UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q



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

For the quarterly period ended ~~March~~June 3130, 2017.



¨	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 incorporation or organization)		(I.R.S. Employer Identification No.)

7600 Wisconsin Avenue, 11th 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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filter,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large Accelerated Filer	x	Accelerated Filer	¨
Non-Accelerated Filer	¨	Smaller Reporting Company	¨
(Do not check if a smaller reporting company)		Emerging Growth Company	¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

As of July 27, 2017, there were 58,740,715 common shares, par value $0.001 per share, outstanding.

FIRST POTOMAC REALTY TRUST

FORM 10-Q

INDEX

		Page
Part I:	Financial Information
Item 1.	Condensed Consolidated Financial Statements
	Consolidated balance sheets as of March 31, 2017 (unaudited) and December 31, 2016	4
	Consolidated balance sheets as of June 30, 2017 (unaudited) and December 31, 2016	4
	Consolidated statements of operations (unaudited) for the three months ended March 31, 2017 and 2016	5
	Consolidated statements of operations (unaudited) for the three and six months ended June 30, 2017 and 2016	5
	Consolidated statements of comprehensive income (loss) (unaudited) for the three months ended March 31, 2017 and 2016	6
	Consolidated statements of comprehensive (loss) income (unaudited) for the three and six months ended June 30, 2017 and 2016	6
	Consolidated statements of cash flows (unaudited) for the three months ended March 31, 2017 and 2016	7
	Consolidated statements of cash flows (unaudited) for the three and six months ended June 30, 2017 and 2016	7
	Notes to condensed consolidated financial statements (unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2830
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	5256
Item 4.	Controls and Procedures	5357
Part II:	Other Information
Item 1.	Legal Proceedings	5458
Item 1A.	Risk Factors	5458
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5459
Item 3.	Defaults Upon Senior Securities	5460
Item 4.	Mine Safety Disclosures	5460
Item 5.	Other Information	5460
Item 6.	Exhibits	5561
	Signatures	5662

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements, including statements regarding ~~potential~~the ~~dispositions~~pending ~~and~~merger ~~the~~transaction ~~timing~~with ofGovernment ~~such~~Properties ~~dispositions,~~Income ~~future~~Trust ~~acquisitions~~(“GOV”) and ~~growth~~the ~~opportunities~~timing of such transaction, and the timing of future tenant occupancies, 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 First Potomac Realty Trust (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, performance or achievements to differ materially from the Company’s expectations include, among others, the following:


•	changes in general or regional economic conditions;


•	the Company’s ability to obtain the required shareholder approval to consummate the pending merger transaction with GOV;


•	the Company’s or GOV’s ability to consummate the pending merger transaction and the risks associated therewith;


•	the outcome of any legal proceedings that may be instituted against the Company and others related to the merger agreement in connection with the pending merger transaction;


•	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 dispositions on acceptable terms, or at all;


•	the Company’s ability to manage its current debt levels and repay or refinance its indebtedness upon maturity or other required payment dates;


•	the Company’s ability to maintain financial covenant compliance under its debt agreements;


•	the Company’s ability to maintain effective internal controls over financial reporting and disclosure controls and procedures;


•	the 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, 2016, under “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and in the other documents the Company files with the Securities and Exchange Commission (“SEC”), which are accessible on the SEC’s website at www.sec.gov.

The risks set forth above are not exhaustive. Other sections of this report may include additional factors that could adversely affect the Company’s business and financial performance. Moreover, the Company operates in a very competitive and rapidly changing environment. 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 do not intend to, and expressly disclaim any duty to, update or revise the forward-looking statements in this discussion to reflect changes in underlying assumptions or factors, new information, future events, or otherwise, after the date hereof, except as may be required by law. In light of these risks and uncertainties, you should not rely upon these forward-looking statements after the date of this report and should keep in mind that any forward-looking statement made in this discussion, or elsewhere, might not occur.

FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES

Consolidated Balance Sheets

(Amounts in thousands, except per share amounts)

	March 31, 2017			December 31, 2016
	June 30, 2017			December 31, 2016
	(unaudited)
Assets:
Rental property, net	$	1,~~024~~021,~~605~~168		$	1,059,272
Assets held-for-sale	—			13,176
Cash and cash equivalents	1314,~~269~~489			14,144
Escrows and reserves	2,~~348~~518			1,419
Accounts and other receivables, net of allowance for doubtful accounts of $922 and $655, respectively	5,611			6,892
Accounts and other receivables, net of allowance for doubtful accounts of $699 and $655, respectively	5,621			6,892
Accrued straight-line rents, net of allowance for doubtful accounts of $471 and $414, respectively	45,211			42,745
Accrued straight-line rents, net of allowance for doubtful accounts of $119 and $414, respectively	48,134			42,745
Investment in affiliates	4241,~~314~~363			49,392
Deferred costs, net	4140,~~603~~442			42,712
Prepaid expenses and other assets	54,~~414~~137			5,389
Intangible assets, net	2322,622			25,106
Total assets	$	1,~~203~~200,~~997~~494		$	1,260,247
Liabilities:
Mortgage loans, net	$	~~295~~271,~~523~~720		$	296,212
Unsecured term loan, net	299,~~433~~462			299,404
Unsecured revolving credit facility, net	4873,~~758~~958			141,555
Accounts payable and other liabilities	4044,~~897~~137			43,904
Accrued interest	1,~~470~~429			1,537
Rents received in advance	6,~~493~~336			6,234
Tenant security deposits	4,~~831~~848			4,982
Deferred market rent, net	1,~~716~~641			1,792
Total liabilities	~~699~~703,~~121~~531			795,620
Noncontrolling interests in the Operating Partnership	2728,~~516~~637			28,244
Equity:
Common shares, $0.001 par value per share, 150,000 shares authorized; 58,716 and 58,319 shares issued and outstanding, respectively	59			58
Common shares, $0.001 par value per share, 150,000 shares authorized; 58,741 and 58,319 shares issued and outstanding, respectively	59			58
Additional paid-in capital	~~916~~915,~~460~~758			913,367
Accumulated other comprehensive loss	(~~273~~27		)	(844		)
Dividends in excess of accumulated earnings	(~~438~~447,~~886~~464		)	(476,198		)
Total equity	~~477~~468,~~360~~326			436,383
Total liabilities, noncontrolling interests and equity	$	1,~~203~~200,~~997~~494		$	1,260,247

See accompanying notes to condensed consolidated financial statements.

FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited)

(Amounts in thousands, except per share amounts)

	Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Revenues:
Rental	$	3029,~~818~~360		$	3331,~~844~~554		$	60,178		$	65,398
Tenant reimbursements and other	76,~~005~~028			86,~~853~~939			13,034			15,792
Total revenues	3735,~~823~~388			4238,~~697~~493			73,212			81,190
Operating expenses:
Property operating	98,~~958~~350			118,~~537~~543			18,307			20,080
Real estate taxes and insurance	4,~~661~~459			54,~~216~~920			9,120			10,136
General and administrative	46,~~497~~214			4,~~578~~305			10,712			8,884
Depreciation and amortization	1413,~~566~~845			15,~~006~~141			28,411			30,147
Total operating expenses	33,682			36,337
Impairment of rental property	—			2,772			—			2,772
Operating income	4,141			6,360
Total operating expenses	32,868			35,681			66,550			72,019
Other expenses (income)
Operating income	2,520			2,812			6,662			9,171
Interest expense	6,344			6,816
Other expenses (income)
Interest and other income	(210		)	(1,003		)
Interest expense	6,053			6,568			12,397			13,384
Equity in earnings of affiliates	(4,223		)	(555		)
Interest and other income	(228		)	(1,101		)	(437		)	(2,104		)
(Gain) loss on sale of rental property	(42,799		)	1,155
Equity in earnings of affiliates	(477		)	(663		)	(4,700		)	(1,219		)
Loss on debt extinguishment	—			48
(Gain) loss on sale of rental property	—			—			(42,799		)	1,155
Total other expenses (income)	(40,888		)	6,461
Loss on debt extinguishment	—			—			—			48
Net income (loss)	45,029			(101		)
Total other expenses (income)	5,348			4,804			(35,539		)	11,264
Less: Net (income) loss attributable to noncontrolling interests	(1,884		)	147
Net (loss) income	(2,828		)	(1,992		)	42,201			(2,093		)
Net income attributable to First Potomac Realty Trust	43,145			46
Less: Net loss (income) attributable to noncontrolling interests	123			390			(1,762		)	537
Less: Dividends on preferred shares	—			(2,248		)
Net (loss) income attributable to First Potomac Realty Trust	(2,705		)	(1,602		)	40,439			(1,556		)
Less: Issuance costs of redeemed preferred shares	—			(1,904		)
Less: Dividends on preferred shares	—			(794		)	—			(3,042		)
Net income (loss) attributable to common shareholders	$	43,145		$	(4,106	)
Less: Issuance costs of redeemed preferred shares	—			(3,095		)	—			(4,999		)
Basic and diluted earnings per common share:
Net (loss) income attributable to common shareholders	$	(2,705	)	$	(5,491	)	$	40,439		$	(9,597	)
Net income (loss) attributable to common shareholders - basic	$	0.75		$	(0.07	)
Basic and diluted earnings per common share:
Net income (loss) attributable to common shareholders - dilutive	$	0.74		$	(0.07	)
Net (loss) income attributable to common shareholders - basic and dilutive	$	(0.05	)	$	(0.10	)	$	0.70		$	(0.17	)
Weighted average common shares outstanding:
Basic	57,~~635~~999			57,~~542~~577			57,662			57,559
Diluted	57,~~907~~999			57,~~542~~577			57,940			57,559

See accompanying notes to condensed consolidated financial statements.

FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES

Consolidated Statements of Comprehensive ~~Income~~ (Loss) Income

(unaudited)

(Amounts in thousands)

	Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Net income (loss)	$	45,029		$	(101	)
Net (loss) income	$	(2,828	)	$	(1,992	)	$	42,201		$	(2,093	)
Unrealized gain on derivative instruments	~~596~~261			~~169~~350			852			505
Unrealized loss on derivative instruments	—(5		)	(~~1,031~~148		)	—			(1,165		)
Total comprehensive income (loss)	45,625			(963		)
Total comprehensive (loss) income	(2,572		)	(1,790		)	43,053			(2,753		)
Net (income) loss attributable to noncontrolling interests	(1,884		)	147
Net loss (income) loss attributable to noncontrolling interests	123			390			(1,762		)	537
Net (gain) loss from derivative instruments attributable to noncontrolling interests	(25		)	36
Net loss (gain) from derivative instruments attributable to noncontrolling interests	11			(9		)	35			28
Comprehensive income (loss) attributable to First Potomac Realty Trust	$	43,716		$	(780	)
Comprehensive (loss) income attributable to First Potomac Realty Trust	$	(2,438	)	$	(1,409	)	$	41,326		$	(2,188	)

See accompanying notes to condensed consolidated financial statements.

FIRST POTOMAC REALTY TRUST AND SUBSIDIARIESConsolidated Statements of Cash Flows(Unaudited, amounts in thousands)
	Three Months Ended March 31,
	Six Months Ended June 30,
	2017			2016
Cash flows from operating activities:
Net income (loss)	$	4542,~~029~~201		$	(~~101~~2,093	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	1428,~~823~~935			1530,~~303~~713
Stock based compensation	~~829~~1,690			~~488~~994
Bad debt expense	~~324~~470			~~105~~371
Amortization of deferred market rent	5057			79155
Amortization of financing costs and discounts	~~434~~864			~~472~~791
Equity in earnings of affiliates	(4,~~223~~700		)	(~~555~~1,219		)
Distributions from investments in affiliates	—1,529			~~425~~726
Impairment of rental property	—			2,772
(Gain) loss on sale of rental property	(42,799		)	1,155
Changes in assets and liabilities:
Escrows and reserves	(~~929~~1,099		)	~~375~~73
Accounts and other receivables	~~1,007~~873			13,~~358~~166
Accrued straight-line rents	(25,~~883~~808		)	(12,~~725~~953		)
Prepaid expenses and other assets	(61,323		)	~~205~~1,604
Tenant security deposits	(~~129~~111		)	(~~748~~650		)
Accounts payable and accrued expenses	(12,~~474~~433		)	(21,~~313~~211		)
Accrued interest	(67108		)	39(102		)
Rents received in advance	~~259~~102			70238
Deferred costs	(12,~~171~~476		)	(~~682~~2,651		)
Total adjustments	(3518,~~955~~825		)	1433,~~051~~972
Net cash provided by operating activities	923,~~074~~376			1331,~~950~~879
Cash flows from investing activities:
Proceeds from sale of rental property, net	85,754			90,501
Change in escrow and reserve accounts	—			246
Principal payments from note receivable	—			34,000
Additions to rental property and furniture, fixtures and equipment	(6,569		)	(17,502		)
Change in escrow and reserve accounts	—			221
Additions to construction in progress	(242		)	(5,141		)
Additions to rental property and furniture, fixtures and equipment	(12,150		)	(30,953		)
Additions to construction in progress	(2,655		)	(10,586		)
Proceeds from sale of rental property owned through unconsolidated joint ventures, net	11,301			—
Net cash provided by investing activities	9082,~~244~~250			6883,~~104~~183
Cash flows from financing activities:
Financing costs	—			(~~245~~309		)
Issuance of debt	450,~~000~~117			80201,~~243~~408
Repayments of debt	(97143,~~891~~009		)	(93151,~~119~~036		)
Dividends to common shareholders	(511,~~815~~643		)	(814,~~701~~511		)
Dividends to preferred shareholders	—			(24,~~776~~442		)
Distributions to noncontrolling interests	(~~255~~509		)	(~~393~~651		)
Income tax obligation payments made on behalf of employees	(232		)	(122		)
Stock option exercises	14			—
Redemption of preferred shares	—			(55,000		)
Income tax obligation payments made on behalf of employees	(251		)	—
Redemption of operating partnership units	—			(319		)
Redemption of preferred shares	—			(145,000		)
Net cash used in financing activities	(100,193		)	(80,432		)
Redemption of operating partnership units	—			(345		)
Net (decrease) increase in cash and cash equivalents	(875		)	1,622
Net cash used in financing activities	(105,281		)	(114,886		)
Net increase in cash and cash equivalents	345			176
Cash and cash equivalents, beginning of period	14,144			13,527
Cash and cash equivalents, end of period	$	1314,~~269~~489		$	1513,~~149~~703

See accompanying notes to condensed consolidated financial statements.

FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES

Consolidated Statements of Cash Flows – Continued

(unaudited)

Supplemental disclosure of cash flow information for the ~~three~~six months ended ~~March~~June 3130, is as follows (dollars in thousands):

	2017			2016
Cash paid for interest, net	$	511,~~975~~620		$	612,~~251~~432
Non-cash investing and financing activities:
Change in fair value of the outstanding common Operating Partnership units	~~(2,383~~895		)	(1,~~324~~072		)
Value of common shares retired to settle employee tax obligation	~~232~~251			~~122~~137
Changes in accruals:
Additions to rental property and furniture, fixtures and equipment	(1,~~610~~932		)	~~421~~(1,049		)
Additions to development and redevelopment	~~474~~1,056			(14,~~190~~853		)

Cash paid for interest on indebtedness is net of capitalized interest of $~~22 thousand~~0.2 million and $0.2 5 million for the ~~three~~six months ended ~~March~~June 3130, 2017 and 2016, respectively.

During the ~~three~~six months ended ~~March 31~~June 30, 2017 and 2016, certain of our employees surrendered common shares owed them valued at $0.23 million and $0.1 million, respectively, to satisfy their statutory minimum tax obligation associated with the vesting of restricted common shares of beneficial interest.

Noncontrolling interests in First Potomac Realty Investment Limited Partnership, our operating partnership (the “Operating Partnership”), 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. We account for issuances of common Operating Partnership units individually, which could result in some portion of our noncontrolling interests being carried at fair value with the remainder being carried at historical cost. At ~~March~~June 3130, 2017 and 2016, we recorded adjustments of $35.72 million and $23.92 million, respectively, to present certain common Operating Partnership units at the greater of their carrying value or redemption value.

At ~~March~~June 3130, 2017 and 2016, we accrued $4.63 million and $108.38 million, respectively, of capital expenditures related to rental property and furniture, fixtures and equipment in accounts payable. At ~~March~~June 3130, 2017 and 2016, we accrued $01.62 million and $40.59 million, respectively, of capital expenditures related to development and redevelopment in accounts payable.

FIRST POTOMAC REALTY TRUST AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(1) Description of Business

First Potomac Realty Trust (the “Company”) is a leader in the ownership, management, redevelopment and development of office and business park properties in the greater Washington, D.C. region. The Company’s focus is owning and operating properties that the Company believes can benefit from its market knowledge and intensive operational skills with a focus on increasing 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 primarily for office use, and business parks contain buildings with office features combined with some industrial property space. 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.

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

We conduct our business through our Operating Partnership. We are the sole general partner of, and, as of ~~March~~June 3130, 2017, owned 95.8% of the common interest in the Operating Partnership. The remaining common 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 that are owned by unrelated parties.

At ~~March~~June 3130, 2017, we wholly owned properties totaling 6.0 million square feet and had a noncontrolling ownership interest in properties totaling an additional 0.4 million square feet through two unconsolidated joint ventures. We also owned land that can support 0.4 million square feet of additional development. Our consolidated properties were 92.46% occupied by ~~372~~378 tenants at ~~March~~June 3130, 2017. We do not include the square footage of properties in development or redevelopment, which totaled 0.1 million square feet at ~~March~~June 3130, 2017, in our occupancy calculation. We derive substantially all of our revenue from leases of space within our properties. As of ~~March~~June 3130, 2017, our largest tenant was the U.S. Government, which accounted for 1413.08% of our total annualized cash basis rent, and the U.S. Government combined with government contractors accounted for 20.9% of our total annualized cash basis rent as of ~~March~~June 3130, 2017. We operate so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes.

Transaction with Government Properties Income Trust

As previously announced, on June 27, 2017, First Potomac entered into a definitive merger agreement with Government Properties Income Trust (NASDAQ: GOV) under which GOV will acquire all of the outstanding shares of First Potomac (the “Transaction”). Under the terms of the merger agreement, First Potomac shareholders will receive a cash payment of $11.15 per share at closing. This represents a premium of 9.3% to First Potomac’s 30-trading day volume weighted average price per share ended April 24, 2017, the last trading day before media speculation regarding a potential sale of First Potomac. The Transaction, which is valued at $1.4 billion, including the assumption of debt, is expected to close prior to year-end 2017. In the interim, pursuant to the merger agreement, the Company has agreed that it will not pay regular, quarterly distributions to the holders of the Company’s common shares prior to the closing of the Transaction, except to the extent that dividends and other distributions are necessary for each of the Company and its real estate investment trust (“REIT”) subsidiary to maintain their respective status as a REIT.

The Transaction is subject to customary closing conditions, including approval by First Potomac shareholders at a special meeting. As a result, the Company can provide no assurances regarding when the Transaction will close, if at all. The Board of Trustees of First Potomac has unanimously approved both the merger and the merger agreement, and has recommended approval of the merger by First Potomac’s shareholders.

During the three and six months ended June 30, 2017, we recorded $2.2 million of costs related to legal, advisory and accounting fees in connection with the Transaction, which are reflected within “General and administrative expense” in our consolidated statements of operations for the respective periods.

(2) Summary of Significant Accounting Policies

(a) Principles of Consolidation

Our unaudited condensed consolidated financial statements include our accounts and the accounts of our Operating Partnership, which we consider to be a variable interest entity (“VIE”), and the subsidiaries in which we or our Operating Partnership has a controlling interest, which includes First Potomac Management, LLC, a wholly-owned subsidiary that manages the majority of our properties. All intercompany balances and transactions have been eliminated in consolidation.

We have condensed or omitted certain information and note 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. We believe 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 our annual report on Form 10-K for the year ended December 31, 2016 and as updated from time to time in our other filings with the SEC.

In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments and accruals necessary to present fairly our financial position as of ~~March~~June 3130, 2017 and the results of our operations, our comprehensive ~~income~~ (loss) income and our cash flows for the three and six months ended ~~March~~June 3130, 2017 and 2016. 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 unaudited condensed consolidated financial statements in conformity with GAAP requires our management team 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 unaudited 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, 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, when acquired in a business combination, or initial cost when constructed or acquired in an asset purchase. 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 our 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 lease
	Tenant improvements		Shorter of the useful life of the asset or the term of the related lease

We regularly review 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 carrying value of a property, an impairment analysis is performed. We assess 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 to maintain the operating capacity, 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. Further, we will record an impairment loss if we expect to dispose of a property in the near term at a price below carrying value. In such an event, we 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 operating capacity, 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. Further, we will record an impairment loss if we expect to dispose of a property in the near term at a price below carrying value. In such an event, we 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.

We will classify a building as held-for-sale in accordance with GAAP in the period in which we have made the decision to dispose of the building, our Board of Trustees or a designated delegate has approved the sale, there is a binding contract pursuant to which the buyer has significant money at risk, or 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. We will cease recording depreciation on a building once it has been classified as held-for-sale.

We will also determine whether the disposal of a building qualifies as a discontinued operation in accordance with GAAP by assessing whether the disposal of the building, or group of buildings, represents a strategic shift that has, or will have, a major effect on the Company’s operations or financial results. If the building does not qualify as a discontinued operation in accordance with GAAP, we will classify the building’s operating results, together with any impairment charges and any gains or losses on the sale of the building, in continuing operations for all periods presented in our consolidated statements of operations. We will classify the assets and liabilities related to the building as held-for-sale in our consolidated balance sheet for the period the held-for-sale criteria were met.

If the building does qualify as a discontinued operation under GAAP, we will classify the building’s operating results, together with any impairment charges and any gains or losses on the sale of the building, in discontinued operations in our consolidated statements of operations for all periods presented and classify the assets and liabilities related to the building as held-for-sale in our consolidated balance sheets for the periods presented. Interest expense is reclassified to discontinued operations only to the extent the disposed or held-for-sale property is secured by specific mortgage debt and the mortgage debt will not be assigned to another property owned by us after the disposition.

statements of operations for all periods presented and classify the assets and liabilities related to the building as held-for-sale in our consolidated balance sheets for the periods presented. Interest expense is reclassified to discontinued operations only to the extent the disposed or held-for-sale property is secured by specific mortgage debt and the mortgage debt will not be assigned to another property owned by us after the disposition.

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

We capitalize interest costs incurred on qualifying expenditures for real estate assets under development or redevelopment, which include our 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. We 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. We also capitalize direct compensation costs of our 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. We do not capitalize any other general and administrative costs such as office supplies, office rent expense or an overhead allocation to our development or redevelopment projects. Capitalized compensation costs were immaterial for the three and six months ended ~~March~~June 3130, 2017 and 2016. Capitalization of interest ends 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. We place redevelopment and development assets into 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) Application of New Accounting Standards

In ~~January~~December ~~2017~~2016, we adopted Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), which requires an entity to evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. The adoption of ASU 2014-15 did not have a material impact on our audited consolidated financial statements and related disclosures or our unaudited condensed consolidated financial statements and related disclosures.

In January 2017, we adopted Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which is intended to simplify several aspects of the accounting for employee share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 requires us to classify cash payments made on behalf of employees for taxes owed on the vesting of restricted common shares, for which we withhold vested common shares owed to the employee in an amount that equates to the value of the employee’s tax obligation, as a financing activity on our statements of cash flows. We elected to adopt ASU 2016-09 retrospectively and the adoption of ASU 2016-09 did not have a material impact on our unaudited condensed consolidated financial statements and related disclosures.

In January 2017, we adopted Accounting Standards Update No. 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control (“ASU 2016-17”), which requires a single decision maker or service provider, in evaluating whether it is the primary beneficiary, to consider on a proportionate basis indirect interests held through related parties under common control. The adoption of ASU 2016-17 did not have a material impact on our unaudited condensed consolidated financial statements and related disclosures.

