##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the quarterly period ended September 30, 2005
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the transition period from _________to _________.
 Commission File Number 1-31824
 FIRST POTOMAC REALTY TRUST
  MARYLAND
(State or other jurisdiction of
incorporation or organization)
    
    37-1470730
(I.R.S. Employer
Identification No.)
 7600 Wisconsin Avenue, 11 th Floor, Bethesda, MD 20814
 (301) 986-9200
 þ o
 þ o
 o o




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##### 



FIRST POTOMAC REALTY TRUST
FORM 10-Q
 INDEX
 PagePart I: Financial InformationItem 1. Financial StatementsCondensed consolidated balance sheets as of September 30, 2005 (unaudited) and December 31, 2004
    
    
    3Condensed consolidated statements of operations (unaudited) for the three and nine months ended September 30,
2005 and 2004
    
    
    4Condensed consolidated statements of cash flows (unaudited) for the nine months ended September 30, 2005 and 2004
    
    
    5Notes to condensed consolidated financial statements (unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25Part II: Other InformationItem 6. Exhibits and Reports on Form 8-K
    
    
    26Signatures
 2




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##### 



FIRST POTOMAC REALTY TRUST
 September 30, 2005(Unaudited)
    
    
    December 31, 2004Assets:Rental property, net
    
    $
    582,202,626
    
    
    $
    463,936,562Intangible assets, net
    
    
    26,556,614
    
    
    
    26,008,351Cash and cash equivalents
    
    
    3,940,751
    
    
    
    2,532,269Escrows and reserves
    
    
    8,131,368
    
    
    
    6,301,465Accounts and other receivables, net of
allowance for doubtful accounts of $423,146
and $147,649, respectively
    
    
    3,904,818
    
    
    
    2,767,879Accrued straight-line rents, net of
allowance for doubtful accounts of $26,926
and $18,209 respectively
    
    
    3,288,353
    
    
    
    2,309,576Deferred costs, net
    
    
    5,781,966
    
    
    
    4,196,229Prepaid expenses and other assets
    
    
    5,716,248
    
    
    
    2,023,823Total assets
    
    $
    639,522,744
    
    
    $
    510,076,154Liabilities:Mortgage loans
    
    $
    347,043,142
    
    
    $
    259,039,281Credit facility
    
    
    43,000,000
    
    
    
    39,679,912Accounts payable and accrued expenses
    
    
    4,549,254
    
    
    
    4,058,025Accrued interest
    
    
    1,611,766
    
    
    
    799,974Rents received in advance
    
    
    2,487,391
    
    
    
    1,744,022Tenant security deposits
    
    
    3,481,918
    
    
    
    2,804,287Deferred market rent, net
    
    
    6,117,137
    
    
    
    5,266,728Total liabilities
    
    
    408,290,608
    
    
    
    313,392,229Minority interests
    
    
    14,525,472
    
    
    
    18,991,052Shareholders equity:Common stock, $0.001 par value, 100,000,000
shares authorized: 16,536,755 and 14,154,000
shares issued and outstanding, respectively
    
    
    16,537
    
    
    
    14,154Additional paid-in capital
    
    
    258,152,870
    
    
    
    209,268,156Deficit
    
    
    (41,462,743
    )
    
    
    (31,589,437
    )Total shareholders equity
    
    
    216,706,664
    
    
    
    177,692,873Total liabilities and shareholders equity
    
    $
    639,522,744
    
    
    $
    510,076,154
  3




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##### 



FIRST POTOMAC REALTY TRUST
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:Rental
    
    $
    16,556,995
    
    
    $
    10,556,176
    
    
    $
    46,551,037
    
    
    $
    24,240,006Tenant reimbursements and other
    
    
    4,155,842
    
    
    
    1,626,363
    
    
    
    8,621,962
    
    
    
    3,665,784Total revenue
    
    
    20,712,837
    
    
    
    12,182,539
    
    
    
    55,172,999
    
    
    
    27,905,790Operating expenses:Property operating
    
    
    3,288,410
    
    
    
