refinancing certain debt obligations at lower rates. From June 2012 through the end of 2012, the Company refinanced approximately $180 million of outstanding debt that had a weighted average interest rate of 6.5% with debt at significantly lower rates.

The Company anticipates interest expense will decline for full-year 2013 compared with 2012 as a result of the Company reducing its overall debt balance.

Interest and other income are summarized as follows:


	Three Months Ended				Six Months Ended				Three Months					Six Months
	June 30,				June 30,						Percent					Percent
(dollars in thousands)	2013		2012		2013		2012		Change		Change			Change		Change
	$	1,574	$	1,499	$	3,105	$	3,007	$	75		5	%	$	98		3	%

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% and is repayable in full on or after December 21, 2013. 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., which has a fixed interest rate of 9.0%. In May 2013, the loan began requiring monthly principal payments, which will reduce the outstanding balance of the loan. The Company recorded interest income related to these loans of $1.5 million during both the three months ended June 30, 2013 and 2012 and $2.9 million during both the six months ended June 30, 2013 and 2012, respectively. In January 2013, the Company subleased 5,000 square feet of its corporate headquarters. For both the three and six months ended June 30, 2013, the Company recognized $0.1 million 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 continue to 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						Six Months Ended					Three Months					Six Months
	June 30,						June 30,							Percent						Percent
(dollars in thousands)	2013			2012			2013			2012		Change		Change			Change			Change
	$	(7	)	$	(24	)	$	(35	)	$	22	$	17		71	%	$	(57	)		NM

Equity in (earnings) losses of affiliates reflects the Company’s aggregate ownership interest in the operating results of the properties, in which it does not have a controlling interest.

Loss on debt extinguishment is summarized as follows:


	Three Months Ended				Six Months Ended				Three Months						Six Months
	June 30,				June 30,							Percent						Percent
(dollars in thousands)	2013		2012		2013		2012		Change			Change			Change			Change
	$	201	$	13,221	$	201	$	13,221	$	(13,020	)		(98	)%	$	(13,020	)		(98	)%

During the second quarter of 2013, the Company recorded a loss on debt extinguishment of $0.2 million that was associated with the prepayment of the Company’s secured term loan, its secured bridge loan and a $16.4 million mortgage loan encumbered by Cloverleaf Center.

On May 10, 2012, the Company and its bank lenders amended the Company’s unsecured revolving credit facility, unsecured term loan and secured loan 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. As a result of the amendments, the Company expensed $0.6 million in fees paid to the bank lenders and $2.2 million in unamortized financing costs associated with the unsecured term loan. On June 11, 2012, the Company prepaid the entire $75.0 million principal amount outstanding under its Senior Notes. As a result of the prepayment, the Company paid a $10.2 million make-whole amount to the holders of the Senior Notes and expensed $0.2 million of unamortized deferred financing costs associated with its Senior Notes.

Provision for Income Taxes

Provision for income taxes is summarized as follows:


	Three Months Ended				Six Months Ended				Three Months						Six Months
	June 30,				June 30,							Percent						Percent
(dollars in thousands)	2013		2012		2013		2012		Change			Change			Change			Change
	$	—	$	101	$	—	$	162	$	(101	)		(100	)%	$	(162	)		(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 and $0.2 million for the three and six months ended June 30, 2013, respectively, compared to the same periods in 2012 due to a third quarter 2012 change in tax regulations in the District of Columbia that required the Company to file a unitary tax return, which allowed 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 and six months ended June 30, 2013.

Income from Discontinued Operations

Income from discontinued operations is summarized as follows:


	Three Months Ended				Six Months Ended				Three Months				Six Months
	June 30,				June 30,						Percent				Percent
(dollars in thousands)	2013		2012		2013		2012		Change		Change		Change		Change
	$	17,188	$	2,333	$	21,987	$	3,499	$	14,855		NM	$	18,488		NM

Discontinued operations reflect the operating results of the Company’s disposed properties and any properties that are classified as held-for-sale at June 30, 2013. During the second quarter of 2013, the Company sold the majority of its industrial portfolio, which was comprised of 24 industrial properties, for gross proceeds of $259.0 million. The Company recognized an $18.7 million gain on the sale of the industrial properties and the gross proceeds received equated to an aggregate capitalization rate of 7.2%. As part of the sale of the industrial properties, the Company incurred $4.4 million of debt extinguishment charges related to debt that was encumbered by the sold properties. During the second quarter of 2013, the Company sold a building at Lafayette Business Center, which was located in the Company’s Northern Virginia reporting segment, for gross proceeds of $2.5 million, which reflected a capitalization rate of 6.3%. The Company calculated the capitalization rates based on the properties annualized net operating income divided by the selling price. During both the three and six months ended June 30, 2013 and 2012, the Company recorded gains on the sale of real estate property of $18.9 million and $0.2 million, respectively. The Company has had, and will have, no continuing involvement with these properties subsequent to their disposal. For more information on the Company’s discontinued operations, see footnote 7 – Discontinued Operations.