In January 2017, we adopted Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”), which was issued by the Financial Accounting Standards Board (“FASB”) in January 2017. ASU 2017-01 provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. We anticipate ASU 2017-01 will change our accounting treatment of future property acquisitions; however, the adoption of ASU 2017-01 did not have a material impact on our unaudited condensed consolidated financial statements and related disclosures.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers and will replace most existing revenue recognition guidance when it becomes effective. In July 2015, the FASB deferred by one year the mandatory effective date of ASU 2014-09 from January 1, 2017 to January 1, 2018. Early adoption is permitted, but not prior to the original effective date of January 1, 2017. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. We have begun to evaluate each of the revenue streams under the new model and the pattern of recognition is not expected to change significantly. We have not yet selected a transition method and are evaluating the impact that ASU 2014-09 will have on our consolidated financial statements and related disclosures.

2015, the FASB deferred by one year the mandatory effective date of ASU 2014-09 from January 1, 2017 to January 1, 2018. Early adoption is permitted, but not prior to the original effective date of January 1, 2017. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. We have begun to evaluate each of the revenue streams under the new model and the pattern of recognition is not expected to change significantly. We have not yet selected a transition method and are evaluating the impact that ASU 2014-09 will have on our consolidated financial statements and related disclosures.

In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which requires, among other things, entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value disclosed for financial instruments measured at amortized cost on the balance sheet. ASU 2016-01 is effective for periods beginning after December 15, 2017; early adoption is not permitted. The guidance is not expected to have a material impact on our consolidated financial statements and related disclosures.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (“ASU 2016-02”), which requires a lessee to record on the balance sheet a right-of-use asset with a corresponding lease liability created by lease terms of more than 12 months. Additional qualitative and quantitative disclosures will also be required. The guidance will become effective for periods beginning after December 15, 2018 and will be applied using a modified retrospective transition method. We are currently evaluating the impact that ASU 2016-02 will have on our consolidated financial statements and related disclosures.

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). The guidance addresses eight classification issues related to the statement of cash flows, including debt prepayment or debt extinguishment costs and distributions received from equity-method investees. The guidance will become effective for periods beginning after December 15, 2017 and early adoption is permitted. ASU 2016-15 requires the use of a retrospective transition method to each period presented. If such retrospective transition is impracticable for certain issues, the adoption of ASU 2016-15 for the applicable issues may be applied prospectively as of the earliest date practicable. The guidance is not expected to have a material impact on our consolidated financial statements or related disclosures.

In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which requires companies to include cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. ASU 2016-18 is effective for periods beginning after December 15, 2017 and early adoption is permitted. The guidance is not expected to have a material impact on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. ASU 2017-04 is effective for periods beginning after December 15, 2019 and early adoption is permitted for measurement dates after January 1, 2017. The guidance is not expected to have a material impact on our consolidated financial statements and related disclosures.

In February 2017, the FASB issued Accounting Standards Update No. 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”), which clarifies the guidance in Subtopic 610-20 on accounting for derecognition of a nonfinancial asset. The update also defines in-substance nonfinancial assets and includes guidance on partial sales of nonfinancial assets. The amendments in ASU 2017-05 are to be applied at the same time that ASU 2014-09 is applied. We are currently evaluating the impact that ASU 2017-05 will have on our consolidated financial statements and related disclosures.

In May 2017, the FASB issued Accounting Standards Update No. 2017-09, Compensation - Stock Compensation (Topic 718) (“ASU 2017-09”), which clarifies and reduces both diversity in practice and cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. ASU 2017-09 is effective for periods beginning after December 15, 2017 and early adoption is permitted. We are currently evaluating the impact that ASU 2017-09 will have on our consolidated financial statements and related disclosures.

(e) Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation, primarily as a result of adopting ASU 2016-09 in January 2017. See note 2(d), Summary of Significant Accounting Policies - Application of New Accounting Standards for more information.

1213

(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 and non-vested shares. We apply the two-class method for determining EPS as our outstanding unvested shares with non-forfeitable dividend rights are considered participating securities. Our excess of distributions over earnings related to participating securities is shown as a reduction in total earnings attributable to common shareholders in our computation of EPS.

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

	Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Numerator for basic and diluted earnings per common share:
Net income (loss)	$	45,029		$	(101	)
Net (loss) income	$	(2,828	)	$	(1,992	)	$	42,201		$	(2,093	)
Less: Net (income) loss attributable to noncontrolling interests	(1,884		)	147
Less: Net loss (income) attributable to noncontrolling interests	123			390			(1,762		)	537
Net income attributable to First Potomac Realty Trust	43,145			46
Net (loss) income attributable to First Potomac Realty Trust	(2,705		)	(1,602		)	40,439			(1,556		)
Less: Dividends on preferred shares	—			(~~2,248~~794		)	—			(3,042		)
Less: Issuance costs of redeemed preferred shares (1)	—			(13,~~904~~095		)	—			(4,999		)
Net income (loss) attributable to common shareholders	43,145			(4,106		)
Net (loss) income attributable to common shareholders	(2,705		)	(5,491		)	40,439			(9,597		)
Less: Allocation to participating securities	(5561		)	(7353		)	(115		)	(126		)
Net income (loss) attributable to common shareholders	$	43,090		$	(4,179	)
Net (loss) income attributable to common shareholders	$	(2,766	)	$	(5,544	)	$	40,324		$	(9,723	)
Denominator for basic and diluted earnings per common share:
Weighted average common shares outstanding - basic	57,~~635~~999			57,~~542~~577			57,662			57,559
Weighted average common shares outstanding - diluted	57,~~907~~999			57,~~542~~577			57,940			57,559
Basic and diluted earnings per common share:
Net income (loss) attributable to common shareholders - basic	$	0.75		$	(0.07	)
Net (loss) income attributable to common shareholders	$	(0.05	)	$	(0.10	)	$	0.70		$	(0.17	)
Net income (loss) attributable to common shareholders - diluted	$	0.74		$	(0.07	)

(1) Represents the original issuance costs associated with the redemption of 23.26 million and 5.8 million 7.750% Series A Cumulative Redeemable Perpetual Preferred Shares (the “7.750% Series A Preferred Shares”) during the three and six months ended ~~March~~June 3130, 2016, respectively.

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

	Three Months Ended March 31,
	Three Months Ended June 30,		Six Months Ended June 30,
	2017	2016	2017	2016
Stock option awards	~~879~~848	~~1,018~~982	863	1,000
Non-vested share awards	~~595~~582	~~484~~489	601	505
	1,474	1,502
	1,430	1,471	1,464	1,505

1314

(4) Rental Property

Rental property represents wholly-owned buildings and related improvements, net of accumulated depreciation, and developable land. All of our rental properties are located within the greater Washington, D.C. region. Rental property consists of the following (dollars in thousands):

	March 31, 2017			December 31, 2016(1)
	June 30, 2017			December 31, 2016(1)
Land and land improvements	$	269,~~920~~932		$	282,923
Buildings and improvements	~~766~~768,~~394~~937			824,867
Construction in progress	2933,~~793~~242			4,605
Tenant improvements	185,~~264~~719			189,031
Furniture, fixtures and equipment	374			408
	1,251,745			1,301,834
	1,258,204			1,301,834
Less: accumulated depreciation	(~~227~~237,~~140~~036		)	(242,562		)
	$	1,~~024~~021,~~605~~168		$	1,059,272

⁽¹⁾ Excludes rental property totaling $13.2 million at December 31, 2016 related to One Fair Oaks, which was classified as held-for-sale at December 31, 2016 and was sold on January 9, 2017.

Development and Redevelopment Activity

We will place completed development and redevelopment assets in-service upon the earlier of one year after major construction activity is deemed to be substantially complete or upon occupancy. We construct office buildings and/or business parks on a build-to-suit basis or with the intent to lease upon completion of construction. At ~~March~~June 3130, 2017, we owned developable land that can accommodate 0.4 million square feet of additional building space, of which 34 thousand is located in the Washington, D.C. reporting segment, 0.1 million is in the Maryland reporting segment, 0.2 million is in the Northern Virginia reporting segment and 0.1 million is in the Southern Virginia reporting segment.

During the ~~first~~second quarter of 2017, we did not place in-service any completed development or redevelopment space. At ~~March~~June 3130, 2017, we did not have any completed development or redevelopment space that had yet to be placed in-service.

(5) Investment in Affiliates

We own an interest in ~~several~~two unconsolidated joint ventures, ~~two~~that ofown ~~which~~properties. ~~currently~~In addition, we own an interest in three unconsolidated joint ventures that sold the properties they owned (Aviation Business Park and Rivers Park I and II) in March 2017. We do not control the activities that are most significant to the joint ventures. As a result, the assets, the liabilities and the operating results of these non-controlled joint ventures are not consolidated within our unaudited condensed consolidated financial statements. Our investments in these joint ventures are recorded as “Investment in affiliates” on our consolidated balance sheets. On March 7, 2017, three of our unconsolidated joint ventures collectively sold Aviation Business Park, a 120,284 square-foot office building, and Rivers Park I and II, a 307,984 square-foot business park, which were all located in our Maryland reporting segment. Based on our percentage ownership of the joint ventures, our share of gross proceeds from the sale totaled $19.0 million, which generated $18.4 million of net proceeds. We used the net proceeds from the sale to repay $7.0 million (our proportionate share) of mortgage debt encumbering Rivers Park I and II, and the remainder was used to repay a portion of the outstanding balance under our unsecured revolving credit facility. We have had, and will have, no continuing involvement in the ownership decisions of any of the unconsolidated joint ventures’ disposed properties subsequent to their disposal.

1415

Our investment in affiliates consisted of the following (dollars in thousands):

	Reporting Segment	OwnershipInterest	Investment at ~~March~~June 3130, 2017		Investment at December 31, 2016
Prosperity Metro Plaza	Northern Virginia	51%	$	2627,~~772~~165	$	26,414
1750 H Street, NW	Washington, D.C.	50%	14,~~594~~198		14,624
Aviation Business Park(1)	Maryland	50%	~~482~~—		5,941
Rivers Park I and II(1)(2)	Maryland	25%	~~466~~—		2,413
			$	4241,~~314~~363	$	49,392

(1) The unconsolidated joint ventures that owned Aviation Business Park and Rivers Park I and II sold these properties on March 7, 2017. ~~Our~~During ~~investment~~the inthree ~~these~~months ~~joint~~ended ~~ventures~~June at30, ~~March~~2017, 31we recognized a nominal loss from these properties, ~~2017~~which iswas primarily ~~comprised~~due to a true-up of ~~our~~accrued ~~share~~liabilities subsequent to the sale of the properties. We anticipate a final true-up of all existing liabilities and a final distribution of any remaining cash ~~that~~to ~~has~~occur ~~not~~in ~~yet~~the ~~been~~third ~~distributed~~quarter of 2017.


⁽²⁾	Rivers Park I and Rivers Park II were owned through two separate unconsolidated joint ventures.

The following table provides a summary of the mortgage debt held by our unconsolidated joint ventures (dollars in thousands):

	FPO Ownership	Effective Interest Rate	Maturity Date	Principal Balance at ~~March~~June 3130, 2017(1)		Principal Balance at December 31, 2016(1)
Rivers Park I and II (2)	25%	LIBOR + 1.90%(3)	September 2017	$	—	$	28,000
1750 H Street, NW(4)	50%	3.92%	August 2024	32,000		32,000
Prosperity Metro Plaza(5)	51%	3.91%	December 2029	50,000		50,000
Weighted Average / Total		3.91%		$	82,000	$	110,000


⁽¹⁾	Reflects the entire balance of the debt secured by the properties, not our portion of the debt.


⁽²⁾	The unconsolidated joint ventures that owned Rivers Park I and II sold these properties on March 7, 2017. The unconsolidated joint venture partners used net proceeds from the sale to repay the mortgage debt encumbering the properties. At December 31, 2016, $2.8 million of the outstanding mortgage balance was recourse to us.

(3) At ~~March~~June 3130, 2017, LIBOR was 01.9822%. All references to LIBOR in the condensed consolidated financial statements refer to one-month LIBOR.


⁽⁴⁾	The loan requires interest-only payments with a constant interest rate over the life of the loan. The loan is repayable in full, without penalty, on or after August 1, 2021.


⁽⁵⁾	The loan requires interest-only payments through December 2024, at which time the loan requires principal and interest payments through its maturity date. The loan is repayable in full, without penalty, on or after June 1, 2029.

The net assets of our unconsolidated joint ventures consisted of the following (dollars in thousands):

	March 31, 2017		December 31, 2016
	June 30, 2017		December 31, 2016
Assets:
Rental property, net	$	~~144~~143,~~065~~184	$	189,245
Cash and cash equivalents	119,~~122~~786		9,887
Other assets	16,~~472~~509		20,726
Total assets	~~171~~169,~~659~~479		219,858
Liabilities:
Mortgage loans, net(1)(2)	81,~~416~~431		109,372
Other liabilities	67,~~503~~608		8,674
Total liabilities	8789,~~919~~040		118,046
Net assets	$	8380,~~740~~439	$	101,812

(1) Of the total mortgage debt that encumbers our unconsolidated properties, none was recourse to us at ~~March~~June 3130, 2017 and $2.8 million was recourse to us at December 31, 2016.

(2) Mortgage loans, net at both ~~March~~June 3130, 2017 and December 31, 2016 included $0.6 million of unamortized deferred financing costs

15Our share of earnings or losses related to our unconsolidated joint ventures is recorded in our consolidated statements of operations as “Equity in earnings of affiliates.” The following table summarizes the results of operations of our unconsolidated joint ventures for the periods presented, of which, our proportionate share is reflected in “Equity in earnings of affiliates” in our

Our share of earnings or losses related to our unconsolidated joint ventures is recorded in our consolidated statements of operations as “Equity in earnings of affiliates.” The following table summarizes the results of operations of our unconsolidated joint ventures for the periods presented, of which, our proportionate share is reflected in “Equity in earnings of affiliates” in our consolidated statements of operations based on our varying ownership interests in the unconsolidated joint ventures (dollars in thousands):16

	Three Months Ended March 31,
	2017			2016
Total revenues	$	5,679		$	6,290
Total operating expenses	(1,937		)	(2,166		)
Net operating income	3,742			4,124
Depreciation and amortization	(1,863		)	(1,966		)
Interest expense, net	(962		)	(993		)
Gain on sale of rental property	10,324			—
Net income	$	11,241		$	1,165

consolidated statements of operations based on our varying ownership interests in the unconsolidated joint ventures (dollars in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Total revenues	$	4,679		$	6,240		$	10,357		$	12,529
Total operating expenses	(1,562		)	(1,814		)	(3,499		)	(3,980		)
Net operating income	3,117			4,426			6,858			8,549
Depreciation and amortization	(1,382		)	(2,006		)	(3,245		)	(3,972		)
Interest expense, net	(817		)	(997		)	(1,778		)	(1,989		)
Gain on sale of rental property	—			—			10,324			—
Net income	$	918		$	1,423		$	12,159		$	2,588

The following table summarizes the results of operations of Aviation Business Park and Rivers Park I and II, which were sold in March 2017, of which, our proportionate share is reflected in “Equity in earnings of affiliates” in our consolidated statements of operations based on our varying ownership interests in the unconsolidated joint ventures that owned the respective properties (dollars in thousands):

	Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Total revenues	$	~~1,113~~—		$	1,~~631~~579		$	1,113		$	3,210
Total operating expenses	(~~275~~70		)	(~~641~~412		)	(342		)	(1,054		)
Net operating income	838			990
Net operating (loss) income	(70		)	1,167			771			2,156
Depreciation and amortization	~~(420~~—		)	(~~643~~666		)	(420		)	(1,309		)
Interest expense, net	~~(146~~1		)	(~~175~~180		)	(146		)	(354		)
Income from operations of disposed properties	272			172
(Loss) income from operations of disposed properties	(69		)	321			205			493
Gain on sale of rental property	~~10,324~~—			—			10,324			—
Net income	$	10,596		$	172
Net (loss) income	$	(69	)	$	321		$	10,529		$	493

We earn various fees from several of our joint ventures, which include management fees, leasing commissions and construction management fees. We recognize fees only to the extent of the third party ownership interest in our unconsolidated joint ventures. We recognized fees from our unconsolidated joint ventures of $0.12 million and $0.23 million for the three and six months ended ~~March~~June 3130, 2017, respectively, and $0.2 million and $0.4 million for the three and six months ended June 30, 2016, respectively, which are reflected within “Tenant reimbursements and other revenues” on our consolidated statements of operations.

(6) Dispositions

We will report a disposed or held-for-sale property or group of properties in discontinued operations only if the disposal represents a strategic shift that has, or will have, a major effect on our operations and financial results. All other disposed properties will have their operating results reflected within continuing operations on our consolidated statements of operations for all periods presented.

We have had, and will have, no continuing involvement with any of our disposed properties subsequent to their disposal. The operations of the disposed properties were not subject to any income based taxes. Other than the properties discussed below in this note 6, Dispositions, and in note 5, Investment in Affiliates, we did not dispose of or enter into any agreements to sell any other properties during the three and six months ended ~~March~~June 3130, 2017 and 2016.

1617

Disposed or Held-for-Sale Properties within Continuing Operations

The following table is a summary of property dispositions whose operating results are included in continuing operations in our consolidated statements of operations for the periods presented (dollars in thousands):



Property	Reporting Segment	Disposition Date	Property Type	Square Feet	Net Sale Proceeds
Plaza 500	Northern Virginia	2/17/2017	Industrial	502,830	$	72,499
One Fair Oaks ⁽¹⁾	Northern Virginia	1/9/2017	Office	214,214	13,255
Storey Park⁽²⁾	Washington, D.C.	7/25/2016	Land	—	52,659
NOVA Non-Core Portfolio⁽³⁾	Northern Virginia	3/25/2016	Various	945,745	90,501


⁽¹⁾	One Fair Oaks was classified as held-for-sale at December 31, 2016, and the building was vacant at the time of sale.


⁽²⁾	This development site could have supported up to 712,000 rentable square feet.


⁽³⁾	Consists of Van Buren Office Park, Herndon Corporate Center, Windsor at Battlefield, Reston Business Campus, Enterprise Center, Gateway Centre Manassas, Linden Business Center and Prosperity Business Center (collectively, the “NOVA Non-Core Portfolio”).

OnOne ~~February 17,~~Fair ~~2017,~~Oaks wemet ~~sold~~our ~~Plaza~~held-for-sale ~~500~~criteria ~~for~~at ~~net~~December ~~proceeds~~31, 2016 and, therefore, the assets of ~~$72.5~~the ~~million~~building ~~and~~were ~~recorded~~classified awithin ~~gain~~“Assets-held-for-sale” on ~~sale~~our ofconsolidated ~~$42.7~~balance ~~million~~sheet at December 31, 2016. The assets classified within held-for-sale as of ~~Plaza~~December 31, 2016 ~~500~~primarily ~~represented~~consisted ~~the~~of ~~divestiture~~$17.6 ofmillion ~~our~~in ~~last~~building ~~industrial~~and ~~property~~building improvements, $1.6 Wemillion ~~used~~of ~~the~~land, ~~proceeds~~and to$6.0 ~~pay~~million ~~down~~of aaccumulated ~~portion~~depreciation. ofNo ~~the~~material ~~outstanding~~liabilities ~~balance~~were ~~under~~classified ~~our~~as ~~unsecured~~held-for-sale ~~revolving~~at ~~credit~~December ~~facility~~31, 2016.

On January 9, 2017, we sold One Fair Oaks for net proceeds of $13.3 million and recorded a gain on sale of $0.1 million. We used the proceeds to pay down a portion of the outstanding balance under our unsecured revolving credit facility. One Fair Oaks met our held-for-sale criteria at December 31, 2016 and, therefore, the assets of the building were classified within “Assets-held-for-sale” on our consolidated balance sheet at December 31, 2016. The assets classified within held-for-sale as of December 31, 2016 primarily consisted of $17.6 million in building and building improvements, $1.6 million of land, and $6.0 million of accumulated depreciation. No material liabilities were classified as held-for-sale at December 31, 2016.

The following table summarizes the aggregate results of operations for the disposed or held-for-sale properties that are included in continuing operations for the periods presented (dollars in thousands):

	Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Revenues	$	~~804~~—		$	73,~~043~~605		$	804		$	10,648
Property operating expenses	~~(304~~—		)	(21,~~823~~341		)	(304		)	(4,163		)
Depreciation and amortization	~~(289~~—		)	(1,~~343~~236		)	(289		)	(2,579		)
Interest expense	—			(~~184~~208		)	—			(392		)
Loss on debt extinguishment	—			~~(48~~—		)	—			(48		)
Income from operations of disposed property	211			2,645
Impairment of rental property(1)	—			(2,772		)	—			(2,772		)
Gain (loss) on sale of rental property(1)	42,799			(1,155		)
(Loss) income from operations of disposed property	—			(1,952		)	211			694
Net income from continuing operations	$	43,010		$	1,490
Gain (loss) on sale of rental property(2)	—			—			42,799			(1,155		)
Net (loss) income from continuing operations	$	—		$	(1,952	)	$	43,010		$	(461	)

(1) During the ~~first~~second quarter of ~~2017~~2016, we recorded aan ~~$0.1~~impairment ~~million~~charge ~~gain~~related onto ~~the~~Storey ~~sale~~Park ofbased ~~One Fair Oaks and a $42.7 million gain~~ on the ~~sale~~anticipated ofsales ~~Plaza 500.~~price ~~During~~less ~~the~~estimated ~~first~~selling ~~quarter~~costs. ofThe ~~2016,~~property wewas ~~recorded~~sold ~~a $1.2 million loss~~ on ~~the~~July ~~sale~~25, ~~of the NOVA Non-Core Portfolio~~2016.

17(2) During the first quarter of 2017, we recorded a $0.1 million gain on the sale of One Fair Oaks and a $42.7 million gain on the sale of Plaza 500. During the first quarter of 2016, we recorded a $1.2 million loss on the sale of the NOVA Non-Core Portfolio.

(7) Debt

Our debt consisted of the following (dollars in thousands):

	March 31, 2017(1)		December 31, 2016(1)
	June 30, 2017(1)		December 31, 2016(1)
Mortgage loans, net, effective interest rates ranging from 4.22% to 6.01%, maturing at various dates through September 2030(2)(3)	$	~~295~~271,~~523~~720	$	296,212
Unsecured term loan, net, effective interest rates ranging from LIBOR plus 1.45% to LIBOR plus 1.80%, with staggered maturity dates ranging from December 2020 to December 2022(2)	299,~~433~~462		299,404
Unsecured revolving credit facility, net, effective interest rate of LIBOR plus 1.50%, maturing December 2019(2)	4873,~~758~~958		141,555
Total	$	~~643~~645,~~714~~140	$	737,171

(1) The balances include a total of $5.84 million and $6.2 million of unamortized deferred financing costs at ~~March~~June 3130, 2017 and December 31, 2016, respectively.

(2) At ~~March~~June 3130, 2017, LIBOR was 01.9822%.

(3) The ~~balances~~balance at ~~March~~June 3130, 2017 includes one construction loan and the balance at December 31, 2016 ~~include~~includes two construction loans.

(a) Mortgage Loans

The following table provides a summary of our mortgage debt, which includes ~~two~~ construction loans (dollars in thousands):

Encumbered Property	ContractualInterest Rate		EffectiveInterestRate			MaturityDate	~~March~~June 3130, 2017			December 31, 2016
440 First Street, NW Construction Loan(1)(2)	LIBOR + 2.50%		LIBOR + 2.50%			May 2017	$	~~32,216~~—		$	32,216
Redland II and III	4.20	%	4.64	%		November 2017	62,~~873~~529			63,214
Northern Virginia Construction Loan(3)	LIBOR + 1.85%		LIBOR + 1.85%			September 2019	34,584			34,584
Northern Virginia Construction Loan(1)(3)	LIBOR + 1.85%		LIBOR + 1.85%			September 2019	43,700			34,584
840 First Street, NE	5.72	%	6.01	%		July 2020	3534,~~023~~843			35,201
Battlefield Corporate Center	4.26	%	4.40	%		November 2020	3,~~309~~264			3,353
1211 Connecticut Avenue, NW	4.22	%	4.47	%		July 2022	28,~~347~~190			28,503
1401 K Street, NW	4.80	%	4.93	%		June 2023	35,~~384~~209			35,556
11 Dupont Circle, NW	4.05	%	4.22	%		September 2030	66,780			66,780
Principal balance			4.4554	%	(4)		~~298~~274,~~516~~515			299,407
Unamortized deferred financing costs							(2,~~993~~795		)	(3,195		)
Total balance, net							$	~~295~~271,~~523~~720		$	296,212

(1) At ~~March~~June 3130, 2017, LIBOR was 01.9822%.

