**•** In January 2011, the Company raised net proceeds of $111.3 million through theissuance of 4.6 million 7.750% Series A Preferred Shares; **•** Executed 2.3 million square feet of leases, generating over 163,000 square feet ofpositive net absorption; **•** In 2010, sold two properties in the Maryland region for net proceeds of $11.4 million;and **•** In 2011, sold a property in the Maryland region for net proceeds of $10.8 millionTotal assets were $1.4 billion at December 31, 2010 compared to $1.1 billion at December 31,2009.**Development and Redevelopment Activity**During 2010, the Company continued development of several parcels of land, including landadjacent to previously acquired properties and land acquired with the intent to develop. TheCompany constructs office, business parks and/or industrial buildings on a build-to-suit basis orwith the intent to lease upon completion of construction. At December 31, 2010, the Company owneddevelopable land that can accommodate approximately 1.7 million square feet of additional buildingspace, which includes 0.1 million square feet in its Maryland reporting segment, 0.6 million squarefeet in its Northern Virginia reporting segment and 1.0 million square feet in its SouthernVirginia reporting segment. Also, the Company will continue to commence redevelopment efforts onunfinished vacant spaces in its portfolio through the investment of capital in electrical, plumbingand other capital improvements in order to expedite the leasing of the spaces.During 2010, the Company completed and placed in-service redevelopment efforts on 98 thousandsquare feet of space, which includes 30 thousand square feet in its Maryland reporting segment, 37thousand square feet in its Northern Virginia reporting segment and 31 thousand square feet in itsSouthern Virginia reporting segment.As of December 31, 2010, the Company had incurred development and redevelopment expendituresfor several buildings, of which the more significant projects are noted below:***Development*** **•** Sterling Park Business Center — a 57,000 square foot office building in the Company’sNorthern Virginia reporting segment, which was completed in January 2011. A portion of thebuilding was pre-leased to a tenant with rent commencing in the second quarter of 2011. Asof December 31, 2010, the Company had spent $5.3 million in costs, which included civil,architectural, mechanical, electrical and plumbing design, and permit fees as well as site,concrete, steel, roof, electrical, mechanical, plumbing, glass, doors, frames, hardware,paint, and landscaping work; and **•** Greenbrier Technology Center III — a 48,000 square foot three-story office building inthe Company’s Southern Virginia reporting segment has been designed and all permits havebeen received. Costs to date include civil, architectural, mechanical, electrical andplumbing design as well as permit fees.***Redevelopment*** **•** Enterprise Parkway — a 70,000 square foot multi-tenanted office building in theCompany’s Southern Virginia reporting segment. Redevelopment activities were completed on31 thousand square feet in December 2010, which was pre-leased to a tenant with rent havingcommenced in December 2010. Redevelopment of the remaining space was substantially completeat December 31, 2010. Costs incurred include building, lobby, common corridor, and bathroomrenovations; design documents, permit fees, demolition, and construction work to preparespace for future tenant layouts; and **•** Three Flint Hill — a 174,000 square foot eight-story Class A office building has beenredesigned and permits are in process. Costs incurred to date include architectural andengineering design fees, permit application fees and demolition work.
 
 

 
On December 28, 2010, the Company acquired 440 First Street, NW, a vacant eight-story, 105,000square foot office building in Washington, D.C., for $15.3 million. On January 11, 2011, theCompany purchased the fee interest in the property’s 45-year ground lease for $8.0 million. Theacquisition was financed by a draw on the Company’s unsecured revolving credit facility andavailable cash. The Company intends to completely redevelop the property and is contemplatingadding an additional 13,000 square feet.**Critical Accounting Policies and Estimates**The Company’s consolidated financial statements are prepared in accordance with U.S. generallyaccepted accounting principles (“GAAP”) that require the Company to make certain estimates andassumptions. Critical accounting policies and estimates are those that require subjective orcomplex judgments and are the policies and estimates that the Company deems most important to theportrayal of its financial condition and results of operations. It is possible that the use ofdifferent reasonable estimates or assumptions in making these judgments could result in materiallydifferent amounts being reported in its condensed consolidated financial statements. The Company’scritical accounting policies relate to revenue recognition, including evaluation of thecollectability of accounts receivable, impairment of long-lived assets, purchase accounting foracquisitions of real estate, derivative instruments and share-based compensation.The following is a summary of certain aspects of these critical accounting policies andestimates.*Revenue Recognition*The Company generates substantially all of its revenue from leases on its office andindustrial properties as well as business parks. The Company recognizes rental revenue on astraight-line basis over the term of its leases, which include fixed-rate renewal periods leased atbelow market rates at acquisition or inception. Accrued straight-line rents represent thedifference between rental revenue recognized on a straight-line basis over the term of therespective lease agreements and the rental payments contractually due for leases that containabatement or fixed periodic increases. The Company considers current information, credit quality,historical trends, economic conditions and other events regarding the tenants’ ability to pay theirobligations in determining if amounts due from tenants, including accrued straight-line rents, areultimately collectible. The uncollectible portion of the amounts due from tenants, includingaccrued straight-line rents, is charged to property operating expense in the period in which thedetermination is made.Tenant leases generally contain provisions under which the tenants reimburse the Company for aportion of property operating expenses and real estate taxes incurred by the Company. Suchreimbursements are recognized in the period in which the expenses are incurred. The Company recordsa provision for losses on estimated uncollectible accounts receivable based on its analysis of riskof loss on specific accounts. Lease termination fees are recognized on the date of terminationwhen the related lease or portion thereof is cancelled, the collectability of the fee is reasonablyassured and the Company has possession of the terminated space.*Accounts Receivable*The Company must make estimates of the collectability of its accounts receivable related tominimum rent, deferred rent, tenant reimbursements, lease termination fees and other income. TheCompany specifically analyzes accounts receivable and historical bad debt experience, tenantconcentrations, tenant creditworthiness and current economic trends when evaluating the adequacy ofits allowance for doubtful accounts receivable. These estimates have a direct impact on theCompany’s net income as a higher required allowance for doubtful accounts receivable will result inlower net income. The uncollectible portion of the amounts due from tenants, includingstraight-line rents, is charged to property operating expense in the period in which thedetermination is made.
 
 

 
*Investments in Real Estate and Real Estate Entities*Investments in real estate are initially recorded at fair value and carried at initial cost,less accumulated depreciation and, when appropriate, impairment losses. Improvements andreplacements are capitalized at fair value when they extend the useful life, increase capacity, orimprove 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 usefullives of the assets. The estimated useful lives of the Company’s assets, by class, are as follows:   Buildings 39 yearsBuilding improvements 5 to 20 yearsFurniture, fixtures and equipment 5 to 15 yearsTenant improvements Shorter of the useful lives of theassets or the terms of the relatedleasesLease related intangible assets Term of related leaseThe Company regularly reviews market conditions for possible impairment of a property’scarrying value. When circumstances such as adverse market conditions, changes in management’sintended holding period or potential sale to a third party indicate a possible impairment of thefair value of a property, an impairment analysis is performed. The Company assesses potentialimpairments 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 onprojections of future revenues, expenses, capital improvement costs, expected holding periods andcapitalization rates. These cash flows consider factors such as expected market trends and leasingprospects, as well as the effects of leasing demand, competition and other factors. If impairmentexists due to the inability to recover the carrying value of a real estate investment based onforecasted undiscounted cash flows, an impairment loss is recorded to the extent that the carryingvalue exceeds the estimated fair value of the property. The Company is required to make estimatesas to whether there are impairments in the carrying values of its investments in real estate.Further, the Company will record an impairment loss if it expects to dispose of a property, in thenear term, at a price below carrying value. In such an event, the Company will record an impairmentloss based on the difference between a property’s carrying value and its projected sales price,less any estimated costs to sell.The Company will classify a building as held-for-sale in the period in which it has made thedecision to dispose of the building, a binding agreement to purchase the property has been signedunder which the buyer has committed a significant amount of nonrefundable cash and no significantfinancing contingencies exist that could cause the transaction not to be completed in a timelymanner. If these criteria are met, the Company will record an impairment loss if the fair value,less anticipated selling costs, is lower than the carrying amount of the property. The Company willclassify any impairment loss, together with the building’s operating results, as discontinuedoperations in its consolidated statements of operations for all periods presented and classify theassets and related liabilities as held-for-sale in its consolidated balance sheets in the periodthe sale criteria are met. Interest expense is reclassified to discontinued operations only to theextent the held-for-sale property is secured by specific mortgage debt and the mortgage debt willnot be transferred to another property owned by the Company after the disposition.The Company recognizes the fair value, if sufficient information exists to reasonably estimatethe fair value, of any liability for conditional asset retirement obligations when incurred, whichis generally upon acquisition, construction, development or redevelopment and/or through the normaloperation of the asset.The Company capitalizes interest costs incurred on qualifying expenditures for real estateassets under development or redevelopment while being readied for their intended use in accordancewith accounting requirements regarding capitalization of interest. The Company will capitalizeinterest when qualifying expenditures for the asset have been made, activities necessary to get theasset ready for its intended use are in progress and interest costs are being incurred. Capitalizedinterest also includes interest associated with expenditures incurred to acquire developable landwhile development activities are in progress. Capitalization of interest will end when the asset issubstantially complete and ready for its intended use, but no later than one year from completionof majorconstruction activity, if the property is not occupied. Capitalized interest is depreciatedover the useful life of the underlying assets, commencing when those assets are placed intoservice.
 
