Annual report pursuant to Section 13 and 15(d)

Properties, net

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Properties, net
 12 Months Ended
Dec. 31, 2011
Properties, net  
Properties, net

5. Properties, net

        Operating properties, net consisted of the following (in thousands):

 
   December 31,  
 
   2011   2010  

Land

   $ 472,483   $ 501,210  

Buildings and improvements

     2,801,252     2,804,595  

Less: accumulated depreciation

     (559,679 )   (503,032 )
           

Operating properties, net

   $ 2,714,056   $ 2,802,773  
           

        Projects we had in development or held for future development consisted of the following (in thousands):

 
   December 31,  
 
   2011   2010  

Land

   $ 229,833   $ 256,487  

Construction in progress, excluding land

     409,086     386,195  
           

Projects in development or held for future development

   $ 638,919   $ 642,682  
           

Strategic Reallocation Plan and Impairment Losses

        In April 2011, we completed a review of our portfolio and identified a number of properties that are no longer closely aligned with our strategy, and our Board of Trustees approved a plan by Management to dispose of some of these properties (the "Strategic Reallocation Plan"). In December 2011, we identified additional properties for disposal, and our Board of Trustees approved a plan by management to increase the scope of the Strategic Reallocation Plan to include the disposition of additional properties. We determined that the carrying amounts of certain of the properties included in the Strategic Reallocation Plan (the "Impaired Properties") will not likely be recovered from the cash flows from the operations and sales of such properties over the shorter holding periods. Accordingly, we recognized aggregate non-cash impairment losses in 2011 of $122.5 million (including $23.3 million classified as discontinued operations and excluding $8.7 million in related income tax benefit) for the amounts by which the carrying values of the Impaired Properties exceeded their respective estimated fair values.

        We estimate that the aggregate fair value of the land and 83 operating properties included in the Strategic Reallocation Plan totaled $562 million at December 31, 2011 and that net proceeds from the plan's execution after the repayment of debt secured by the properties will approximate $441 million. We expect to complete the operating property dispositions by the end of 2013 and use the proceeds to invest in properties that will serve customers in the United States Government, defense information technology and related data sectors, to repay borrowings on our Revolving Credit Facility and for general corporate purposes. We completed the sale of the following properties under the Strategic Reallocation Plan in 2011 (dollars in thousands):

Project Name
  Location   Date of
Sale 		  Number
of
Buildings 		  Total
Rentable
Square Feet 		  Sale Price   Gain on
Sale 		 

1344 & 1348 Ashton Road and 1350 Dorsey Road

   Hanover, Maryland   5/24/2011     3     39,000   $ 3,800   $ 150  

216 Schilling Circle

   Hunt Valley, Maryland   8/23/2011     1     36,000     4,700     175  

Towson Portfolio

   Towson, Maryland   9/29/2011     4     179,000     16,000     1,134  

11011 McCormick Road

   Hunt Valley, Maryland   11/1/2011     1     57,000     3,450     822  

10001 Franklin Square Drive

   White Marsh, Maryland   12/13/2011     1     218,000     16,250     305  

Rutherford Business Center Portfolio

   Woodlawn, Maryland   12/15/2011     13     365,000     32,460     2,221  
                           

 

             23     894,000   $ 76,660   $ 4,807  
                           

        On February 15 and 17, 2011, the United States Army (the "Army") provided us disclosures regarding the past testing and use of tactical defoliants/herbicides at our property in Cascade, Maryland that was formerly an Army base known as Fort Ritchie ("Fort Ritchie"). Upon receipt of these disclosures, we commenced a review of our development plans and prospects for the property. We believe that these disclosures by the Army are likely to cause further delays in the resolution of certain existing litigation related to the property, and that they also increase the level of uncertainty as to our ultimate development rights at the property and future residential and commercial demand for the property. We analyzed various possible outcomes and resulting cash flows expected from the operations and ultimate disposition of the property. After determining that the carrying amount of the property will not likely be recovered from those cash flows, we recognized a non-cash impairment loss of $27.7 million in March 2011 for the amount by which the carrying value of the property exceeded its estimated fair value.

        In 2011, we also recognized additional impairment losses of $803,000 on goodwill associated with operating properties.

