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FPO > SEC Filings for FPO > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for FIRST POTOMAC REALTY TRUST

Form 10-Q for FIRST POTOMAC REALTY TRUST


9-Nov-2012

Quarterly Report


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.

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

The Company conducts its business through First Potomac Realty Investment Limited Partnership, the Company's operating partnership (the "Operating Partnership"). The Company is the sole general partner of, and, as of September 30, 2012, owned a 95.2% interest in the Operating Partnership. The remaining interests in the Operating Partnership, which are presented as noncontrolling interests in the Operating Partnership in the accompanying unaudited condensed consolidated financial statements, are limited partnership interests, some of which are owned by several of the Company's executive officers and trustees who contributed properties and other assets to the Company upon its formation, and other unrelated parties.

At September 30, 2012, the Company wholly-owned or had a controlling interest in properties totaling 13.8 million square feet and had a noncontrolling ownership interest in properties totaling an additional 0.9 million square feet through five unconsolidated joint ventures. The Company also owned land that can accommodate approximately 2.4 million square feet of additional development. The Company's consolidated properties were 83.2% occupied by 621 tenants. The Company does not include square footage that is in development or redevelopment in its occupancy calculation, which totaled 0.3 million square feet at September 30, 2012. The Company derives substantially all of its revenue from leases of space within its properties. As of September 30, 2012, the Company's largest tenant was the U.S. Government, which along with government contractors, accounted for over 25% of the Company's total annualized base rent.

The primary source of the Company's revenue and earnings is rent received from tenants under long-term (generally three to ten years) operating leases at its properties, including reimbursements from tenants for certain operating costs. Additionally, the Company may generate earnings from the sale of assets either outright or contributed into joint ventures.

The Company's long-term growth will principally be driven by its ability to:

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

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

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

Executive Summary

The Company had net income of $7.4 million for the three months ended September 30, 2012 compared with a net loss of $3.7 million for the same period in 2011. Net income for the three months ended September 30, 2012 was primarily due to a $4.3 million benefit as a result of a change in tax regulations enacted by the District of Columbia that became effective in September 2012 and a $3.0 million gain on the sale of the Company's 95% interest in an unconsolidated joint venture. The net loss for the three months ended September 30, 2011 was primarily due to a $3.1 million impairment charge for a property that was disposed of in the first quarter of 2012. The Company's funds from operations ("FFO") available to common shareholders were $19.9 million, or $0.38 per diluted share, compared with FFO of $13.8 million, or $0.27 per diluted share, for the three months ended September 30, 2012, respectively. The increase in FFO for the three months ended September 30, 2012 was due to an increase in net operating income and the $4.3 million benefit as a result of a change in tax regulations.


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For the nine months ended September 2012 and 2011, the Company's net loss was $9.3 million and $6.9 million, respectively. The Company's FFO available to common shareholders were $35.5 million, or $0.67 per diluted share, and $38.2 million, or $0.74 per diluted share, for the nine months ended September 30, 2012 and 2011, respectively. The increase in net loss and the decrease in FFO for the nine months ended September 2012 compared with the same period in 2011 was primarily due to $13.2 million of debt extinguishment charges and $3.2 million of legal and accounting fees associated with the Company's internal investigation and accounting fees and $0.4 million of personnel separation costs, which were partially offset by an increase in net operating income and the $4.3 million benefit from the change in tax regulations.

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 475,000 square feet of leases, including 143,000 square feet of new leases;

Sold a 95% interest in an unconsolidated joint venture that owned 1200 17th Street, NW, an office building in Washington, D.C., for $43.7 million, which resulted in a $3.0 million gain on the sale;

Entered into a $68.4 million mortgage loan encumbered by Redland Corporate Center; and,

In October 2012, entered into a $22.0 million mortgage loan encumbered by 1005 First Street, NE.

Internal Investigation

As previously disclosed in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, the Audit Committee of the Board of Trustees completed its 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, and briefed the Board of Trustees regarding the results of the investigation and recommendations as to certain remedial and enhancement measures. In response to the recommendations of the Audit Committee, the Board of Trustees adopted a number of measures designed to remediate the underlying causes of the material weakness, as well as certain other enhancement measures unrelated to the material weakness. These remedial actions and enhancement measures include enhancements to debt covenant compliance controls, enhancements to financial reporting controls, enhancement of the role of the Company's legal and accounting functions, and general control enhancements regarding, among other things, enterprise risk management and communication by management with the Audit Committee and outside legal counsel.

Several of the foregoing remedial actions and enhancement measures have been completed or are currently underway, including, as previously disclosed, the hiring of a new chief financial officer and the engagement of a new third-party accounting firm to perform the Company's internal audit function. Management continues to work toward the full implementation of these remedial actions and enhancement measures and will continue to provide periodic reports on the implementation of these measures to the Audit Committee. Management believes that it has made progress remediating the material weakness; however, because some of the remedial actions must be successfully tested for multiple periods, management believes that it needs to continue to monitor the successful implementation of those steps before it is able to conclude that the material weakness has been remediated. For more information regarding these matters, see "Item 4. Controls and Procedures-Background" and "-Remediation of Material Weakness and Implementation of Enhancement Measures."