 

 
*Purchase Accounting*Acquisitions of rental property from third parties are accounted for at fair value. Anyliabilities assumed or incurred are recorded at their fair value at the time of acquisition. Thefair value of the acquired property is allocated between land and building (on an as-if vacantbasis) based on management’s estimate of the fair value of those components for each type ofproperty and to tenant improvements based on the depreciated replacement cost of the tenantimprovements, which approximates their fair value. The fair value of the in-place leases isrecorded as follows: **•** the fair value of leases in-place on the date of acquisition is based on absorptioncosts for the estimated lease-up period in which vacancy and foregone revenue are avoideddue to the presence of the acquired leases; **•** the fair value of above and below-market in-place leases based on the present value(using a discount rate that reflects the risks associated with the acquired leases) of thedifference between the contractual rent amounts to be paid under the assumed lease and theestimated market lease rates for the corresponding spaces over the remaining non-cancelableterms of the related leases, which range from one to fifteen years; and **•** the fair value of intangible tenant or customer relationships.The Company’s determination of these fair values requires it to estimate market rents for eachof the leases and make certain other assumptions. These estimates and assumptions affect the rentalrevenue, and depreciation and amortization expense recognized for these leases and associatedintangible assets and liabilities.*Derivative Instruments*In the normal course of business, the Company is exposed to the effect of interest ratechanges. The Company may enter into derivative agreements to mitigate exposure to unexpectedchanges in interest rates and may use interest rate protection or cap agreements to reduce theimpact of interest rate changes. The Company does not use derivatives for trading or speculativepurposes and intends to enter into derivative agreements only with counterparties that it believeshave a strong credit rating to mitigate the risk of counterparty default or insolvency.The Company may designate a derivative as either a hedge of the cash flows from a debtinstrument or anticipated transaction (cash flow hedge) or a hedge of the fair value of a debtinstrument (fair value hedge). All derivatives are recognized as assets or liabilities at fairvalue. For effective hedging relationships, the change in the fair value of the assets orliabilities is recorded within equity (cash flow hedge), or through earnings (fair value hedge).Ineffective portions of derivative transactions will result in changes in fair value recognized inearnings. The Company records its proportionate share of unrealized gains or losses on itsderivative instruments associated with its unconsolidated joint ventures within equity and“Investment in Affiliates.” The Company incorporates credit valuation adjustments to appropriatelyreflect both its own nonperformance risk and the respective counterparty’s nonperformance risk inthe fair value measurements. In adjusting the fair value of its derivative contracts for the effectof nonperformance risk, the Company has considered the impact of netting any applicable creditenhancements, such as collateral postings, thresholds, mutual inputs and guarantees.*Share-Based Compensation*The Company measures the cost of employee services received in exchange for an award of equityinstruments based on the grant-date fair value of the award. For options awards, the Company uses aBlack-Scholes option-pricing model. Expected volatility is based on an assessment of the Company’srealized volatility over the preceding five years, which is equivalent to the awards expected life.The expected term represents the period of time the options are anticipated to remain outstandingas well as the Company’s historical experience for groupings ofemployees that have similar behavior and considered separately for valuation purposes. Fornon-vested share awards that vest over a predetermined time period, the Company uses theoutstanding share price at the date of issuance to fair value the awards. For non-vested sharesawards that vest based on performance conditions, the Company uses a Monte Carlo simulation(risk-neutral approach) to determine the value and derived service period of each tranche. Theexpense associated with the share based awards will be recognized over the period during which anemployee is required to provide services in exchange for the award — the requisite service period(usually the vesting period). The fair value for all share-based payment transactions arerecognized as a component of income from continuing operations.
 
 

 
**Results of Operations*****Comparison of the Years Ended December 31, 2010, 2009 and 2008***During 2010, the Company acquired the following consolidated properties: a building at ThreeFlint Hill; a building at 500 First Street, NW; a building at Battlefield Corporate Center; twobuildings at Redland Corporate Center; two buildings at Atlantic Corporate Park; a building at 1211Connecticut Ave, NW; a building at 440 First Street, NW and a building at 7458 Candlewood Road foran aggregate purchase cost of $286.2 million.During 2009, the Company acquired: four buildings at Cloverleaf Center and three buildings atAshburn Center for an aggregate purchase cost of $40.0 million.During 2008, the Company acquired the following buildings at an aggregate purchase cost of$46.4 million: four buildings at Triangle Business Center; and six buildings at RiversPark I andII. In December 2008, the Company contributed the RiversPark I and II buildings to newly formedconsolidated joint ventures. On January 1, 2010 and March 17, 2009, the Company deconsolidatedRiversPark I and II, respectively, from its consolidated financial statements; however, theoperating results of the properties are included in the Company’s consolidated statements ofoperations through their date of deconsolidation. For more information on the deconsolidation ofRiversPark I and II, see footnote 5, *Investment in Affiliates*.Collectively, the properties acquired in 2010, 2009 and 2008 are referred to as the“Non-comparable Properties.”The term “Comparable Portfolio” refers to all consolidated properties owned by the Company forthe entirety of the periods being presented.***Total Revenues***Total revenues are summarized as follows:                                   Year Ended December 31,      Percent  Year Ended December 31,      Percent (amounts in thousands) 2010  2009  Increase  Change  2009  2008  Increase  Change                                  Rental $111,860  $106,122  $5,738   5% $106,122  $99,003  $7,119   7%                                 Tenant reimbursementsand other $26,687  $24,526  $2,161   9% $24,526  $21,895  $2,631   12%
 
 

 
***Rental Revenue***Rental revenue is comprised of contractual rent, the impacts of straight-line revenue and theamortization of intangible assets and liabilities representing above and below market leases.Rental revenue increased $5.7 million in 2010 as compared with 2009, due to increased revenuesresulting from the Company’s Non-comparable Properties, which contributed $6.5 million ofadditional rental revenue in 2010 compared with 2009. For the Comparable Portfolio, rental revenuedecreased $0.8 million in 2010 compared with 2009, primarily due to an increase in vacancy;however, rental rates increased 9.1% on new leases during 2010. The weighted average occupancy oftheComparable Portfolio was 84.8% during 2010 compared with 87.0% during 2009. The Companyexpects rental revenues will increase in 2011 due to a full-year of revenues from the propertiesacquired in 2010 and additional properties acquired in 2011. The increase in rental revenue in 2010compared with 2009 includes $1.2 million for the Company’s Maryland reporting segment and $4.7million for the Northern Virginia reporting segment. For the Southern Virginia reporting segment,rental revenue decreased $0.2 million in 2010 compared to 2009.The Company’s consolidated portfolio was 82.3% occupied at December 31, 2010 compared with85.1% occupied at December 31, 2009. Excluding the Company’s fourth quarter 2010 acquisitions ofAtlantic Corporate Park, which was vacant at acquisition, and Redland Corporate Center II, whichwas 99% vacant at acquisition, the Company’s consolidated portfolio was 85.2% occupied at December31, 2010. The Company does not include square footage that is in development or redevelopment inits occupancy calculation.Rental revenue increased $7.1 million in 2009 as compared with 2008. Rental revenue for theComparable Portfolio increased $4.9 million, which can be attributed to an increase in rentalrates, as the average rental rates for the Company’s entire portfolio increased on new and renewalleases by 19.6% and 10.4%, respectively, during 2009, with the Company executing a combined 2.2million square feet of new and renewal leases during the year. The Non-comparable Propertiescontributed rental revenue of $2.2 million in 2009 compared to 2008. The increase in rental revenuein 2009 compared with 2008 includes $2.3 million for the Company’s Maryland reporting segment, $2.1million for the Northern Virginia reporting segment and $2.7 million for the Southern Virginiareporting segment. The increase in rental revenue for the Maryland reporting segment was due to theaddition of new properties during 2009 and 2008. The increases in rental revenue for the Northernand Southern Virginia reporting segments was due to higher market rates and increased occupancy.***Tenant Reimbursements and Other Revenues***Tenant reimbursements and other revenues include operating and common area maintenance costsreimbursed by the Company’s tenants’ as well as other incidental revenues such as lease terminationpayments, construction management fees and late fees. Tenant reimbursements and other revenuesincreased $2.2 million in 2010 compared with 2009. The increase in tenant reimbursements and otherrevenues is primarily due to the Non-comparable Properties, which contributed $1.5 million ofadditional tenant reimbursements and other revenues in 2010 compared with 2009. The ComparablePortfolio contributed $0.7 million of additional tenant reimbursements and other revenues during2010 compared with 2009 due to an increase in termination fee income and higher recoverableproperty operating expenses as a result a $0.9 million increase in recoverable snow and ice removalcosts in 2010 compared with 2009. The Company expects tenant reimbursements and other revenues toincrease in 2011 due to a full-year of recoverable operating expenses from properties acquired in2010, partially offset by lower recoveries due to reduced snow and ice removal costs in 2011. Theincreases in tenant reimbursements and other revenues in 2010 compared with 2009 include $0.6million for the Maryland reporting segment, $0.8 million for the Northern Virginia reportingsegment and $0.8 million for the Southern Virginia reporting segment.Tenant reimbursements and other revenues increased $2.6 million in 2009 compared with 2008.The increase is primarily due to the Comparable Portfolio, which contributed $2.1 million ofadditional tenant reimbursements and other revenues to the portfolio in 2009 due to an increase inrecoverable property operating expenses. Tenant reimbursements and other revenues increased $0.5million as a result of the Non-comparable Properties during 2009. The increases in tenantreimbursements and other revenues in 2009 compared with 2008 include $1.1 million for the Marylandreporting segment, $1.2 million for the Northern Virginia reporting segment and $0.3 million forthe Southern Virginia reporting segment.
 
 

 
***Total Expenses******Property Operating Expenses***Property operating expenses are summarized as follows:                                   Year Ended December 31,      Percent  Year Ended December 31,      Percent (amounts in thousands) 2010  2009  Increase  Change  2009  2008  Increase  Change                                  Property operating $33,714  $32,150  $1,564   5% $32,150  $26,497  $5,653   21%Real estate taxes andinsurance $12,954  $12,666  $288   2% $12,666  $11,859  $807   7%Property operating expenses increased $1.6 million in 2010 compared with the same period in2009. The Non-comparable Properties contributed property operating expenses of $1.7 million.Property operating expenses for the Comparable Portfolio decreased $0.1 million in 2010 comparedwith the same period in 2009, primarily due to lower reserves for bad debt. The Company expectsproperty operating expenses to increase in 2011 due to a full-year impact of properties acquired in2010, offset by a reduction in snow and ice removal costs as the Company experienced a significantamount of these costs in January and February 2010. The increase in property operating expenses in2010 compared with 2009 includes $0.2 million for the Maryland reporting segment, $1.1 million forthe Northern Virginia reporting segment and $0.3 million for the Southern Virginia reportingsegment.Property operating expenses increased $5.7 million in 2009 compared with the same period in2008. Property operating expenses for the Comparable Portfolio increased $4.7 million in 2009compared with the same period in 2008, primarily due to an increase in snow and ice removal costsduring the fourth quarter of 2009 and an increase in reserves for anticipated bad debt expense,primarily incurred in the first half of 2009. The Non-comparable Properties contributed additionalproperty operating expenses of $1.0 million. The increase in property operating expenses in 2009compared with 2008 includes $3.1 million for the Maryland reporting segment, $1.6 million for theNorthern Virginia reporting segment and $1.0 million for the Southern Virginia reporting segment.Real estate taxes and insurance expenses increased $0.3 million in 2010 compared with the sameperiod in 2009. The Non-comparable Properties contributed an increase in real estate taxes andinsurance of $1.0 million in 2010. For the Comparable Portfolio, real estate taxes and insurancedecreased $0.7 million in 2010 compared with 2009, primarily due to lower real estate assessmentsand real estate tax rates on the Company’s Northern Virginia properties located in Fairfax Countyand Prince William County, Virginia. The increase in real estate taxes and insurance expenses in2010 compared with 2009 includes $0.2 million for the Maryland reporting segment and $0.2 millionfor the Northern Virginia reporting segment. For the Southern Virginia reporting segment, realestate taxes and insurance decreased $0.1 million in 2010 compared with 2009.Real estate taxes and insurance expenses increased $0.8 million in 2009 compared with the sameperiod in 2008. Real estate taxes and insurance associated with the Comparable Portfolio increased$0.6 million in 2009 compared to 2008. The Non-comparable Properties experienced an increase inreal estate taxes and insurance of $0.2 million in 2009. The increase in real estate taxes andinsurance expenses in 2009 compared with 2008 includes $0.5 million for the Maryland reportingsegment, $0.2 million for the Northern Virginia reporting segment and $0.1 million for the SouthernVirginia reporting segment.***Other Operating Expenses***General and administrative expenses are summarized as follows:                                   Year Ended December 31,      Percent  Year Ended December 31,      Percent (amounts in thousands) 2010  2009  Increase  Change  2009  2008  Increase  Change   $14,523  $13,219  $1,304   10% $13,219  $11,938  $1,281   11%
 