Net (income) loss attributable to noncontrolling interests

Net (income) loss attributable to noncontrolling interests is summarized as follows:


	Three Months Ended					Six Months Ended					Three Months					Six Months
	June 30,					June 30,								Percent					Percent
(dollars in thousands)	2013			2012		2013			2012		Change			Change		Change			Change
	$	(466	)	$	789	$	(406	)	$	1,108	$	(1,255	)		NM	$	(1,514	)		NM

Net (income) 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 and six months ended June 30, 2013, the Company recognized net income of $14.5 million and $16.4 million, respectively, which was primarily due to a $14.3 million gain, less debt extinguishment charges, recorded on the sale of the majority of its industrial properties, compared with a net loss of $13.2 million and $16.7 million for the three and six months ended June 30, 2012, respectively, which was due to debt extinguishment charges of $13.2 million that were incurred in the second quarter of 2012. As of June 30, 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 (income) loss attributable to noncontrolling interests” on its consolidated statements of operations. The Company’s consolidated joint ventures had an aggregate net loss for both the three and six months ended June 30, 2013 compared with aggregate net income for both the three and six months ended June 30, 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.

Comparison of the Three and Six Months Ended June 30, 2013 with the Three and Six Months Ended June 30, 2012

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

CONSOLIDATED


	Three Months Ended										Six Months Ended
	June 30,										June 30,
(dollars in thousands)	2013			2012			$ Change		% Change		2013			2012			$ Change		% Change
Number of buildings ⁽¹⁾		150			150			—		—		150			150			—		—
Same property revenue
Rental	$	31,484		$	30,958		$	526		1.7	$	62,837		$	62,057		$	780		1.3
Tenant reimbursements		7,522			7,186			336		4.7		15,915			14,354			1,561		10.9

Total same property revenue		39,006			38,144			862		2.3		78,752			76,411			2,341		3.1

Same property operating expenses
Property		8,959			8,242			717		8.7		19,086			17,832			1,254		7.0
Real estate taxes and insurance		4,066			3,922			144		3.7		8,655			7,773			882		11.3

Total same property operating expenses		13,025			12,164			861		7.1		27,741			25,605			2,136		8.3

Same property net operating income	$	25,981		$	25,980		$	1		0.0	$	51,011		$	50,806		$	205		0.4

Reconciliation to total property operating income (loss)
Same property net operating income	$	25,981		$	25,980						$	51,011		$	50,806
Non-comparable net operating income⁽²⁾		525			1,631							829			1,842
General and administrative		(4,985	)		(7,245	)						(10,252	)		(12,142	)
Depreciation and amortization		(14,739	)		(13,738	)						(29,244	)		(27,289	)
Other⁽³⁾		(9,494	)		(22,180	)						(17,892	)		(33,410	)
Discontinued operations		17,188			2,333							21,987			3,499

Total net income (loss)	$	14,476		$	(13,219	)					$	16,439		$	(16,694	)


	Weighted Average Occupancy						Weighted Average Occupancy
	2013			2012			2013			2012
Same Properties		83.5	%		82.9	%		83.0	%		82.2	%

⁽¹⁾

Same-property comparisons are based upon those consolidated properties owned and in-service for the entirety of the periods presented. Same-property results exclude the operating results of the following non same-properties: Three Flint Hill, 440 First Street, NW, Davis Drive, and one building at Lafayette Business Center.

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

⁽³⁾	Includes acquisition costs, impairment of real estate assets, contingent consolidation charges, total other expenses, net, loss on debt extinguishment and (provision) benefit for income taxes from the Company’s consolidated statements of operations.

