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| FPO > SEC Filings for FPO > Form 10-Q on 9-Nov-2012 | All Recent SEC Filings |
9-Nov-2012
Quarterly Report
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.
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."
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 %
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(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
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 %
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(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.
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 %
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(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.
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 %
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(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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