 

 
General and administrative expenses increased $1.3 million during 2010 compared with 2009. Theincrease is primarily due to an increase in compensation accruals and non-cash, share-basedcompensation expense as a result of the restricted shares awarded to the Company’s officers in 2009and 2010, which are amortized over derived service periods that are comparably shorter than thoseassociated with previous awards.General and administrative expenses increased $1.3 million during 2009 compared with 2008,primarily due to an increase in non-cash, share-based compensation expense, as the restrictedshares awarded to the Company’s officers in 2009 had a shorter vesting period than previouslyissued awards.Acquisition costs are summarized as follows:                                   Year Ended December 31,      Percent  Year Ended December 31,      Percent (amounts in thousands) 2010  2009  Increase  Change  2009  2008  Increase  Change                                    $7,169  $1,076  $6,093   566% $1,076  $—  $1,076   — During 2010, the Company incurred acquisition and closing costs of $7.2 million associatedwith ten acquisitions, including two acquisitions through unconsolidated joint ventures, and threepending first quarter 2011 acquisitions under contract. In 2009, the Company incurred $1.1 millionof acquisition and closing costs related to the acquisitions of two properties. Beginning in 2009,in accordance with new accounting standards, all acquisition and closing costs are expensed on theCompany’s consolidated statements of operations. Prior to 2009, all acquisition and closing costsassociated with an acquired property were capitalized as part of the basis of the acquiredbusiness.Depreciation and amortization expenses are summarized as follows:                                   Year Ended December 31,      Percent  Year Ended December 31,      Percent (amounts in thousands) 2010  2009  Increase  Change  2009  2008  Increase  Change                                    $42,613  $40,174  $2,439   6% $40,174  $36,260  $3,914   11%Depreciation and amortization expense includes depreciation of real estate assets andamortization of intangible assets and leasing commissions. Depreciation and amortization expenseincreased $2.4 million in 2010 compared with 2009, primarily due to the Non-comparable Properties,which contributed additional depreciation and amortization expense of $2.6 million. The increase indepreciation was partially offset by a $0.2 million decrease in depreciation and amortizationexpense for the Comparable Portfolio due to several intangible assets associated with acquisitionsfully amortizing in 2010. The Company anticipates depreciation and amortization expense to increasein 2011 due to recognizing a full-year of depreciation and amortization expense for propertiesacquired in 2010 and new acquisitions expected in 2011.Depreciation and amortization expense increased $3.9 million in 2009 compared with the sameperiod in 2008. The Comparable Portfolio generated additional depreciation and amortizationexpenses of $2.8 million due to an increase in expense related to the disposal of assets fromtenants that vacated during the year. The remaining increase of $1.1 million in depreciationexpense was attributed to the Non-comparable Properties.Impairment of real estate assets are summarized as follows:                                   Year Ended December 31,      Percent  Year Ended December 31,      Percent (amounts in thousands) 2010  2009  Increase  Change  2009  2008  Increase  Change                                    $2,386  $—  $2,386   —  $—  $—  $—   — On December 29, 2010, the Company acquired 7458 Candlewood Road in the Company’s Marylandreporting segment for $22.6 million. On January 6, 2011, the Company was notified that the largesttenant at the property filedfor Chapter 11 bankruptcy protection. As a result, the Company recorded an impairment chargeof $2.4 million associated with the non-recoverable value of the intangible assets associated withthe lease.
 
 

 
The Company did not record any additional impairment from real estate assets that contributeto its continuing operations during 2010, 2009 and 2008.Contingent consideration related to acquisition of property is summarized as follows:                                   Year Ended December 31,      Percent  Year Ended December 31,      Percent (amounts in thousands) 2010  2009  Increase  Change  2009  2008  Change  Change                                    $710  $—  $710   —  $—  $—  $—   — As part of the consideration for the Company’s acquisition of Ashburn Center, the Company isobligated to record contingent consideration arising from a fee agreement entered into with theseller in which the Company will be obligated to pay additional consideration if certain returnsare achieved over the five year term of the agreement or if the property is sold within the term ofthe five year agreement. The Company initially recorded $0.7 million at the time of acquisition inDecember 2009, which represented the fair value of the Company’s potential obligation atacquisition. During 2010, the Company was able to lease the vacant space faster than it hadanticipated and, therefore, recorded additional contingent consideration of $0.7 million thatreflected an increase in the potential consideration that may be owed to the seller.***Other Expenses (Income)***Interest expense is summarized as follows:                                   Year Ended December 31,      Percent  Year Ended December 31,      Percent (amounts in thousands) 2010  2009  Increase  Change  2009  2008  Decrease  Change                                    $33,758  $32,412  $1,346   4% $32,412  $35,628  $3,216   9%The Company seeks to employ cost-effective financing methods to fund its acquisitions anddevelopment projects and to refinance its existing debt to provide greater balance sheetflexibility or to take advantage of lower interest rates. The methods used to fund the Company’sactivities impact the period-over-period comparisons of interest expense.Interest expense increased $1.3 million in 2010 compared with 2009. In December 2009, theCompany extended the maturity dates on approximately $185.0 million of debt, which includedexpanding the capacity of the Company’s unsecured revolving credit facility, which was furtherexpanded in the second quarter of 2010. As part of the refinancing, the Company used the additionalcapacity to repay $40.0 million of its secured term loans. The refinancing resulted in a highereffective interest rate on the Company’s unsecured revolving credit facility, which resulted inadditional interest expense of $2.9 million in 2010 compared with the same period in 2009. In 2010,the Company’s weighted average borrowings on its unsecured revolving credit facility was $123.4million with a weighted average interest rate of 3.5% compared with weighted average borrowings of$95.2 million with a weighted average interest rate of 1.6% in 2009. The repayment of a portion ofthe Company’s term loans as described above resulted in a decline in interest expense of $0.6million in 2010 compared with the same period in 2009. The Company had fixed LIBOR on $85.0 millionof variable rate debt through two interest rate swap agreements, which both expired in August 2010.As a result, the interest expense related to the interest rate swap agreements declined $0.8million in 2010 compared with 2009. During the fourth quarter of 2010, the Company entered into a$50.0 million term loan, which was scheduled to mature in February 2011 and was later extended toMay 2011. The term loan contributed additional interest of $0.3 million in 2010 compared with 2009.Due to the Company’s recent debt issuances and refinancing, it has incurred additional deferredfinancing costs, which increased interest expense $0.6 million in 2010 compared with 2009.
 
 

 
During the second quarter of 2010, the Company issued 0.9 million common shares of its commonstock in exchange for retiring $13.0 million of its Exchangeable Senior Notes and used availablecash to retire an additional$7.0 million of its Exchangeable Senior Notes. The Company repurchased $34.5 million ofExchangeable Senior Notes in 2009. The repurchase of Exchangeable Senior Notes resulted in areduction of interest expense of $1.3 million in 2010 compared with 2009. Mortgage interest expenseincreased $0.2 million during 2010 compared with 2009 due to a full-year of mortgage interestexpense incurred on the Cloverleaf Center mortgage loan entered into during the fourth quarter of2009, and mortgage interest expense on mortgage loans encumbering 500 First Street, NW, BattlefieldCorporate Center and 7458 Candlewood Road, which were acquired in 2010. The increase in mortgagedebt was offset by a reduction in outstanding mortgages as the Company retired $23.7 million ofmortgage debt during 2010 compared with $14.3 million of mortgage debt retired during 2009. Also,the Company deconsolidated $9.9 million of variable rate mortgage debt encumbering RiversPark I anda related cash flow hedge on January 1, 2010. The deconsolidated RiversPark I resulted in anincrease in interest expense of $0.4 million in 2010 compared to 2009, as the Company recognized areduction in interest expense related to its Financing Obligation in 2009. The Company furtherincreased its construction activities in 2010 compared with 2009, which resulted in additionalcapitalized interest of $0.5 million.Interest expense decreased $3.2 million in 2009 compared with 2008. In 2009, the Company’smortgage interest expense decreased $2.5 million as the Company retired $14.2 million of mortgagedebt encumbering Glenn Dale Business Center, 4200 Tech Court and Park Central I. In 2008, theCompany retired $87.6 million of mortgage debt encumbering Herndon Corporate Center, NorfolkCommerce Park II and the Suburban Maryland Portfolio. The prepayment of the $72.1 million SuburbanMaryland Portfolio mortgage loan, in the third quarter of 2008, was partially financed through theissuance of a $35.0 million secured term loan, later amended to increase the total commitment to$50.0 million, which resulted in an additional $0.8 million of interest expense in 2009 comparedwith 2008. The remainder was financed with a draw on the Company’s unsecured revolving creditfacility. The Company also used its unsecured revolving credit facility to primarily fund thepartial repurchase of its Exchangeable Senior Notes. Since the beginning of 2008, the Company hasrepurchased $74.5 million of its Exchangeable Senior Notes at a discount, which resulted in a $2.2million decrease of interest expense and discount amortization in 2009 compared with the sameperiod in 2008. The increased borrowings on the unsecured revolving credit facility were offset bya lower weighted average interest rate. In 2009, the Company’s average balance on its unsecuredrevolving credit facility was $95.2 million with a weighted average interest rate 1.6%, comparedwith an average balance of $71.8 million with a weighted average interest rate of 4.0% for 2008.The lower weighted average interest rate on the unsecured revolving credit facility resulted in a$1.4 million decrease of interest expense in 2009. The decline in interest rates in 2009 comparedwith 2008 resulted in $1.3 million less of interest expense related to a $50.0 million secured termloan that originated in 2007. The Company entered into two separate interest rate swap agreementsto fix the applicable interest rates on $85.0 million of its variable rate debt, which due to adecline in interest rates resulted in a combined $2.1 million of additional interest expense for2009 compared with 2008. The decrease in the Company’s interest expense was partially offset by a$1.2 million decrease in capitalized interest expense in 2009 compared with the same period in2008, which was attributable to a decline in development and redevelopment activity in 2009.At December 31, 2010, the Company had $725.0 million of debt outstanding with a weightedaverage interest rate of 4.8% compared with $645.1 million of debt outstanding with a weightedaverage interest rate of 5.4% at December 31, 2009.Interest and other income are summarized as follows:                                   Year Ended December 31,      Percent  Year Ended December 31,      Percent (amounts in thousands) 2010  2009  Increase  Change  2009  2008  Decrease  Change                                    $634  $516  $118   23% $516  $660  $144   22%On December 21, 2010, the Company provided a $25.0 million loan to the members of the owner ofa building at 950 F Street, NW in Washington, D.C. The Company’s loan is secured by a portion ofthe members’ interest in the owner of the property. The loan has a fixed interest rate of 12.5%,matures on April 1, 2017 and is repayable in full on or after December 21, 2013. Interest andother income include amounts earned on the Company’s funds held in various cash operating andescrow accounts. The Company recorded interest income of $0.1 million for the year ended December31, 2010. Interest income on the Company’s various cash operating and escrow accounts decreased in2010 compared with 2009 primarily due to lower average interest rates. The Company earned aweighted averageinterest rate of 1.5% on an average cash balance of $7.4 million during 2010, compared with aweighted average interest rate of 3.5% on an average cash balance of $6.7 million during 2009.
 