Same Property NOI was flat for the three months ended June 30, 2013 and increased $0.2 million for the six months ended June 30, 2013 compared with the same periods in 2012. Total same property revenues increased $0.9 million and $2.3 million for the three and six months ended June 30, 2013, respectively, due to an increase in occupancy and higher recoverable operating expenses. Same property expenses increased $0.9 million and $2.1 million for the three and six months ended June 30, 2013, respectively, due to higher operating expenses as a result of higher occupancy. Same Property operating expenses for the six months ended June 30, 2013 also increased due to an increase in snow and ice removal costs.

MARYLAND


	Three Months Ended										Six Months Ended
	June 30,										June 30,
(dollars in thousands)	2013		2012		$ Change			% Change			2013		2012		$ Change			% Change
Number of buildings ⁽¹⁾		57		57		—			—			57		57		—			—
Same property revenue
Rental	$	9,947	$	10,094	$	(147	)		(1.5	)	$	19,904	$	20,020	$	(116	)		(0.6	)
Tenant reimbursements		1,576		1,636		(60	)		(3.7	)		3,557		3,445		112			3.3

Total same property revenue		11,523		11,730		(207	)		(1.8	)		23,461		23,465		(4	)		(0.0	)

Same property operating expenses
Property		2,674		2,497		177			7.1			5,822		5,674		148			2.6
Real estate taxes and insurance		1,003		997		6			0.6			1,977		1,948		29			1.5

Total same property operating expenses		3,677		3,494		183			5.2			7,799		7,622		177			2.3

Same property net operating income	$	7,846	$	8,236	$	(390	)		(4.7	)	$	15,662	$	15,843	$	(181	)		(1.1	)

Reconciliation to total property operating income
Same property net operating income	$	7,846	$	8,236							$	15,662	$	15,843
Non-comparable net operating income⁽²⁾		199		1,106								303		1,322

Total property operating income	$	8,045	$	9,342							$	15,965	$	17,165


	Weighted Average Occupancy						Weighted Average Occupancy
	2013			2012			2013			2012
Same Properties		80.8	%		80.9	%		80.5	%		79.5	%

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

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

Same Property NOI for the Maryland properties decreased $0.4 million and $0.2 million for the three and six months ended June 30, 2013, respectively, compared with the same periods in 2012. Total same property revenues decreased $0.2 million for the three months ended June 30, 2013 compared with the same period in 2012 due to decrease in occupancy and remained relatively flat for the six months ended June 30, 2013 compared with the same period in 2012. Total same property operating expenses for the Maryland properties increased $0.2 million for the three months ended June 30, 2013 compared with the same period in 2012 due to a recovery of anticipated bad debt expense in 2012, which decreased its operating expenses for the three months ended June 30, 2012. Total same property operating expenses for the Maryland properties also increased $0.2 million for the six months ended June 30, 2013 compared with the same period in 2012 due to an increase in snow and ice removal costs.

NORTHERN VIRGINIA


	Three Months Ended										Six Months Ended
	June 30,										June 30,
(dollars in thousands)	2013		2012		$ Change			% Change			2013		2012		$ Change		% Change
Number of buildings ⁽¹⁾		51		51		—			—			51		51		—		—
Same property revenue
Rental	$	9,308	$	8,798	$	510			5.8		$	18,529	$	18,100	$	429		2.4
Tenant reimbursements		2,231		2,314		(83	)		(3.6	)		4,901		4,661		240		5.1

Total same property revenue		11,539		11,112		427			3.8			23,430		22,761		669		2.9

Same property operating expenses
Property		2,455		2,296		159			6.9			5,277		4,952		325		6.6
Real estate taxes and insurance		1,160		1,145		15			1.3			2,766		2,468		298		12.1

Total same property operating expenses		3,615		3,441		174			5.1			8,043		7,420		623		8.4

Same property net operating income	$	7,924	$	7,671	$	253			3.3		$	15,387	$	15,341	$	46		0.3

Reconciliation to total property operating income
Same property net operating income	$	7,924	$	7,671							$	15,387	$	15,341
Non-comparable net operating income⁽²⁾		586		164								908		114

Total property operating income	$	8,510	$	7,835							$	16,295	$	15,455


	Weighted Average						Weighted Average
	Occupancy						Occupancy
	2013			2012			2013			2012
Same Properties		81.0	%		78.9	%		79.9	%		77.8	%

⁽¹⁾	Same-property comparisons are based upon those consolidated properties owned and 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 one building at Lafayette Business Center.