(2) ~~This~~On ~~construction~~May ~~loan is collateralized by 440 First Street~~23, ~~NW. In May 2016~~2017, we ~~extended~~used ~~the~~a ~~maturity~~$32.0 ~~date~~million bydraw ~~one~~under ~~year~~the tounsecured ~~May~~revolving ~~30,~~credit ~~2017.~~facility Weand ~~can~~available ~~repay~~cash ~~all~~to ~~or a portion of the construction loan~~repay, without penalty, ~~at any time during~~ the ~~term~~construction ~~of the~~ loan. Atencumbering ~~March~~440 ~~31,~~First ~~2017~~Street, ~~per the terms of the loan agreement, 50% of the outstanding principal balance and all of the outstanding accrued interest were recourse to us~~NW.


⁽³⁾	This construction loan has a borrowing capacity of up to $43.7 million and is collateralized by the NOVA build-to-suit, which was placed in-service in the third quarter of 2016. We can repay all or a portion of the Northern Virginia Construction Loan, without penalty, at any time during the term of the loan.


⁽⁴⁾	Represents the weighted average interest rate on total mortgage debt.

1819

(b) Unsecured Term Loan and Unsecured Revolving Credit Facility

The table below shows the outstanding balances and the interest rates of the three tranches of the $300.0 million unsecured term loan and the unsecured revolving credit facility at ~~March~~June 3130, 2017 and December 31, 2016 (dollars in thousands):

	Maturity Date	Interest Rate(1)	~~March~~June 3130, 2017			December 31, 2016
Unsecured Term Loan
Tranche A	December 2020	LIBOR + 1.45%	$	100,000		$	100,000
Tranche B	June 2021	LIBOR + 1.45%	100,000			100,000
Tranche C	December 2022	LIBOR + 1.80%	100,000			100,000
Total			300,000			300,000
Unamortized deferred financing costs			(~~567~~538		)	(596		)
Total, net			$	299,~~433~~462		$	299,404
Unsecured Revolving Credit Facility
Outstanding borrowings	December 2019(2)	LIBOR + 1.50% (3)	$	5176,000		$	144,000
Unamortized deferred financing costs			(2,~~242~~042		)	(2,445		)
Total, net			$	4873,~~758~~958		$	141,555

(1) Reflects the interest rate spreads at ~~March~~June 3130, 2017. At ~~March~~June 3130, 2017, LIBOR was 01.9822%. The interest rate spread is subject to change based on our maximum total indebtedness ratio. For more information, see note 7(d), Debt – Financial Covenants.


⁽²⁾	The maturity date of the unsecured revolving credit facility may be extended for two, six-month terms at our option.

(3) At ~~March~~June 3130, 2017, our outstanding borrowings under the unsecured revolving credit facility had a weighted average interest rate of 2.57%.

During the three months ended ~~March~~June 3130, 2017, we ~~repaid $97.0 million of the outstanding balance under the unsecured revolving credit facility. In January 2017, we~~ used ~~the~~a ~~net~~draw ~~proceeds~~on ~~from~~ the ~~sale~~Northern ofVirginia ~~One~~Construction ~~Fair~~Loan ~~Oaks and available cash~~ to repay $1412.0 million of the outstanding balance under our unsecured revolving credit facility. InDuring ~~February 2017, we used a portion of~~ the ~~net~~three ~~proceeds~~months ~~from~~ended ~~the~~June ~~sale~~30, of2017, ~~Plaza~~we ~~500~~borrowed ~~to repay~~ $7032.0 million ofunder the ~~outstanding balance under our~~ unsecured revolving credit facility~~. In March 2017~~, we used our proportionate share of the net proceeds from the sale of Aviation Business Park and Rivers Park I and II to repay $7.0 million of the mortgage loan that encumbered Rivers Park I and II (our proportionate share) and the remainder was used, together with available cash, to repay ~~$13.0 million of~~ the ~~outstanding~~440 ~~balance~~First ~~under~~Street, ~~our~~NW ~~unsecured~~Construction ~~revolving~~Loan ~~credit~~and ~~facility. During the three months ended March 31, 2017, we~~ borrowed $45.0 million ~~under the unsecured revolving credit facility~~ for general corporate purposes.

For the three and six months ended ~~March~~June 3130, 2017, our weighted average borrowings outstanding under the unsecured revolving credit facility were $9666.61 million and $81.3 million, respectively, with a weighted average interest rate of 2.35% ~~compared~~and ~~with~~2.4%, respectively. For the three and six months ended June 30, 2016, our weighted average borrowings ofoutstanding under the unsecured revolving credit facility were $~~169~~162.53 million and $165.9 million, respectively, with a weighted average interest rate of 1.98% ~~for~~and ~~the three months ended March 31~~1.9%, ~~2016~~ respectively. Our maximum outstanding borrowings were $~~144~~88.0 million and $~~193~~144.0 million ~~during~~for the three and six months ended ~~March 31~~June 30, 2017, respectively, and ~~2016,~~$204.0 ~~respectively~~million for both the three and six months ended June 30, 2016.

As of the date of this filing, we had $5172.0 million outstanding and $~~172~~169.03 million available capacity under the unsecured revolving credit facility. We are required to pay a commitment fee at an annual rate of 0.15% of the unused capacity if our usage exceeds 50% of our total capacity under the revolving credit facility, or 0.25% if our usage does not exceed 50%.

At ~~March~~June 3130, 2017, we had nine interest rate swap agreements outstanding that collectively fixed LIBOR, at a weighted average interest rate of 1.4%, on $240.0 million of our variable rate debt. On July 18, 2017, five swaps that together fixed LIBOR, at a weighted average interest rate of 1.5%, on $147.5 million of our variable rate date expired. See note 8, Derivative Instruments, for more information about our interest rate swap agreements.

(d) Financial Covenants

The credit agreement governing our unsecured revolving credit facility and unsecured term loan contains various restrictive covenants, including with respect to liens, indebtedness, investments, distributions, mergers and asset sales. 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 under the agreement to be immediately due and payable.

1920

~~among~~Our ~~other~~outstanding ~~things~~corporate debt agreements contain specific financial covenants that may impact future financing decisions made by us or may be impacted by a decline in operations. These covenants relate to our allowable leverage, ~~declare~~minimum ~~the~~tangible ~~principal~~net worth, ~~accrued~~fixed ~~interest~~charge coverage and other ~~obligations~~financial ~~under~~metrics. As of June 30, 2017, we were in compliance with the ~~agreement~~covenants toof beour ~~immediately~~amended, ~~due~~restated and ~~payable.~~consolidated unsecured revolving credit facility and unsecured term loan and the Northern Virginia Construction Loan.

Our outstanding corporate debt agreements contain specific financial covenants that may impact future financing decisions made by us or may be impacted by a decline in operations. These covenants relate to our allowable leverage, minimum tangible net worth, fixed charge coverage and other financial metrics. As of March 31, 2017, we were in compliance with the covenants of our amended, restated and consolidated unsecured revolving credit facility and unsecured term loan, the 440 First Street, NW Construction Loan and the Northern Virginia Construction Loan.

Our 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 we were 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 we 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 our liquidity, financial condition, results of operations and ability to make distributions to our shareholders.

Our unsecured revolving credit facility and unsecured term loan are subject to interest rate spreads that float based on the quarterly measurement of our maximum consolidated total indebtedness to gross asset value ratio. Based on our leverage ratio at ~~March~~June 3130, 2017, the applicable interest rate spreads on the unsecured revolving credit facility and the unsecured term loan will remain unchanged.

(8) Derivative Instruments

We are exposed to certain risks arising from business operations and economic factors. We use derivative financial instruments to manage exposures that arise from business activities in which our 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. We do not use derivatives for trading or speculative purposes and we intend to enter into derivative agreements only with counterparties that we believe have a strong credit rating to mitigate the risk of counterparty default or insolvency. No hedging activity can completely insulate us from the risks associated with changes in interest rates. Moreover, interest rate hedging could fail to protect us or adversely affect us because, among other things:


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


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


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


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

We enter into interest rate swap agreements to hedge our exposure on our 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.

2021



Maturity Date	Notional Amount		Interest Rate Contractual Component	Fixed LIBOR Interest Rate
July 2017	$	30,000	LIBOR	2.093	%
July 2017	30,000		LIBOR	2.093	%
July 2017	25,000		LIBOR	1.129	%
July 2017	12,500		LIBOR	1.129	%
July 2017	50,000		LIBOR	0.955	%
July 2018	12,500		LIBOR	1.383	%
July 2018	30,000		LIBOR	1.660	%
July 2018	25,000		LIBOR	1.394	%
July 2018	25,000		LIBOR	1.135	%
Total/Weighted Average	$	240,000		1.442	%

~~Our~~On ~~interest~~July 18, ~~rate~~2017, ~~swap~~five ~~agreements~~swaps ~~are~~that ~~designated~~together asfixed ~~cash~~LIBOR ~~flow~~at ~~hedges~~a ~~and~~weighted weaverage ~~record~~interest ~~the~~rate ~~effective portion~~ of ~~any~~1.5%, 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 ~~our consolidated balance sheets~~$147.5 Wemillion ~~record any gains or losses incurred as a result~~ of ~~each interest rate swap agreement’s fixed rate deviating from~~ our ~~respective~~variable ~~loan’s contractual~~ rate ~~within~~date ~~“Interest expense” in our consolidated statements of operations~~expired. ~~We did not have any material ineffectiveness associated with our cash flow hedges during the three months ended March 31, 2017 and 2016.~~

~~Amounts~~Our ~~reported~~interest rate swap agreements are designated as cash flow hedges and we record the effective portion of any unrealized gains associated with the change in ~~accumulated~~fair ~~other~~value ~~comprehensive~~of ~~loss~~the ~~related~~swap toagreements ~~derivatives~~within ~~will~~“Accumulated beother ~~reclassified~~comprehensive toloss” and “~~Interest~~Prepaid ~~expense~~expenses and other assets” onand ~~our~~the ~~consolidated~~effective ~~statements~~portion of ~~operations~~any asunrealized ~~interest~~losses ~~payments~~within ~~are~~“Accumulated ~~made~~other comprehensive loss” and “Accounts payable and other liabilities” on our ~~variable-rate~~consolidated ~~debt~~balance sheets. We ~~reclassified~~record ~~accumulated~~any ~~other~~gains ~~comprehensive~~or losses incurred as ana ~~increase~~result toof each interest ~~expense~~rate ofswap ~~$0.4~~agreement’s ~~million~~fixed ~~and~~rate ~~$0.8~~deviating ~~million~~from ~~for~~our ~~the~~respective ~~three~~loan’s ~~months~~contractual ~~ended~~rate ~~March 31, 2017~~within ~~and~~“Interest ~~2016,~~expense” ~~respectively.~~in Asour ofconsolidated ~~March 31, 2017,~~statements weof ~~estimated~~operations. ~~that~~We ~~$0.4~~did ~~million~~not ofhave ~~our~~any ~~accumulated~~material ~~other~~ineffectiveness ~~comprehensive~~associated ~~loss~~with ~~will~~our becash ~~reclassified~~flow ashedges anduring ~~increase~~the tothree ~~interest~~and ~~expense~~six ~~over~~months ~~the~~ended ~~following~~June 30, 2017 ~~twelve~~and ~~months~~2016.

Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to “Interest expense” on our consolidated statements of operations as interest payments are made on our variable-rate debt. We reclassified accumulated other comprehensive losses as an increase to interest expense of $0.3 million and $0.6 million for the three and six months ended June 30, 2017, respectively, and $0.8 million and $1.6 million for the three and six months ended June 30, 2016, respectively. As of June 30, 2017, we estimated that $0.1 million of our accumulated other comprehensive loss will be reclassified as an increase to interest expense over the following twelve months.

(9) Fair Value Measurements

Our application of GAAP outlines a valuation framework and creates 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 we provide 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 we have 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).

2122

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 our 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 our consolidated assets and liabilities that are measured on a non-recurring and recurring basis as of ~~March~~June 3130, 2017 and December 31, 2016 (dollars in thousands):

	Balance at March 31, 2017		Level 1		Level 2		Level 3
	Balance at June 30, 2017		Level 1		Level 2		Level 3
Recurring Measurements:
Derivative instrument-swap assets	$	6870	$	—	$	6870	$	—
Derivative instrument-swap liabilities	~~378~~123		—		~~378~~123		—
	Balance at December 31, 2016		Level 1		Level 2		Level 3
Recurring Measurements:
Derivative instrument-swap liabilities	$	906	$	—	$	906	$	—

We did not re-measure or complete any transactions involving non-financial assets or non-financial liabilities that are measured at fair value on a recurring basis during the ~~three~~six months ended ~~March~~June 3130, 2017 and 2016. Also, no transfers into or out of fair value measurement levels for assets or liabilities that are measured on a recurring basis occurred during the ~~three~~six months ended ~~March~~June 3130, 2017 and 2016.

Impairment of Rental Property

We regularly review market conditions for possible impairment of a property’s carrying value. When circumstances such

as adverse market conditions, changes in management’s intended holding period or potential sale to a third party indicate a possible impairment of a property, an impairment analysis is performed.

On July 25, 2016, we sold Storey Park, a development site located in our Washington, D.C. reporting segment. The property was classified as held-for-sale on our consolidated balance sheet at June 30, 2016, and during the second quarter of 2016, we recorded an impairment charge of $2.8 million related to the property based on the anticipated sales price, less estimated selling costs. See note 6, Dispositions, for more information.

Interest Rate Derivatives

At ~~March~~June 3130, 2017, we had hedged $240.0 million of our variable rate debt through nine interest rate swap agreements. On July 18, 2017, five swaps that together fixed LIBOR, at a weighted average interest rate of 1.5%, on $147.5 million of our variable rate date expired. See note 8, Derivative Instruments, for more information about our interest rate swap agreements.

The interest rate derivatives are fair valued based on prevailing market yield curves on the measurement date and also incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting any applicable credit enhancements, such as collateral postings, thresholds, mutual inputs and guarantees. We use a third party to assist in valuing our 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 our interest rate swap agreements. Our interest rate swap derivatives are effective cash flow hedges and the effective portion of the change in fair value is recorded in the equity section of our 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. We determine the fair value of our 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. We deem the fair value measurement of our debt instruments as a Level 2 measurement as we use quoted interest rates for similar debt instruments to value our debt instruments.

The carrying amount and estimated fair value of our debt instruments are as follows (dollars in thousands):

	March 31, 2017				December 31, 2016
	June 30, 2017				December 31, 2016
	CarryingValue(1)		FairValue		CarryingValue(1)		FairValue
Financial Liabilities:
Mortgage debt	$	~~298~~274,~~516~~515	$	~~296~~274,~~923~~716	$	299,407	$	300,927
Unsecured term loan	300,000		300,000		300,000		300,000
Unsecured revolving credit facility	5176,000		5176,000		144,000		144,000
Total	$	~~649~~650,~~516~~515	$	~~647~~650,~~923~~716	$	743,407	$	744,927

(1) The debt balances exclude a combined total of $5.84 million and $6.2 million of unamortized deferred financing costs at ~~March~~June 3130, 2017 and December 31, 2016, respectively.

(10) Equity

In December 2015, our Board of Trustees authorized the redemption of some or all of our 6.4 million outstanding 7.750% Series A Preferred Shares. On January 19, 2016 and April 27, 2016, we used proceeds from dispositions to redeem 2.2 million shares and 3.6 million shares, respectively, of our 7.750% Series A Preferred Shares at a redemption price of $25.00 per share, plus accrued dividends up to the applicable dates of redemption. On July 6, 2016, we used proceeds from the repayment of a mezzanine loan to redeem the remaining 0.6 million outstanding shares of our 7.750% Series A Preferred Shares at a redemption price of $25.00 per share, plus accrued dividends up to the date of redemption. The 7.750% Series A Preferred Shares (NYSE: FPO-PA) were delisted from trading on the New York Stock Exchange upon redemption of the remaining 0.6 million outstanding shares on July 6, 2016.

On January 24, 2017, we declared a dividend of $0.10 per common share, equating to an annualized dividend of $0.40 per common share. The dividend was paid on February 15, 2017 to common shareholders of record as of February 8, 2017. We record dividends on non-vested share awards as a reduction of shareholders’ equity. Dividends paid on non-vested share awards that subsequently do not vest are recorded as compensation expense in the period in which they are forfeited or expire. For each dividend paid by us on our common shares and, when applicable, preferred shares, the Operating Partnership distributes an equivalent distribution on our common and preferred Operating Partnership units, respectively.

On April 25, 2017, we declared a dividend of $0.10 per common share~~, equating to an annualized dividend of $0~~.40 ~~per common share.~~ The dividend ~~will~~was be paid on May 15, 2017 to common shareholders of record as of May 8, 2017.

~~Our~~Pursuant ~~unsecured~~to ~~revolving~~the ~~credit~~terms ~~facility~~of ~~and~~the ~~unsecured~~merger ~~term~~agreement ~~loan~~in connection with the Transaction, the ~~440~~Company ~~First~~has ~~Street,~~agreed NWthat ~~Construction~~it ~~Loan~~will ~~and~~not pay regular, quarterly distributions to the ~~Northern~~holders ~~Virginia~~of ~~Construction~~the ~~Loan~~Company’s ~~contain~~common ~~certain~~shares ~~restrictions~~prior ~~that~~to ~~include,~~the ~~among~~date ~~other~~of ~~things~~Transaction, ~~requirements~~except to ~~maintain~~the ~~specified~~extent ~~coverage~~that ~~ratios~~dividends and other ~~financial~~distributions ~~covenants,~~are ~~which~~necessary ~~may~~for ~~limit~~both ~~our~~the ~~ability~~Company toand ~~make~~its ~~distributions~~REIT subsidiary to ~~our~~maintain ~~common~~their ~~and~~status ~~preferred~~as ~~shareholders,~~a ~~except~~REIT. ~~for~~Any ~~distributions~~payment ~~required~~of dividends prior to ~~maintain~~the ~~our~~completion ~~qualification~~of asthe Transaction will result in a ~~REIT~~corresponding reduction in the $11.15 per share merger consideration.

Our unsecured revolving credit facility and unsecured term loan and the Northern Virginia Construction Loan contain certain restrictions that include, among other things, requirements to maintain specified coverage ratios and other financial covenants, which may limit our ability to make distributions to our common and preferred shareholders, except for distributions required to maintain our qualification as a REIT.

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. Our equity and redeemable noncontrolling interests are as follows (dollars in thousands):

	Total Equity			Redeemablenoncontrollinginterests
Balance at December 31, 2016	$	436,383		$	28,244
Net income	4340,~~145~~439			1,~~884~~762
Changes in ownership, net	32,~~076~~330			(~~2,382~~895		)
Distributions to owners	(511,~~815~~643		)	(~~255~~509		)
Other comprehensive income, net	~~571~~817			2535
Balance at March 31, 2017	$	477,360		$	27,516
Balance at June 30, 2017	$	468,326		$	28,637



	First Potomac Realty Trust			Non-redeemable noncontrolling interests⁽¹⁾			Total Equity			Redeemable noncontrolling interests
Balance at December 31, 2015	$	624,528		$	800		$	625,328		$	28,813
Net loss	(1,556		)	(110		)	(1,666		)	(427		)
Changes in ownership, net	(141,506		)	—			(141,506		)	(1,417		)
Distributions to owners	(18,953		)	—			(18,953		)	(651		)
Other comprehensive loss, net	(632		)	—			(632		)	(28		)
Balance at June 30, 2016	$	461,881		$	690		$	462,571		$	26,290

	FirstPotomacRealty Trust			Non-redeemablenoncontrollinginterests(1)			Total Equity			Redeemablenoncontrollinginterests
Balance at December 31, 2015	$	624,528		$	800		$	625,328		$	28,813
Net income (loss)	46			(14		)	32			(133		)
Changes in ownership, net	(53,145		)	—			(53,145		)	(1,644		)
Distributions to owners	(10,948		)	—			(10,948		)	(393		)
Other comprehensive loss, net	(826		)	—			(826		)	(36		)
Balance at March 31, 2016	$	559,655		$	786		$	560,441		$	26,607


⁽¹⁾	Our 97% owned consolidated joint venture sold Storey Park on July 25, 2016, at which time all assets and liabilities owned by the joint venture were either sold or settled at the time of disposition and the remaining proceeds from the sale were distributed to the joint venture partners in accordance with the terms of the joint venture agreement. See note 6, Dispositions, for more information.

A summary of our accumulated other comprehensive loss is as follows (dollars in thousands):

	2017			2016
Beginning balance at January 1,	$	(844	)	$	(2,360	)
Net unrealized gain (loss) on derivative instruments	~~596~~852			(~~862~~660		)
Net (gain) loss attributable to noncontrolling interests	(2535		)	3628
Ending balance at March 31,	$	(273	)	$	(3,186	)
Ending balance at June 30,	$	(27	)	$	(2,992	)

(11) Noncontrolling Interests

(a) Noncontrolling Interests in the Operating Partnership

Noncontrolling interests relate to the common interests in the Operating Partnership not owned by us. 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 our option, our common shares on a one-for-one basis or cash based on the fair value of our 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. We account for issuances of common Operating Partnership units individually, which could result in some portion of our noncontrolling interests being carried at fair value with the remainder being carried at historical cost. Based on the closing price of our common shares at March 31, 2017, the cost to acquire, through cash purchase or issuance of our common shares, all of the outstanding common Operating Partnership units not owned by us would be $26.2 million. At March 31, 2017 and December 31, 2016, we recorded adjustments of $3.7 million and $6.1 million, respectively, to present certain common Operating Partnership units at the greater of their carrying value or redemption value.

At March 31, 2017, 2,545,602 of the total common Operating Partnership units, or 4.2%, were not owned by us. During the three months ended March 31, 2017, no common Operating Partnership units were redeemed with available cash. During the three months ended March 31, 2016, 38,539 common Operating Partnership units were redeemed with available cash. No common Operating Partnership units were redeemed for common shares during the three months ended March 31, 2017 or 2016. 25

June 30, 2017, the cost to acquire, through cash purchase or issuance of our common shares, all of the outstanding common Operating Partnership units not owned by us would be $28.3 million. At June 30, 2017 and December 31, 2016, we recorded adjustments of $5.2 million and $6.1 million, respectively, to present certain common Operating Partnership units at the greater of their carrying value or redemption value.

At June 30, 2017, 2,545,602 of the total common Operating Partnership units, or 4.2%, were not owned by us. During the six months ended June 30, 2017, no common Operating Partnership units were redeemed with available cash. During the six months ended June 30, 2016, 41,591 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, 2017 or 2016.

(b) Noncontrolling Interests in a Consolidated Partnership

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

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” on our consolidated statements of operations.

On August 4, 2011, we formed a joint venture, in which we had a 97% interest, with an affiliate of Perseus Realty, LLC to acquire Storey Park in our Washington, D.C. reporting segment, which was placed into development in August 2013. Storey Park was sold July 25, 2016, at which time all assets and liabilities owned by the joint venture were either sold or settled at the time of disposition and the remaining proceeds from the sale were distributed to the joint venture partners in accordance with the terms of the joint venture agreement. See note 6, Dispositions, for more information.

(12) Share-Based Payments

We record costs related to our share-based compensation based on the grant date fair value calculated in accordance with GAAP. We recognize 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 our consolidated statements of operations based on the employee’s job function.