    2,191,897
    
    
    
    9,443,162
    
    
    
    5,034,896Real estate taxes and insurance
    
    
    1,640,483
    
    
    
    1,122,437
    
    
    
    4,558,974
    
    
    
    2,585,263General and administrative
    
    
    2,053,561
    
    
    
    1,184,121
    
    
    
    5,691,135
    
    
    
    3,287,779Depreciation and amortization
    
    
    6,612,825
    
    
    
    3,811,330
    
    
    
    17,517,539
    
    
    
    8,961,169Total operating expenses
    
    
    13,595,279
    
    
    
    8,309,785
    
    
    
    37,210,810
    
    
    
    19,869,107Operating income
    
    
    7,117,558
    
    
    
    3,872,754
    
    
    
    17,962,189
    
    
    
    8,036,683Other expenses (income):Interest expense
    
    
    5,493,088
    
    
    
    3,327,609
    
    
    
    14,682,081
    
    
    
    7,844,370Interest and other income
    
    
    (41,136
    )
    
    
    (107,749
    )
    
    
    (78,321
    )
    
    
    (171,880
    )Total other expenses
    
    
    5,451,952
    
    
    
    3,219,860
    
    
    
    14,603,760
    
    
    
    7,672,490Income from continuing operations
before minority interests and
discontinued operations
    
    
    1,665,606
    
    
    
    652,894
    
    
    
    3,358,429
    
    
    
    364,193Minority interests
    
    
    (104,121
    )
    
    
    (60,424
    )
    
    
    (232,286
    )
    
    
    (24,140
    )Income from continuing operations
    
    
    1,561,485
    
    
    
    592,470
    
    
    
    3,126,143
    
    
    
    340,053Income from discontinued operations
    
    
    
    
    
    
    64,691
    
    
    
    
    
    
    
    88,632Net income
    
    $
    1,561,485
    
    
    $
    657,161
    
    
    $
    3,126,143
    
    
    $
    428,685Weighted average common shares
outstanding  basic
    
    
    16,539,621
    
    
    
    14,154,000
    
    
    
    15,747,688
    
    
    
    10,648,599Weighted average common shares
outstanding  diluted
    
    
    16,779,741
    
    
    
    14,283,720
    
    
    
    15,952,463
    
    
    
    10,768,305Basic and diluted net income per share:Income from continuing operations
    
    $
    0.09
    
    
    $
    0.04
    
    
    $
    0.20
    
    
    $
    0.03Income from
discontinued operations
    
    
    
    
    
    
    0.01
    
    
    
    
    
    
    
    0.01Basic and diluted net income per share
    
    $
    0.09
    
    
    $
    0.05
    
    
    $
    0.20
    
    
    $
    0.04
  4




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##### 



FIRST POTOMAC REALTY TRUST
 Nine Months Ended September 30,2005
    
    
    2004Cash flows from operating activitiesNet income
    
    $
    3,126,143
    
    
    $
    428,685Adjustments to reconcile net income to net
cash provided by operating activities:Discontinued operations:Depreciation and amortization
    
    
    
    
    
    
    180,240Minority interests
    
    
    
    
    
    
    10,234Depreciation and amortization
    
    
    17,587,720
    
    
    
    8,852,656Bad debt expense
    
    
    381,926
    
    
    
    291,789Stock based compensation
    
    
    338,952
    
    
    
    82,503Amortization of deferred market rent
    
    
    (883,929
    )
    
    
    (356,992
    )Amortization of deferred financing costs
    
    
    669,388
    
    
    
    754,986Amortization of rent abatement
    
    
    91,740
    
    
    
    52,712Minority interests
    
    
    232,286
    
    
    
    24,140Changes in assets and liabilities:Escrows and reserves
    
    
    (1,829,903
    )
    
    
    (1,781,342
    )Accounts and other receivables
    
    
    (1,488,713
    )
    
    
    (1,103,105
    )Accrued straight-line rents
    
    
    (1,008,929
    )
    