⁽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 Northern Virginia properties increased $0.3 million for the three months ended June 30, 2013 and increased slightly for the six months ended June 30, 2013 compared with the same periods in 2012. Total same property revenues increased $0.4 million and $0.7 million for the three and six months ended June 30, 2013, respectively, compared with the same periods in 2012 primarily due to higher occupancy. Total same property operating expenses increased $0.3 million during the three months ended June 30, 2013 compared with the same period in 2012 due to an increase in reserves for anticipated bad debt expense and increased $0.6 million during the six months ended June 30, 2013 compared with the same period in 2012 due to an increase in real estate taxes and snow and ice removal costs.

SOUTHERN VIRGINIA


	Three Months Ended												Six Months Ended
	June 30,												June 30,
(dollars in thousands)	2013			2012			$ Change			% Change			2013			2012			$ Change			% Change
Number of buildings ⁽¹⁾		38			38			—			—			38			38			—			—
Same property revenue
Rental	$	7,194		$	7,051		$	143			2.0		$	14,346		$	13,903		$	443			3.2
Tenant reimbursements		1,442			1,401			41			2.9			2,825			2,605			220			8.4

Total same property revenue		8,636			8,452			184			2.2			17,171			16,508			663			4.0

Same property operating expenses
Property		2,410			2,135			275			12.9			4,969			4,380			589			13.4
Real estate taxes and insurance		657			665			(8	)		(1.2	)		1,317			1,348			(31	)		(2.3	)

Total same property operating expenses		3,067			2,800			267			9.5			6,286			5,728			558			9.7

Same property net operating income	$	5,569		$	5,652		$	(83	)		(1.5	)	$	10,885		$	10,780		$	105			1.0

Reconciliation to total property operating income
Same property net operating income	$	5,569		$	5,652								$	10,885		$	10,780
Non-comparable net operating loss⁽²⁾		(175	)		(149	)								(237	)		(279	)

Total property operating income	$	5,394		$	5,503								$	10,648		$	10,501


	Weighted Average						Weighted Average
	Occupancy						Occupancy
	2013			2012			2013			2012
Same Properties		85.6	%		84.6	%		85.3	%		83.6	%

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

⁽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 decreased $0.1 million for the three months ended June 30, 2013 compared with the same period in 2012 and increased $0.1 million for the six months ended June 30, 2013 compared with the same period in 2012. Total same property revenues increased $0.2 million and $0.7 million for the three and six months ended June 30, 2013, respectively, compared with the same periods in 2012 as a result of an increase in occupancy. Total same property operating expenses increased $0.3 million and $0.6 million for the three and six months ended June 30, 2013, respectively, compared with the same periods in 2012 due to higher operating expenses as a result of higher occupancy. Same Property operating expenses also increased for the six months ended June 30, 2013 due to an increase in snow and ice removal costs.

WASHINGTON, D.C.


	Three Months Ended									Six Months Ended
	June 30,									June 30,
(dollars in thousands)	2013			2012		$ Change		% Change		2013			2012		$ Change		% Change
Number of buildings ⁽¹⁾		4			4		—		—		4			4		—		—
Same property revenue
Rental	$	5,035		$	5,015	$	20		0.4	$	10,058		$	10,034	$	24		0.2
Tenant reimbursements		2,273			1,835		438		23.9		4,632			3,643		989		27.1

Total same property revenue		7,308			6,850		458		6.7		14,690			13,677		1,013		7.4

Same property operating expenses
Property		1,420			1,314		106		8.1		3,018			2,826		192		6.8
Real estate taxes and insurance		1,246			1,115		131		11.7		2,595			2,009		586		29.2

Total same property operating expenses		2,666			2,429		237		9.8		5,613			4,835		778		16.1

Same property net operating income	$	4,642		$	4,421	$	221		5.0	$	9,077		$	8,842	$	235		2.7

Reconciliation to total property operating income
Same property net operating income	$	4,642		$	4,421					$	9,077		$	8,842
Non-comparable net operating (loss) income⁽²⁾		(85	)		510						(145	)		685

Total property operating income	$	4,557		$	4,931					$	8,932		$	9,527


	Weighted Average						Weighted Average
	Occupancy						Occupancy
	2013			2012			2013			2012
Same Properties		99.3	%		99.3	%		99.3	%		99.4	%

⁽¹⁾	Same-property comparisons are based upon those consolidated properties owned and 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 $0.2 million for both the three and six months ended June 30, 2013 compared with the same periods in 2012. Total same property revenues increased $0.4 million and $1.0 million for the three and six months ended June 30, 2013, respectively, compared with the same periods in 2012 due to an increase in recoverable operating expenses. Total same property operating expense increased $0.2 million and $0.8 million for the three and sixth months ended June 30, 2013, respectively, compared with the same periods in 2012 primarily due to an increase in real estate taxes.