Non-Vested Share Awards

We issue 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. We issue new common shares, subject to restrictions, upon each grant of non-vested common share awards. ~~During~~In ~~the~~May ~~first quarter of~~ 2017, we granted a total of ~~160~~25,~~349~~090 non-vested ~~time-based~~ common shares to our ~~officers~~non-employee ~~and employees~~trustees. The ~~time-based~~ awards will vest ~~ratably~~ on anthe ~~annual~~earlier ~~basis~~of ~~over~~May a23, ~~three-year~~2018, ~~period from~~ the ~~grant~~ date. ~~In February 2017, we granted a total~~ of ~~257,937 non-vested performance-based common shares to~~ our ~~officers.~~2018 ~~The~~annual ~~number~~meeting of ~~shares~~shareholders ~~that~~or ~~will be earned under~~ the ~~February~~closing ~~2017 performance-based awards will be determined at the end~~ of ~~2019, based upon~~ the ~~achievement of specified market performance goals measured over the performance period from January 1~~Transaction, ~~2017~~subject ~~through~~to ~~December~~continued ~~31,~~service ~~2019.~~by Of the ~~shares~~trustee ~~earned,~~until ~~50%~~such ~~will vest on February 1, 2020 and the remaining earned shares will vest on February 1, 2021~~date. ~~Any shares that are not earned will be forfeited.~~

We recognized compensation expense associated with all of our non-vested common share awards of $0.8 million and $01.46 million during the three and six months ended ~~March~~June 3130, 2017, respectively, compared with $0.5 million and $0.9 million during the three and six months ended June 30, 2016, respectively. Dividends on all non-vested common share awards are recorded as a reduction of equity. We apply the two-class method for determining EPS as our outstanding non-vested common shares with non-forfeitable dividend rights are considered participating securities. Our excess of distributions over earnings related to participating securities is shown as a reduction in total earnings attributable to common shareholders in our computation of EPS.

~~A summary of our non-vested common share awards at March 31, 2017 is as follows:~~26

	Non-vestedCommonShares		WeightedAverage GrantDate Fair Value
Non-vested at December 31, 2016	711,374		$	9.85
Granted	418,286		8.54
Vested	(80,179	)	10.99
Expired	(1,630	)	12.38
Forfeited	(991	)	11.03
Non-vested at March 31, 2017	1,046,860		$	9.23

A summary of our non-vested common share awards at June 30, 2017 is as follows:

We value our non-vested time-based share awards at the grant date fair value, which is the market price of our common shares. For the non-vested performance-based common share awards granted in February 2017, we used a Monte Carlo Simulation (risk-neutral approach) to determine the number of shares that may be issued pursuant to the award as these awards were deemed to have a market condition. The risk-free interest rate assumptions used in the Monte Carlo Simulation were determined based on the zero coupon risk-free rate for the time frame of 0.25 years to 3 years, which ranged from 0.70% to 1.60%, respectively. The volatility used for our common share price in the Monte Carlo Simulation varied between 25.82% and 22.93%. Based on the Monte Carlo Simulation, the weighted average grant date fair value of the February 2017 non-vested performance-based common share awards was $7.11.



	Non-vested Common Shares		Weighted Average Grant Date Fair Value
Non-vested at March 31, 2017	1,046,860		$	9.23
Granted	25,090		10.96
Vested	(45,378	)	9.45
Forfeited	(495	)	11.03
Non-vested at June 30, 2017	1,026,077		$	9.27

We valued the non-vested common shares granted to our non-employee trustees in May 2017 at the grant date fair value, which is the market price of our common shares. As of ~~March~~June 3130, 2017, we had $7.61 million of unrecognized compensation cost related to non-vested common shares. We anticipate this cost will be recognized over a weighted-average period of 3.2.9 years.

(13) Segment Information

Our reportable segments consist of four distinct reporting and operational segments within the greater Washington, D.C. region in which we operate: Washington, D.C., Maryland, Northern Virginia and Southern Virginia. We evaluate the performance of our segments based on the operating results of the properties located within each segment, which excludes large non-recurring gains and losses, gains or losses from sale of rental property, 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 in their operating results other than the impact of straight-line revenue and the amortization of deferred market rents, deferred lease incentives and deferred tenant improvement reimbursements. There are no inter-segment sales or transfers recorded between segments.

	Three Months Ended March 31, 2017
	Washington, D.C.			Maryland(1)			Northern Virginia			Southern Virginia			Consolidated
Number of buildings	6			34			12			19			71
Square feet	917,643			1,886,177			1,168,990			2,023,858			5,996,668
Total revenues	$	11,722		$	11,235		$	7,312		$	7,554		$	37,823
Property operating expense	(3,139		)	(2,657		)	(1,956		)	(2,206		)	(9,958		)
Real estate taxes and insurance	(2,292		)	(982		)	(741		)	(646		)	(4,661		)
Total property operating income	$	6,291		$	7,596		$	4,615		$	4,702		23,204
Depreciation and amortization expense													(14,566		)
General and administrative													(4,497		)
Other income													40,888
Net income													$	45,029
Total assets (2)	$	443,800		$	322,738		$	260,564		$	159,487		$	1,203,997
Capital expenditures(3)	$	1,522		$	2,350		$	2,295		$	606		$	6,810
	Three Months Ended March 31, 2016
	Washington, D.C.			Maryland			Northern Virginia			Southern Virginia			Consolidated
Number of buildings	6			34			14			19			73
Square feet	918,566			1,885,630			1,715,730			2,023,858			6,543,784
Total revenues	$	11,290		$	11,587		$	12,307		$	7,513		$	42,697
Property operating expense	(2,968		)	(3,235		)	(3,320		)	(2,014		)	(11,537		)
Real estate taxes and insurance	(2,372		)	(929		)	(1,297		)	(618		)	(5,216		)
Total property operating income	$	5,950		$	7,423		$	7,690		$	4,881		25,944
Depreciation and amortization expense													(15,006		)
General and administrative													(4,578		)
Other expenses													(6,461		)
Net loss													$	(101	)
Total assets (2)	$	468,561		$	338,553		$	294,480		$	166,015		$	1,359,943
Capital expenditures(3)	$	4,910		$	959		$	15,757		$	897		$	22,643

(1) Redland I within our Maryland reporting segment was placed into redevelopment during March 2017.

(2) Total assets include our investment in properties that are owned through joint ventures that are not consolidated within our condensed consolidated financial statements. For more information on our unconsolidated investments, including location within our reportable segments, see note 5, Investment in Affiliates. Corporate assets not allocated to any of our reportable segments totaled $17.4 million and $92.3 million at March 31, 2017 and 2016, respectively.

(3) Capital expenditures for corporate assets not allocated to any of our reportable segments were immaterial for the three months ended March 31, 2017 and $0.1 million for the three months ended March 31, 2016.

The results of operations of our four reporting segments for the three and six months ended June 30, 2017 and 2016 are as follows (dollars in thousands):



	Three Months Ended June 30, 2017
	Washington, D.C.			Maryland⁽¹⁾			Northern Virginia			Southern Virginia			Consolidated
Number of buildings	6			34			12			19			71
Square feet	918,019			1,887,246			1,169,066			2,023,854			5,998,185
Total revenues	$	11,564		$	10,035		$	6,352		$	7,437		$	35,388
Property operating expense	(2,818		)	(2,277		)	(1,566		)	(1,689		)	(8,350		)
Real estate taxes and insurance	(2,180		)	(890		)	(722		)	(667		)	(4,459		)
Total property operating income	$	6,566		$	6,868		$	4,064		$	5,081		22,579
Depreciation and amortization expense													(13,845		)
General and administrative⁽²⁾													(6,214		)
Other expenses													(5,348		)
Net loss													$	(2,828	)
Capital expenditures⁽³⁾	$	1,830		$	3,427		$	1,581		$	680		$	7,994

	Three Months Ended June 30, 2016
	Washington, D.C.			Maryland			Northern Virginia			Southern Virginia			Consolidated
Number of buildings	6			34			14			19			73
Square feet	917,241			1,885,759			1,716,904			2,023,858			6,543,762
Total revenues	$	11,580		$	10,900		$	8,707		$	7,306		$	38,493
Property operating expense	(2,563		)	(2,097		)	(2,194		)	(1,689		)	(8,543		)
Real estate taxes and insurance	(2,422		)	(960		)	(943		)	(595		)	(4,920		)
Total property operating income	$	6,595		$	7,843		$	5,570		$	5,022		25,030
Depreciation and amortization expense													(15,141		)
General and administrative													(4,305		)
Impairment of rental property													(2,772		)
Other expenses													(4,804		)
Net loss													$	(1,992	)
Capital expenditures⁽³⁾	$	3,287		$	2,402		$	12,297		$	837		$	18,895



	Six Months Ended June 30, 2017
	Washington, D.C.			Maryland⁽¹⁾			Northern Virginia			Southern Virginia			Consolidated
Total revenues	23,286			21,271			13,664			14,991			$	73,212
Property operating expense	(5,954		)	(4,933		)	(3,526		)	(3,894		)	(18,307		)
Real estate taxes and insurance	(4,471		)	(1,872		)	(1,463		)	(1,314		)	(9,120		)
Total property operating income	$	12,861		$	14,466		$	8,675		$	9,783		45,785
Depreciation and amortization expense													(28,411		)
General and administrative⁽²⁾													(10,712		)
Other income													35,539
Net income													$	42,201
Total assets ⁽⁴⁾	$	441,351		$	322,061		$	261,031		$	157,685		$	1,200,494
Capital expenditures⁽³⁾	$	3,352		$	5,777		$	3,876		$	1,286		$	14,805

	Six Months Ended June 30, 2016
	Washington, D.C			Maryland			Northern Virginia			Southern Virginia			Consolidated
Total revenues	$	22,869		$	22,488		$	21,014		$	14,819		$	81,190
Property operating expense	(5,532		)	(5,329		)	(5,514		)	(3,705		)	(20,080		)
Real estate taxes and insurance	(4,794		)	(1,889		)	(2,240		)	(1,213		)	(10,136		)
Total property operating income	$	12,543		$	15,270		$	13,260		$	9,901		50,974
Depreciation and amortization expense													(30,147		)
General and administrative													(8,884		)
Impairment of rental property													(2,772		)
Other expenses													(11,264		)
Net loss													$	(2,093	)
Total assets⁽⁴⁾	$	503,484		$	335,932		$	298,533		$	163,956		$	1,320,046
Capital expenditures⁽³⁾	$	8,198		$	3,361		$	28,054		$	1,734		$	41,539


⁽¹⁾	Redland I within our Maryland reporting segment was placed into redevelopment during March 2017.


⁽²⁾	Includes $2.2 million of legal, advisory and accounting fees associated with the Transaction.


⁽³⁾	Capital expenditures for corporate assets not allocated to any of our reportable segments totaled $0.5 million and $0.1 million for the three months ended June 30, 2017 and 2016, respectively, and $0.5 million and $0.2 million for the six months ended June 30, 2017 and 2016, respectively.

⁽⁴⁾

Total assets include our investment in properties that are owned through joint ventures that are not consolidated within our condensed consolidated financial statements. For more information on our unconsolidated investments, including location within our reportable segments, see note 5, Investment in Affiliates. Corporate assets not allocated to any of our reportable segments totaled $18.4 million and $18.1 million at June 30, 2017 and 2016, respectively.

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

The following discussion and analysis of First Potomac Realty Trust’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 Quarterly Report on Form 10-Q. The discussion and analysis is derived from the consolidated operating results and activities of First Potomac Realty Trust (the “Company”). This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. The Company’s 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 and included elsewhere in this Quarterly Report on Form 10-Q. See “Special Note About Forward-Looking Statements” above.

References in this Quarterly Report on Form 10-Q to “we,” “our,” “us,” the “Company” or “First Potomac,” refer to First Potomac Realty Trust and its subsidiaries, on a consolidated basis, unless the context indicates otherwise.

Overview

We are a leader in the ownership, management, redevelopment and development of office and business park properties in the greater Washington, D.C. region. Our focus is owning and operating properties that we believe can benefit from our market knowledge and intensive operational skills with a focus on increasing their profitability and value. Our 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 primarily for office use, and business parks contain buildings with office features combined with some industrial property space. We separate our properties into four distinct reporting segments, which we refer to as the Washington, D.C., Maryland, Northern Virginia and Southern Virginia reporting segments.

We conduct our business through First Potomac Realty Investment Limited Partnership, our operating partnership (the “Operating Partnership”). We are the sole general partner of, and, as of ~~March~~June 3130, 2017, owned 95.8% of the common interest in the Operating Partnership. The remaining common 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 that are owned by unrelated parties.

At ~~March~~June 3130, 2017, we wholly owned properties totaling 6.0 million square feet and had a noncontrolling ownership interest in properties totaling an additional 0.4 million square feet through two unconsolidated joint ventures. We also owned land that can support 0.4 million square feet of additional development. Our consolidated properties were 92.46% occupied by ~~372~~378 tenants at ~~March~~June 3130, 2017. We did not include the square footage of properties in development or redevelopment, which totaled 0.1 million square feet at ~~March~~June 3130, 2017, in our occupancy calculation. We derive substantially all of our revenue from leases of space within our properties. As of ~~March~~June 3130, 2017, our largest tenant was the U.S. Government, which accounted for 1413.08% of our total annualized cash basis rent, and the U.S. Government combined with government contractors accounted for 20.9% of our total annualized cash basis rent as of ~~March~~June 3130, 2017. We operate so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes.

The primary source of our revenue is rent received from tenants under long-term (generally three to ten years) operating leases at our properties, including reimbursements from tenants for certain operating costs. Additionally, we may generate earnings from the sale of assets to third parties or the contribution of assets to joint ventures.

~~Our~~Notwithstanding the pending Transaction (defined below under “Transaction with Government Properties Income Trust”), our long-term growth will principally be driven by our ability to:


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


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


•	develop and redevelop existing assets;


•	continue to grow our portfolio through acquisitions of new properties, potentially through joint ventures; and


•	execute initiatives designed to increase balance sheet capacity and expand the potential sources of capital.

2830

Transaction with Government Properties Income Trust

Executive Summary

For the three months ended ~~March~~June 3130, 2017 and 2016, net ~~income~~loss attributable to common shareholders was $432.17 million, or $0.7405 per diluted share, and $5.5 million, or $0.10 per diluted share, respectively. For the six months ended June 30, 2017 net income attributable to common shareholders was $40.4 million, or $0.70 per diluted share compared with a net loss attributable to common shareholders of $49.16 million, or $0.0717 per diluted share for the six months ended June 30, 2016. The decrease in net loss for the three months ended ~~March~~June 30, 2017 31compared with the same period in 2016 was primarily due to a $2.8 million impairment charge related to Storey Park, which was classified as held-for sale at June 30, 2016 and was sold on July 25, 2016. The increase in net income for the ~~three~~six months ended ~~March~~June 3130, 2017 compared with the same period in 2016 was primarily due to a $42.7 million gain on the sale of Plaza 500 and a $3.8 million gain (reflecting our proportionate share) on our unconsolidated joint ventures’ sale of Aviation Business Park and Rivers Park I and II, which is reflected in “Equity in Earnings of Affiliates” in the accompanying condensed consolidated statement of operations for the ~~three~~six months ended ~~March 31~~June 30, 2017.

Funds From Operations (“FFO”) available to common shareholders and unitholders ~~increased~~decreased to $1311.97 million for the three months ended ~~March~~June 3130, 2017 from $1213.80 million for the same period in 2016 ~~due~~and decreased to ~~a decrease in accrued dividends on preferred shares, as well as the~~ $125.96 million write-off of original issuance costs associated with the redemption of 2.2 million 7.750% Series A Cumulative Redeemable Perpetual Preferred Shares (the “7.750% Series A Preferred Shares”) in the first quarter of 2016. FFO also increased for the ~~three~~six months ended ~~March~~June 3130, 2017 ~~compared~~from ~~with~~$25.8 million for the same period in 2016 primarily due to ~~additional~~property ~~income resulting from rent commencement at the NOVA build-to-suit~~dispositions, ~~which~~as ~~was~~well ~~placed~~as in$2.2 ~~service~~million in ~~August~~transaction ~~2016,~~costs aassociated ~~decrease~~with inthe ~~interest expense and an increase in same property net operating income (“Same Property NOI”)~~Transaction.

Same property net operating income (“Same Property NOI”), FFO and FFO available to common shareholders and unitholders are non-GAAP financial measures. For a description of Same Property NOI, including why we believe our presentation of Same Property NOI is useful and a reconciliation of Same Property NOI to net ~~income~~ (loss) income, see “Same Property Net Operating Income.” For a description of FFO and FFO available to common shareholders and unitholders, including why we believe our presentation is useful and a reconciliation of FFO and FFO available to common shareholders and unitholders to net ~~income~~ (loss) income attributable to common shareholders, see “Funds From Operations.”

Significant Activity

• As previously ~~disclosed~~announced, ~~sold~~we ~~One~~entered ~~Fair~~into ~~Oaks~~a ~~for~~definitive ~~net~~merger ~~proceeds~~agreement under which GOV will acquire all of ~~$13~~the outstanding shares of First Potomac.3 ~~million~~Under inthe ~~January~~terms ~~2017~~of ~~and~~the ~~sold~~merger ~~Plaza~~agreement, ~~500~~First ~~for~~Potomac ~~net~~shareholders ~~proceeds~~will receive a cash payment of $7211.515 ~~million~~per inshare ~~February~~at closing. The Transaction is expected to close prior to year-end 2017.

•InLeased ~~March~~percentage ~~2017,~~at ~~sold~~June ~~Rivers~~30, ~~Park~~2017 Iremained ~~and~~relatively IIflat ~~and~~at ~~Aviation~~94.4% ~~Business~~compared ~~Park,~~with ~~which~~June ~~were owned through unconsolidated joint ventures~~30, ~~for net proceeds based on our ownership interest in the joint ventures of $18~~2016.4 ~~million.~~

•~~Occupied~~Repaid ~~and~~the ~~leased percentages at March 31, 2017 remained relatively flat at 92~~$32.4%2 ~~and~~million ~~94.0%,~~construction ~~respectively,~~loan ~~compared~~encumbering ~~with~~440 ~~March~~First 31Street, ~~2016~~NW.

2931

Properties:

The following sets forth certain information about our properties by segment as of ~~March~~June 3130, 2017 (including properties in development and redevelopment, dollars in thousands):

WASHINGTON, D.C. REGION

Property	Buildings	Sub-Market(1)	Square Feet	AnnualizedCash BasisRent(2)		Leased ~~atMarch~~atJune 3130, 2017		Occupied ~~atMarch~~atJune 3130, 2017
Office
11 Dupont Circle, NW	1	CBD	151,~~144~~603	$	4,~~468~~247	7773.13	%	7773.13	%
440 First Street, NW	1	Capitol Hill	138,648	4,~~394~~427		91.9	%	8587.67	%
500 First Street, NW	1	Capitol Hill	129,035	4,~~638~~556		100.0	%	100.0	%
840 First Street, NE	1	NoMA	248,536	7,~~702~~380		100.0	%	100.0	%
1211 Connecticut Avenue, NW	1	CBD	131,746	3,~~758~~773		91.2	%	91.2	%
1401 K Street, NW	1	East End	118,~~534~~451	3,~~592~~594		8685.94	%	7776.27	%
Total/Weighted Average	6		~~917~~918,~~643~~019	2827,~~552~~977		9291.02	%	89.85	%
Unconsolidated Joint Venture
1750 H Street, NW	1	CBD	113,131	4,~~319~~279		100.0	%	94.6	%
Region Total/Weighted Average	7		1,~~030~~031,~~774~~150	$	32,~~871~~256	92.92	%	90.40	%


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

⁽²⁾

Annualized cash basis rent at the end of the quarter, 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 our full service leases. This amount does not include items such as rent abatement, unreimbursed expenses, non-recurring revenues and expenses, differences in leased compared with occupied space, and timing differences related to tenant activity.

3032

MARYLAND REGION

Property	Buildings	Location	Square Feet	AnnualizedCash BasisRent(1)		Leased ~~atMarch~~atJune 3130, 2017		Occupied ~~atMarch~~atJune 3130, 2017
Office
Annapolis Business Center	2	Annapolis	101,113	$	1,~~770~~773	100.0	%	100.0	%
Cloverleaf Center	4	Germantown	173,916	2,~~649~~674		89.8	%	89.8	%
Hillside I and II	2	Columbia	87,267	~~991~~1,009		87.6	%	87.6	%
Metro Park North	4	Rockville	~~191~~192,~~211~~280	23,~~963~~106		8791.38	%	8786.38	%
Redland II and III(2)	2	Rockville	349,267	9,~~872~~945		100.0	%	100.0	%
TenThreeTwenty	1	Columbia	138,944	2,~~143~~252		9396.4	%	9396.4	%
Total Office	15		1,~~041~~042,~~718~~787	20,~~388~~759		9495.03	%	94.03	%
Business Park
Ammendale Business Park(3)	7	Beltsville	312,846	34,~~997~~080		90.7	%	8090.57	%
Gateway 270 West	6	Clarksburg	252,295	3,~~243~~253		92.9	%	92.9	%
Snowden Center	5	Columbia	145,423	2,~~230~~243		96.0	%	96.0	%
Total Business Park	18		710,564	9,~~470~~576		92.6	%	8892.16	%
Total/Weighted Average	33		1,~~752~~753,~~282~~351	2930,~~858~~335		9394.42	%	9193.6	%
Redevelopment
Redland I (2)	1	Rockville	133,895	—
Region Total/Weighted Average	34		1,~~886~~887,~~177~~246	$	2930,~~858~~335	9394.42	%	9193.6	%

⁽¹⁾


⁽²⁾	Redland II and III refer to 520 and 530 Gaither Road, respectively. We use the term Redland when collectively referring to Redland I (540 Gaither Road), II and III. Redland I was placed into redevelopment in March 2017.


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

3133

NORTHERN VIRGINIA REGION

Property	Buildings	Location	Square Feet	AnnualizedCash BasisRent(1)		Leased ~~atMarch~~atJune 3130, 2017		Occupied ~~atMarch~~atJune 3130, 2017
Office
Atlantic Corporate Park	2	Sterling	218,~~326~~230	$	3,~~983~~914	9693.28	%	9492.84	%
NOVA build-to-suit	1	Not Disclosed	167,440	4,050		100.0	%	100.0	%
Three Flint Hill	1	Oakton	180,699	3,~~721~~562		9691.26	%	9691.26	%
1775 Wiehle Avenue	1	Reston	129,982	23,~~984~~029		95.5	%	95.5	%
Total Office	5		696,~~447~~351	14,~~738~~555		9795.0	%	9694.56	%
Business Park
Sterling Park Business Center(2)	7	Sterling	472,~~543~~715	4,~~393~~641		9296.17	%	8684.9	%
Total Consolidated	12		1,~~168~~169,~~990~~066	19,~~131~~196		95.07	%	9290.67	%
Unconsolidated Joint Venture
Prosperity Metro Plaza	2	Merrifield	326,197	89,~~884~~078		100.0	%	100.0	%
Region Total/Weighted Average	14		1,495,~~187~~263	$	28,~~015~~274	96.16	%	9492.27	%

⁽¹⁾


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

3234

SOUTHERN VIRGINIA REGION

Property	Buildings	Location	Square Feet	AnnualizedCash BasisRent(1)		Leased ~~atMarch~~atJune 3130, 2017		Occupied ~~atMarch~~atJune 3130, 2017
Office
Greenbrier Towers	2	Chesapeake	171,~~766~~762	$	1,~~866~~890	87.16	%	8587.21	%
Business Park
Battlefield Corporate Center	1	Chesapeake	96,720	861		100.0	%	100.0	%
Crossways Commerce Center(2)	9	Chesapeake	1,082,461	1112,~~904~~212		9597.71	%	9495.57	%
Greenbrier Business Park(3)	4	Chesapeake	411,237	4,~~670~~710		94.0	%	94.0	%
Norfolk Commerce Park(4)	3	Norfolk	261,674	2,~~718~~623		9691.19	%	9691.19	%
Total Business Park	17		1,852,092	20,~~153~~406		95.69	%	9495.90	%
Region Total/Weighted Average	19		2,023,~~858~~854	$	22,~~019~~296	9495.92	%	94.13	%

⁽¹⁾


⁽²⁾	Crossways Commerce Center consists of the following properties: Coast Guard Building, Crossways Commerce Center I, Crossways Commerce Center II, Crossways Commerce Center IV and 1434 Crossways Boulevard.