    
    (425,267
    )Prepaid expenses and other assets
    
    
    (1,732,606
    )
    
    
    (1,614,742
    )Tenant security deposits
    
    
    677,631
    
    
    
    1,441,028Accounts payable and accrued expenses
    
    
    448,577
    
    
    
    1,468,031Accrued interest
    
    
    811,792
    
    
    
    550,679Rent received in advance
    
    
    743,369
    
    
    
    707,812Deferred costs
    
    
    (805,851
    )
    
    
    (550,638
    )Total adjustments
    
    
    14,233,450
    
    
    
    8,584,724Net cash provided by operating activities
    
    
    17,359,593
    
    
    
    9,013,409Cash flows from investing activitiesPurchase deposit on future acquisitions
    
    
    (2,030,000
    )
    
    
    (350,000
    )Additions to rental property
    
    
    (3,192,321
    )
    
    
    (1,603,947
    )Acquisition of rental property and associated
intangible assets
    
    
    (78,493,675
    )
    
    
    (79,473,616
    )Net cash used in investing activities
    
    
    (83,715,996
    )
    
    
    (81,427,563
    )Cash flows from financing activitiesFinancing costs
    
    
    (1,863,469
    )
    
    
    (808,687
    )Repayments of debt
    
    
    (115,065,128
    )
    
    
    (26,393,921
    )Dividends to shareholders
    
    
    (12,999,448
    )
    
    
    (5,562,539
    )Distributions to minority interests
    
    
    (1,033,706
    )
    
    
    (711,717
    )Proceeds from debt
    
    
    153,800,000
    
    
    
    18,000,000Proceeds from issuance of shares, net
    
    
    44,923,363
    
    
    
    91,789,543Stock option exercises
    
    
    3,273
    
    
    
    Net cash provided by financing activities
    
    
    67,764,885
    
    
    
    76,312,679Net increase in cash and cash equivalents
    
    
    1,408,482
    
    
    
    3,898,525Cash and cash equivalents, beginning of period
    
    
    2,532,269
    
    
    
    16,307,508Cash and cash equivalents, end of period
    
    $
    3,940,751
    
    
    $
    20,206,033
  5




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##### 



FIRST POTOMAC REALTY TRUST
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (1) Summary of Significant Accounting Policies
 (a) Description of Business
   (b) Principles of Consolidation
    (c) Revenue Recognition
   6




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##### 



(d) Rental Property and Intangible Assets
      (e) Income Taxes
  7




---



##### 



(f) Minority Interests
  (g) Income Per Share
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Numerator for basic and diluted per share
calculations:Income from continuing operations
    
    $
    1,561,485
    
    
    $
    592,470
    
    
    $
    3,126,143
    
    
    $
    340,053Income from discontinued operations
    
    
    
    
    
    
    64,691
    
    
    
    
    
    
    
    88,632Net income
    
    $
    1,561,485
    
    
    $
    657,161
    
    
    $
    3,126,143
    
    
    $
    428,685Denominator for basic and diluted per share
calculations:Weighted average shares outstanding  basic:
    
    
    16,539,621
    
    
    
    14,154,000
    
    
    
    15,747,688
    
    
    
    10,648,599Effect of dilutive shares:Employee stock option awards
    
    
    240,120
    
    
    
    129,720
    
    
    
    204,775
    
    
    
    119,706Denominator for diluted per share amounts
    
    
    16,779,741
    
    
    
    14,283,720
    
    
    
    15,952,463
    
    
    
    10,768,305Basic and diluted net income per share:Continuing operations
    
    $
    0.09
    
    
    $
    0.04
    
    
    $
    0.20
    
    
    $
    0.03Discontinued operations
    
    
    
    
    
    
    0.01
    
    
    
    
    
    
    
    0.01Net income
    
    $
    0.09
    
    
    $
    0.05
    
    
    $
    0.20
    
    
    $
    0.04
 (h) Stock Based Compensation
  8




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##### 



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2005Net income, as reported
    
    $
    1,561,485
    
    
    $
    657,161
    
    
    $
    3,126,143
    
    
    $
    428,685Add: total stock-based compensation
included in reported net income, net of
minority interests
    