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 has executed on several key components of its updated strategic and capital plan, including the Industrial Portfolio Sale, which generated total gross proceeds of $259.0 million; the issuance of 7,475,000 common shares, the net proceeds of which were primarily used to repay outstanding debt; and a 25% reduction in the quarterly dividend beginning in the first quarter of 2013. The Company expects to meet short-term liquidity requirements generally through the drawdown of current cash balances, 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 June 30, 2013, the Company had $50.0 million outstanding and $65.9 million of availability under its unsecured revolving credit facility. In July 2013, the Company added five additional properties to the borrowing base that collateralizes the unsecured revolving credit facility and, as a result, the available capacity under the unsecured revolving credit facility was $173.0 million at the time of this filing. The Company has $60.5 million of mortgage debt maturing in the second half of 2013. At June 30, 2013, the Company had a balance of $64.6 million in cash and cash equivalents and $39.0 million in escrows and reserves, which included $28.2 million of proceeds from the Industrial Portfolio Sale that is currently being held with a qualified intermediary in order to facilitate a potential tax-free exchange As of the date of this filing, the Company has identified several potential acquisitions that would meet the requirements for a tax-free exchange; however, the Company can provide no assurances that it will be able to complete any of the potential acquisitions, as a tax-free exchange, or at all.

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 9.4% 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.

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 and unsecured term loan, proceeds from disposal of strategically identified assets (outright or through joint ventures) and the issuance of equity and debt securities. 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.

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

Equity Offering

Construction Loan

Mortgage Debt

During the second quarter of 2013, the Company utilized a portion of the proceeds from the Industrial Portfolio Sale to repay $42.7 million of mortgage and other indebtedness secured by the properties, and to pay associated prepayment penalties and closing costs. In addition, the Company used a portion of the net proceeds from the sale to prepay a $16.4 million mortgage loan that encumbered Cloverleaf Center and to repay $121.0 million of the outstanding balance under its unsecured revolving credit facility.

The Company repaid the following mortgages or debt instruments in the second quarter of 2013 (dollars in thousands):


Month	Year		Property	Effective Interest Rate			Principal Balance Repaid
June		2013	Cloverleaf Center		6.75	%	$	16,427
June		2013	Mercedes Center – Note 1		6.04	%		4,799
June		2013	Mercedes Center – Note 2		6.30	%		9,260
June		2013	Jackson National Life Loan-Northridge		5.19	%		6,985
May		2013	Jackson National Life Loan—I-66 Commerce Center		5.19	%		21,695

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 June 30, 2013, the Company was in compliance with the covenants of its unsecured term loan, unsecured revolving credit facility and Construction Loan.

Below is a summary of certain financial covenants associated with these debt agreements at June 30, 2013 (dollars in thousands):

Unsecured Revolving Credit Facility, Unsecured Term Loan and Construction Loan


Covenant	Quarter Ending June 30, 2013			Covenant
Consolidated Total Leverage Ratio⁽¹⁾		49.8	%	£	65.0	%
Net Worth⁽¹⁾	$	757,738		³	$601,202
Fixed Charge Coverage Ratio⁽¹⁾		1.93x		³	1.50x
Consolidated Debt Yield⁽¹⁾		15.5	%	³	10.0	%
Maximum Dividend Payout Ratio		60.5	%	£	95	%
Restricted Investments:
Joint Ventures		6.4	%	£	10	%
Real Estate Assets Under Development		4.1	%	£	15	%
Undeveloped Land		1.5	%	£	5	%
Structured Finance Investments		3.6	%	£	5	%
Total Restricted Investments		15.7	%	£	25	%
Restricted Indebtedness:
Unhedged Variable Rate Debt		3.4	%	£	25	%
Maximum Secured Debt		26.1	%	£	40	%
Maximum Secured Recourse Debt		1.9	%	£	15	%
Unencumbered Pool Leverage⁽¹⁾		54.9	%	£	65	%
Unencumbered Pool Interest Coverage Ratio⁽¹⁾		2.98x		³	1.75x

⁽¹⁾	These are the only covenants that apply to the Construction Loan.