⁽³⁾	Greenbrier Business Park consists of the following properties: Greenbrier Technology Center I, Greenbrier Technology Center II and Greenbrier Circle Corporate Center.


⁽⁴⁾	Norfolk Commerce Park consists of the following properties: Norfolk Business Center, Norfolk Commerce Park II and Gateway II.

3335

Development and Redevelopment Activity

In March 2017, the sole tenant of 540 Gaither Road at Redland (“Redland I”) exercised its early termination option and vacated the 133,895 square-foot building, which is located in our Maryland reporting segment. Upon the tenant vacating Redland I, the building was placed into redevelopment. At ~~March~~June 3130, 2017, our total investment in the building under redevelopment was $2325.69 million, which included the $23.0 million total original cost basis of the building and land. The majority of costs incurred as of ~~March~~June 3130, 2017 in excess of the original cost basis of the building and land related to ~~site~~renovating ~~planning~~the ~~and~~building’s ~~design costs~~interior. We currently ~~anticipate~~expect ~~spending~~to ~~$4.6~~complete ~~million on~~ the building redevelopment, ~~which~~in ~~excludes~~the ~~anticipated~~third ~~tenant~~quarter ~~improvements~~ of ~~$5.4~~2017 ~~million~~at ~~and~~an ~~leasing~~anticipated ~~commissions~~total project cost of $14.93 million., Wewhich ~~currently~~excludes ~~expect~~the tooriginal ~~complete~~cost basis of the building ~~redevelopment~~and inany ~~the~~capitalized ~~third~~interest ~~quarter of 2017~~costs; however, we can provide no assurances regarding the timing, cost or results of the project.

Lease Expirations

At ~~March~~June 3130, 2017, 1011.87% of our annualized cash basis rent, excluding month-to-month leases (which represent an immaterial percentage of our annualized cash basis rent), was scheduled to expire during the next twelve months, and 97.39% of our annualized cash basis rent, excluding month-to-month leases, was scheduled to expire during the remainder of 2017, which includes 4.76% of our annualized cash basis rent that is related to the Bureau of Prisons (whose lease iswas scheduled to expire in July 2017). The Bureau of Prisons fully leases 500 First Street, NW in our Washington, D.C. reporting segment and was subject to a lease that was scheduled to expire in July 2016. During the second quarter of 2016, we entered into a one-year lease extension with the Bureau of Prisons, ~~which~~(to isextend ~~set~~the tolease ~~expire~~expiration into July 2017), and weduring ~~believe~~the ~~there~~third isquarter aof ~~likelihood~~2017, ~~that~~we entered into another amendment with the ~~tenant~~Bureau ~~will~~of ~~elect~~Prisons to ~~further~~ extend the expiration date of the lease ~~due~~ to ~~potential~~March ~~short-term~~2018, ~~delays~~which inamendment ~~relocating~~provides tothe ~~its~~tenant ~~new~~with ~~space;~~an ~~however,~~option weto ~~can~~terminate ~~provide~~the nolease, ~~assurances~~without ~~regarding~~ the ~~length~~payment of ~~such~~a ~~extension~~termination orfee, ~~that~~as ~~such~~early ~~extension~~as ~~will~~December ~~occur at all~~2017. Currently, we are evaluating various strategies with respect to 500 First Street, NW, which include repositioning 500 First Street, NW and gauging new tenant interest to lease this property, all with the ultimate goal of maximizing value upon the expiration of the lease; however, we can provide no assurances regarding the outcome of these or any other alternative strategies for the property. We expect replacement rents on leases expiring during the remainder of 2017 to increase slightly on a cash basis relative to the current rental rates being paid by tenants.

Current tenants are not obligated to renew their leases upon the expiration of their terms. If non-renewals or terminations occur, we 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 our financial obligations. Moreover, the terms of a renewal or new lease, including the amount of rent, may be less favorable to us than the current lease terms, or we may be forced to provide tenant improvements at our 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. We continually monitor our 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. Prior to signing a lease with a tenant, we generally assess the prospective tenant’s credit quality through review of its financial statements and tax returns, and the result of that review is a factor in establishing the rent to be charged and/or level of security deposit required. Over the course of our leases, we monitor our tenants to stay aware of any material changes in credit quality. The metrics we use to evaluate a significant tenant’s liquidity and creditworthiness depend on facts and circumstances specific to that tenant and to the industry in which it operates and include the tenant’s credit history and economic conditions related to the tenant, its operations and the markets in which it operates. These factors may change over time. In addition, our property management personnel have regular contact with tenants and tenant employees and, where the terms of the lease permit and we deem it prudent, we may request tenant financial information for periodic review, review publicly-available financial statements in the case of public company tenants and monitor news and rating agency reports regarding our tenants (or their parent companies) and their underlying businesses. In addition, we regularly analyze account receivable balances as part of the ongoing monitoring of the timeliness of rent collections from tenants.

During the first quarter of 2017, we had a tenant retention rate of 32% and we experienced negative net absorption of 116,000 square feet. The low retention rate and negative net absorption were due to the lease termination of the Department of Health and Human Services at Redland I, who was the sole tenant of the 133,895 square-foot building. We have begun repositioning Redland 36

34During the second quarter of 2017, we had a tenant retention rate of 56% and experienced positive net absorption of 18,000 square feet. The 56% retention rate is attributable to several lease terminations at our Washington, D.C., Northern Virginia and Southern Virginia segments. After reflecting all of the renewal leases on a triple-net basis to allow for comparability, the weighted average rental rate of our renewed leases decreased 2.3% for the three months ended June 30, 2017 and increased 1.3% for the six months ended June 30, 2017 on a U.S. generally accepted accounting principles (“GAAP”) basis, compared with the expiring leases. During the second quarter of 2017, we executed new leases for 65,000 square feet, with the majority of the new leases (based on square footage) containing rent escalations. After reflecting all comparable leases on a triple-net basis to allow for comparability, the weighted average rental rate of our new leases increased 19.5% for the three months ended June 30, 2017 and 11.9% for the six months ended June 30, 2017 on a GAAP basis for comparable leases, which exclude leases on first generation spaces, suites that have been vacant for over twelve months, or spaces where a material change in the use will occur relative to the previous tenant’s use of the space.

I,The asfollowing ~~the~~table ~~building~~sets ~~was~~forth placed into redevelopment in March 2017. In addition, during the second quarter of 2016, we re-leased two floors at Redland I, which totaled 45,000 square feet, or approximately 34.0% of the building’s total square footage. We anticipate that the new tenant atimprovement ~~Redland~~and Ileasing ~~will~~commission ~~take~~costs ~~occupancy in early 2018; however, we can provide no assurances regarding the timing of when the tenant will take occupancy. After reflecting all of the renewal leases~~ on a ~~triple-net~~rentable ~~basis~~square tofoot ~~allow for comparability, the weighted average rental rate of our renewed leases for the three months ended March 31, 2017 increased 4.6% on a U.S. generally accepted accounting principles (“GAAP”)~~ basis, ~~compared with the expiring leases. During the first quarter of 2017, we executed new leases~~ for ~~74,000~~all ~~square feet, with the majority of the~~ new ~~leases~~and ~~(based~~renewal ~~on square footage) containing rent escalations. After reflecting all~~ leases onsigned aduring ~~triple-net basis to allow for comparability,~~ the ~~weighted~~six ~~average~~months ~~rental~~ended ~~rate of our new leases increased 2.3% on a GAAP basis~~June 30, ~~compared with expiring leases.~~ 2017:

The following table sets forth tenant improvement and leasing commission costs on a rentable square foot basis for all new and renewal leases signed during the three months ended March 31, 2017:



	New	Renewal
Tenant improvements (per rentable square foot)	$33.05	$5.72
Leasing commissions (per rentable square foot)	$10.40	$3.35

	New	Renewal
Tenant improvements (per rentable square foot)	$32.61	$5.37
Leasing commissions (per rentable square foot)	$13.69	$2.21

The following table sets forth a summary schedule of the lease expirations at our consolidated properties for leases in place as of June 30, 2017, assuming no tenant exercises renewal options or early termination rights (dollars in thousands, except per square foot data):

The following table sets forth a summary schedule of the lease expirations at our consolidated properties for leases in place as of March 31, 2017, assuming no tenant exercises renewal options or early termination rights (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	2	20,151	0.4	%	$	238	0.2	%	$	11.80
2017⁽⁴⁾	21	314,988	5.7	%	7,908		7.9	%	25.11
2018	61	643,108	11.6	%	9,223		9.2	%	14.34
2019	61	737,981	13.3	%	10,770		10.8	%	14.59
2020	61	940,481	17.0	%	15,548		15.6	%	16.53
2021	49	498,150	9.0	%	7,387		7.4	%	14.83
2022	50	560,335	10.1	%	8,670		8.7	%	15.47
2023	19	488,958	8.8	%	11,512		11.5	%	23.54
2024	23	444,113	8.1	%	8,813		8.8	%	19.84
2025	15	254,373	4.6	%	4,616		4.6	%	18.15
2026	12	142,806	2.6	%	2,883		2.9	%	20.19
Thereafter	34	487,796	8.8	%	12,236		12.4	%	25.08
Total / Weighted Average	408	5,533,240	100.0	%	$	99,804	100.0	%	$	18.04

Year of Lease Expiration(1)	Number ofLeasesExpiring	LeasedSquare Feet	% of LeasedSquare Feet		AnnualizedCash BasisRent(2)		% ofAnnualizedCash BasisRent		Average BaseRent perSquareFoot(2)(3)
2017(4)	35	385,619	7.0	%	$	9,232	9.3	%	$	23.94
2018	62	647,263	11.7	%	9,209		9.2	%	14.23
2019	61	755,009	13.7	%	10,921		11.0	%	14.47
2020	56	930,021	16.9	%	15,162		15.2	%	16.30
2021	48	496,315	9.0	%	7,338		7.4	%	14.79
2022	49	583,478	10.6	%	9,099		9.1	%	15.59
2023	18	487,062	8.8	%	11,429		11.5	%	23.47
2024	22	418,829	7.6	%	8,446		8.5	%	20.16
2025	14	243,297	4.4	%	4,491		4.5	%	18.46
2026	12	142,806	2.6	%	3,180		3.2	%	22.27
Thereafter	26	422,913	7.7	%	11,054		11.1	%	26.14
Total / Weighted Average	403	5,512,612	100.0	%	$	99,561	100.0	%	$	18.06


⁽¹⁾	We classify leases that expired or were terminated on the last day of the year as leased square footage since the tenant is contractually entitled to the space.

⁽²⁾

Annualized cash basis rent at the end of the quarter, 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 estimated operating expense reimbursements that are included, along with base rent, in the contractual payments of our full-service leases. This amount does not include items such as rent abatement, unreimbursed expenses, nonrecurring revenues and expenses, differences in leased and occupied space and timing differences related to tenant activity.

(3) Represents annualized cash basis rent at ~~March~~June 3130, 2017, divided by the square footage of the expiring leases.

(4) Includes the contractual expiration of the Bureau of Prisons at 500 First Street, NW on July 31, 2017. Subsequent to the end of the second quarter of 2017, we entered into an amendment to extend the expiration date of the Bureau of Prison’s lease to March 2018, which provides the tenant with an option to terminate the lease, without the payment of a termination fee, as early as December 2017.

3537

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with GAAP that require us 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 we deem most important to the portrayal of our 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 our consolidated financial statements. All of our significant accounting policies, including certain critical accounting policies, are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

Results of Operations

Comparison of the Three and Six Months Ended ~~March~~June 3130, 2017 with the Three and Six Months Ended ~~March~~June 3130, 2016

The term “Comparable Portfolio” refers to all consolidated properties owned by us and in-service, with operating results reflected in our continuing operations, for the entirety of the periods presented.

The term “Non-Comparable Properties” refers to properties that we have acquired, sold, placed in-service, or placed in development or redevelopment during the periods presented. The Non-Comparable Properties are comprised of the following properties:

• Plaza 500, which was sold in February 2017; One Fair Oaks, which was sold in January 2017; Storey Park, a development site that was located in our Washington, D.C. reporting segment and was owned by a 97% consolidated joint venture, which was sold in July 2016; and the NOVA Non-Core Portfolio, which was comprised of eight properties and was sold in March 2016. For the Results of Operations discussion below with respect to the comparison of the three and six months ended ~~March~~June 3130, 2017 and 2016, these eleven properties are collectively referred to as the “Disposed Properties”.;

• Redland I, which was placed into redevelopment on March 23, 2017. following the tenant vacating the 133,895 square-foot building; and


•	The NOVA build-to-suit, which was fully placed in-service during the third quarter of 2016.

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

~~Assuming~~The nomerger ~~additional~~agreement ~~property~~for ~~acquisitions~~the orTransaction ~~dispositions~~contains ~~during~~certain customary restrictive covenants, including, among other things, covenants with respect to the ~~remainder~~conduct of our business prior to closing the Transaction, subject to certain consent rights by GOV and certain limited exceptions. Notwithstanding the Transaction, which is expected to occur prior to year-end 2017, we expect rental revenues, tenant reimbursement and other revenues, property operating expense, real estate taxes and insurance expense and depreciation expense to all decrease in 2017 compared with 2016 due to the sale of the Disposed Properties. ~~If additional dispositions or acquisitions occur, such expected increases or decreases could materially change.~~

Total Revenues

Total revenues are summarized as follows:

	Three Months Ended March 31,							Percent
										Three Months					Six Months
(dollars in thousands)	2017		2016		Change			Change
	Three Months Ended June 30,				Six Months Ended June 30,								Percent					Percent
Rental	$	30,818	$	33,844	$	(3,026	)	(9	)%
(dollars in thousands)	2017		2016		2017			2016		Change			Change		Change			Change
Tenant reimbursements and other	$	7,005	$	8,853	$	(1,848	)	(21	)%
Rental	$	29,360	$	31,554	$	60,178		$	65,398	$	(2,194	)	(7	)%	$	(5,220	)	(8	)%
Tenant reimbursements and other	$	6,028	$	6,939	$	13,034		$	15,792	$	(911	)	(13	)%	$	(2,758	)	(17	)%

3638

Rental Revenue

Rental revenue is comprised of contractual rent, the impact of straight-line revenue, the amortization of deferred lease incentive costs and deferred tenant improvement reimbursement revenue, and the amortization of deferred market rent assets and liabilities representing above and below market rate leases at acquisition. Rental revenue decreased $32.02 million for the three months ended ~~March~~June 3130, 2017 compared with the same period in 2016. For the Comparable Portfolio, rental revenue increased $0.7 1 million for the three months ended ~~March~~June 3130, 2017 compared with the same period in 2016 due to ~~higher~~an increase in rental rates onfor new ~~and renewal~~ leases, while total occupancy remained relatively flat for the Comparable Portfolio. The weighted average occupancy of the Comparable Portfolio was 92.15% ~~and~~for the three months ended June 30, 2017 compared with 92.37% for the three months ended ~~March~~June 3130, ~~2017~~ ~~and~~ 2016~~, respectively~~. Rental revenue for the Non-Comparable Properties decreased $32.7 3 million ~~for the~~ three months ended ~~March~~June 3130, 2017, compared with the same period in 2016 due to the following:

•a $42.76 million decrease from the Disposed Properties; ~~and~~

•a $0.7 million decrease from Redland I, which was placed into redevelopment in March 2017; and

•a $1.0 million increase from the NOVA build-to-suit.

Rental revenue decreased $5.2 million for the six months ended June 30, 2017 compared with the same period in 2016. For the Comparable Portfolio, rental revenue increased $0.8 million for the six months ended June 30, 2017, compared with the same period in 2016 due to an increase in rental rates for new leases, which offset a slight decrease in occupancy for the Comparable Portfolio. The weighted average occupancy of the Comparable Portfolio was 92.3% for the six months ended June 30, 2017 compared with 92.7% for the same period in 2016. Rental revenue for the Non-Comparable Properties decreased $6.0 million for the six months ended June 30, 2017 compared with the same period in 2016 due to the following:

•a $7.3 million decrease from the Disposed Properties;

•a $0.8 million decrease from Redland I; and

•a $2.1 million increase from the NOVA build-to-suit.

Rental revenue increased (decreased) for each reporting segment during the periods presented, due to the factors discussed above, as follows:

	Reporting Segment
(dollars in thousands)	Washington, D.C.		Maryland			Northern Virginia			Southern Virginia		Total
Increase (decrease) in rental revenue:
Three months ended March 31, 2017 compared with the same period in 2016	$	450	$	61		$	(3,616	)	$	79	$	(3,026	)
Three months ended June 30, 2017 compared with the same period in 2016	$	28	$	(601	)	$	(1,725	)	$	104	$	(2,194	)
Six months ended June 30, 2017 compared with the same period in 2016	$	478	$	(540	)	$	(5,341	)	$	183	$	(5,220	)

The significant decrease within the Northern Virginia reporting segment primarily relates to the Disposed Properties.

Tenant Reimbursements and Other Revenues

Tenant reimbursements and other revenues include operating and common area maintenance costs reimbursed by our 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 $10.89 million for the three months ended ~~March~~June 3130, 2017, compared with the same period in 2016. For the Comparable Portfolio, tenant reimbursements and other revenues ~~decreased~~increased $0.51 million for the three months ended ~~March~~June 3130, 2017 compared with the same period in 2016 due to aan ~~reduction~~increase ~~of snow and ice removal reimbursements associated with a decrease~~ in ~~the~~operating ~~related~~ expense recoveries. Tenant reimbursements and other revenues for the Non-Comparable Properties decreased $1.3 0 million for the three months ended ~~March~~June 3130, 2017 compared with the same period in 2016 due to the following:

• a $1.60 million decrease from the Disposed Properties; ~~and~~


•	a $0.3 million decrease from Redland I; and


•	a $0.3 million increase from the NOVA build-to-suit.

~~Tenant reimbursements and other revenues decreased for each reporting segment during the periods presented, due to the factors discussed above, as follows:~~39

	Reporting Segment
(dollars in thousands)	Washington, D.C.			Maryland			Northern Virginia			Southern Virginia			Total
Decrease in tenant reimbursements and other revenues:
Three months ended March 31, 2017 compared with the same period in 2016	$	(18	)	$	(413	)	$	(1,379	)	$	(38	)	$	(1,848	)

Tenant reimbursements and other revenues decreased $2.8 million for the six months ended June 30, 2017 compared with the same period in 2016. For the Comparable Portfolio, tenant reimbursements and other revenues decreased by $0.4 million primarily due to a reduction of snow and ice removal reimbursements associated with a decrease in the related expense. Tenant reimbursements and other revenues for the Non-Comparable Properties decreased by $2.4 million due to the following:

37• a $2.6 million decrease from the Disposed Properties;


•	a $0.4 million decrease from Redland I; and


•	a $0.6 million increase from the NOVA build-to-suit.

Tenant reimbursements and other revenues (decreased) increased for each reporting segment during the periods presented, due to the factors discussed above, as follows:



	Reporting Segment
(dollars in thousands)	Washington, D.C.			Maryland			Northern Virginia			Southern Virginia			Total
(Decrease) increase in tenant reimbursements and other revenues:
Three months ended June 30, 2017 compared with the same period in 2016	$	(45	)	$	(264	)	$	(630	)	$	28		$	(911	)
Six months ended June 30, 2017 compared with the same period in 2016	$	(61	)	$	(677	)	$	(2,009	)	$	(11	)	$	(2,758	)

Total Property Expenses

Total property expenses are summarized as follows:

	Three Months Ended March 31,							Percent
										Three Months					Six Months
(dollars in thousands)	2017		2016		Change			Change
	Three Months Ended June 30,				Six Months Ended June 30,								Percent					Percent
Property operating	$	9,958	$	11,537	$	(1,579	)	(14	)%
(dollars in thousands)	2017		2016		2017			2016		Change			Change		Change			Change
Real estate taxes and insurance	$	4,661	$	5,216	$	(555	)	(11	)%
Property operating	$	8,350	$	8,543	$	18,307		$	20,080	$	(193	)	(2	)%	$	(1,773	)	(9	)%
Real estate taxes and insurance	$	4,459	$	4,920	$	9,120		$	10,136	$	(461	)	(9	)%	$	(1,016	)	(10	)%

Property Operating Expenses

Property operating expenses decreased $10.62 million for the three months ended ~~March~~June 3130, 2017 compared with the same period in 2016. For the Comparable Portfolio, property operating expenses ~~decreased~~increased $0.1 3 million for the three months ended ~~March 31~~June 30, 2017 compared with the same period in 2016, primarily due to aan ~~decrease~~increase in ~~snow~~utilities ~~and~~expense ~~ice~~in ~~removal~~our ~~costs~~Washington, D.C. reporting segment. Property operating expenses for the Non-Comparable Properties decreased $10.5 million for the three months ended ~~March~~June 3130, 2017 compared with the same period in 2016 due to the following:

• a $10.7 million decrease from the Disposed Properties;


•	a $0.1 million decrease from Redland I; and


•	a $0.3 million increase from the NOVA build-to-suit.

Property operating expenses decreased $1.8 million for the six months ended June 30, 2017 compared with the same period in 2016. For the Comparable Portfolio, property operating expenses increased $0.2 million for the six months ended June 30, 2017 compared with the same period in 2016 due to an increase in bad debt and utilities expense, partially offset by a decrease in snow and ice removal costs. Property operating expenses for the Non-Comparable Properties decreased $2.0 million for the six months ended June 30, 2017 compared with the same period in 2016 due to the following:

•a $2.5 million decrease from the Disposed Properties;

•a $0.1 million decrease from Redland I; and

•a $0.6 million increase from the NOVA build-to-suit.

Property operating expenses increased (decreased) for each reporting segment during the periods presented, due to the factors discussed above, as follows:

	Reporting Segment
(dollars in thousands)	Washington, D.C.		Maryland			Northern Virginia			Southern Virginia		Total
Increase (decrease) in property operating expenses:
Three months ended March 31, 2017 compared with the same period in 2016	$	171	$	(578	)	$	(1,364	)	$	192	$	(1,579	)
Three months ended June 30, 2017 compared with the same period in 2016	$	255	$	180		$	(628	)	$	—	$	(193	)
Six months ended June 30, 2017 compared with the same period in 2016	$	422	$	(396	)	$	(1,988	)	$	189	$	(1,773	)

Real Estate Taxes and Insurance Expense

Real estate taxes and insurance expense decreased $0.65 million for the three months ended ~~March~~June 3130, 2017 compared with the same period in 2016. For the Comparable Portfolio, real estate taxes and insurance expense increased $0.2 million for the three months ended ~~March~~June 3130, 2017 compared with the same period in 2016 due to ~~higher~~an increase in real estate tax assessments ~~primarily~~ for certain properties inacross ~~Washington,~~the Dportfolio.C. Real estate taxes and insurance expense for the Non-Comparable Properties decreased $0.8 7 million for the three months ended ~~March~~June 3130, 2017 compared with the same period in 2016 due to the ~~Disposed Properties.~~following:

•a $0.7 million decrease from the Disposed Properties;

•a $0.1 million decrease from Redland I; and

•a $0.1 million increase from the NOVA build-to-suit.

Real estate taxes and insurance expense decreased $1.0 million for the six months ended June 30, 2017 compared with the same period in 2016. For the Comparable Portfolio, real estate taxes and insurance expense increased $0.4 million due to increased real estate tax assessments for certain properties across the portfolio. Real estate taxes and insurance expense for the Non-Comparable Properties decreased $1.4 million for the six months ended June 30, 2017 compared with the same period in 2016 due to the following:

•a $1.5 million decrease from the Disposed Properties;

•a $0.1 million decrease from Redland I; and

•a $0.2 million increase from the NOVA build-to-suit.