    
    156,161
    
    
    
    25,031
    
    
    
    315,416
    
    
    
    72,377Deduct: total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of minority interests
    
    
    (220,874
    )
    
    
    (78,124
    )
    
    
    (507,773
    )
    
    
    (221,734
    )Pro forma net income
    
    $
    1,496,772
    
    
    $
    604,068
    
    
    $
    2,933,786
    
    
    $
    279,328Net income
per share, as reported 
basic and diluted
    
    $
    0.09
    
    
    $
    0.05
    
    
    $
    0.20
    
    
    $
    0.04Pro forma
net income per share  basic
    
    $
    0.09
    
    
    $
    0.04
    
    
    $
    0.19
    
    
    $
    0.03Pro forma
net income per share  diluted
    
    $
    0.09
    
    
    $
    0.04
    
    
    $
    0.18
    
    
    $
    0.03
 (i) Derivatives
  (j) Use of Estimates
  9




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##### 



(k) Application of New Accounting Standards
   (l) Reclassifications
  (2) Rental Property
  September 30, 2005
    
    
    December 31, 2004Land
    
    $
    131,804,311
    
    
    $
    109,757,972Buildings and improvements
    
    
    462,668,778
    
    
    
    361,025,011Tenant improvements
    
    
    15,689,128
    
    
    
    10,542,159Furniture, fixtures and equipment
    
    
    9,769,503
    
    
    
    9,705,397619,931,720
    
    
    
    491,030,539Less: accumulated depreciation
    
    
    (37,729,094
    )
    
    
    (27,093,977
    )$
    582,202,626
    
    
    $
    463,936,562
     10




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##### 



Acquired tenant
    
    
    Building and
    
    
    In-place leases
    
    
    Above and belowLand
    
    
    improvements
    
    
    improvements
    
    
    intangible
    
    
    market leases, net
    
    
    TotalReston Business Campus
    
    $
    1,996,358
    
    
    $
    383,612
    
    
    $
    8,371,884
    
    
    $
    1,006,761
    
    
    $
    (15,330
    )
    
    $
    11,743,2851400 Cavalier Boulevard
    
    
    1,387,481
    
    
    
    24,475
    
    
    
    11,323,652
    
    
    
    824,436
    
    
    
    (253,297
    )
    
    
    13,306,747Enterprise Center
    
    
    3,727,580
    
    
    
    197,726
    
    
    
    27,067,104
    
    
    
    1,339,867
    
    
    
    (150,975
    )
    
    
    32,181,302Glenn Dale Business
Center
    
    
    3,369,189
    
    
    
    206,210
    
    
    
    14,288,458
    
    
    
    860,410
    
    
    
    (328,948
    )
    
    
    18,395,319Gateway Centre Manassas
    
    
    3,014,700
    
    
    
    702,392
    
    
    
    6,028,527
    
    
    
    736,236
    
    
    
    76,310
    
    
    
    10,558,1651434 Crossways
Boulevard
    
    
    4,447,403
    
    
    
    2,211,238
    
    
    
    22,509,839
    
    
    
    2,022,182
    
    
    
    (923,422
    )
    
    
    30,267,2402000 Gateway Boulevard
    
    
    4,087,816
    
    
    
    
    
    
    
    10,542,878
    
    
    
    
    
    
    
    
    
    
    
    14,630,694Total
    
    $
    22,030,527
    
    
    $
    3,725,653
    
    
    $
    100,132,342
    
    
    $
    6,789,892
    
    
    $
    (1,595,662
    )
    
    $
    131,082,752
 Pro Forma Financial Information
   Three Months Ended
    
    Nine Months EndedSeptember 30, 2005
    
    September 30, 2004
    
    September 30, 2005
    
    September 30, 2004Pro forma total revenues
    
    $
    21,220,859
    
    
    $
    19,639,258
    
    
    $
    60,467,680
    
    
    $
    58,121,559Pro forma net income
    
    
    1,305,305
    
    
    