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.

Consolidated cash flow information is summarized as follows:


	Six Months Ended June 30,
(amounts in thousands)	2013			2012			Change
Cash provided by operating activities	$	33,701		$	22,682		$	11,019
Cash provided by (used in) investing activities		143,636			(25,800	)		169,436
Cash (used in) provided by financing activities		(122,062	)		2,509			(124,571	)

Net cash provided by operating activities increased $11.0 million for the six months ended June 30, 2013 compared with the same period in 2012, which was primarily attributable to a $10.2 million make-whole payment that was paid in June 2012 as part of the prepayment of the Company’s $37.5 million Series A Senior Notes and its $37.5 million Series B Senior Notes. Also, net cash provided by operating activities increased for the six months ended June 30, 2013 due to a decrease in accounts and other receivables and a decline in cash used for deferred costs, such as leasing commissions, compared with the same period in 2012. The increase in cash provided by operating activities was partially offset by a decrease in both rents received in advance and accounts payable and accrued expenses compared with the same period in 2012.

Net cash provided by investing activities was $143.6 million for the six months ended June 30, 2013 compared with net cash used in investing activities of $25.8 million for the same period in 2012. During the six months ended June 30, 2013, the Company received net proceeds of $207.2 million from the sale of 24 industrial properties and a building at Lafayette Business Center, of which, the Company placed $28.2 million of the net proceeds from the sale of its industrial properties in an escrow account held by a qualified intermediary in order to facilitate a potential tax-free exchange; however, the Company can provide no assurances that it will be able to complete any of the potential acquisitions, as a tax-free exchange, or at all. For the six months ended June 30, 2012, the Company sold three properties for net proceeds of $10.8 million. Also, cash provided by investing activities increased as investment in affiliates declined $1.3 million for the six months ended June 30, 2013 compared with the same period in 2012.

Net cash used in financing activities was $122.1 million for the six months ended June 30, 2013 compared with net cash provided by financing activities of $2.5 million for the same period in 2012. During the six months ended June 30, 2013, the Company issued $99.2 million of debt and repaid $302.2 million of its outstanding debt compared with the issuance of $267.0 million of debt and the repayment of $282.9 million of outstanding debt during the six months ended June 30, 2012. During the six months ended June 30, 2013, the Company issued common shares for net proceeds of $105.1 million compared with the issuance of preferred and common shares for net proceeds of $43.5 million and $3.6 million, respectively, during the six months ended June 30, 2012. In the first quarter of 2013, the Company reduced its quarterly dividend by 25%, which resulted in a $5.0 million reduction in dividends paid to common shareholders for the six months ended June 30, 2013 compared with the same period in 2012.

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 was paid on August 5, 2013. At June 30, 2013, the Company had recorded the $8.4 million deferred purchase price obligation within “Accounts payable and other liabilities” in its consolidated balance sheets.

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 June 30, 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. In June 2013, the Company achieved stabilization per the terms of the agreement and recorded an increase of $75 thousand in its contingent consideration liability. The Company intends to pay $1.7 million to the former owner of Corporate Campus at Ashburn Center in the third quarter of 2013 to satisfy the obligation.

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 June 30, 2013, the fair value of the Company’s total contingent consideration obligation to the former owner of Aviation Business Park was immaterial.

As of June 30, 2013, the Company had development and redevelopment contractual obligations, which include amounts accrued at June 30, 2013, of $8.7 million related to development activities at 1005 First Street, NE and redevelopment activities at 440 First Street, NW, both of which are located in the Company’s Washington, D.C. reporting segment. As of June 30, 2013, the Company had capital improvement obligations of $2.9 million outstanding. Capital improvement obligations represent commitments for roof, asphalt, HVAC and common area replacements contractually obligated as of June 30, 2013. Also, as of June 30, 2013, the Company had $2.9 million due to contractors related to 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 June 30, 2013, the Company remained liable to those local municipalities for $1.4 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 June 30, 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 June 30, 2013, owned 95.8% 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.

Dividends

On July 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 August 15, 2013 to common shareholders of record as of August 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 August 15, 2013 to preferred shareholders of record as of August 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. 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.