Real estate taxes and insurance expense (decreased) increased for each reporting segment during the periods presented, due to the factors discussed above, as follows:

	Reporting Segment
(dollars in thousands)	Washington, D.C.			Maryland			Northern Virginia			Southern Virginia		Total
(Decrease) increase in real estate taxes and insurance expense:
Three months ended March 31, 2017 compared with the same period in 2016	$	(80	)	$	53		$	(556	)	$	28	$	(555	)
Three months ended June 30, 2017 compared with the same period in 2016	$	(242	)	$	(70	)	$	(221	)	$	72	$	(461	)
Six months ended June 30, 2017 compared with the same period in 2016	$	(323	)	$	(17	)	$	(777	)	$	101	$	(1,016	)

3841

Other Operating Expenses

General and administrative expenses are summarized as follows:

	Three Months Ended March 31,							Percent
										Three Months				Six Months
(dollars in thousands)	2017		2016		Change			Change
	Three Months Ended June 30,				Six Months Ended June 30,							Percent				Percent
General and administrative	$	4,497	$	4,578	$	(81	)	(2	)%
(dollars in thousands)	2017		2016		2017			2016		Change		Change		Change		Change
General and administrative	$	6,214	$	4,305	$	10,712		$	8,884	$	1,909	44	%	$	1,828	21	%

General and administrative expenses ~~decreased~~increased $01.9 million and $1.8 million for the three and six months ended ~~March 31~~June 30, 2017, respectively, compared with the same ~~period~~periods in 2016 primarily due to a$2.2 ~~decrease~~million inof ~~salary~~legal, ~~expenses~~advisory and accounting fees associated with the Transaction, ~~marketing~~which ~~costs~~were ~~and~~incurred ~~other~~during ~~overhead~~the ~~reductions~~second quarter of 2017. WeExcluding ~~currently~~the ~~anticipate~~Transaction ~~that~~costs, general and administrative expenses decreased $0.3 million and $0.4 million for the ~~remainder~~three ofand ~~2017~~six ~~will~~months ~~increase~~ended ~~compared~~June ~~with~~30, ~~2016~~2017, respectively, primarily due to ana ~~increase~~reduction in ~~share-based~~ compensation costs and other reductions in overhead expense.

We currently anticipate that general and administrative expenses for the remainder of 2017 will increase compared with 2016 due to costs associated with the Transaction.

Depreciation and amortization expense is summarized as follows:

	Three Months Ended March 31,							Percent
										Three Months					Six Months
(dollars in thousands)	2017		2016		Change			Change
	Three Months Ended June 30,				Six Months Ended June 30,								Percent					Percent
Depreciation and amortization	$	14,566	$	15,006	$	(440	)	(3	)%
(dollars in thousands)	2017		2016		2017			2016		Change			Change		Change			Change
Depreciation and amortization	$	13,845	$	15,141	$	28,411		$	30,147	$	(1,296	)	(9	)%	$	(1,736	)	(6	)%

Depreciation and amortization expense includes depreciation of rental property and the amortization of intangible assets and leasing commissions. Depreciation and amortization expense decreased $01.43 million for the three months ended ~~March~~June 3130, 2017 compared with the same period in 2016. For the Comparable Portfolio, depreciation and amortization decreased $0.12 million for the three months ended ~~March~~June 3130, 2017 compared with the same period in 2016 due to the full amortization of certain lease-level assets. Depreciation and amortization expense for the Non-Comparable Properties decreased $01.31 million for the three months ended ~~March~~June 3130, 2017 compared with the same period in 2016 due to the following:

• a $1.03 million decrease from the Disposed Properties; ~~and~~


•	a $0.5 million decrease from Redland I; and

•a $0.7 million increase from the NOVA build-to-suit.

Depreciation and amortization expense decreased $1.7 million for the six months ended June 30, 2017 compared with the same period in 2016. For the Comparable Portfolio, depreciation and amortization expense decreased $0.3 million due to the full amortization of certain lease-level assets. Depreciation and amortization expense for the Non-Comparable Properties decreased $1.4 million for the six months ended June 30, 2017 compared with the same period in 2016 due to the following:


•	a $2.3 million decrease from the Disposed Properties;


•	a $0.5 million decrease from Redland I; and

•a $1.4 million increase from the NOVA build-to-suit.

Impairment of rental property is summarized as follows:




	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2017		2016		2017		2016
Impairment of rental property	$	—	$	2,772	$	—	$	2,772

On July 25, 2016, our 97% owned consolidated joint venture sold Storey Park for a contractual purchase price of $54.5 million, which generated net proceeds of $52.7 million. The property was classified as held-for-sale at June 30, 2016 and, during the second quarter of 2016, we recorded a $2.8 million impairment charge related to Storey Park based on the sales price, less estimated selling costs.

Other Expenses (Income)

Interest expense is summarized as follows:

	Three Months Ended March 31,							Percent
										Three Months					Six Months
(dollars in thousands)	2017		2016		Change			Change
	Three Months Ended June 30,				Six Months Ended June 30,								Percent					Percent
Interest expense	$	6,344	$	6,816	$	(472	)	(7	)%
(dollars in thousands)	2017		2016		2017			2016		Change			Change		Change			Change
Interest expense	$	6,053	$	6,568	$	12,397		$	13,384	$	(515	)	(8	)%	$	(987	)	(7	)%

Interest expense decreased $0.5 million and $1.0 million for the three and six months ended ~~March~~June 3130, 2017, respectively, compared with the same ~~period~~periods in 2016 due to a lower average outstanding debt ~~balance~~balances and the ~~maturity~~expiration of two ~~swaps~~swap agreements in July 2016 that together fixed LIBOR at a weighted average interest rate of 1.8% on $60.0 million of our variable-rate debt ~~in July 2016~~. For the three months ended March 31, 2017, our aggregate weighted average borrowings under the unsecured revolving credit facility and the unsecured term loan totaled $396.6 million, with a weighted average interest rate of 2.34% compared with aggregate weighted average borrowings of $469.5 million with a weighted average interest rate of 1.96% for the same period in 2016.

For the three and six months ended June 30, 2017, our aggregate weighted average borrowings under the unsecured revolving credit facility and the unsecured term loan totaled $366.1 million and $381.4 million, respectively, with a weighted average interest rate of 2.60% and 2.47%, respectively, compared with aggregate weighted average borrowings of $462.3 million and $465.9 million with a weighted average interest rate of 1.82% and 1.89% for the three and six months ended June 30, 2016, respectively. During both the three and six months ended June 30, 2017, we had fixed LIBOR at 1.4% on $240.0 million of our variable rate debt compared with our fixing LIBOR at 1.5% on $300.0 million of variable rate debt for both the three and six months ended June 30, 2016.

We anticipate interest expense will slightly decrease for the remainder of 2017 compared with 2016 due to repayments of outstanding debt and the July 2017 maturity of $147.5 million of interest rate swaps that together fix LIBOR at a weighted average interest rate of 1.5%, which are anticipated to be partially offset by a higher LIBOR. All references to LIBOR in the condensed consolidated financial statements refer to one-month LIBOR.

Interest and other income are summarized as follows:

	Three Months Ended March 31,							Percent
										Three Months					Six Months
(dollars in thousands)	2017		2016		Change			Change
	Three Months Ended June 30,				Six Months Ended June 30,								Percent					Percent
Interest and other income	$	210	$	1,003	$	(793	)	(79	)%
(dollars in thousands)	2017		2016		2017			2016		Change			Change		Change			Change
Interest and other income	$	228	$	1,101	$	437		$	2,104	$	(873	)	(79	)%	$	(1,667	)	(79	)%

Interest and other income decreased $0.89 million and $1.7 million for the three and six months ended ~~March~~June 3130, 2017, respectively, compared with the same ~~period~~periods in 2016. On June 2, 2016, the owners of 950 F Street, NW, a ten-story, 287,000 square-foot office/retail building located in Washington, D.C., prepaid a mezzanine loan that had an outstanding balance of $34.0 million and paid an exit fee upon the loan’s prepayment. The loan required monthly interest-only payments and had a fixed interest rate of 9.75%.

We anticipate that interest and other income will decrease for the remainder of 2017 compared with 2016 as a result of the reduction in interest income from the ~~prepayment~~repayment of the $34.0 million ~~950 F Street, NW~~ mezzanine loan in June 2016.

Equity in earnings of affiliates is summarized as follows:

	Three Months Ended March 31,						Percent
									Three Months					Six Months
(dollars in thousands)	2017		2016		Change		Change
	Three Months Ended June 30,				Six Months Ended June 30,							Percent				Percent
Equity in earnings of affiliates	$	4,223	$	555	$	3,668	661	%
(dollars in thousands)	2017		2016		2017		2016		Change			Change		Change		Change
Equity in earnings of affiliates	$	477	$	663	$	4,700	$	1,219	$	(186	)	(28	)%	$	3,481	286	%

Equity in earnings of affiliates reflects our aggregate ownership interest in the operating results of the properties in which we do not have a controlling interest. On March 7, 2017, three of our unconsolidated joint ventures collectively sold Aviation Business Park and Rivers Park I and II, which are all located in Maryland. Based on our percentage ownership of the joint ventures, our share of gross proceeds from the sale totaled $19.0 million, which generated $18.4 million of net proceeds. We used the net proceeds from the sale to repay $7.0 million (our proportionate share) of mortgage debt encumbering Rivers Park I and II, and the remainder was used to repay a portion of the outstanding balance under our unsecured revolving credit facility.

OnEquity ~~March~~in 7,earnings ~~2017, three~~ of ~~our~~affiliates ~~unconsolidated~~decreased ~~joint ventures collectively sold Aviation Business Park and Rivers Park I and II, which are all located in Maryland~~$0.2 million ~~Based~~for onthe ~~our~~three ~~percentage~~months ~~ownership~~ended ofJune ~~the joint ventures~~30, ~~our~~2017 ~~share~~compared ofwith ~~gross proceeds from~~ the ~~sale~~same ~~totaled~~period ~~$19.0~~in ~~million,~~2016 ~~which~~primarily ~~generated~~due ~~$18.4~~to ~~million of net proceeds. We used~~ the ~~net proceeds from the~~ sale ~~to repay $7.0 million (our proportionate share)~~ of ~~mortgage~~Aviation ~~debt~~Business ~~encumbering~~Park and Rivers Park I and II, ~~and~~during the ~~remainder~~first ~~was~~quarter ~~used to repay a portion~~ of ~~the outstanding balance under our unsecured revolving credit facility~~2017.

Equity in earnings of affiliates increased $3.75 million for the ~~three~~six months ended ~~March~~June 3130, 2017 compared with the same period in 2016 primarily due to recognizing a $3.8 million gain (our proportionate share) ~~gain~~ on the sale of Aviation Business Park and Rivers Park I and II during the first quarter of 2017. We have had, and will have, no continuing involvement in the ownership decisions of any of the unconsolidated joint ventures’ disposed properties subsequent to their disposal. For more information about our unconsolidated joint ventures’ disposed properties, see note 5, Investment in Affiliates, in the notes to our condensed consolidated financial statements.

(Gain) loss on sale of rental property is summarized as follows:

	Three Months Ended March 31,
	Three Months Ended June 30,					Six Months Ended June 30,
(dollars in thousands)	2017			2016		2017			2016
(Gain) loss on sale of rental property	$	~~(42,799~~—	)	$	~~1,155~~—	$	(42,799	)	$	1,155

On February 17, 2017, we sold Plaza 500, a 502,830 square-foot industrial property located in Northern Virginia, for gross proceeds of $75.0 million, which generated net proceeds of $72.5 million, and we recorded a $42.7 million gain on sale. We used a portion of the net proceeds from the sale to repay $70.0 million of the outstanding balance under our unsecured revolving credit facility.

On January 9, 2017, we sold One Fair Oaks, a 214,214 square-foot office building located in Northern Virginia, for gross proceeds of $13.7 million, which generated net proceeds of $13.3 million, and we recorded a $0.1 million gain on sale. We used the net proceeds from the sale, together with available cash, to repay $14.0 million of the outstanding balance under our unsecured revolving credit facility.

the net proceeds from the sale, together with available cash, to repay $14.0 million of the outstanding balance under our unsecured revolving credit facility.

On March 25, 2016, we sold the NOVA Non-Core Portfolio for net proceeds of $90.5 million, and we recorded a $1.2 million loss on the sale in the first quarter of 2016.

We have had, and will have, no continuing involvement with these properties subsequent to their disposal. For more information about our disposed properties, see note 6, Dispositions, in the notes to our condensed consolidated financial statements.

Loss on debt extinguishment is summarized as follows:

	Three Months Ended March 31,
	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2017		2016		2017		2016
Loss on debt extinguishment	$	—	$	48—	$	—	$	48

On March 1, 2016 we used available cash to defease the $0.2 million outstanding balance of the mortgage loan encumbering Gateway Centre Manassas, which was included in the NOVA Non-Core Portfolio and was sold on March 25, 2016. In connection with the defeasance, we incurred $48 thousand of extinguishment charges for the ~~three~~six months ended ~~March~~June 3130, 2016.

Net loss (income) ~~loss~~ attributable to noncontrolling interests

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

	Three Months Ended March 31,
	Three Months Ended June 30,					Six Months Ended June 30,
(dollars in thousands)	2017			2016		2017			2016
Net (income) loss attributable to noncontrolling interests	$	(1,884	)	$	147
Net loss (income) attributable to noncontrolling interests	$	123		$	390	$	(1,762	)	$	537

Net loss (income) ~~loss~~ attributable to noncontrolling interests reflects the ownership interests in our net income or loss, less amounts owed to our preferred shareholders, attributable to parties other than us. WeFor ~~had net income of $43.1 million for~~ the three and six months ended ~~March~~June 3130, 2017, ~~and~~we had a net loss, ~~less~~of ~~preferred~~$2.7 million ~~dividends,~~and net income of $440.24 million, ~~for~~respectively. For the three and six months ended ~~March 31~~June 30, 2016., ~~The~~we ~~weighted~~had ~~average~~a ~~percentage~~net ofloss, ~~the~~less ~~common~~preferred ~~Operating~~dividends, ~~Partnership~~of ~~units held by third parties was 4~~$5.2%5 million and 4$9.~~3% for the three months ended March 31~~6 million, ~~2017 and 2016,~~ respectively.

~~Prior~~At toJune ~~the sale of Storey Park on July 25~~30, 2016, we consolidated the operating results of one joint venture, which owned Storey Park, and we recognized our joint venture partner’s percentage of gains or losses within net (income) loss attributable to noncontrolling interests. The joint venture partner’s aggregate share of earnings in the operating results of our consolidated joint venture was immaterial for the three and six months ended ~~March~~June 30, 2016.

Same Property Net Operating Income

Same Property NOI, defined as property revenues (rental and tenant reimbursements and other revenues) less property operating expenses (real estate taxes, property operating and insurance expenses) from the consolidated properties owned by us and in-service for the entirety of the periods presented, is a primary performance measure we use to assess the results of operations at our properties. Same Property NOI is a non-GAAP measure. As an indication of our operating performance, Same Property NOI should not be considered an alternative to net ~~income~~ (loss) income calculated in accordance with GAAP. A reconciliation of our Same Property NOI to net ~~income~~ (loss) income is presented below. The Same Property NOI results exclude the collection of termination fees, as these items vary significantly period-over-period, thus impacting trends and comparability. Also, Same Property NOI includes a normalized management fee percentage in lieu of an administrative overhead allocation for comparative purposes. We eliminate depreciation and amortization expense, which are property level expenses, in computing Same Property NOI as these are non-cash expenses that are based on historical cost accounting assumptions and management believes these expenses do not offer the investor significant insight into the operations of the property. This presentation allows management and investors to determine whether growth or declines in net operating income are a result of increases or decreases in property operations or the acquisition or disposition of additional properties. While this presentation provides useful information to management and investors, the results should be read in conjunction with the results from the consolidated statements of operations to provide a complete depiction of our total performance.

4245

Comparison of the Three Months Ended ~~March~~June 3130, 2017 with the Three Months Ended ~~March 31~~June 30, 2016

Reconciliation of Same Property NOI for Our Reporting Segments

The following table provides a reconciliation of our Same Property NOI for our reporting segments to our consolidated net ~~income (~~loss) for the three months ended ~~March~~June 3130, 2017 and 2016 and provides a basis for our discussion of total Same Property NOI for the three months ended ~~March~~June 3130, 2017 compared with the same period in 2016. A detailed discussion of each reporting segment’s Same Property NOI results for the three months ended ~~March~~June 3130, 2017 and 2016 follows this table.

CONSOLIDATED

(dollars in thousands)	Three Months Ended ~~March~~June 3130, 2017									Three Months Ended ~~March~~June 3130, 2016								Same Property(1)
Revenues:	Same Property(1)			Non-Same Property(2)			All Properties			Same Property(1)		Non-Same Property(2)			All Properties			$ Change			% Change
Rental	$	28,~~471~~317		$	21,~~347~~043		$	3029,~~818~~360		$	2728,~~779~~192	$	63,~~065~~362		$	3331,~~844~~554		$	~~692~~125		20.54
Tenant reimbursements and other(3)	65,~~187~~565			~~818~~463			76,~~005~~028			65,~~655~~443		21,~~198~~496			86,~~853~~939			~~(468~~122		)	(72.02	)
Total revenues	3433,~~658~~882			31,~~165~~506			3735,~~823~~388			3433,~~434~~635		84,~~263~~858			4238,~~697~~493			~~224~~247			0.7
Operating expenses:
Property(4)	87,~~997~~712			~~961~~638			98,~~958~~350			97,~~221~~621		~~2,316~~922			118,~~537~~543			~~(224~~91		)	(21.42	)
Real estate taxes and insurance	4,~~358~~330			~~303~~129			4,~~661~~459			4,~~171~~147		~~1,045~~773			54,~~216~~920			~~187~~183			4.54
Total operating expenses	1312,~~355~~042			~~1,264~~767			1412,~~619~~809			1311,~~392~~768		31,~~361~~695			1613,~~753~~463			~~(37~~274		)	(02.3	)
Net operating income	$	21,~~303~~840		$	~~1,901~~739		2322,~~204~~579			$	21,~~042~~867	$	43,~~902~~163		25,~~944~~030			$	~~261~~(27	)	1(0.21	)
General and administrative expenses							(46,~~497~~214		)						(4,~~578~~305		)
Depreciation and amortization							(1413,~~566~~845		)						(15,~~006~~141		)
Total other expenses (income)							40,888								(6,461		)
Impairment of rental property							—								(2,772		)
Net income (loss)							$	45,029							$	(101	)
Total other expenses income							(5,348		)						(4,804		)
	Three Months Ended March 31, 2017									Three Months Ended March 31, 2016								Same Property(1)
Net loss							$	(2,828	)						$	(1,992	)
	Three Months Ended June 30, 2017									Three Months Ended June 30, 2016								Same Property(1)
Net Operating Income by Segment:	Same Property(1)			Non-Same Property(2)			All Properties			Same Property(1)		Non-Same Property(2)			All Properties			$ Change			% Change
Washington, D.C.	$	6,~~347~~627		$	(5661	)	$	6,~~291~~566		$	6,~~191~~744	$	(~~241~~149	)	$	56,~~950~~595		$	~~156~~(117	)	2(1.57	)
Maryland	6,~~878~~916			~~718~~(48		)	76,~~596~~868			6,~~620~~925		~~803~~918			7,~~423~~843			~~258~~(9		)	3(0.91	)
Northern Virginia	3,~~283~~121			~~1,332~~943			4,~~615~~064			3,~~190~~077		42,~~500~~493			75,~~690~~570			9344			21.94
Southern Virginia	45,~~795~~176			(9395		)	45,~~702~~081			5,~~041~~121		(~~160~~99		)	45,~~881~~022			~~(246~~55		)	(41.91	)
Total	$	21,~~303~~840		$	~~1,901~~739		$	2322,~~204~~579		$	21,~~042~~867	$	43,~~902~~163		$	25,~~944~~030		$	~~261~~(27	)	1(0.21	)
	Weighted Average Occupancy for the Three Months Ended March 31,
	Weighted Average Occupancy for the Three Months Ended June 30,
	2017			2016
Same Properties	92.15		%	92.37		%

(1) Same property comparisons are based upon those consolidated properties owned and in-service for the entirety of the periods presented. Same property results for the three months ended ~~March~~June 3130, 2017 and 2016 exclude the operating results of all disposed properties and the results of the following non-same properties that were owned as of ~~March~~June 3130, 2017: Redland I and the NOVA build-to-suit.

(2) Includes property operating results for Redland I, the NOVA build-to-suit and all properties that were disposed of prior to ~~March~~June 3130, 2017. Also includes an administrative overhead allocation, which was replaced by a normalized management fee for comparative purposes, and termination fee income.


⁽³⁾	Excludes termination fee income for comparative purposes.


⁽⁴⁾	Same property operating expenses have been adjusted to reflect a normalized management fee in lieu of an administrative overhead allocation for comparative purposes.

Same Property NOI ~~increased~~slightly ~~$0.3~~decreased ~~million~~ for the three months ended ~~March~~June 3130, 2017 compared with the same period in 2016. Total same property revenues increased $0.2 million for the three months ended ~~March~~June 3130, 2017 compared with the same period in 2016 primarily due to an increase in ~~rental~~operating ~~rates~~expense onrecoveries ~~new~~ and ~~renewal~~an ~~leases,~~increase ~~partially offset by a decrease~~ in ~~snow~~rental ~~and~~rates ~~ice~~on ~~removal~~new ~~cost recoveries~~leases. Total same property operating expenses ~~decreased~~increased ~~slightly~~$0.3 million for the three months ended ~~March~~June 3130, 2017 compared with the same period in 2016 primarily due to ~~a decrease in snow and ice removal costs and~~ an increase in ~~anticipated bad debt reserves, which were partially offset by an increase in~~ real estate taxes ~~due~~related to higher real estate tax assessments at certain properties.

4346

Washington, D.C.
	Three Months Ended March 31,
(dollars in thousands)	2017			2016			$ Change			% Change
Number of buildings(1)	6			6			—			—
Same property revenues
Rental	$	9,149		$	8,699		$	450		5.2
Tenant reimbursements and other(2)	2,532			2,551			(19		)	(0.7	)
Total same property revenues	11,681			11,250			431			3.8
Same property operating expenses
Property(3)	3,043			2,913			130			4.5
Real estate taxes and insurance	2,291			2,146			145			6.8
Total same property operating expenses	5,334			5,059			275			5.4
Same Property NOI	$	6,347		$	6,191		$	156		2.5
	Weighted Average Occupancy for the Three Months Ended March 31,
	2017			2016
Same Properties	90.3		%	88.1		%

Comparison of the Six Months Ended June 30, 2017 with the Six Months Ended June 30, 2016

Reconciliation of Same Property NOI for Our Reporting Segments

The following table provides a reconciliation of our Same Property NOI for our reporting segments to our consolidated net income (loss) for the six months ended June 30, 2017 and 2016 and provides a basis for our discussion of total Same Property NOI for the six months ended June 30, 2017 compared with the same period in 2016. A detailed discussion of each reporting segment’s Same Property NOI results for the six months ended June 30, 2017 and 2016 follows this table.

CONSOLIDATED



(dollars in thousands)	Six Months Ended June 30, 2017									Six Months Ended June 30, 2016								Same Property⁽¹⁾
Revenues:	Same Property⁽¹⁾			Non-Same Property⁽²⁾			All Properties			Same Property⁽¹⁾		Non-Same Property⁽²⁾			All Properties			$ Change			% Change
Rental	$	56,788		$	3,390		$	60,178		$	55,971	$	9,427		$	65,398		$	817		1.5
Tenant reimbursements and other⁽³⁾	11,752			1,282			13,034			12,098		3,694			15,792			(346		)	(2.9	)
Total revenues	68,540			4,672			73,212			68,069		13,121			81,190			471			0.7
Operating expenses:
Property⁽⁴⁾	16,709			1,598			18,307			16,841		3,239			20,080			(132		)	(0.8	)
Real estate taxes and insurance	8,688			432			9,120			8,318		1,818			10,136			370			4.4
Total operating expenses	25,397			2,030			27,427			25,159		5,057			30,216			238			0.9
Net operating income	$	43,143		$	2,642		45,785			$	42,910	$	8,064		50,974			$	233		0.5

General and administrative expenses							(10,712		)						(8,884		)
Depreciation and amortization							(28,411		)						(30,147		)
Impairment of rental property							—								(2,772		)
Total other (expenses) income							35,539								(11,264		)
Net income (loss)							$	42,201							$	(2,093	)

	Six Months Ended June 30, 2017									Six Months Ended June 30, 2016								Same Property⁽¹⁾
Net Operating Income by Segment:	Same Property⁽¹⁾			Non-Same Property⁽²⁾			All Properties			Same Property⁽¹⁾		Non-Same Property⁽²⁾			All Properties			$ Change			% Change
Washington, D.C.	$	12,974		$	(113	)	$	12,861		$	12,934	$	(391	)	$	12,543		$	40		0.3
Maryland	13,794			672			14,466			13,545		1,725			15,270			249			1.8
Northern Virginia	6,404			2,271			8,675			6,268		6,992			13,260			136			2.2
Southern Virginia	9,971			(188		)	9,783			10,163		(262		)	9,901			(192		)	(1.9	)
Total	$	43,143		$	2,642		$	45,785		$	42,910	$	8,064		$	50,974		$	233		0.5

	Weighted Average Occupancy for the Six Months Ended June 30,
	2017			2016
Same Properties	92.3		%	92.7		%


⁽¹⁾	Same property comparisons are based upon those consolidated properties owned and in-service for the entirety of the periods presented. Same property results for the six months ended June 30, 2017 and 2016 exclude the operating results of all disposed properties and the results of the following non-same properties that were owned as of June 30, 2017: Redland I and the NOVA build-to-suit.