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Properties:

The following sets forth certain information for the Company's consolidated properties by segment as of September 30, 2012 (including properties in development and redevelopment, dollars in thousands):

WASHINGTON, D.C. REGION



                                                                                                 Annualized          Leased at            Occupied at
                                                                                                 Cash Basis        September 30,         September 30,
Property                                    Buildings       Sub-Market(1)     Square Feet         Rent(2)             2012(3)               2012(3)
Downtown DC-Office
500 First Street, NW                                 1      Capitol Hill           129,035      $      4,783                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             3,427                 97.1 %                97.1 %

Total                                                4                             531,714            17,717                 99.3 %                99.3 %

Redevelopment
440 First Street, NW                                 1      Capitol Hill           135,000                -                    -                     -

Joint Venture Property (unconsolidated)
1750 H Street, NW                                    1           CBD               111,373             4,073                100.0 %               100.0 %

Region Total                                         6                             778,087      $     21,790                 99.4 %                99.4 %

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

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

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

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


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MARYLAND REGION



                                                                                         Annualized          Leased at            Occupied at
                                                                                         Cash Basis        September 30,         September 30,
Property                              Buildings         Location      Square Feet         Rent(1)             2012(2)               2012(2)
SUBURBAN MD
Business Park
Ammendale Business Park(3)                     7       Beltsville          311,636      $      3,962                 97.3 %                90.4 %
Gateway 270 West                               6       Clarksburg          255,415             2,767                 81.6 %                75.8 %
Girard Business Center(4)                      7      Gaithersburg         298,009             3,110                 88.8 %                88.8 %
Rumsey Center                                  4        Columbia           134,619             1,182                 84.1 %                72.6 %
Snowden Center                                 5        Columbia           144,981             2,183                100.0 %               100.0 %

Total Business Park                           29                         1,144,660            13,204                 90.4 %                85.9 %
Office
Worman's Mill Court                            1       Frederick            40,051               367                 87.7 %                87.7 %
Annapolis Business Center                      2       Annapolis           101,898             1,564                 98.8 %                98.8 %
Campus at Metro Park North                     4       Rockville           190,720             3,366                 89.6 %                89.6 %
Cloverleaf Center                              4       Germantown          173,655             2,443                 86.1 %                86.1 %
Gateway Center                                 2      Gaithersburg          44,451               514                 72.2 %                72.2 %
Hillside Center                                2        Columbia            86,189             1,284                100.0 %               100.0 %
Merrill Lynch Building                         1        Columbia           136,975             1,562                 75.4 %                75.4 %
Patrick Center                                 1       Frederick            66,469               957                 77.0 %                77.0 %
Redland Corporate Center                       2       Rockville           348,469             6,789                 88.0 %                88.0 %
West Park                                      1       Frederick            28,417               267                 81.7 %                75.0 %

Total Office                                  20                         1,217,294            19,113                 87.0 %                86.8 %
Industrial
Frederick Industrial Park(5)                   3       Frederick           550,490             4,121                 91.5 %                91.5 %
Glenn Dale Business Center                     1       Glenn Dale          315,962             1,521                 86.9 %                86.9 %

Total Industrial                               4                           866,452             5,642                 89.8 %                89.8 %

Total Suburban Maryland                       53                         3,228,406            37,959                 89.0 %                87.3 %

BALTIMORE
Business Park
Owings Mills Business Park(6)                  6      Owings Mills         219,284             1,675                 58.8 %                58.8 %
Triangle Business Center                       4       Baltimore            74,182               357                 47.8 %                47.8 %

Total Business Park                           10                           293,466             2,032                 56.0 %                56.0 %
Industrial
Mercedes Center                                1        Hanover            295,006             1,303                 74.0 %                74.0 %

Total Baltimore                               11                           588,472             3,335                 65.0 %                65.0 %

Total Consolidated                            64                         3,816,878            41,294                 85.3 %                83.9 %

Joint Venture Properties
(Unconsolidated)
RiversPark I and II                            6        Columbia           307,747             3,740                 89.1 %                87.5 %
Aviation Business Park                         3      Glen Burnie          120,662               659                 37.8 %                26.3 %

Total Joint Ventures                           9                           428,409             4,399                 74.6 %                70.2 %

Region Total                                  73                         4,245,287      $     45,693                 84.2 %                82.5 %

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

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

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

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

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

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


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NORTHERN VIRGINIA REGION



                                                                                              Annualized          Leased at            Occupied at
                                                                              Square          Cash Basis        September 30,         September 30,
Property                                   Buildings         Location          Feet            Rent(1)             2012(2)               2012(2)
Business Park
Corporate Campus at Ashburn Center                  3         Ashburn           194,184      $      2,837                100.0 %               100.0 %
Gateway Centre Manassas                             3        Manassas           102,388               540                 51.1 %                51.1 %
Linden Business Center                              3        Manassas           109,725               843                 67.8 %                62.4 %
Prosperity Business Center                          1       Merrifield           71,343               903                100.0 %               100.0 %
Sterling Park Business Center(3)                    7        Sterling           464,577             3,902                 85.8 %                75.8 %