    471,202
    
    
    
    3,931,208
    
    
    
    970,193Pro forma diluted net
income per share
    
    $
    0.08
    
    
    $
    0.03
    
    
    $
    0.25
    
    
    $
    .09
 (3) Discontinued Operations
  11




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##### 



Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2004
    
    
    September 30, 2004Revenue
    
    $
    238,590
    
    
    $
    627,072Property expenses
    
    
    116,859
    
    
    
    347,966Depreciation and amortization
    
    
    50,658
    
    
    
    180,240Income from discontinued operations before
minority interests
    
    
    71,073
    
    
    
    98,866Minority interests in discontinued operations
    
    
    6,382
    
    
    
    10,234Income from discontinued operations
    
    $
    64,691
    
    
    $
    88,632
 (4) Borrowings
  September 30,
    
    
    December 31,2005
    
    
    2004Mortgage debt with interest rates
ranging from 5.1% to 8.5% maturing
at various dates through February
2013
    
    $
    347,043,142
    
    
    $
    259,039,281Credit facility with a variable rate
    
    
    43,000,000
    
    
    
    39,679,912$
    390,043,142
    
    
    $
    298,719,193
 (a) Credit Facility
    12




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##### 



(b) Mortgage Debt
   September 30,
    
    
    December 31,2005
    
    
    2004Van Buren Business Park, 6600 Business Parkway, 13129 Airpark Road and Plaza 500, 7.26%,
matures December 2007.
    
    $
    38,276,721
    
    
    $
    38,719,5874200 Tech Court, 8.07%, matures October 2009.
    
    
    1,803,126
    
    
    
    1,818,1784212 Tech Court, 8.53%, matures June 2010.
    
    
    1,752,942
    
    
    
    1,765,342Crossways Commerce Center, 6.70%, matures October 2012.
    
    
    26,133,906
    
    
    
    26,338,201Newington Business Park Center, 6.70%, matures October 2012.
    
    
    16,485,209
    
    
    
    16,614,078Interstate Plaza, 7.45%, effective interest rate of 5.30%, matures January 2007.
    
    
    8,611,637
    
    
    
    8,795,754Herndon Corporate Center, 5.11%, effective interest rate of 5.66%, matures April 2008.
    
    
    8,790,924
    
    
    
    8,877,703Aquia Commerce Center, 6.50%, effective interest rate of 6.50%, matures February 2013.
    
    
    954,339
    
    
    
    1,022,811Suburban Maryland Portfolio, 6.71%, effective interest rate of 5.54%, matures September 2008.
    
    
    78,550,883
    
    
    
    80,129,447Norfolk Commerce Park II, 6.90%, effective interest rate of 5.28%, matures August 2008.
    
    
    7,759,867
    
    
    
    7,804,6344612 Navistar Drive, 7.48%, effective interest rate of 5.20%, matures July 2011.
    
    
    14,468,258
    
    
    
    14,753,542Campus at Metro Park North, 7.11%, effective interest rate of 5.25%, matures February 2012.
    
    
    26,424,687
    
    
    
    26,900,004Alexandria Corporate Park, Greenbrier Technology Center II, Norfolk Business Center, Rumsey
Center, and Snowden Center, 5.19%, matures July 2015.
    
    
    65,000,000
    
    
    
    Greenbrier Technology Center II and Norfolk Business Center, floating rate mortgage of LIBOR +
2.45%, paid off in July 2005.
    
    
    
    
    
    
    10,500,000Rumsey Center and Snowden Center, floating rate mortgage of LIBOR + 2.35%, paid off in July 2005.
    
    
    
    
    
    
    15,000,000Enterprise Center, 8.03%, effective interest rate of 5.20%, matures December 2010.
    
    
    20,164,207
    
    
    
    Glenn Dale Business Center, 7.83% effective interest rate of 5.13%, matures May 2009.
    