        The table below sets forth the impairment losses recognized in 2011 by period of recognition and by property classification (in thousands):

 
   Three Months Ended  
 
   3/31/2011   6/30/2011   12/31/2011   Total  

Non-operating properties

   $ 27,742   $ 13,574   $ 39,193   $ 80,509  

Operating properties

     —     31,031     39,481     70,512  
                   

Total

   $ 27,742   $ 44,605   $ 78,674   $ 151,021  
                   

2011 Acquisition

        On August 9, 2011, we acquired 310 The Bridge Street, a 138,000 square foot office property in Huntsville, Alabama that was 100% leased, for $33.4 million. The table below sets forth the allocation of the acquisition costs of this property (in thousands):

Land, operating properties

   $ 261  

Building and improvements

     26,577  

Intangible assets on real estate acquisitions

     6,575  
       

Total assets

   $ 33,413  
       

        Intangible assets recorded in connection with the above acquisitions included the following (dollars in thousands):

 
    
   Weighted
Average
Amortization
Period
(in Years) 		 

Tenant relationship value

   $ 3,187     8  

In-place lease value

     2,904     3  

Above-market leases

     484     3  
             

 

   $ 6,575     6  
             

        We expensed $156,000 in 2011 in connection with acquisitions of operating properties that are included in business development expenses on our consolidated statements of operations.

2011 Construction Activities

        During 2011, we placed into service an aggregate of 566,000 square feet in seven newly constructed office properties, including three in the Baltimore/Washington Corridor, two in Greater Baltimore, one in San Antonio and one in St. Mary's County. As of December 31, 2011, we had construction underway on six office properties that we estimate will total 789,000 square feet upon completion, including three in the Baltimore/Washington Corridor, one in Greater Baltimore, one in Northern Virginia and one in Huntsville, Alabama, and redevelopment underway on one office property in Greater Philadelphia that we estimate will total 113,000 square feet upon completion.

2010 Acquisitions

        Our acquisitions in 2010 included:

  • •
    1550 Westbranch Drive, a 152,000 square foot office property in McLean, Virginia that was 100% leased, for $40.0 million on June 28, 2010;

    •
    9651 Hornbaker Road, a 233,000 square foot wholesale data center known as Power Loft @ Innovation in Manassas, Virginia, for $115.5 million on September 14, 2010. Rents for this property are based on the amount of megawatts of power made available for the exclusive use of tenants in the property; we refer to this power as critical load. This property, the shell of which was completed in early 2010, was 17% leased on the date of acquisition to two tenants that have a combined initial critical load of three megawatts and further expansion rights of up to a combined five megawatts. We expect to complete the development of the property to an initial stabilization critical load of 18 megawatts for additional development costs of approximately $160.0 million, of which $82.3 million was incurred through December 31, 2011;

    •
    two office properties totaling 362,000 square feet at 1201 M Street SE and 1220 12th Street SE (known as Maritime Plaza I and II) in Washington, DC that were 100% leased for $122.1 million on September 28, 2010. The buildings are subject to ground leases that expire in 2099 and 2100. In connection with this acquisition, we assumed a $70.1 million mortgage loan having a fair value at assumption of $73.3 million with a stated fixed interest rate of 5.35% (effective interest rate of 3.95%) that matures in March 2014; and

    •
    3120 Fairview Park Drive, a 183,000 square foot, shell-complete office property in Falls Church, Virginia for $43.0 million on November 23, 2010.

        The table below sets forth the allocation of the aggregate acquisition costs of these properties (in thousands):

Land, operating properties

   $ 13,265  

Land, development

     5,545  

Building and improvements

     173,589  

Construction in progress

     85,525  

Intangible assets on real estate acquisitions

     42,896  
       

Total assets

     320,820  

Below-market leases

     (231 )
       

Total acquisition cost

   $ 320,589  
       

        Intangible assets recorded in connection with the above acquisitions included the following (dollars in thousands):

 
    
   Weighted
Average
Amortization
Period (in Years) 		 

In-place lease value

   $ 21,616     4  

Tenant relationship value

     14,450     10  

Above-market cost arrangements

     6,193     40  

Above-market leases

     637     2  
             

 

   $ 42,896     11  
             

        We expensed $3.4 million in 2010 in connection with acquisitions of operating properties that are included in business development expenses on our consolidated statements of operations.

2010 Construction Activities

        During 2010, we placed into service an aggregate of 816,000 square feet in nine newly constructed office properties, including three in the Baltimore/Washington Corridor, two in greater Baltimore, two in San Antonio and two in Colorado Springs.