 

 
Interest and other income decreased in 2009 compared with 2008 primarily due to lower averageinterest rates in 2009 compared with 2008. The Company earned an interest rate of 3.5% on anaverage cash balance of $6.7 million during 2009, compared with 3.6% on an average cash balance of$5.1 million during 2008.Equity in losses of affiliates is summarized as follows:                                   Year Ended December 31,      Percent  Year Ended December 31,      Percent (amounts in thousands) 2010  2009  Increase  Change  2009  2008  Increase  Change                                    $124  $95  $29   31% $95  $—  $95   — Equity in losses of affiliates reflects the Company’s ownership interest in the operatingresults of its properties, in which, it does not have a controlling interest. On March 17, 2009 andJanuary 1, 2010, the Company deconsolidated RiversPark II and RiversPark I, respectively. Also, theCompany acquired two properties, 1750 H Street and Aviation Business Park, in the fourth quarter of2010 through unconsolidated joint ventures. The increase in equity in losses of affiliates reflectsa larger aggregate loss from the Company’s nonconsolidated properties in 2010 compared with 2009.Gains on early retirement of debt are summarized as follows:                                   Year Ended December 31,      Percent  Year Ended December 31,      Percent (amounts in thousands) 2010  2009  Decrease  Change  2009  2008  Increase  Change                                    $164  $6,167  $6,003   97% $6,167  $4,374  $1,793   41%In 2010, the Company issued 0.9 million of its common shares in exchange for retiring $13.03million of Exchangeable Senior Notes and used available cash to retire $7.0 million of itsExchangeable Senior Notes, which resulted in a gain of $0.2 million, net of deferred financingcosts and discounts.In 2009, the Company retired $34.5 million of its Exchangeable Senior Notes, which resulted ina gain of $6.3 million, net of deferred financing costs and discounts. The Exchangeable SeniorNotes repurchased in 2009 were funded with proceeds from the Company’s controlled equity offeringprogram, borrowings on the Company’s unsecured revolving credit facility and available cash. Thegains on early retirement of debt were partially offset by debt retirement charges during thefourth quarter of 2009 associated with the restructuring the Company’s unsecured revolving creditfacility and two secured term loans.In 2008, the Company retired $40.0 million of its Exchangeable Senior Notes, which resulted ina gain of $4.4 million, net of deferred financing costs and discounts. The majority of ExchangeableSenior Notes repurchased in 2008 were funded with borrowings on the Company’s unsecured revolvingcredit facility and available cash.***Provision for Income Taxes***Provision for income taxes is summarized as follows:                                   Year Ended December 31,      Percent  Year Ended December 31,      Percent (amounts in thousands) 2010  2009  Increase  Change  2009  2008  Change  Change                                    $31  $—  $31   —  $—  $—  $—   — During 2010, the Company acquired three properties in Washington, D.C. Two of theseproperties, 1211 Connecticut Avenue, NW and 440 First Street, NW, are subject to franchise taxes asa result of conducting business in Washington, D.C. The Company recorded provision for incometaxes totaling $31 thousand in 2010. The Company did not own any properties located in WashingtonD.C. prior to 2010.
 
 

 
***Discontinued Operations***Discontinued operations are summarized as follows:                                   Year Ended December 31,      Percent  Year Ended December 31,      Percent (amounts in thousands) 2010  2009  Decrease  Change  2009  2008  Decrease  Change                                    $(3,038) $(1,483) $1,555   105% $(1,483) $16,391  $17,874   109%Discontinued operations represents the operating results and all costs associated with OldCourthouse Square, Deer Park and 7561 Lindbergh Drive, all of which were formerly in the Company’sMaryland reporting segment and Alexandria Corporate Park, formerly in the Company’s NorthernVirginia reporting segment.In February 2011, the Company sold its Old Courthouse Square property in Martinsburg, WestVirginia for net proceeds of $10.8 million. The property was acquired as part of a portfolioacquisition in 2004, and was the Company’s only retail asset. In June 2010, the Company sold 7561Lindbergh Drive, for net proceeds of $3.9 million. The Company reported a gain on the sale of $0.6million in the second quarter of 2010. In April 2010, the Company sold Deer Park for net proceedsof $7.5 million. The property was acquired as part of a portfolio acquisition in 2004 and waslocated in a non-core submarket of Baltimore, Maryland. In June 2008, the Company sold AlexandriaCorporate Park, for net proceeds of $50.6 million and recognized a gain on sale of $14.3 million.The Company has had, and will have, no continuing involvement with these properties subsequent totheir disposal. During 2010 and 2009, the Company incurred impairment charges of $4.0 million and$2.5 million, respectively, related to its Old Courthouse Square and Deer Park properties.***Net loss (income) attributable to noncontrolling interests***Net loss (income) attributable to noncontrolling interests are summarized as follows:                                   Year Ended December 31,      Percent  Year Ended December 31,      Percent (amounts in thousands) 2010  2009  Decrease  Change  2009  2008  Decrease  Change                                    $232  $(124) $356   287% $(124) $(615) $491   80%Net loss (income) attributable to noncontrolling interests reflects the ownership interests innet (loss) income attributable to parties other than the Company. During 2010, the Company incurreda net loss of $11.7 million compared with net income of $4.1 million in 2009.Due to the issuance of 18.3 million of the Company’s common shares during 2010, thenoncontrolling interests owned by limited partners decreased to 1.9% as of December 31, 2010compared with 2.3% as of December 31, 2009. The reduction in noncontrolling parties ownershippercentage in the Operating Partnership was partially offset by the issuance of 230,876 OperatingPartnership units to fund a portion of the Company’s acquisition of Battlefield Corporate Center.During the fourth quarter of 2010, the Company acquired Redland Corporate Center through a jointventure, in which, it had a 97% economic interest. The Company consolidates the operating resultsof the property and recognizes its joint venture partner’s percentage of gains or losses fromRedland Corporate Center in net loss (income) attributable to noncontrolling interests. During2010, the joint venture partner’s share of the loss in the operations of Redland Corporate Centerwas $2 thousand.During 2009, the Company generated net income of $4.1 million compared with net income of$20.1 million in 2008. During 2008, the Company sold Alexandria Corporate Park, which resulted inan increase of $16.2 million in net income from discontinued operations, including a $14.3 milliongain on sale. The Company did not dispose of any properties during 2009. The noncontrollinginterests owned by limited partners decreased to 2.3% as of December 31, 2009 compared with 2.7% asof December 31, 2008, primarily due to the issuance of 2.8 million shares of the Company’s commonstock during 2009.
 
 

 
**Same Property Net Operating Income**Same Property Net Operating Income (“Same Property NOI”), defined as operating revenues(rental, tenant reimbursements and other revenues) less operating expenses (property operatingexpenses, real estate taxes and insurance) from the properties owned by the Company for theentirety of the periods presented, is a primary performance measure the Company uses to assess theresults of operations at its properties. Same Property NOI is a non-GAAP measure. As an indicationof the Company’s operating performance, Same Property NOI should not be considered an alternativeto net income calculated in accordance with GAAP. A reconciliation of the Company’s Same PropertyNOI to net income from its consolidated statements of operations is presented below. The SameProperty NOI results exclude corporate-level expenses, as well as certain transactions, such as thecollection of termination fees, as these items vary significantly period-over-period and thusimpact trends and comparability. Also, the Company eliminates depreciation and amortizationexpense, which are property level expenses, in computing Same Property NOI because these arenon-cash expenses that are based on historical cost accounting assumptions and management believesthese expenses do not offer the investor significant insight into the operations of the property.This presentation allows management and investors to distinguish whether growth or declines in netoperating income are a result of increases or decreases in property operations or the acquisitionof additional properties. While this presentation provides useful information to management andinvestors, the results below should be read in conjunction with the results from the consolidatedstatements of operations to provide a complete depiction of total Company performance.***2010 Compared with 2009***The following tables of selected operating data provide the basis for our discussion of SameProperty NOI in 2010 compared with 2009:                   Year Ended December 31,       (dollars in thousands) 2010  2009  $ Change  % Change Number of buildings(1)  165   165   —   — Same property revenues                Rental $103,093  $103,513  $(420)  (0.4)Tenant reimbursements and other  23,171   23,039   132   0.6               Total same property revenues  126,264   126,552   (288)  (0.2)              Same property operating expenses                Property  30,317   29,843   474   1.6 Real estate taxes and insurance  11,720   12,391   (671)  (5.4)              Total same property operating expenses  42,037   42,234   (197)  (0.5)                               Same property net operating income $84,227  $84,318  $(91)  (0.1)                               Reconciliation to net (loss) income:                Same property net operating income $84,227  $84,318         Non-comparable net operating income(2)(3)  7,652   1,514         General and administrative expenses  (14,523)  (13,219)        Depreciation and amortization  (42,613)  (40,174)        Other expenses, net  (43,380)  (26,900)        Discontinued operations(4)  (3,038)  (1,483)                       Net (loss) income $(11,675) $4,056                        
 
 