    
    9,202,905
    
    
    
    Gateway Centre Manassas, 7.35% effective interest rate of 5.88%, matures November 2016.
    
    
    1,936,090
    
    
    
    1434 Crossways Blvd, 6.25% and 7.05%, effective interest rate of 5.38%, matures August 2012.
    
    
    20,727,441
    
    
    
    $
    347,043,142
    
    
    $
    259,039,281
  13




---



##### 



(5) Segment Information
  (6) Related Party Transaction
  (7) Shareholders Equity
   (8) Supplemental Disclosure of Cash Flow Information
  2005
    
    2004Cash paid for interest on indebtedness
    
    $
    14,655,893
    
    
    $
    6,649,356Issuance of common share to trustees
    
    $
    56,348
    
    
    $
    Non-cash financing activitiesDebt assumed in connection with
acquisitions of real estate
    
    $
    52,589,077
    
    
    $
    91,037,733Conversion of operating partnership units
    
    $
    3,664,162
    
    
    $
    
 14




---



##### 



(9) Subsequent Events
     15




---



##### 



Executive Summary
   Significant Third Quarter Transactions
 
    
    Acquired the following properties:
 
    
    Gateway Centre, a three-building, 99,632-square-foot multi-tenanted property in
Manassas, Virginia, for $10.3 million. The acquisition was financed, in part, by the
assumption of a $1.8 million mortgage loan, fair valued at $2.0 million. The balance
of the acquisition cost was funded with available cash;
    
    1434 Crossways Boulevard, a two-building, 220,501-square-foot multi-tenanted
flex/office property in Chesapeake, Virginia, for $28.0 million. The acquisition was
financed, in part, by the assumption of two separate mortgage loans of $8.7 and $10.0
million, fair valued at $20.7 million in the aggregate. The balance of the acquisition
cost was funded with available cash;
    
    2000 Gateway Boulevard, a 421,100-square-foot warehouse/flex property in Hampton,
Virginia, for $14.0 million. The acquisition cost was financed with borrowings under
the Companys credit facility;
 16




---



##### 



Other Activity
 
    
    Closed on a $100.0 million fixed-rate secured financing with Jackson National Life;
with $65.0 million funded in July 2005 and the remainder to be funded in fourth quarter
2005; and
    
    Recognized $1.2 million in termination fee income during the third quarter 2005.
    
    Recognized $0.3 million of non-recurring charges including $0.1 million due to the
write-off of unamortized debt costs associated with mortgage refinancings and $0.2
million of severance-related charges.
 Critical Accounting Policies and Estimates
   Revenue Recognition
   Investments in Real Estate and Real Estate Entities
   Buildings and improvements
    
    
    
    39 yearsTenant improvements
    
    
    
    Shorter of the useful lives or the terms of the related leasesFurniture, fixtures, and equipment
    
    
    
    5 to 15 years
  17




---



##### 



Purchase Accounting
   Results of Operations
 Comparison of the Three and Nine Months Ended September 30, 2005 to the Three and Nine Months
Ended September 30, 2004
  2004 Acquisitions
  18




---



##### 



2005 Acquisitions
   Total Revenues
  Three Months
    
    Nine MonthsThree Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent2005
    
    2004
    
    2005
    
    2004
    
    Increase
    
    Change
    
    Increase
    
    ChangeRental
    
    $
    16,556,995
    
    
    $
    10,556,176
    
    
    $
    46,551,037
    
    
    $
    24,240,006
    
    
    $
    6,000,819
    
    
    
    57
    %
    
    $
    22,311,031
    
    
    
    92
    %Tenant reimbursements & other
    
    
    4,155,842
    
    
    
    1,626,363
    
    
    
    8,621,962
    
    
    
    3,665,784
    
    
    
    2,529,479
    
    
    
    156
    %
    
    
    4,956,178
    
    
    