Total Business Park                                17                           942,217             9,025                 83.9 %                78.4 %
Office
Atlantic Corporate Park                             2        Sterling           221,372             1,080                 29.8 %                29.8 %
Cedar Hill                                          2      Tysons Corner        102,632             2,164                100.0 %               100.0 %
Herndon Corporate Center                            4         Herndon           128,063             1,740                 88.4 %                88.4 %
Lafayette Business Center(4)                        6        Chantilly          253,867             3,536                 83.5 %                82.2 %
One Fair Oaks                                       1         Fairfax           214,214             5,150                100.0 %               100.0 %
Reston Business Campus                              4         Reston             83,373               950                 73.5 %                64.0 %
Three Flint Hill                                    1         Oakton            181,397             2,121                 68.8 %                44.8 %
Van Buren Office Park                               5         Herndon            81,564               898                 77.2 %                77.2 %
Windsor at Battlefield                              2        Manassas           155,511             2,069                 90.3 %                90.3 %

Total Office                                       27                         1,421,993            19,708                 77.2 %                73.3 %
Industrial
13129 Airpark Road                                  1        Culpeper           149,888               630                 75.9 %                75.9 %
I-66 Commerce Center(5)                             1        Haymarket          236,082             3,470                100.0 %               100.0 %
Interstate Plaza                                    1       Alexandria          109,029             1,124                 98.9 %                98.9 %
Newington Business Park Center                      7         Lorton            254,272             2,370                 82.5 %                80.1 %
Plaza 500                                           2       Alexandria          505,258             4,898                 74.5 %                74.5 %

Total Industrial                                   12                         1,254,529            12,492                 83.2 %                82.7 %

Total Consolidated                                 56                         3,618,739            41,225                 81.0 %                77.9 %

Total Development / Redevelopment(6)                                             36,797                -                    -                     -

Joint Venture Property (Unconsolidated)
Metro Place III & IV                                2       Merrifield          325,328             7,073                100.0 %               100.0 %

Region Total                                       58                         3,980,864      $     48,298                 84.2 %                82.7 %

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

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

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

(4) Lafayette Business Center consists of the following properties: Enterprise Center and Tech Court.

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

(6) Includes development at Sterling Park Business Center and redevelopment at Sterling Park and Van Buren Office Park.


Table of Contents

SOUTHERN VIRGINIA REGION



                                                                                  Annualized         Leased at           Occupied at
                                                                                  Cash Basis       September 30,        September 30,
Property                            Buildings       Location    Square Feet        Rent(1)            2012(2)              2012(2)
RICHMOND
Business Park
Chesterfield Business Center(3)             11      Richmond         320,308     $      1,881                90.3 %               88.6 %
Hanover Business Center                      4      Ashland          183,659              796                68.5 %               66.1 %
Park Central                                 3      Richmond         204,762            1,966                81.8 %               80.1 %
Virginia Center Technology Park              1     Glen Allen        118,579            1,270                86.7 %               85.2 %

Total Business Park                         19                       827,308            5,913                82.8 %               81.0 %
Industrial
Northridge                                   2      Ashland          139,346              775                82.9 %               82.9 %
River's Bend Center(4)                       6      Chester          795,139            4,626                95.6 %               95.6 %

Total Industrial                             8                       934,485            5,401                93.7 %               93.7 %

Total Richmond                              27                     1,761,793           11,314                88.6 %               87.7 %

NORFOLK
Business Park
Crossways Commerce Center(5)                 9     Chesapeake      1,087,250           10,890                94.2 %               93.1 %
Battlefield Corporate Center                 1     Chesapeake         96,720              780               100.0 %              100.0 %
Greenbrier Business Park(6)                  4     Chesapeake        411,815            3,866                77.0 %               76.7 %
Hampton Roads Center(7)                      3      Hampton          584,345            2,484                63.5 %               63.5 %
Norfolk Commerce Park(8)                     3      Norfolk          262,683            1,949                66.6 %               66.6 %

Total Business Park                         20                     2,442,813           19,969                81.2 %               80.7 %
Office
Greenbrier Towers                            2     Chesapeake        172,350            2,076                93.6 %               93.6 %

Total Office                                 2                       172,350            2,076                93.6 %               93.6 %
Industrial
Cavalier Industrial Park                     4     Chesapeake        394,308            1,342                80.4 %               80.4 %
Diamond Hill Distribution Center             4     Chesapeake        712,339            2,813                95.1 %               91.9 %

Total Industrial                             8                     1,106,647            4,155                89.9 %               87.8 %
Total Norfolk                               30                     3,721,810           26,200                84.3 %               83.4 %

Region Total                                57                     5,483,603     $     37,514                85.7 %               84.8 %

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

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

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

(4) River's Bend Center consists of the following properties: River's Bend Center and River's Bend Center II.

(5) 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.

(6) Greenbrier Business Park consists of the following properties: Greenbrier . . .

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