 
           Full Year   Weighted Average Occupancy   2010  2009 Same Properties  84.7%  86.9%Total  84.2%  86.7%    (1)  Represents properties owned for the entirety of the periods presented. (2) Non-comparable Properties include: RiversPark I and II, Cloverleaf Business Center,Ashburn Center, Three Flint Hill, 500 First Street, NW, Battlefield Corporate Center, RedlandCorporate Center, Atlantic Corporate Center, 1211 Connecticut Ave, NW, 440 First Street, NW, 7458Candlewood Road, 1750 H Street, NW and Aviation Business Park. (3) Non-comparable property NOI has been adjusted to reflect a normalized managementfee percentage in lieu of an administrative overhead allocation for comparative purposes. (4) Discontinued operations include the gain on disposal and income from the operationsof Old Courthouse Square, Deer Park and 7561 Lindbergh Drive.Same Property NOI decreased slightly, or 0.1%, for the twelve months ended December 31, 2010as compared with the same period in 2009. Same property rental revenue decreased $0.4 million forthe twelve months ended December 31, 2010, primarily due to an increase in vacancy. Tenantreimbursements and other revenue increased $0.1 million for the twelve months ended December 31,2010 as a result of an increase in recoverable property operating expenses, primarily snow and iceremoval costs. Total same property operating expenses decreased $0.2 million for the full year of2010 due to lower real estate assessments and real estate tax rates on the Company’s NorthernVirginia properties located in Fairfax County and Prince William County, Virginia. The reduction inreal estate tax expense was partially offset by an increase in snow and ice removal costs, whichwere partially offset by a reduction in reserves for anticipated bad debt expense.**Maryland**                   Year Ended December 31,       (dollars in thousands) 2010  2009  $ Change  % Change Number of buildings(1)  63   63   —   — Same property revenues                Rental $31,516  $32,053  $(537)  (1.7)Tenant reimbursements and other  6,755   6,630   125   1.9               Total same property revenues  38,271   38,683   (412)  (1.1)                               Same property operating expenses                Property  9,537   9,600   (63)  (0.7)Real estate taxes and insurance  3,910   3,860   50   1.3               Total same property operating expenses  13,447   13,460   (13)  (0.1)                               Same property net operating income $24,824  $25,223  $(399)  (1.6)                               Reconciliation to total property operating income:                Same property net operating income $24,824  $25,223         Non-comparable net operating income (2)(3)  3,894   2,038                        Total property operating income $28,718  $27,261                                   Full Year   Weighted Average Occupancy   2010  2009 Same Properties  81.1%  84.4%Total  81.4%  83.9%
 
 

 
    (1) Represents properties owned for the entirety of the periods presented. (2) Non-comparable Properties include: RiversPark I and II, Cloverleaf Business Center, Redland Corporate Center, 7458 CandlewoodRoad and Aviation Business Park. (3) Non-comparable property NOI has been adjusted to reflect a normalized management fee percentage in lieu of an administrativeoverhead allocation for comparative purposes.Same Property NOI for the Maryland properties decreased $0.4 million for the twelve monthsended December 31, 2010 compared with the same period in 2009. Total same property revenuesdecreased $0.4 million during 2010 due to an increase in vacancy. Total same property operatingexpenses for the Maryland properties decreased slightly for the twelve months ended December 31,2010 primarily due to lower maintenance expenses and reserves for anticipated bad debt expense,which were partially offset by an increase in snow and ice removal costs.**Northern Virginia**                   Year Ended December 31,        (dollars in thousands) 2010  2009  $ Change  % Change Number of buildings(1)  48   48   —   — Same property revenues                Rental $32,341  $32,254  $87   0.3 Tenant reimbursements and other  7,178   7569   (391)  (5.2)             Total same property revenues  39,519   39,823   (304)  (0.8)                               Same property operating expenses                Property  8,916   9,126   (210)  (2.3)Real estate taxes and insurance  3,758   4,284   (526)  (12.3)              Total same property operating expenses  12,674   13,410   (736)  (5.5)                               Same property net operating income $26,845  $26,413  $432   1.6                                Reconciliation to total propertyoperating income:                Same property net operating income $26,845  $26,413         Non-comparable net operating income(loss)(2)(3)  3,566   (219)                       Total property operating income $30,411  $26,194                                   Full Year   Weighted Average Occupancy   2010  2009 Same Properties  85.8%  88.4%Total  83.8%  87.8%    (1) Represents properties owned for the entirety of the periods presented. (2) Non-comparable Properties include Ashburn Center, Three Flint Hill,500 First Street, NW, Atlantic Corporate Center, 1211 Connecticut Ave, NW, 440 FirstStreet, NW and 1750 H Street, NW. (3) Non-comparable property NOI has been adjusted to reflect a normalizedmanagement fee percentage in lieu of an administrative overhead allocation forcomparative purposes.
 
 

 
Same Property NOI for the Northern Virginia properties increased $0.4 million for the twelvemonths ended December 31, 2010 compared with the same period in 2009. Total same property revenuesdecreased $0.3 million during the twelve months ended December 31, 2010 compared with 2009 asincreases in rental rates were offset by an increase in vacancy. During 2010, total same propertyoperating expenses decreased $0.7 million compared with 2009 as decreases in real estate taxes andutility expenses, along with a decline in reserves for bad debt, were partially offset by anincrease in snow and ice removal costs.**Southern Virginia**                   Year Ended December 31,       (dollars in thousands) 2010  2009  $ Change  % Change Number of buildings(1)  54   54   —   — Same property revenues                Rental $39,236  $39,206  $30   0.1 Tenant reimbursements and other  9,238   8,840   398   4.5               Total same property revenues  48,474   48,046   428   0.9                                Same property operating expenses                Property  11,864   11,117   747   6.7 Real estate taxes and insurance  4,052   4,247   (195)  (4.6)              Total same property operating expenses  15,916   15,364   552   3.6                                Same property net operating income $32,558  $32,682  $(124)  (0.4)                               Reconciliation to total property operating income:                Same property net operating income $32,558  $32,682         Non-comparable net operating income (loss)(2)(3)  192   (305)                       Total property operating income $32,750  $32,377                                   Full Year   Weighted Average Occupancy   2010  2009 Same Properties  86.2%  87.3%Total  86.3%  87.3%    (1) Represents properties owned for the entirety of the periodspresented. (2) Non-comparable Properties include: Battlefield Corporate Center. (3) Non-comparable property NOI has been adjusted to reflect anormalized management fee percentage in lieu of an administrative overheadallocation for comparative purposes.Same property NOI for the Southern Virginia properties decreased $0.1 million for the twelvemonths ended December 31, 2010 compared with the same period in 2009. Total same property rentalrevenue increased $0.4 million primarily due to an increase in recoverable operating expenses.Total same property operating expenses increased approximately $0.5 million during 2010 comparedwith 2009 due to an increase in snow and ice removal costs, which was partially offset by adecrease in real estate tax expense.
 
 

 
***2009 Compared with 2008***The following tables of selected operating data provide the basis for our discussion of SameProperty NOI in 2009 compared with 2008:                   Year Ended December 31,       (dollars in thousands) 2009  2008  $ Change  % Change Number of buildings (1)  166   166   —   — Same property revenues                Rental $103,522  $99,729  $3,793   3.8 Tenant reimbursements and other  22,942   20,440   2,502   12.2               Total same property revenues  126,464   120,169   6,295   5.2                                Same property operating expenses                Property  30,012   25,545   4,467   17.5 Real estate taxes and insurance  12,495   12,010   485   4.0               Total same property operating expenses  42,507   37,555   4,952   13.2                                Same property net operating income $83,957  $82,614  $1,343   1.6                                Reconciliation to net income:                Same property net operating income $83,957  $82,614         Non-comparable net operating income(loss)(2)(3)(4)  1,875   (72)        General and administrative expenses  (13,219)  (11,938)        Depreciation and amortization  (40,174)  (36,260)        Other expenses, net  (26,900)  (30,594)        Discontinued operations(5)  (1,483)  16,391                        Net income $4,056  $20,141                                   Full Year   Weighted Average Occupancy   2009  2008 Same Properties  86.6%  86.1%Total  86.2%  86.1%    (1) Represents properties owned for the entirety of the periods presented. (2) Non-comparable Properties include: Triangle Business Center, RiversPark I and II, Cloverleaf Center and Ashburn Center. (3) Excludes a 76,000 square foot redevelopment building at Ammendale Commerce Center, which was placed in-service duringthe fourth quarter of 2008. (4) Non-comparable property NOI has been adjusted to reflect a normalized management fee percentage in lieu of anadministrative overhead allocation for comparative purposes. (5) Discontinued operations include the gain on disposal and income from the operations of Old Courthouse Square, DeerPark, 7561 Lindbergh Drive and Alexandria Corporate Park.Same Property NOI increased $1.3 million, or 1.6%, for the twelve months ended December 31,2009 as compared with the same period in 2008. Same property rental revenue increased $3.8 millionfor the twelve monthsended December 31, 2009, primarily as the result of higher market rental rates realized in 2009.Tenant reimbursements and other revenue increased $2.5 million for the twelve months ended December31, 2009 as a result of an increase in operating expenses, which resulted in higher reimbursementrevenue from the tenants, and higher ancillary fees. Total same property operating expensesincreased $5.0 million for the full year of 2009 due to an increase in reserves for anticipated baddebt expense, higher property assessments, which led to increased real estate taxes, and anincrease in snow and ice removal costs in the fourth quarter of 2009.
 
 

 
**Maryland**                   Year Ended December 31,       (dollars in thousands) 2009  2008  $ Change  % Change Number of buildings (1)  64   64   —   — Same property revenues                Rental $32,062  $33,029  $(967)  (2.9)Tenant reimbursements and other  6,533   6,408   125   2.0              Total same property revenues  38,595   39,437   (842)  (2.1)                               Same property operating expenses                Property  9,770   7,876   1,894   24.0 Real estate taxes and insurance  3,963   3,770   193   5.1               Total same property operating expenses  13,733   11,646   2,087   17.9                                Same property net operating income $24,862  $27,791  $(2,929)  (10.5)                               Reconciliation to total property operatingincome:                Same property net operating income $24,862  $27,791         Non-comparable net operating income(loss)(2)(3)  2,399   (412)                       Total property operating income $27,261  $27,379                                   Full Year   Weighted Average Occupancy   2009  2008 Same Properties  83.4%  88.5%Total  82.9%  88.2%    (1) Represents properties owned for the entirety of the periods presented. (2) Non-comparable Properties include: Ammendale Commerce Center, Annapolis Commerce Park East, Triangle Business Center andRiversPark I and II, which was contributed to a consolidated joint venture in December 2008. (3) Non-comparable property NOI has been adjusted to reflect a normalized management fee percentage in lieu of an administrativeoverhead allocation for comparative purposes.Same Property NOI for the Maryland properties decreased $2.9 million for the twelve monthsended December 31, 2009 compared with the same period in 2008. Total same property revenuesdecreased $0.8 million during 2009 due to a decrease in occupancy in the region. Total sameproperty operating expenses for the Maryland properties increased $2.1 million for the twelvemonths ended December 31, 2009, which was primarily due to an increase in reserves for anticipatedbad debt expense, particularly among the region’s Baltimore area properties, and snow and iceremoval costs in the fourth quarter of 2009.
 