    135
    %
 Rental Revenues
   Tenant Reimbursement and Other Revenues
  19




---



##### 



Total Expenses
 Property Operating Expenses
  Three Months
    
    Nine MonthsThree Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent2005
    
    2004
    
    2005
    
    2004
    
    Increase
    
    Change
    
    Increase
    
    ChangeProperty operating expenses
    
    $
    3,288,410
    
    
    $
    2,191,897
    
    
    $
    9,443,162
    
    
    $
    5,034,896
    
    
    $
    1,096,513
    
    
    
    50
    %
    
    $
    4,408,266
    
    
    
    88
    %Real estate taxes & insurance
    
    
    1,640,483
    
    
    
    1,122,437
    
    
    
    4,558,974
    
    
    
    2,585,263
    
    
    
    518,046
    
    
    
    46
    %
    
    
    1,973,711
    
    
    
    76
    %
 Property Operating Expenses.
 Real Estate Taxes and Insurance.
 Other Operating Expenses
  Three Months
    
    Nine MonthsThree Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent2005
    
    2004
    
    2005
    
    2004
    
    Increase
    
    Change
    
    Increase
    
    Change$2,053,561
    
    $
    1,184,121
    
    
    $
    5,691,135
    
    
    $
    3,287,779
    
    
    $
    869,440
    
    
    
    73
    %
    
    $
    2,403,356
    
    
    
    73
    %
   Three Months
    
    Nine MonthsThree Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent2005
    
    2004
    
    2005
    
    2004
    
    Increase
    
    Change
    
    Increase
    
    Change$6,612,825
    
    $
    3,811,330
    
    
    $
    17,517,539
    
    
    $
    8,961,169
    
    
    $
    2,801,495
    
    
    
    74
    %
    
    $
    8,556,370
    
    
    
    95
    %
  20




---



##### 



Interest Expense
  Three Months
    
    Nine MonthsThree Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent2005
    
    2004
    
    2005
    
    2004
    
    Increase
    
    Change
    
    Increase
    
    Change$5,493,088
    
    $
    3,327,609
    
    
    $
    14,682,081
    
    
    $
    7,844,370
    
    
    $
    2,165,479
    
    
    
    65
    %
    
    $
    6,837,711
    
    
    
    87
    %
  Minority Interests
  Three Months
    
    Nine MonthsThree Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent2005
    
    2004
    
    2005
    
    2004
    
    Change
    
    Change
    
    Change
    
    Change$(104,121)
    
    
    ($60,424
    )
    
    $
    (232,286
    )
    
    
    ($24,140
    )
    
    $
    (43,697
    )
    
    
    72
    %
    
    $
    (208,146
    )
    
    
    862
    %
  Liquidity and Capital Resources
    21




---



##### 



Cash Flows
  Nine Months Ended September 30,2005
    
    
    2004
    
    
    ChangeCash and cash equivalents
    
    $
    3,940,751
    
    
    $
    20,206,033
    
    
    $
    (16,265,282
    )Cash provided by operating activities
    
    
    17,359,593
    
    
    
    9,013,409
    
    
    
    8,346,184Cash used in investing activities
    
    
    (83,715,996
    )
    
    
    (81,427,563
    )
    
    
    (2,288,433
    )Cash provided by financing activities
    
    
    67,764,885
    
    
    
    76,312,679
    
    
    
    (8,547,794
    )
  22




---



##### 



Dividends and Distributions
   Funds From Operations
    23




---



##### 



Funds From Operations
    
    
    Funds From OperationsThree Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
applicable to common shareholders
    
    $
    1,561,485
    
    
    $
    657,161
    
    
    $
    3,126,143
    
    
    $
    428,685Add: Real estate
depreciation and
amortization
    
    
    6,612,825
    
    
    
    3,811,330
    
    
    
    17,517,539
    
    
    
    8,961,169Discontinued
operations
depreciation and
amortization
    
    
    
    
    
    
    50,658
    
    
    
    
    
    
    
    180,240Minority interests
    
    
    104,121
    
    
    
    66,806
    
    
    
    232,286
    
    
    
    34,374FFO available to common
shareholders and
unitholders
    
    $
    8,278,431
    
    
    $
    4,585,955
    
    
    $
    20,875,968
    
    
    $
    9,604,468Weighted
average number of diluted common shares and partnership units
outstanding
    
    
    17,895,101
    
    
    
    15,680,243
    
    
    
    17,067,823
    
    
    
    12,164,828
 Forward Looking Statements
  24




---



##### 



25




---



##### 



PART II: OTHER INFORMATION
 Item 6. Exhibits
 No.
    