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Net income (loss) attributable to First Potomac Realty Trust	$	14,010		$	(12,430	)	$	16,033		$	(15,586	)
Dividends on preferred shares		(3,100	)		(3,100	)		(6,200	)		(5,764	)

Net income (loss) attributable to common shareholders		10,910			(15,530	)		9,833			(21,350	)
Add: Depreciation and amortization:
Real estate assets		14,739			13,738			29,244			27,289
Discontinued operations		1,255			2,482			3,659			5,053
Unconsolidated joint ventures		1,317			1,484			2,669			2,967
Consolidated joint ventures		(53	)		(44	)		(104	)		(82	)
Impairment of real estate assets⁽¹⁾		1,446			—			1,446			3,021
Gain on sale of real estate property		(18,947	)		(161	)		(18,947	)		(161	)
Net income (loss) attributable to noncontrolling interests in the Operating Partnership		474			(817	)		419			(1,152	)

FFO available to common shareholders and unitholders		11,141			1,152			28,219			15,585
Dividends on preferred shares		3,100			3,100			6,200			5,764

FFO	$	14,241		$	4,252		$	34,419		$	21,349

Weighted average common shares and Operating Partnership units outstanding – diluted		56,289			52,889			54,703			52,848

⁽¹⁾

Impairment charges of $1.4 million are included in continuing operations in the Company’s consolidated statements of operations for both the three and six months ended June 30, 2013 and $1.9 million for the six months ended June 30, 2012. The remaining impairment charges for the six months ended June 30, 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 $688.0 million of debt outstanding at June 30, 2013, of which $294.4 million was fixed rate debt and $350.0 million was variable rate debt that had been swapped to a fixed interest rate. The remainder of the Company’s debt, $43.7 million, was variable rate debt that consisted of a $22.0 million mortgage loan and the $21.7 million outstanding balance under the Construction Loan. The mortgage loan has a contractual interest rate of LIBOR plus 2.75%, with a 5.0% floor and the Construction Loan has a contractual interest rate of LIBOR plus 2.50%. At June 30, 2013, LIBOR was 0.19%. A change in interest rates of 1% would result in an increase or decrease of $0.2 million in interest expense on its unhedged variable rate debt on an annualized basis.

The table below summarizes the Company’s interest rate swap agreements as of June 30, 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				1.5004	%

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, 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 June 30, 2013, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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 June 30, 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 June 30, 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 six months ended June 30, 2013. During the six months ended June 30, 2013, 5,900 common Operating Partnership units were redeemed with available cash. No common Operating Partnership units were redeemed for common shares during the six months ended June 30, 2013.

Issuer Purchases of Equity Securities

During the three months ended June 30, 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 June 30, 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

April 1, 2013 through April 30, 2013

—

N/A

May 1, 2013 through May 31, 2013

5,950

14.98

N/A

June 1, 2013 through June 30, 2013

—

N/A

Total

5,950

14.98

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.

Item 6. Exhibits


No.		Description

10.1		Purchase and Sale Agreement, dated as of May 17, 2013, by and among certain subsidiaries of First Potomac Realty Investment Limited Partnership and BRE/Industrial Acquisition Holdings 1, L.L.C. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 20, 2013).

10.2*		First Amendment, dated as of June 13, 2013, to Purchase and Sale Agreement, dated as of May 17, 2013, by and among certain subsidiaries of First Potomac Realty Investment Limited Partnership and BRE/Industrial Acquisition Holdings 1, L.L.C.

10.3*		Amendment No. 3 to the Company’s 2003 Equity Compensation Plan.

10.4*		Amendment No. 3 to the Company’s 2009 Equity Compensation Plan.

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 June 30, 2013, formatted in XBRL: (i) Consolidated balance sheets as of June 30, 2013 (unaudited) and December 31, 2012; (ii) Consolidated statements of operations (unaudited) for the three and six months ended June 30, 2013 and 2012; (iii) Consolidated statements of comprehensive income (loss) (unaudited) for the three and six months ended June 30, 2013 and 2012; (iv) Consolidated statements of cash flows (unaudited) for the six months ended June 30, 2013 and 2012; and (v) Notes to condensed consolidated financial statements (unaudited).

*	Filed herewith.

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: August 6, 2013		/s/ Douglas J. Donatelli
		Douglas J. Donatelli
		Chairman of the Board and Chief Executive Officer

Date: August 6, 2013		/s/ Andrew P. Blocher
		Andrew P. Blocher
		Executive Vice President and Chief Financial Officer