 

 
**Northern Virginia**                   Year Ended December 31,       (dollars in thousands) 2009  2008  $ Change  % Change Number of buildings(1)  48   48   —   — Same property revenues                Rental $32,254  $30,184  $2,070   6.9 Tenant reimbursements and other  7,569   6,335   1,234   19.5               Total same property revenues  39,823   36,519   3,304   9.0                                Same property operating expenses                Property  9,126   7,525   1,601   21.3 Real estate taxes and insurance  4,284   4,086   198   4.8               Total same property operating expenses  13,410   11,611   1,799   15.5                                Same property net operating income $26,413  $24,908  $1,505   6.0                                Reconciliation to total property operating income:                Same property net operating income $26,413  $24,908         Non-comparable net operating loss(2)(3)  (219)  (218)                       Total property operating income $26,194  $24,690                                   Full Year   Weighted Average Occupancy   2009  2008 Same Properties  88.4%  87.2%Total  87.8%  87.4%    (1) Represents properties owned for the entirety of the periods presented. (2) Non-comparable Properties include: Ashburn Center. (3) Non-comparable property NOI has been adjusted to reflect a normalizedmanagement fee percentage in lieu of an administrative overhead allocation forcomparative purposes.Same Property NOI for the Northern Virginia properties increased $1.5 million for the twelvemonths ended December 31, 2009 compared with the same period in 2008. Total same property revenuesincreased $3.3 million during the twelve months ended December 31, 2009 due to an increase inoccupancy and in rental rates. The increase in operating expenses, along with higher occupancy,resulted in an increase in tenant reimbursements and other revenues during 2009. Same propertyoperating expenses increased $1.8 million due to increases in snow and ice removal costs, utilityexpenses and reserves for anticipated bad debt expense. The Company also experienced higherassessed valuations on many Northern Virginia properties that, in turn, resulted in increased realestate tax expense.
 
 

 
**Southern Virginia**                   Year Ended December 31,       (dollars in thousands) 2009  2008  $ Change  % Change Number of buildings (1)  54   54   —   — Same property revenues                Rental $39,206  $36,516  $2,690   7.4 Tenant reimbursements and other  8,840   7,697   1,143   14.8               Total same property revenues  48,046   44,213   3,833   8.7                                Same property operating expenses                Property  11,116   10,144   972   9.6 Real estate taxes and insurance  4,248   4,154   94   2.3               Total same property operating expenses  15,364   14,298   1,066   7.5                                Same property net operating income $32,682  $29,915  $2,767   9.2                                Reconciliation to total property operating income:                Same property net operating income $32,682  $29,915         Non-comparable net operating (loss) income(2)  (305)  558                        Total property operating income $32,377  $30,473                                   Full Year   Weighted Average Occupancy   2009  2008 Same Properties  87.3%  84.2%Total  87.3%  84.2%    (1) Represents properties owned for the entirety of the periods presented. (2) Non-comparable property NOI has been adjusted to reflect a normalizedmanagement fee percentage in lieu of an administrative overhead allocation forcomparative purposes.Same property NOI for the Southern Virginia properties increased $2.8 million for the twelvemonths ended December 31, 2009 compared with the same period in 2008. Same property rental revenueincreased $3.8 million during 2009 as a result of an increase in occupancy and in rental rates. Anincrease in operating expenses, along with higher occupancy, resulted in an increase in tenantreimbursements and other revenues during 2009. Same property operating expenses increased $1.0million during full year 2009 due to an increase in snow and ice removal costs, utility expense andreal estate taxes.**Liquidity and Capital Resources****Overview**The Company seeks to maintain a flexible balance sheet, with an appropriate balance of cash,debt, equity and available funds under its unsecured revolving credit facility, to readily provideaccess to capital given the volatility of the market and to position itself to take advantage ofpotential growth opportunities. The Company expects to meet short-term liquidity requirementsgenerally through working capital, net cash provided by operations, and, if necessary, borrowingson its unsecured revolving credit facility. The Company’s short-term obligations consist primarilyof the lease for its corporate headquarters, normal recurring operating expenses, regular debtpayments, recurring expenditures for corporate and administrative needs, non-recurring expendituressuch as capitalimprovements, tenant improvements and redevelopments, leasing commissions and dividends topreferred and common shareholders.
 
 

 
Over the next twelve months, the Company believes that it will generate sufficient cash flowfrom operations and have access to the capital resources necessary to expand and develop itsbusiness, to fund its operating and administrative expenses, to continue to meet its debt serviceobligations and to pay distributions in accordance with REIT requirements. However, the Company’scash flow from operations could be adversely affected due to uncertain economic factors andvolatility in the financial and credit markets. In particular, the Company cannot assure that itstenants will not default on their leases or fail to make full rental payments if their businessesare challenged due to, among other things, the economic conditions (particularly if the tenants areunable to secure financing to operate their businesses). This may be particularly true for theCompany’s tenants that are smaller companies. Further, approximately 14% of the Company’sannualized base rent is scheduled to expire during the next twelve months and, if it is unable torenew these leases or re-let the space, its cash flow could be negatively impacted.The Company intends to meet long-term funding requirements for property acquisitions,development, redevelopment and other non-recurring capital improvements through net cash providedfrom operations, long-term secured and unsecured indebtedness, including borrowings under itsunsecured revolving credit facility, secured term loans and unsecured senior notes, proceeds fromdisposal of strategically identified assets (outright and through joint ventures) and the issuanceof equity and debt securities. For example, as described in more detail below, in 2010, the Companyraised aggregate net proceeds of $264.8 million through the issuance of 18.3 million common shares,expanded its unsecured credit facility by $50.0 million and entered into a $50.0 million seniorsecured term loan. In addition, in January 2011, the Company raised net proceeds of $111.3 millionthrough the issuance of 4.6 million 7.750% Series A Preferred Shares.The Company relies on these third party sources of capital to meet both short-term andlong-term liquidity requirements, and its ability to access these third party sources of capital inthe future will be dependent on, among other things, general economic conditions, general marketconditions for REITs, rental rates, occupancy levels, market perceptions and the trading price ofthe Company’s shares. The Company will continue to analyze which sources of capital are mostadvantageous to it at any particular point in time, but can provide no assurance that these sourcesof capital will be available on terms the Company deems attractive, or at all.**Financing Activity***Equity Offerings*On November 16, 2010, the Company issued 11.5 million common shares at a price of $15.50 pershare, which generated net proceeds of approximately $170.4 million. The Company used the majorityof the proceeds to pay down a portion of the outstanding balance on its unsecured revolving creditfacility, to fund the acquisition of Atlantic Corporate Park and for other general corporatepurposes. During the second quarter of 2010, the Company issued 880,648 common shares in exchangefor $13.03 million of Exchangeable Senior Notes. During the first quarter of 2010, the Companyissued 6.3 million common shares at a price of $14.50 per share, which generated net proceeds of$87.1 million. The Company used $82.9 million of the proceeds to pay down a portion of theoutstanding balance on its unsecured revolving credit facility and the remainder for other generalcorporate purposes.During 2010, the Company increased the amount of its common shares that could be issuedthrough its controlled equity offering program by 5.0 million common shares. In 2010, the Companysold 0.5 million common shares through its controlled equity offering program at a weighted averageoffering price of $15.46 per share, which generated net proceeds of approximately $7.3 million. AtDecember 31, 2010, the Company had 4.8 million common shares available for issuance under itscontrolled equity offering program.In January 2011, the Company issued 4.6 million 7.750% Series A Preferred Shares at a price of$25.00 per share, which generated net proceeds of $111.3 million. Dividends for the Series APreferred Shares are cumulative from the date of original issuance and payable on a quarterly basisbeginning on February 15, 2011. The Company used the proceeds from the issuance of its Series APreferred Shares to pay down $105.0 million of the outstanding balance on its unsecured revolvingcredit facility and for other general corporate purposes.
 
 

 
*Unsecured Revolving Credit Facility*On December 29, 2009, the Company replaced its $125.0 million unsecured revolving creditfacility with a new $175.0 million facility. In the second quarter of 2010, the Company expandedthe unsecured revolving credit facility to $225.0 million with the addition of two new lenders andeliminated the 1% LIBOR floor associated with the facility’s applicable interest rate. Theunsecured revolving credit facility matures in January 2013 with a one-year extension at theCompany’s option, which it intends to exercise. The variable interest rate on the unsecuredrevolving credit facility is LIBOR plus a spread of 275 to 375 basis points, depending on theCompany’s overall leverage. At December 31, 2010, the applicable spread was 300 basis points andLIBOR was 0.26%. The Company had $33.9 million of unused capacity on its unsecured revolving creditfacility at December 31, 2010.*Secured Term Loans*On November 10, 2010, the Company entered into a $50.0 million senior secured term loan withKey Bank, N.A., which originally matured in February 2011. During 2011, the Company’s exercised athree month extension and the loan now matures in May 2011. The loan has an interest rate of LIBORplus 350 basis points. The proceeds from the loan were used to partially finance the acquisition ofRedland Corporate Center.At December 31, 2010, the Company had two other secured terms loans totaling $60.0 million.The Company’s $40.0 million secured term loan is separated into four $10 million loans, with theirmaturities staggered in one-year intervals beginning January 15, 2011 and ending on January 15,2014. On January 14, 2011, the Company repaid the first $10.0 million loan with available cash. AtDecember 31, 2010, the loan bears interest at LIBOR plus 250 basis points, which increased by 100basis points on January 1, 2011 and will increase by 100 basis points every year, to a maximum of550 basis points. During 2010, the Company exercised a one-year extension on its $20.0 millionsecured term loan, which will mature in August 2011.*Interest Rate Swap Agreements*In July 2010, the Company entered into an interest rate swap agreement that, beginning onJanuary 18, 2011, fixed LIBOR at 1.474% on $50.0 million of the Company’s variable rate debt. Theinterest rate swap will mature on January 15, 2014.During January 2008 and August 2008, the Company entered into a two swap agreements that fixedLIBOR at 2.71% on $50.0 million of its outstanding variable rate debt and at 3.33% on $35.0 millionof its outstanding variable rate debt, respectively. Both swap agreements matured in August 2010.*Exchangeable Senior Notes*During 2010, the Company issued 880,648 common shares in exchange for retiring $13.03 millionof its Exchangeable Senior Notes and used $6.9 million of available cash to retire $7.02 million ofits Exchangeable Senior Notes. The retirement of Exchangeable Senior Notes in 2010 resulted in again of $0.2 million, net of deferred financing costs and discounts. As of December 31, 2010, theCompany had used $66.3 million in cash and $12.4 million of the Company’s common shares torepurchase $94.6 million of its Exchangeable Senior Notes.
 