    Description3.1
    
    Amended and Restated Declaration of Trust of the Registrant
(incorporated by reference to Exhibit 3.1 to the Registrants
Registration Statement on Form S-11 (Registration No. 333-107172).3.2
    
    Amended and Restated Bylaws of the Registrant (incorporated by
reference to Exhibit 3.2 to the Registrants Registration Statement
on Form S-11 (Registration No. 333-107172).4.1
    
    Amended and Restated Agreement of Limited Partnership of First
Potomac Realty Investment, L.P. dated September 15, 2003
(incorporated by reference to Exhibit 3.3 to the Registrants
Registration Statement on Form S-11 (Registration No. 333-107172).10.1
    
    Amendment No. 1 to the Registrants 2003 Equity Compensation Plan
(incorporated by reference to Exhibit 10.1 to the Registrants
Current Report on Form 8-K dated May 20, 2005 and filed with the SEC
on October 20, 2005).10.2
    
    Loan Agreement by and between Jackson National Life Insurance
Company, as Lender and Rumsey First LLC, Snowden First LLC, GTC II
First LLC, Norfolk First, LLC, Bren Mar, LLC, Plaza 500, LLC and FP
Van Buren, LLC, all Delaware limited liability companies, as
Borrowers (incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K dated and filed with the SEC on July 22,
2005).31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a 
14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a 
14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (This exhibit shall not be deemed filed
for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, or otherwise subject to the liability of that section.
Further, this exhibit shall not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended.)32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (This exhibit shall not be deemed filed
for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, or otherwise subject to the liability of that section.
Further, this exhibit shall not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended.)
 26




---



##### 



FIRST POTOMAC REALTY TRUSTDate: November 9, 2005
    
    /s/ Douglas J. DonatelliDouglas J. DonatelliPresident and Chief Executive OfficerDate: November 9, 2005
    
    /s/ Barry H. BassBarry H. BassExecutive Vice President and Chief Financial Officer(Principal Financial Officer)
 27




---



##### 



No.
    
    Description3.1
    
    Amended and Restated Declaration of Trust of the Registrant
(incorporated by reference to Exhibit 3.1 to the Registrants
Registration Statement on Form S-11 (Registration No. 333-107172).3.2
    
    Amended and Restated Bylaws of the Registrant (incorporated by
reference to Exhibit 3.2 to the Registrants Registration Statement
on Form S-11 (Registration No. 333-107172).4.1
    
    Amended and Restated Agreement of Limited Partnership of First
Potomac Realty Investment, L.P. dated September 15, 2003
(incorporated by reference to Exhibit 3.3 to the Registrants
Registration Statement on Form S-11 (Registration No. 333.107172).10.1
    
    Amendment No. 1 to the Registrants 2003 Equity Compensation Plan
(incorporated by reference to Exhibit 10.1 to the Registrants
Current Report on Form 8-K dated May 20, 2005 and filed with the SEC
on October 20, 2005).10.2
    
    Loan Agreement by and between Jackson National Life Insurance
Company, as Lender and Rumsey First LLC, Snowden First LLC, GTC II
First LLC, Norfolk First, LLC, Bren Mar, LLC, Plaza 500, LLC and FP
Van Buren, LLC, all Delaware limited liability companies, as
Borrowers (incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K dated and filed with the SEC on July 22,
2005).31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a 
14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a 
14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (This exhibit shall not be deemed filed
for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, or otherwise subject to the liability of that section.
Further, this exhibit shall not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended.)32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (This exhibit shall not be deemed filed
for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, or otherwise subject to the liability of that section.
Further, this exhibit shall not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended.)