⁽²⁾	Includes property operating results for Redland I, the NOVA build-to-suit and all properties that were disposed of prior to June 30, 2017. Also includes an administrative overhead allocation, which was replaced by a normalized management fee for comparative purposes, and termination fee income.


⁽³⁾	Excludes termination fee income for comparative purposes.


⁽⁴⁾	Same property operating expenses have been adjusted to reflect a normalized management fee in lieu of an administrative overhead allocation for comparative purposes.

Same Property NOI increased $0.2 million for the six months ended June 30, 2017 compared with the same period in 2016. Total same property revenues increased $0.5 million for the six months ended June 30, 2017 compared with the same period in 2016 primarily due to an increase in rental rates on new and renewal leases, partially offset by a decrease in snow and ice removal cost recoveries. Total same property operating expenses increased $0.2 million for the six months ended June 30, 2017 compared with the same period in 2016 due to an increase in real estate taxes related to higher real estate tax assessments at certain properties and an increase in anticipated bad debt reserves, which were partially offset by a decrease in snow and ice removal costs.



Washington, D.C.
	Three Months Ended June 30,											Six Months Ended June 30, 2016
(dollars in thousands)	2017			2016			$ Change			% Change		2017			2016			$ Change			% Change
Number of buildings⁽¹⁾	6			6			—			—		6			6			—			—
Same property revenues
Rental	$	9,113		$	9,085		$	28		0.3		$	18,263		$	17,784		$	479		2.7
Tenant reimbursements and other⁽²⁾	2,407			2,454			(47		)	(1.9	)	4,939			5,005			(66		)	(1.3	)
Total same property revenues	11,520			11,539			(19		)	(0.2	)	23,202			22,789			413			1.8
Same property operating expenses
Property⁽³⁾	2,714			2,590			124			4.8		5,757			5,502			255			4.6
Real estate taxes and insurance	2,179			2,205			(26		)	(1.2	)	4,471			4,353			118			2.7
Total same property operating expenses	4,893			4,795			98			2.0		10,228			9,855			373			3.8
Same Property NOI	$	6,627		$	6,744		$	(117	)	(1.7	)	$	12,974		$	12,934		$	40		0.3

	Weighted Average Occupancy for the Three Months Ended June 30,											Weighted Average Occupancy for the Six Months Ended June 30,
	2017			2016								2017			2016
Same Properties	89.7		%	89.5		%						90.1		%	89.0		%


⁽¹⁾	Same property comparisons are based upon those consolidated properties owned and in-service for the entirety of the periods presented.


⁽²⁾	Excludes termination fee income for comparative purposes.


⁽³⁾	Same property operating expenses have been adjusted to reflect a normalized management fee in lieu of an administrative overhead allocation for comparative purposes.

Same Property NOI for the Washington, D.C. properties ~~increased~~decreased $0.21 million for the three months ended ~~March~~June 30, 2017 compared with the same period in 2016 and remained relatively flat for the six months ended June 3130, 2017 compared with the same period in 2016. For the three months ended ~~March~~June 3130, 2017, total same property revenues slightly decreased due to a decrease in operating expense recoveries. For the six months ended June 30, 2017, total same property revenues increased $0.4 million compared with the same period in 2016 due to an increase in occupancy at certain Washington, D.C. properties. Total same property operating expenses increased by $0.31 million for the three months ended ~~March~~June 3130, 2017 compared with the same period in 2016 due to an increase in utilities expense. Total same property operating expenses increased by $0.4 million for the six months ended June 30, 2017 compared with the same period in 2016 due to an increase in anticipated bad debt reserves and an increase in real estate tax expenses ~~due~~related to higher real estate tax assessments.

4448

Maryland
	Three Months Ended March 31,
	Three Months Ended June 30,											Six Months Ended June 30, 2016
(dollars in thousands)	2017			2016			$ Change			% Change		2016			2015			$ Change			% Change
Number of buildings(1)	33			33			—			—		33			33			—			—
Same property revenues
Rental	$	8,~~599~~654		$	8,~~453~~523		$	~~146~~131		1.75		$	17,253		$	16,976		$	277		1.6
Tenant reimbursements and other(2)	1,~~607~~292			1,~~955~~208			~~(348~~84		)	~~(17~~7.80	)	2,899			3,162			(263		)	(8.3	)
Total same property revenues	109,~~206~~946			109,~~408~~731			~~(202~~215		)	(12.92	)	20,152			20,138			14			0.1
Same property operating expenses
Property(3)	2,~~433~~142			21,~~958~~969			~~(525~~173		)	~~(17~~8.78	)	4,575			4,927			(352		)	(7.1	)
Real estate taxes and insurance	~~895~~888			~~830~~837			6551			76.81		1,783			1,666			117			7.0
Total same property operating expenses	3,~~328~~030			32,~~788~~806			~~(460~~224		)	~~(12~~8.10	)	6,358			6,593			(235		)	(3.6	)
Same Property NOI	$	6,~~878~~916		$	6,~~620~~925		$	~~258~~(9	)	3(0.91	)	$	13,794		$	13,545		$	249		1.8
	Weighted Average Occupancy for the Three Months Ended March 31,
	Weighted Average Occupancy for the Three Months EndedJune 30,											Weighted Average Occupancy for the Six Months Ended June 30,
	2017			2016								2016			2015
Same Properties	9192.36		%	9193.63		%						92.3		%	92.5		%

(1) Same property comparisons are based upon those consolidated properties owned and in-service for the entirety of the periods presented. Same property results exclude the results of the following non-same property that was owned as of ~~March~~June 3130, 2017: Redland I.


⁽²⁾	Excludes termination fee income for comparative purposes.


⁽³⁾	Same property operating expenses have been adjusted to reflect a normalized management fee in lieu of an administrative overhead allocation for comparative purposes.

Same Property NOI for the Maryland properties remained relatively flat for the three months ended June 30, 2017 compared with the same period in 2016 and increased $0.32 million for the ~~three~~six months ended ~~March~~June 3130, 2017 compared with the same period in 2016. Total same property revenues ~~decreased~~increased $0.2 million for the three months ended ~~March~~June 3130, 2017 compared with the same period in 2016 due to higher rental rates on new leases. Total same property revenues slightly increased for the six months ended June 30, 2017 compared with the same period in 2016 due to higher rental rates on new and renewal leases, partially offset by a decrease in snow and ice removal cost recoveries. Total same property operating expenses increased $0.2 million for the three months ended June 30, ~~partially~~2017 ~~offset~~compared bywith anthe ~~increase~~same period in ~~rental~~2016 ~~revenue~~primarily due to ~~higher~~an ~~rental~~increase ~~rates~~in onanticipated ~~new~~bad ~~and~~debt ~~renewal leases~~reserves. Total same property operating expenses decreased $0.52 million for the ~~three~~six months ended ~~March~~June 3130, 2017 compared with the same period in 2016 due to a decrease in snow and ice removal costs, partially offset by an increase in real estate taxes related to higher real estate tax assessments.

4549

Northern Virginia
	Three Months Ended March 31,
	Three Months Ended June 30,											Six Months Ended June 30, 2016
(dollars in thousands)	2017			2016			$ Change			% Change		2016			2015			$ Change			% Change
Number of buildings(1)	11			11			—			—		11			11			—			—
Same property revenues
Rental	$	4,~~336~~167		$	4,~~319~~305		$	17(138	)	0(3.42	)	$	8,503		$	8,624		$	(121	)	(1.4	)
Tenant reimbursements and other(2)	~~881~~812			~~945~~796			~~(64~~16		)	(62.80	)	1,693			1,741			(48		)	(2.8	)
Total same property revenues	54,~~217~~979			5,~~264~~101			(47122		)	(02.94	)	10,196			10,365			(169		)	(1.6	)
Same property operating expenses
Property(3)	1,~~406~~259			1,~~494~~510			(88251		)	(516.96	)	2,665			3,004			(339		)	(11.3	)
Real estate taxes and insurance	~~528~~599			~~580~~514			~~(52~~85		)	(916.05	)	1,127			1,093			34			3.1
Total same property operating expenses	1,~~934~~858			2,~~074~~024			(~~140~~166		)	(6.8.2	)	3,792			4,097			(305		)	(7.4	)
Same Property NOI	$	3,~~283~~121		$	3,~~190~~077		$	9344		21.94		$	6,404		$	6,268		$	136		2.2
	Weighted Average Occupancy for the Three Months Ended March 31,
	Weighted Average Occupancy for the Three Months EndedJune 30,											Weighted Average Occupancy for the Six Months Ended June 30,
	2017			2016								2016			2015
Same Properties	91.37		%	9391.07		%						90.2		%	93.0		%


⁽²⁾	Excludes termination fee income for comparative purposes.


⁽³⁾	Same property operating expenses have been adjusted to reflect a normalized management fee in lieu of an administrative overhead allocation for comparative purposes.

Same Property NOI for the Northern Virginia properties remained relatively flat for the three months ended June 30, 2017 compared with the same period in 2016 and increased $0.1 million for the ~~three~~six months ended ~~March~~June 3130, 2017 compared with the same period in 2016. Total same property revenues ~~slightly~~ decreased $0.1 million and $0.2 million for the three and six months ended ~~March~~June 3130, 2017, respectively, compared with the same ~~period~~periods in 2016 primarily due to a ~~decrease~~write-off inof ~~snow~~unamortized ~~and~~rent ~~ice~~abatement ~~removal~~during ~~cost~~the ~~recoveries~~second quarter of 2017 related to a tenant’s downsizing. Total same property operating expenses decreased $0.12 million and $0.3 million for the three and six months ended ~~March~~June 3130, 2017, respectively, compared with the same ~~period~~periods in 2016 primarily due to a decrease in ~~snow~~anticipated ~~and~~bad ~~ice~~debt ~~removal costs and a decrease in real estate tax expense due to lower tax assessments~~reserves.

4650

Southern Virginia
	Three Months Ended March 31,
	Three Months Ended June 30,											Six Months Ended June 30, 2016
(dollars in thousands)	2017			2016			$ Change			% Change		2016			2015			$ Change			% Change
Number of buildings(1)	19			19			—			—		19			19			—			—
Same property revenues
Rental	$	6,~~387~~383		$	6,~~308~~279		$	79104		1.37		$	12,769		$	12,587		$	182		1.4
Tenant reimbursements and other(2)	1,~~167~~054			~~1,204~~985			~~(37~~69		)	(37.10	)	2,221			2,190			31			1.4
Total same property revenues	7,~~554~~437			7,~~512~~264			42173			02.64		14,990			14,777			213			1.4
Same property operating expenses
Property(3)	21,~~115~~597			1,~~856~~552			~~259~~45			142.09		3,712			3,408			304			8.9
Real estate taxes and insurance	~~644~~664			~~615~~591			2973			412.74		1,307			1,206			101			8.4
Total same property operating expenses	2,~~759~~261			2,~~471~~143			~~288~~118			115.75		5,019			4,614			405			8.8
Same Property NOI	$	45,~~795~~176		$	5,~~041~~121		$	~~(246~~55	)	(41.91	)	$	9,971		$	10,163		$	(192	)	(1.9	)
	Weighted Average Occupancy for the Three Months Ended March 31,
	Weighted Average Occupancy for the Three Months EndedJune 30,											Weighted Average Occupancy for the Six Months Ended June 30,
	2017			2016								2016			2015
Same Properties	94.12		%	94.45		%						94.3		%	94.4		%


⁽¹⁾	Same property comparisons are based upon those consolidated properties owned and in-service for the entirety of the periods presented.


⁽²⁾	Excludes termination fee income for comparative purposes.


⁽³⁾	Same property operating expenses have been adjusted to reflect a normalized management fee in lieu of an administrative overhead allocation for comparative purposes.

Same Property NOI for the Southern Virginia properties remained relatively flat for the three months ended June 30, 2017 compared with the same period in 2016 and decreased $0.2 million for the ~~three~~six months ended ~~March~~June 3130, 2017 compared with the same period in 2016. Total same property revenues ~~slightly~~ increased $0.2 million for both the three and six months ended ~~March~~June 3130, 2017 compared with the same ~~period~~periods in 2016 due to an increase in rental rates on new and renewal leases. Total same property operating expenses increased $0.31 million and $0.4 million for the three and six months ended ~~March~~June 3130, 2017, respectively, compared with the same ~~period~~periods in 2016 primarily due to an increase in real estate taxes related to higher tax assessments. In addition, total same property operating expenses for the six months ended June 30, 2017 increased compared with the same period in 2016 due to higher snow and ice removal costs.

4751

Liquidity and Capital Resources

Overview

We seek to maintain a flexible balance sheet, with an appropriate balance of cash, debt, equity and available funds under our unsecured revolving credit facility, to readily provide access to capital given the volatility of the market and to position us to take advantage of potential growth opportunities (including both internal growth through development and redevelopment, as well as external growth through acquisitions).

On January 9, 2017, we sold One Fair Oaks, a vacant 214,214 square-foot office building located in Northern Virginia, and used the $13.3 million net proceeds from the sale, together with available cash, to repay $14.0 million of the outstanding balance under the unsecured revolving credit facility. In February 2017, we sold Plaza 500, a 502,830 square-foot industrial property located in Northern Virginia, and used a portion of the net proceeds to repay $70.0 million of the outstanding balance under the unsecured revolving credit facility. In March 2017, we used our proportionate share of the net proceeds from the sale of Aviation Business Park and Rivers Park I and II to repay $7.0 million (our proportionate share) of the mortgage loan that encumbered Rivers Park I and II, and the remainder was used, together with available cash, to repay $13.0 million of the outstanding balance under our unsecured revolving credit facility.

We expect to meet short-term liquidity requirements generally through working capital, net cash provided by operations, and, if necessary, borrowings on our unsecured revolving credit facility. Our short-term obligations consist primarily of the lease for our 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 common shareholders.

As ofpreviously ~~the~~announced, ~~date~~on ofJune ~~this~~27, ~~filing~~2017, weFirst ~~had~~Potomac ~~$51.0 million~~entered ~~outstanding~~into ~~and~~a ~~$172.0~~definitive ~~million~~merger ~~available~~agreement with GOV under which GOV will acquire all of the ~~unsecured~~outstanding ~~revolving~~shares ~~credit~~of ~~facility~~First Potomac. InUnder the ~~next~~terms 12of ~~months~~the merger agreement, weFirst ~~have~~Potomac shareholders will receive a cash payment of $3211.215 ~~million~~per ~~construction~~share ~~loan~~at ~~and~~closing. aThe Transaction, which is valued at $621.94 ~~million~~billion, ~~fixed-rate~~including ~~loan~~the ~~maturing~~assumption ~~and~~of wedebt, ~~are~~is ~~currently~~expected ~~contemplating~~to ~~whether~~close prior to ~~refinance~~year-end or2017. In the interim, pursuant to ~~repay~~the merger agreement, the ~~loans~~Company athas agreed that it will not pay regular, quarterly distributions to the ~~time~~holders of ~~their~~the ~~maturity.~~Company’s ~~For~~common ashares ~~list~~prior to the closing of ~~principal~~the ~~debt~~Transaction, ~~balances~~except to the extent that dividends and ~~their~~other ~~maturity~~distributions ~~dates,~~are asnecessary ~~well~~for each of the Company and its REIT subsidiary to maintain their respective status as a ~~reconciliation~~REIT. Any payment of ~~our~~dividends ~~borrowings~~prior to the ~~net~~completion ~~debt~~of ~~balances~~the ~~presented~~Transaction will result in ~~our~~a ~~consolidated~~corresponding ~~balance~~reduction ~~sheets~~in the $11.15 per share merger consideration.The Transaction is subject to customary closing conditions, ~~see~~including ~~note~~approval 7by First Potomac shareholders at a special meeting. As a result, ~~Debt~~the Company can provide no assurances regarding when the Transaction will close, inif at all. The Board of Trustees of First Potomac has unanimously approved both the ~~notes~~merger toand ~~our~~the ~~condensed~~merger ~~consolidated~~agreement, ~~financial~~and ~~statements~~has recommended approval of the merger by First Potomac’s shareholders.

~~Over~~On ~~the~~May ~~next~~23, ~~twelve months~~2017, we ~~believe~~borrowed ~~that~~$32.0 wemillion ~~will~~under ~~generate~~the ~~sufficient~~unsecured ~~cash~~revolving ~~flow~~credit ~~from~~facility ~~operations~~ and ~~have~~used ~~access~~such ~~to the capital resources~~funds, ~~through~~together ~~debt~~with ~~and~~available ~~equity~~cash ~~markets, necessary~~ to ~~expand and develop our business~~repay, towithout ~~fund our operating and administrative expenses~~penalty, tothe ~~continue~~$32.2 tomillion ~~meet~~construction ~~our~~loan ~~debt~~encumbering ~~service~~440 ~~obligations~~First ~~and~~Street, toN.W. ~~pay~~As ~~distributions~~of inthe ~~accordance~~date ~~with~~of ~~REIT~~this ~~requirements. However~~filing, ~~our~~we ~~cash~~had ~~flow~~$72.0 million ~~from~~outstanding ~~operations~~ and ~~our~~$169.3 ~~ability~~million toavailable ~~access~~under the ~~debt~~unsecured ~~and~~revolving ~~equity~~credit ~~markets~~facility. ~~could~~In ~~be adversely affected due to uncertain economic factors and volatility in~~ the ~~financial~~next ~~and~~12 ~~credit markets. In particular~~months, we ~~cannot~~have ~~assure~~a ~~that~~$62.5 ~~our~~million ~~tenants~~fixed-rate ~~will~~loan ~~not~~maturing, ~~default~~and onwe ~~their~~intend ~~leases or fail~~ to ~~make~~repay ~~full~~the ~~rental~~loan ~~payments~~during ~~if their businesses are challenged due to, among other things,~~ the ~~economic~~third ~~conditions~~quarter ~~(particularly~~of if2017. ~~the~~For ~~tenants~~a ~~are~~list ~~unable~~of toprincipal ~~secure~~debt ~~financing~~balances toand ~~operate~~ their ~~businesses).~~maturity ~~This~~dates, ~~may~~as bewell ~~particularly~~as ~~true~~a ~~for~~reconciliation ~~our tenants that are smaller companies. Further, 10.8%~~ of our ~~annualized~~borrowings ~~cash basis rent is scheduled~~ to ~~expire during~~ the ~~next~~net ~~twelve~~debt ~~months~~balances ~~(which~~presented ~~includes~~in ~~4.7% of~~ our ~~annualized~~consolidated ~~cash~~balance ~~basis~~sheets, ~~rent~~see ~~that~~note ~~is related to the Bureau of Prisons at 500 First Street~~7, ~~NW) and~~Debt, ifin wethe ~~are~~notes ~~unable~~ to ~~renew these leases or re-lease the space,~~ our ~~cash~~condensed ~~flow~~consolidated ~~could~~financial ~~be negatively impacted~~statements.

~~The~~Notwithstanding ~~Bureau~~the ofpending ~~Prisons~~Transaction, ~~which~~over ~~fully~~the ~~leases~~next ~~500~~twelve ~~First~~months, ~~Street~~we believe that we will generate sufficient cash flow from operations and have access to the capital resources, NWnecessary into ~~Washington~~expand and develop our business, ~~D.C.~~to fund our operating and administrative expenses, ~~was~~to ~~subject~~continue to ameet ~~lease~~our ~~that~~debt ~~was~~service ~~scheduled~~obligations and to ~~expire~~pay distributions in ~~July~~accordance ~~2016~~with REIT requirements. ~~During~~However, ~~the~~our ~~second~~cash ~~quarter~~flow offrom ~~2016,~~operations weand ~~entered~~our ~~into~~ability ato ~~one-year~~access ~~lease~~capital ~~extension~~resources ~~with~~could ~~the~~be ~~Bureau~~adversely ofaffected ~~Prisons,~~due ~~which~~to isuncertain ~~set~~economic tofactors ~~expire~~and volatility in ~~July~~the ~~2017,~~financial and wecredit ~~believe~~markets. ~~there~~In isparticular, awe ~~likelihood~~cannot assure that ~~the~~our ~~tenant~~tenants will ~~elect~~not default on their leases or fail to ~~further~~make ~~extend~~full ~~the~~rental ~~expiration~~payments ~~date~~if oftheir ~~the~~businesses ~~lease~~are challenged due to, ~~potential~~among ~~short-term~~other ~~delays~~things, inthe ~~relocating~~economic toconditions ~~its~~(particularly ~~new~~if ~~space;~~the ~~however,~~tenants weare ~~can~~unable ~~provide~~to nosecure ~~assurances~~financing ~~regarding~~to ~~the~~operate ~~length~~their ofbusinesses). ~~such~~This ~~extension~~may orbe ~~that~~particularly ~~such~~true ~~extension~~for ~~will~~our ~~occur~~tenants atthat ~~all~~are smaller companies. ~~Currently~~Further, we11.7% ~~are~~of ~~evaluating~~our ~~various~~annualized ~~strategies~~cash ~~with~~basis ~~respect~~rent, excluding month-to-month ~~500~~leases ~~First~~(which ~~Street,~~represent ~~NW,~~an ~~which~~immaterial ~~includes~~percentage ~~repositioning~~of ~~500~~our ~~First~~annualized ~~Street~~cash basis rent), NWis ~~and~~scheduled ~~gauging~~to ~~new~~expire ~~tenant~~during ~~interest~~the tonext ~~lease~~twelve ~~this~~months ~~property,~~(which ~~all~~includes ~~with~~4.6% ~~the~~of ~~ultimate~~our ~~goal~~annualized ofcash ~~maximizing~~basis ~~value~~rent ~~upon~~that is related to the ~~expiration~~Bureau of ~~the~~Prisons ~~lease;~~at ~~however,~~500 weFirst ~~can~~Street, ~~provide~~NW) noand, ~~assurances~~if ~~regarding~~we ~~the~~are ~~outcome~~unable ofto renew these leases or ~~any~~re-lease ~~other~~the ~~alternative~~space, ~~strategies~~our ~~for~~cash ~~the~~flow ~~property~~could be negatively impacted.