 

 
*Repayment of Mortgage Debt*The Company has repaid the following mortgages since January 1, 2009 (dollars in thousands):                   Effective    Month Year Property Interest Rate  Amount January 2011 Indian Creek Court  5.90% $11,982 December 2010 Enterprise Center  5.20%  16,712 November 2010 Park Central II  5.66%  5,305 June 2010 4212 Tech Court  8.53%  1,654 November 2009 Park Central I  5.66%  4,540 October 2009 4200 Tech Court  8.07%  1,706 May 2009 Glen Dale Business Center  5.13%  8,033                       $49,932             ***Cash Flows***Due to the nature of the Company’s business, it relies on net cash provided by operations tofund its short-term liquidity needs. Net cash provided by operations is substantially dependent onthe continued receipt of rental payments and other expenses reimbursed by the Company’s tenants.The recent economic downturn may affect tenants’ ability to meet their obligations, including thepayment of rent contractually owed to the Company, and the Company’s ability to lease space to newor replacement tenants on favorable terms, all of which could affect the Company’s cash availablefor short-term liquidity needs. Although the recent economic downturn and uncertainty in theglobal credit markets has had varying impacts that have negatively impacted debt financing and theavailability of capital across many industries, the Company anticipates that its available cashflow from operating activities, and available cash from borrowings and other sources, will beadequate to meet its capital and liquidity needs in both the short and long term.The Company could also fund building acquisitions, development, redevelopment and othernon-recurring capital improvements through additional borrowings, issuance of Operating Partnershipunits or sales of assets, outright or through joint ventures.Consolidated cash flow information is summarized as follows:                       Year ended December 31,  Change (amounts in thousands) 2010  2009  2008  2010 vs. 2009  2009 vs. 2008                      Cash provided by operating activities $36,664  $40,008  $38,064  $(3,344) $1,944                      Cash used in investing activities  (349,808)  (62,938)  (21,062)  (286,870)  (41,876)                     Cash provided by (used in) financingactivities  337,104   15,898   (5,848)  321,206   21,746 ***Comparison of the Years Ended December 31, 2010 and 2009***Net cash provided by operating activities decreased $3.3 million in 2010 compared with 2009,primarily due to a net loss of $11.7 million incurred during the year ended December 31, 2010compared with net income of $4.1 million for the year ended December 31, 2009. The decrease in net(loss) income was primarily due to an increase in acquisition costs of $6.1 million during 2010compared with 2009 as the Company acquired ten properties,including two through unconsolidated joint ventures, in 2010 compared with the acquisition oftwo properties in 2009. Also, the decline in net (loss) income in 2010 was due to additional snowand ice removal expenses, net of recoveries, incurred in the first quarter of 2010 compared with2009. The decrease in cash provided by operating activities was also due to a reduction of rentsreceived in advance due to the timing of payments during 2010 compared with 2009.
 
 

 
Net cash used in investing activities increased $286.9 million during 2010 compared with 2009.The increase in cash used for investing activities is primarily due to an increase in propertyacquisitions in 2010 as the Company acquired eight consolidated properties compared with theacquisition of two consolidated properties in 2009. The Company also acquired a parcel of land for$3.2 million in 2010. The Company paid $21.0 million in 2010 to invest in two separateunconsolidated joint ventures. In 2010, the Company provided a $24.8 million subordinated loan tothe owners of 950 F Street, NW in Washington, D.C., which is secured by a portion of the owners’interest in the property. At December 31, 2010, the Company had paid $7.4 million in deposits onpotential acquisitions compared with $0.5 million of deposits at December 31, 2009. During thesecond quarter of 2010, the Company sold its Deer Park and 7561 Lindbergh Drive properties for netproceeds of $11.4 million. The Company did not dispose of any properties during 2009. On January 1,2010, the Company deconsolidated a joint venture that owns RiversPark I. As a result, $0.9 millionof cash held by RiversPark I was removed from the Company’s condensed consolidated financialstatements. The increase in cash used in investing activities was also attributable to a $4.6million increase in additions to construction in progress as the Company experienced a highervolume of development and redevelopment activity in 2010 compared with 2009.Net cash provided by financing activities increased $321.2 million during 2010 compared with2009. During 2010, the Company issued $362.0 million of debt, which consisted of borrowings fromthe Company’s unsecured revolving credit facility totaling $254.0 million, mortgage loans totaling$58.0 million encumbering three of the Company’s 2010 acquisitions and the issuance of a $50.0million senior secured term loan used to partially fund the acquisition of Redland CorporateCenter, compared with the issuance of $109.5 million of debt issuances in 2009. The increase incash provided by financing activities was also attributed to the issuance of 18.3 million of theCompany’s common shares in 2010, for net proceeds of $264.6 million. The proceeds were used torepay a portion of the Company’s outstanding revolving credit facility during 2010, to fundacquisitions and for other general corporate purposes. In 2009, the Company issued 2.8 millionshares of common stock, through its controlled equity offering program, for net proceeds of $29.5million. The increase in proceeds from the Company’s debt and equity issuances in 2010 comparedwith 2009 were used to acquire properties and refinance existing debt, as the Company repaid $258.3million in 2010 compared with $92.6 million in 2009. The Company’s equity issuances have resultedin an increase in its outstanding common shares, which have resulted in a $2.3 million increase individends paid in 2010 compared with 2009.***Comparison of the Years Ended December 31, 2009 and 2008***Net cash provided by operating activities increased $1.9 million in 2009. The increase wasattributable to an improvement in operating results in 2009 compared with 2008. The increase incash provided by operations was partially offset by a decrease in escrows and reserves during 2009compared with 2008 due to the repayment, in 2008, of the mortgage encumbering the Suburban MarylandPortfolio, which released all previously escrowed funds to the Company.Net cash used in investing activities was $62.9 million in 2009 compared with $21.1 million in2008. The difference is primarily attributable to $50.6 million of net proceeds the Companyreceived from the sale of its Alexandria Corporate Park property in 2008. The Company did notdispose of any properties during 2009. During 2009, the Company acquired two properties for a totalpurchase price of $39.3 million compared with acquisitions with a purchase price totaling $46.4million in 2008. During 2008, the Company contributed one of its acquired properties to a jointventure for net proceeds of $11.6 million. The increase in net cash used in investing activitieswas partially offset by a $13.7 million decline in additions to rental property, development andredevelopment activity.
 
 

 
Net cash provided by financing activities was $15.9 million during 2009 compared with net cashused in financing activities of $5.8 million during 2008. During the 2009, the Company borrowed$109.5 million comparedwith $217.3 million of borrowings in 2008, though the Company incurred an additional $2.1million of financing charges during 2009 compared with 2008. The decline in borrowings during 2009was a result of less debt maturing in 2009, as the Company repaid $92.6 million of its outstandingdebt during 2009 compared with repayments totaling $230.6 million in 2008. The repayments of debtincluded $26.5 million and $28.6 million of cash used to retire $34.5 million and $40.0 million ofthe Company’s Exchangeable Senior Notes, which resulted in gains of $6.3 million and $4.4 millionduring 2009 and 2008, respectively. The Company received net proceeds from issuance of its commonstock of $29.5 million in 2009 compared with net proceeds of $43.9 million in 2008. The Companypaid dividends of $0.94 per common share during 2009 compared with dividends paid of $1.36 percommon share in 2008, which resulted in a total reduction of dividends paid to shareholders anddistributions paid to unitholders of $8.0 million in 2009 compared with 2008.***Distributions***The Company is required to distribute to its shareholders at least 90% of its REIT taxableincome in order to qualify as a REIT, including some types of taxable income it recognizes for taxpurposes but with regard to which it does not receive corresponding cash. In addition, the Companymust distribute to its shareholders 100% of its taxable income to eliminate its U.S. federal incometax liability. Funds used by the Company to pay dividends on its common shares are provided throughdistributions from the Operating Partnership. For every common share of the Company, the OperatingPartnership has issued to the Company a corresponding common unit. At December 31, 2010, theCompany was the sole general partner of and owned 98.1% of the Operating Partnership’s units. Theremaining interests in the Operating Partnership are limited partnership interests, some of whichare owned by certain of the Company’s executive officers, trustees and unrelated parties whocontributed properties and other assets to the Company upon its formation. The OperatingPartnership is required to make cash distributions to the Company in an amount sufficient to meetits distribution requirements. The cash distributions by the Operating Partnership reduce theamount 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 aquarterly basis, the Company’s management team recommends a distribution amount that is approved bythe Company’s Board of Trustees. The amount of future distributions will be based on taxableincome, cash from operating activities and available cash and at the discretion of the Company’sBoard of Trustees.
 
 

 
***Debt Financing***The following table sets forth certain information with respect to the Company’s indebtednessat December 31, 2010.                           Balance             Effective  December 31,  Annualized Debt      Balance at (dollars in thousands) Interest Rate  2010  Service  Maturity Date  Maturity **Fixed Rate Debt**                    Indian Creek Court(1)  5.90% $11,982  $1,162   1/01/2011  $11,982 403/405 Glenn Drive  5.50%  7,960   746   7/01/2011   7,807 4612 Navistar Drive(2)  5.20%  12,189   1,131   7/11/2011   11,921 Campus at Metro Park(2)  5.25%  22,556   2,028   2/11/2012   21,581 1434 Crossways Boulevard Building II  5.38%  9,484   826   8/05/2012   8,866 Crossways Commerce Center  6.70%  24,179   2,087   10/01/2012   23,313 Newington Business Park Center  6.70%  15,252   1,316   10/01/2012   14,706 Prosperity Business Center  5.75%  3,502   305   1/01/2013   3,242 Aquia Commerce Center I  7.28%  353   165   2/01/2013   42 1434 Crossways Boulevard Building I  5.38%  8,225   665   3/05/2013   7,597 Linden Business Center  5.58%  7,080   512   10/01/2013   6,596 Owings Mills Business Center  5.75%  5,448   425   3/01/2014   5,066 Annapolis Commerce Park East  6.25%  8,491   665   6/01/2014   8,010 Cloverleaf Center  6.75%  17,204   1,464   10/08/2014   15,953 Plaza 500, Van Buren Business Park,Rumsey Center, Snowden Center,Greenbrier Technology Center II,Norfolk Business Center, Northridge I& II and 15395 John Marshall Highway  5.19%  99,151   5,146   8/01/2015   91,588 Hanover Business Center:                    Hanover Building D  6.63%  642   161   8/01/2015   13 Hanover Building C  6.63%  1,041   186   12/01/2017   13 Chesterfield Business Center:                    Chesterfield Buildings C, D, G and H  6.63%  1,681   414   8/01/2015   34 Chesterfield Buildings A, B, E and F  6.63%  2,398   291   6/01/2021   26 7458 Candlewood Road — Note I  6.30%  9,938   819   1/1/2016   8,821 7458 Candlewood Road — Note II  6.04%  4,761   424   1/1/2016   4,567 Gateway Centre Building I  5.88%  1,189   219   11/01/2016   — 500 First Street, NW  5.79%  38,793   2,722   7/1/2020   32,000 Battlefield Corporate Center  4.40%  4,289   320   11/1/2020   2,618 Airpark Business Center  6.63%  1,308   173   6/01/2021   14                      5.71%(3)  319,096   24,372       286,376                      **Convertible Debt**                    Exchangeable Senior Notes(4)  5.84%  29,936   1,218   12/15/2011   30,450                      **Senior Unsecured Debt**                    Series A Notes  6.41%  37,500   2,404   6/15/2013   37,500 Series B Notes  6.55%  37,500   2,456   6/15/2016   37,500                   **Total Fixed Rate Debt**  5.85%(3) $424,032  $30,450      $391,826                                        **Variable Rate Debt**                    Secured Term Loan I (5)                    Loan A LIBOR+2.50% $10,000  $276   1/15/2011  $10,000 Loan B LIBOR+2.50%  10,000   276   1/15/2012   10,000 Loan C LIBOR+2.50%  10,000   276   1/15/2013   10,000 Loan D LIBOR+2.50%  10,000   276   1/15/2014   10,000 Secured Term Loan II LIBOR+2.50%  20,000   552   8/11/2011   20,000 Senior Secured Term Loan (6) LIBOR+3.50%  50,000   1,880   5/10/2011   50,000 Unsecured Revolving Credit Facility(7)(8) LIBOR+3.00%  191,000   6,227   1/15/2014   191,000                   **Total Variable Rate Debt**  3.24%(2)(9) $301,000  $9,763      $301,000                   **Total at December 31, 2010**  **4.77****%****(2)(9)** **$****725,032**  **$****40,213****(10)**     **$****692,826**                   
 
 

 
    (1) In January 2011, the Company repaid the $12.0 million mortgage encumbering IndianCreek Court with available cash. (2) The maturity date on these loans represents the anticipated repayment date of theloans, after which date the interest rates on the loans increase. (3) Represents the weighted average interest rate. (4) During 2010, the Company retired $20.1 million of its Exchangeable Senior Notes.The principal amount of the Exchangeable Senior Notes was $30.4 million at December 31,2010. (5) Interest on the loan is LIBOR plus 250 basis points, which increases by 100 basispoints each year beginning on January 1, 2011, to a maximum of 550 basis points. InJanuary 2011, the Company repaid the $10.0 million balance of Loan A with available cash. (6) On November 10, 2010, the Company entered into a three month $50.0 million seniorsecured term loan with KeyBank, N.A. In February 2011, the Company extended the maturitydate of the term loan to May 10, 2011. (7) The unsecured revolving credit facility matures in January 2013 with a one-yearextension at the Company’s option, which it intends to exercise. (8) As of December 31, 2009, the borrowing base for the Company’s unsecuredrevolving credit facility included the following properties: 13129Airpark Road, Virginia Center, Aquia Commerce Center II, Airpark Place, Gateway West II,Crossways II, Reston Business Campus, Cavalier Industrial Park, Gateway Centre (BuildingII), Enterprise Parkway, Diamond Hill Distribution Center, Linden Business Center(Building I), 1000 Lucas Way, River’s Bend Center, Crossways I, Sterling Park BusinessCenter, Sterling Park Land, 1408 Stephanie Way, Davis Drive, Gateway 270, Gateway II,Greenbrier Circle Corporate Center, Greenbrier Technology Center I, Pine Glen, AmmendaleCommerce Center, River’s Bend Center II, Park Central (Building V), Hanover AB, HerndonCorporate Center, 6900 English Muffin Way, Gateway West, 4451 Georgia Pacific, 20270Goldenrod Lane, Old Courthouse Square, Patrick Center, West Park, Woodlands BusinessCenter, 15 Worman’s Mill Court, Girard Business Center, Girard Place, Owings MillsCommerce Center, 4200 Tech Court, Park Central I, Triangle Business Center and AshburnCenter. (9) In July 2010, the Company entered into an interest rate swap agreement that,beginning on January 18, 2011, fixed LIBOR at 1.474% on $50.0 million of the Company’svariable rate debt. The swap agreement will mature on January 15, 2014. (10) During 2010, the Company paid approximately $4.8 million in principal payments,which excludes $23.7 million related to mortgage debt that was repaid in 2010.All of our outstanding debt contains customary, affirmative covenants including financialreporting, standard lease requirements and certain negative covenants. The Company is also subjectto cash management agreements with most of its mortgage lenders. These agreements require thatrevenue generated by the subject property be deposited into a clearing account and then swept intoa cash collateral account for the benefit of the lender from which cash is distributed only afterfunding of improvement, leasing and maintenance reserves and payment of debt service, insurance,taxes, capital expenditures and leasing costs.*Exchangeable Senior Notes*On December 11, 2006, the Company issued $125.0 million of 4.0% Exchangeable Senior Notes fornet proceeds of approximately $122.2 million. The Exchangeable Senior Notes mature on December 15,2011 and are equal in right of payment with all of the Company’s other senior unsubordinatedindebtedness. Interest is payable on June 15 and December 15 of each year beginning on June 15,2007. Holders may, under certain conditions, exchange their notes for cash or a combination of cashand the Company’s common shares, at the Company’s option, at any time after October 15, 2011. TheExchangeable Senior Notes are exchangeable into the Company’s common shares, which are adjustedfor, among other things, the payment of dividends to the Company’s common shareholders subject to amaximum exchange rate. Holders may exchange their notes prior to maturity under certain conditions,including during any calendar quarter beginning after December 31, 2006 (and only during suchcalendar quarter), if and only if, the closing sale price of the Company’s common shares for atleast 20 trading days in the period of 30 trading days ending on the last trading day of thepreceding quarter is greater than 130% of the exchange price on the applicable trading day. TheExchangeable Senior Notes have not been registered under the Securities Act and may not be tradedor sold except to certain defined qualified institutional buyers. The notes are senior unsecuredobligations of the Operating Partnership and guaranteed by the Company. As of December 31, 2010,the Company was in compliance with all of the financial covenants of its Exchangeable Senior Notes.
 
 

 
The Company used $7.6 million of the proceeds to purchase a capped call option. The cappedcall option is designed to reduce the potential dilution of common shares upon the exchange of thenotes and protects the Company against any dilutive effects of the conversion feature if the marketprice of the Company’s common sharesis between $36.12 and $42.14 per share. This option allows the Company to receive shares ofthe Company’s common stock from a counterparty equal to the amount of common stock and/or cashrelated to the excess conversion value that the Company would pay the holders of the ExchangeableSenior Notes upon conversion. The option will terminate upon the earlier of the maturity date ofthe notes or the first day in which the notes are no longer outstanding due to conversion orotherwise. The option was recorded as a reduction of equity. To the extent the then fair value perCompany common share exceeds the cap price during the observation period relating to an exchange ofnotes, the reduction in potential dilution will be limited to the difference between the strikeprice and the cap price. The Company applied the majority of the remaining proceeds toward theJanuary 2007 purchase of three buildings at Greenbrier Business Center.During 2010, the Company issued 880,648 common shares in exchange for retiring $13.03 millionof its Exchangeable Senior Notes and used available cash to retire $7.02 million of itsExchangeable Senior Notes. The retirement of Exchangeable Senior Notes resulted in a gain of $0.2million, or approximately $0.01 per diluted share, net of deferred financing costs and discounts.At December 31, 2010, each $1,000 principal amount of the Exchangeable Senior Notes was convertibleinto 28.039 shares for a total of approximately 0.9 million shares, which is equivalent to anexchange rate of $35.66 per Company common share. The capped call option associated with therepurchased notes was effectively terminated on their respective repurchase dates.*Senior Notes*On June 22, 2006, the Operating Partnership completed a private placement of unsecured SeniorNotes totaling $75.0 million. The transaction was comprised of $37.5 million in 7-year Series ASenior Notes, maturing on June 15, 2013 and bearing a fixed interest rate of 6.41%, and $37.5million in 10-year Series B Senior Notes, maturing on June 15, 2016 and bearing a fixed interestrate of 6.55%. Interest is payable for the Series A and Series B Senior Notes on June 15 andDecember 15 of each year beginning December 15, 2006. The Senior Notes are equal in right ofpayment with all the Operating Partnership’s other senior unsubordinated indebtedness. As ofDecember 31, 2010, the weighted average interest rate on the Senior Notes was 6.48%.On November 8, 2010, the Company, the Operating Partnership, certain of the Company’ssubsidiaries and certain holders of the Company’s Senior Unsecured Series A and Series B Notessufficient to effect the Amendment (as herein defined) (the “Noteholders”) entered into a FirstAmendment, Consent and Waiver dated as of November 5, 2010 to the Note Purchase Agreement dated asof June 22, 2006 (the “Amendment”). Pursuant to the Amendment, the Company added certainsubsidiaries as guarantors of the Company’s Senior Unsecured Series A and Series B Notes and agreedthat, to the extent the Company or any of its subsidiaries (other than certain excludedsubsidiaries) provides a lien for the benefit of the lenders or administrative agent under theCompany’s unsecured revolving credit facility, the Company or its subsidiaries, as applicable, willgrant the holders of the Company’s Senior Unsecured Series A and Series B Notes a similar firstpriority lien over the same assets, property and undertaking as those encumbered in respect of theunsecured revolving credit facility. In addition, the Company agreed to add a covenant to theterms of the Company’s Senior Unsecured Series A and Series B Notes that as at the end of anyfiscal quarter, (a) for the fourth quarter of 2010 through the third quarter of 2011, itsConsolidated Debt Yield (as defined in the revolving credit agreement) will not be less than 10.5%,and (b) for each quarter thereafter, its Consolidated Debt Yield will not be less than 11.0%. TheCompany also agreed to add a covenant to the terms of the Company’s Senior Unsecured Series A andSeries B Notes that, as of the end of any fiscal quarter after giving effect to the Amendment, itsratio of (i) Adjusted Net Operating Income (as defined in the unsecured revolving credit facility)for the applicable quarter, annualized, divided by (ii) its Unsecured Interest Expense (as definedin the revolving credit facility) for the applicable quarter, annualized, shall not be less than1.75 to 1.0. The covenants mirror already existing covenants contained in the Company’s unsecuredrevolving credit agreement. In exchange for these modifications, the Noteholders agreed to waivethe Company’s previous failure to provide certain subsidiary guarantees. The Company agreed to paya waiver and consent fee to the holders of the Company’s Senior Unsecured Series A and Series BNotes in an aggregate amount equal to $37,500. As of December 31, 2010, the Company was incompliance with all the financial covenants of its Senior Notes.
 
 

 
***Financial Covenants***The Company’s outstanding corporate debt agreements contain specific financial covenants thatmay impact future financing decisions made by the Company or may be impacted by a decline inoperations. These covenantsdiffer by debt instrument and relate to the Company’s allowable leverage, minimum tangible networth, fixed debt coverage and other financial metrics. As of December 31, 2010, the Company was incompliance with all of the financial covenants of its outstanding debt instruments. Below is asummary of certain financial covenants associated with the Company’s outstanding debt at December31, 2010 (dollars in thousands):*Unsecured Revolving Credit Facility and Secured Term Loans*                   Unsecured             Revolving Credit             Facility and 2007             Secured Term      2008 Secured      Loan  Covenant  Term Loan  Covenant Unencumbered Pool Leverage(1)  61.2%  ≤ 62.5%  —   — UnencumberedPool Debt Service Coverage Ratio(1),(2)  2.9x  ≥ 1.75x  —   — Maximum Consolidated Total Indebtedness  51.3%  ≤ 62.5%  49.1%  ≤ 60%Minimum Tangible Net Worth $731,189  $601,477  $800,802  $601,477 Fixed Charge Coverage Ratio  2.04x  ≥ 1.50x  2.04x  ≥ 1.50xMaximum Dividend Payout Ratio  92.2%  ≤ 95%  92.2%  ≤ 95%Maximum Secured Debt  30.1%  ≤ 40%  28.7%  ≤ 40%    (1) Covenant does not apply to the Company’s secured term loans.