WeThe ~~also~~Bureau ~~believe~~of Prisons, ~~based~~which onfully ~~our~~leases ~~historical~~500 ~~experience~~First ~~and~~Street, ~~forecasted~~NW ~~operations~~in Washington, D.C., was subject to a lease that was scheduled to expire in July 2016. During the second quarter of 2016, we ~~will~~entered ~~have~~into ~~sufficient~~a ~~cash~~one-year ~~flow~~lease orextension ~~access~~with the Bureau of Prisons (to ~~capital~~extend the lease expiration to ~~meet~~July ~~our~~2017), ~~obligations~~and ~~over~~during the ~~next~~third ~~five~~quarter ~~years.~~of We2017, ~~intend~~we entered into another amendment with the Bureau of Prisons to ~~meet~~extend ~~our~~the ~~long-term~~expiration ~~funding~~date ~~requirements~~of ~~for~~the ~~property~~lease ~~acquisitions~~to March 2018, ~~development~~which amendment provides the tenant with an option to terminate the lease, ~~redevelopment~~without ~~and~~the ~~other~~payment ~~non-recurring~~of ~~capital~~a ~~improvements~~termination ~~through~~fee, ~~net~~as ~~cash~~early ~~provided~~as ~~from~~December ~~operations~~2017. Currently, ~~long-term~~we ~~secured~~are ~~and~~evaluating ~~unsecured~~various ~~indebtedness~~strategies with respect to 500 First Street, ~~including~~NW, ~~borrowings~~which ~~under~~includes ~~our~~repositioning ~~unsecured~~500 ~~revolving~~First ~~credit~~Street, ~~facility~~NW and ~~unsecured~~gauging ~~term~~new ~~loan,~~tenant ~~proceeds~~interest ~~from~~to ~~disposal~~lease ofthis ~~strategically~~property, ~~identified~~all ~~assets~~with ~~(outright~~the orultimate ~~through~~goal ~~joint~~of ~~ventures)~~maximizing ~~and/or~~value upon the ~~issuance~~expiration of ~~equity~~the ~~and/or~~lease; ~~debt~~however, ~~securities.~~we Incan provide no assurances regarding the ~~process~~outcome of ~~exploring~~these ~~different~~or ~~financing~~any ~~options,~~other wealternative ~~actively~~strategies ~~monitor~~for the ~~impact~~property.

48We also believe, based on our historical experience and forecasted operations, that we will have sufficient cash flow or access to capital to meet our obligations over the next five years. We intend to meet our long-term funding requirements for property

~~that each potential financing decision will have on our financial covenants in order to avoid any issues of non-compliance with the terms of our existing financial covenants.~~52

acquisitions, development, redevelopment and other non-recurring capital improvements through net cash provided from operations, long-term secured and unsecured indebtedness, including borrowings under our unsecured revolving credit facility and unsecured term loan, proceeds from disposal of strategically identified assets (outright or through joint ventures) and/or the issuance of equity and/or debt securities. In the process of exploring different financing options, we actively monitor the impact that each potential financing decision will have on our financial covenants in order to avoid any issues of non-compliance with the terms of our existing financial covenants.

Our ability to raise funds through sales of debt and equity securities and access to 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 our shares. We will continue to analyze which sources of capital are most advantageous to us at any particular point in time, but the capital markets may not be consistently available on terms we deem attractive, or at all.

Financial Covenants

Our outstanding corporate debt agreements contain specific financial covenants that may impact future financing decisions made by us or may be impacted by a decline in operations. As of ~~March~~June 3130, 2017, we were in compliance with the covenants of our amended, restated and consolidated unsecured revolving credit facility and unsecured term loan, ~~the 440 First Street, NW Construction Loan~~ and the Northern Virginia Construction Loan.

Our 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 facility. These debt agreements also contain cross-default provisions that would be triggered if we are 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 we 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 our liquidity, financial condition, results of operations and ability to make distributions to our shareholders.

Below is a summary of certain financial covenants associated with these debt agreements at ~~March~~June 3130, 2017 (dollars in thousands):

Unsecured Revolving Credit Facility, Unsecured Term Loan and Construction Loans

Covenants	Quarter Ended ~~March~~June 3130, 2017	Covenant
Consolidated Total Leverage Ratio(1)	4746.41%	≤ 60%
Tangible Net Worth(1)	$~~772~~812,~~118~~503	≥ $601,202
Fixed Charge Coverage Ratio(1)	3.~~02x~~15x	≥ 1.50x
Maximum Dividend Payout Ratio	40.92%	≤ 95%
Restricted Indebtedness:
Maximum Secured Debt	2321.20%	≤ 40%
Unencumbered Pool Leverage(1)	41.98%	≤ 60%
Unencumbered Pool Interest Coverage Ratio(1)	5.~~28x~~54	≥ 1.75x

(1) These are the only covenants that apply to our ~~440 First Street, NW Construction Loan and~~ Northern Virginia Construction Loan, which are calculated in accordance with the amended, restated and consolidated unsecured revolving credit facility.

Cash Flows

Due to the nature of our business, we rely on working capital and net cash provided by operations and, if necessary, borrowings under our unsecured revolving credit facility to fund our short-term liquidity needs. Net cash provided by operations is substantially dependent on the continued receipt of rental payments and other expenses reimbursed by our tenants. The ability of tenants to meet their obligations, including the payment of rent contractually owed to us, and our ability to lease space to new or replacement tenants on favorable terms, could affect our cash available for short-term liquidity needs. We intend 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 our unsecured revolving credit facility, proceeds from asset dispositions and the issuance of equity and debt securities. However, we may not be able to obtain capital from such sources on favorable terms, in the time period we desire, or at all. In addition, our continued ability to borrow under our existing debt instruments is subject to compliance with our financial and operating covenants and a failure to comply

4953

facility, proceeds from asset dispositions and the issuance of equity and debt securities. However, we may not be able to obtain capital from such sources on favorable terms, in the time period we desire, or at all. In addition, our continued ability to borrow under our existing debt instruments is subject to compliance with our 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, we may be required to repay such debt with capital from other sources, which may not be available on attractive terms, or at all.

We 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:

	Three Months Ended March 31,
	Six Months Ended June 30,
(dollars in thousands)	2017			2016			Change
Net cash provided by operating activities	$	923,~~074~~376		$	1331,~~950~~879		$	(48,~~876~~503	)
Net cash provided by investing activities	9082,~~244~~250			6883,~~104~~183			~~22,140~~(933		)
Net cash used in financing activities	(~~100~~105,~~193~~281		)	(80114,~~432~~886		)	~~(19~~9,~~761~~605		)

Net cash provided by operating activities decreased $48.95 million for the ~~three~~six months ended ~~March~~June 3130, 2017 compared with the same period in 2016 primarily due to a decrease in net operating income due to property dispositions during 2016 and the first quarter of 2017. ~~In addition, there was an increase in deferred costs for the three months ended March 31, 2017 compared with the same period in 2016.~~

Net cash provided by investing activities increased $220.19 million for the ~~three~~six months ended ~~March~~June 3130, 2017 compared with the same period in 2016. During the ~~three~~six months ended ~~March~~June 3130, 2017, we received aggregate net proceeds of $85.8 million from the sales of Plaza 500 and One Fair Oaks. In addition, we received $11.3 million of distributions from ~~three of~~ our unconsolidated joint ventures, which primarily ~~represented~~reflected our proportionate share of the net proceeds from the combined sale of Aviation Business Park and Rivers Park I and II. During the ~~three~~six months ended ~~March~~June 3130, 2016, the owners of 950 F Street, NW prepaid a mezzanine loan that had an outstanding balance of $34.0 million. In addition, we received aggregate net proceeds of $90.5 million from the sale of the NOVA Non-Core Portfolio. The increase in cash provided by investing activities for the ~~three~~six months ended ~~March~~June 3130, 2017 compared with the same period in 2016 was also related to a $1526.87 million combined decrease in cash used for construction activities and additions to rental property and furniture, fixtures and equipment, which was primarily driven by a decrease in costs incurred for the NOVA build-to-suit, which was placed in-service in August 2016.

Net cash used in financing activities ~~increased~~decreased $199.86 million for the ~~three~~six months ended ~~March~~June 3130, 2017 compared with the same period in 2016. We issued $450.01 million of debt and repaid $97143.90 million of outstanding debt during the ~~three~~six months ended ~~March~~June 3130, 2017 compared with the issuance of $80201.24 million of debt and the repayment of $93151.10 million of outstanding debt during the ~~three~~six months ended ~~March 31~~June 30, 2016. In addition, during the ~~three~~six months ended ~~March~~June 3130, 2016, we used cash from dispositions to redeem 25.28 million 7.750% Series A Preferred Shares with a total face value of $55145.0 million, ~~and~~which weresulted ~~paid~~in ~~preferred~~a ~~dividends of~~ $24.84 million onreduction ~~the~~in ~~remainder~~preferred ~~of our outstanding 7~~dividends.~~750% Series A Preferred Shares, which were fully redeemed during the second and third quarters of 2016.~~ Dividends to common shareholders decreased $2.9 million for the ~~three~~six months ended ~~March 31~~June 30, 2017 compared with the same period in 2016 due to a reduction of our quarterly dividend rate from $0.15 per common share to $0.10 per common share, which was effective for dividends paid on and after May 16, 2016.

Contractual Obligations

As of ~~March~~June 3130, 2017, we had contractual construction in progress obligations, which included amounts accrued at ~~March~~June 3130, 2017, of $64.16 million. The amount of contractual construction in progress obligations are primarily related to the redevelopment of Redland I at 540 Gaither Road and the development of a café pavilion amenity at Redland, which are located in our Maryland reporting segment. As of ~~March~~June 3130, 2017, we had contractual rental property and furniture, fixtures and equipment obligations of $715.10 million outstanding, which included amounts accrued at ~~March~~June 3130, 2017. The amount of contractual rental property and furniture, fixtures and equipment obligations at ~~March~~June 3130, 2017 included costs for various properties across our reporting segments, including significant capital improvements at 1401 K Street, NW, which is located in our Washington, D.C. reporting segment, and Three Flint Hill, which is located in our Northern Virginia reporting segment. We anticipate meeting our contractual obligations related to our construction activities with cash from our operating activities. In the event cash from our operating activities is not sufficient to meet our contractual obligations, we can access additional capital through our unsecured revolving credit facility.

We remain liable, solely to the extent of our proportionate ownership percentage, to fund any capital shortfalls or commitments from properties owned through unconsolidated joint ventures.

5054

We have various obligations to certain local municipalities associated with our development projects that will require completion of specified site improvements, such as sewer and road maintenance, grading and other general landscaping work. As of ~~March~~June 3130, 2017, we remained liable to those local municipalities for $2.23 million in the event that we do not complete the specified work. We intend to complete the site improvements in satisfaction of these obligations.

We had no other material contractual obligations as of ~~March~~June 3130, 2017.

Distributions

We are required to distribute at least 90% of our REIT taxable income to our shareholders in order to maintain qualification as a REIT, including some types of taxable income we recognize for tax purposes but with regard to which we do not receive corresponding cash. In addition, we must distribute 100% of our taxable income to our shareholders to eliminate our U.S. federal income tax liability. The funds we use to pay dividends on our common and preferred shares are provided through distributions from the Operating Partnership. For each of our common and, when applicable, preferred shares, the Operating Partnership has issued a corresponding common and preferred unit to us. We are the sole general partner of and, as of ~~March~~June 3130, 2017, owned 95.8% of the common interest in the Operating Partnership. The remaining common interests in the Operating Partnership are limited partnership interests that are owned by unrelated parties. In 2016, we redeemed all of our outstanding 7.750% Series A Preferred Shares and now only have common shares and Operating Partnership common units outstanding. The Operating Partnership is required to make cash distributions to us in an amount sufficient to meet our 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, our management team ~~recommends~~has historically recommended a distribution amount that must then be approved by our Board of Trustees in its sole discretion. ~~The~~However, pursuant to the merger agreement in connection with the Transaction, the Company has agreed that it will not pay regular, quarterly distributions to the holders of the Company’s common shares prior to the closing of Transaction, except to the extent that dividends and other distributions are necessary for both the Company and its REIT subsidiary to maintain their status as a REIT. Absent such prohibition, the amount of future distributions ~~will~~would be at the discretion of our Board of Trustees and ~~will~~would be based on, among other things: (i) the taxable income and cash flow generated by our operating activities; (ii) cash generated by, or used in, our financing and investing activities; (iii) the annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986, as amended; ~~and~~ (iv) such other factors as the Board of Trustees deems relevant; and (v) the terms of the merger agreement, as discussed above. Our 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 for additional information regarding the financial covenants, as well as “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 for the year ended December 31, 2016. See “Dividends” below for additional restrictions on paying dividends contained in the merger agreement.

Dividends

OnPursuant ~~January 24~~to the merger agreement in connection with the Transaction, ~~2017~~the Company has agreed that it will not pay regular, wequarterly ~~declared~~distributions ato ~~dividend~~the holders of ~~$0.10~~the ~~per~~Company’s common ~~share~~shares prior to the closing of Transaction, ~~equating~~except to anthe ~~annualized~~extent ~~dividend~~that ofdividends ~~$0.40~~and ~~per~~other ~~common~~distributions ~~share.~~are ~~The~~necessary ~~dividend~~for ~~was~~both ~~paid~~the onCompany ~~February 15,~~and ~~2017~~its REIT subsidiary to ~~common~~maintain ~~shareholders~~their status as a REIT. Any payment of ~~record~~dividends asprior to the completion of ~~February 8,~~the ~~2017~~Transaction will result in a corresponding reduction in the $11.15 per share merger consideration.

Funds From Operations

FFO, which is a non-GAAP measure used by many investors and analysts that follow the public real estate industry, represents net income (computed in accordance with GAAP), excluding (gains) losses on sales of rental property and impairments of rental property, plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. We also exclude from our FFO calculation, the impact related to third parties from our consolidated joint venture. FFO available to common shareholders and unitholders is calculated as FFO less accumulated dividends on our preferred shares and the write-off of issuance costs associated with our redeemed preferred shares for the applicable periods presented. We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts (“NAREIT”), which ~~may differ from the methodology for calculating FFO, or similarly titled measures, utilized by other equity REITs and, accordingly, may not be comparable to such other REITs.~~

We consider FFO and FFO available to common shareholders and unitholders useful measures of performance for an equity REIT as they facilitate an understanding of the operating performance of our properties without giving effect to real estate depreciation and amortization, which assume that the value of rental property diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, we believe that FFO provides a meaningful indication of our performance. We also consider FFO an appropriate supplemental performance measure given its wide use by investors and analysts. However, FFO does not represent amounts available for our 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 our cash needs, 55

51may differ from the methodology for calculating FFO, or similarly titled measures, utilized by other equity REITs and, accordingly, may not be comparable to such other REITs.

Our presentation of FFO in accordance with NAREIT’s definition should not be considered as an alternative to net income (loss) attributable to common shareholders (computed in accordance with GAAP) as an indicator of our financial performance.

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

	Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Net income (loss) attributable to common shareholders	$	43,145		$	(4,106	)
Net (loss) income attributable to common shareholders	$	(2,705	)	$	(5,491	)	$	40,439		$	(9,597	)
Add: Depreciation and amortization:
Rental property	1413,~~566~~845			15,~~006~~141			28,411			30,147
Unconsolidated joint ventures	~~870~~700			~~881~~895			1,571			1,776
(Gain) loss on sale of rental property	(42,799		)	1,155
Impairment of rental property	—			2,772			—			2,772
Gain on sale of rental property owned through unconsolidated joint ventures(1)	(3,797		)	—
(Gain) loss on sale of rental property	—			—			(42,799		)	1,155
Net income (loss) attributable to noncontrolling interests in the Operating Partnership	1,884			(133		)
Gain on sale of rental property owned through unconsolidated joint ventures(1)	—			—			(3,797		)	—
FFO available to common shareholders and unitholders	13,869			12,803
Net (loss) income attributable to noncontrolling interests in the Operating Partnership	(123		)	(294		)	1,762			(427		)
Dividends on preferred shares	—			2,248
FFO available to common shareholders and unitholders	11,717			13,023			25,587			25,826
Issuance costs of redeemed preferred shares (2)	—			1,904
Dividends on preferred shares	—			794			—			3,042
FFO	$	13,869		$	16,955
Issuance costs of redeemed preferred shares (2)	—			3,095			—			4,999
Weighted average common shares and Operating Partnership units outstanding – basic	60,181			60,149
FFO	$	11,717		$	16,912		$	25,587		$	33,867
Weighted average common shares and Operating Partnership units outstanding – diluted	60,452			60,234
Weighted average common shares and Operating Partnership units outstanding – basic	60,234			60,155			60,207			60,151
Weighted average common shares and Operating Partnership units outstanding – diluted	60,544			60,230			60,486			60,232


⁽¹⁾	Reflects our proportionate share of the gain on sale of Aviation Business Park and Rivers Park I and II, which were sold by the unconsolidated joint ventures that owned the respective properties in March 2017. For more information, see note 5, Investment in Affiliates, in the notes to our condensed consolidated financial statements.

(2) Represents original issuance costs associated with the 7.750% Series A Preferred Shares that were redeemed during the ~~three~~periods ~~months ended March 31, 2016~~presented.

ITEM 3: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. In the normal course of business, we are exposed to the effect of interest rate changes. We have historically entered into derivative agreements to mitigate our exposure to unexpected changes in interest. Market risk refers to the risk of loss from adverse changes in market interest rates. We periodically use derivative financial instruments to seek to manage, or hedge, interest rate risks related to our borrowings. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based on their credit rating and other factors. We intend to enter into derivative agreements only with counterparties that we believe have a strong credit rating to mitigate the risk of counter-party default or insolvency.

We had $649.5 million of debt outstanding at March 31, 2017, of which $231.7 million was fixed-rate debt and $240.0 million was hedged variable-rate debt. The remainder of our debt, $177.8 million, was unhedged variable-rate debt that consisted of $51.0 million under the unsecured revolving credit facility, $60.0 million under the unsecured term loan, a $32.2 million outstanding balance under the 440 First Street, NW Construction Loan and a $34.6 million outstanding balance under the Northern Virginia Construction Loan. At March 31, 2017, the 440 First Street, NW Construction Loan had a contractual interest rate of LIBOR plus 2.50%, and the Northern Virginia Construction Loan had a contractual interest rate of LIBOR plus 1.85%. At March 31, 2017, LIBOR was 0.98%. A change in interest rates of 100 basis points would result in an increase or decrease of $1.8 million in interest expense on our unhedged variable rate debt on an annualized basis. 56

~~Our~~We ~~gross~~had $650.5 million of debt ~~balances~~outstanding ~~exclude~~at aJune ~~total~~30, 2017, of which $5230.8 million was fixed-rate debt and $240.0 million was hedged variable-rate debt. The remainder of ~~unamortized~~our ~~deferred~~debt, ~~financing~~$179.7 ~~costs~~million, atwas ~~March~~unhedged variable-rate debt that consisted of $76.0 31million under the unsecured revolving credit facility, $60.0 million under the unsecured term loan, and a $43.7 million outstanding balance under the Northern Virginia Construction Loan. At June 30, 2017, the Northern Virginia Construction Loan had a contractual interest rate of LIBOR plus 1.85%. At June 30, 2017, LIBOR was 1.22%. A change in interest rates of 100 basis points would result in an increase or decrease of $1.8 million in interest expense on our unhedged variable rate debt on an annualized basis.

52Our gross debt balances exclude a total of $5.4 million of unamortized deferred financing costs at June 30, 2017.

The table below summarizes our interest rate swap agreements as of ~~March~~June 3130, 2017 (dollars in thousands):



Maturity Date	Notional Amount		Interest Rate Contractual Component	Fixed LIBOR Interest Rate
July 2017	$	30,000	LIBOR	2.093	%
July 2017	30,000		LIBOR	2.093	%
July 2017	25,000		LIBOR	1.129	%
July 2017	12,500		LIBOR	1.129	%
July 2017	50,000		LIBOR	0.955	%
July 2018	12,500		LIBOR	1.383	%
July 2018	30,000		LIBOR	1.660	%
July 2018	25,000		LIBOR	1.394	%
July 2018	25,000		LIBOR	1.135	%
Total/Weighted Average	$	240,000		1.442	%

On July 18, 2017, five swap agreements that together fixed LIBOR at a weighted average interest rate of 1.5% on $147.5 million of our variable rate date expired.

For fixed-rate debt, changes in interest rates generally affect the fair value of our debt but not our earnings or cash flow. See note 9, Fair Value Measurements, in the notes to our condensed consolidated financial statements for more information on the fair value of our debt.

ITEM 4: CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain 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 our 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.

We 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 our internal control over financial reporting during the quarter ended ~~March~~June 3130, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to legal proceedings and claims arising in the ordinary course of our business. In the opinion of our management, as of ~~March~~June 3130, 2017, we were not involved in any material litigation, nor, to management’s knowledge, is any material litigation threatened against us or the Operating Partnership.

Item 1A. Risk Factors

AsIn ofaddition ~~March 31, 2017, there were no material changes~~ to ~~our~~the risk factors previously disclosed in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, we are also subject to the following additional risks.

If the Transaction is completed, our shareholders will forgo the opportunity to benefit from potential future appreciation in the value of the Company.

If the Transaction is consummated, shareholders will no longer hold interests in the Company and, therefore, will not be entitled to benefit from any potential future appreciation in the value of the Company. In addition, in the absence of the Transaction, we could have various opportunities to enhance our value, including, but not limited to, entering into a transaction that values our common shares higher than the value provided for in the merger agreement pursuant to the Transaction. Therefore, if the Transaction is completed, shareholders will forgo future appreciation, if any, in the value of the Company and the opportunity to participate in any other potential transactions that may have resulted in a higher price per share than the price to be paid in the Transaction.

Failure to complete the Transaction could negatively affect the value of our common shares and its future business and financial results.

If the Transaction is not completed, our ongoing business could be adversely affected, and it would be subject to a variety of risks associated with the failure to complete the Transaction, including the following:


•	being required, under certain circumstances, to pay GOV a termination fee $25 million or reimburse GOV’s transaction expenses up to $5 million;


•	incurrence of substantial costs in connection with the proposed Transaction, such as legal, accounting, financial advisory, filing, printing and mailing fees;


•	diversion of management focus and resources from operational matters and other strategic opportunities while working to implement the Transaction; and


•	reputational harm due to the adverse perception of any failure to successfully complete the Transaction.

If the Transaction is not completed, these risks could materially affect our business and financial results and the price of its common shares.

The pendency of the Transaction could adversely affect our business and operations.

During the pendency of the Transaction, our business and operations could be adversely affected due to uncertainty of our customers, vendors and employees and due to certain restrictions on our activities. Prior to consummation of the Transaction, some of our tenants or vendors may delay or defer decisions with respect to their business with the Company, which could negatively affect revenues, earnings, cash flows and expenses, regardless of whether the Transaction is completed. Similarly, current and prospective employees may experience uncertainty about their future roles with The RMR Group LLC, a Maryland limited liability company and GOV’s manager, following the Transaction, which may materially adversely affect the our ability to attract and retain key personnel during the pendency of the Transaction. Also, due to operating restrictions in the merger agreement, we may be unable, during the pendency of the Transaction, to pursue strategic transactions, undertake significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions, even if such actions would prove beneficial. In addition, under the terms of the merger agreement, we may not declare or pay any dividends to the holders of our common shares during the period ending the earlier of the date of the closing of the Transaction or the termination of the merger agreement, subject to certain exceptions. Depending on when the Transaction is consummated, these restrictions may prevent holders of our common shares from receiving dividends that they might otherwise have received.

The merger agreement contains provisions that could discourage a potential competing acquirer of the Company or could result in any competing acquisition proposal being at a lower price than it might otherwise be.

The merger agreement contains provisions that, subject to limited exceptions, restrict our ability to solicit, initiate, knowingly encourage or facilitate any acquisition proposal. With respect to any written, bona fide acquisition proposal that the we receive, GOV generally has an opportunity to offer to modify the terms of the merger agreement in response to such proposal before the Board of Trustees may withdraw or modify its recommendation to shareholders in response to such acquisition proposal or terminate the merger agreement to enter into a definitive agreement with respect to such acquisition proposal. Upon termination of the merger agreement under circumstances relating to an acquisition proposal, the Company may be required to pay a termination fee of $25 million to GOV.

These provisions could discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of our business from considering or making a competing acquisition proposal, even if the potential competing acquirer was prepared to pay consideration with a higher per share cash value than the market value proposed to be received or realized in the Transaction, or might cause a potential competing acquirer to propose to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee and expense reimbursement that may become payable in certain circumstances under the merger agreement.

The Transaction is subject to certain conditions which, if not satisfied or waived in a timely manner, would delay the Transaction or adversely impact our ability to complete the Transaction.

The completion of the Transaction is subject to certain conditions, including receipt of our shareholders’ approval and other customar

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