What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-10-27 compared with 2022-07-28 · 177 added, 186 removed, 390 unchanged (48% of the section changed)

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We are a real estate investment trust, or REIT, organized under Maryland law.

As of June 30, 2022, our wholly owned properties were comprised of 172 properties and we had noncontrolling ownership interests of 51% and 50% in two unconsolidated joint ventures that own three properties containing approximately 444,000 rentable square feet.

As of June 30, 2022, our properties are located in 32 states and the District of Columbia and contain approximately 22,491,000 rentable square feet.

As of June 30, 2022, our properties were leased to 287 different tenants with a weighted average remaining lease term (based on annualized rental income) of approximately 6.2 years.

government is our largest tenant, representing approximately 18.5% of our annualized rental income as of June 30, 2022.

The term annualized rental income as used herein is defined as the annualized contractual base rents from our tenants pursuant to our lease agreements as of June 30, 2022, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization.

The COVID-19 pandemic and the various governmental and market responses intended to contain and mitigate the spread of the virus and its detrimental public health impact have had a significant impact on the global economy, including the U.S.

Many of the restrictions that had been imposed in the United States during the pandemic have since been lifted and commercial activity in the United States generally has increasingly returned to pre-pandemic practices and operations.

However, certain market practices that have resulted from the pandemic, including increased alternative work arrangements such as work from home, are continuing to be experienced.

We are continuing to closely monitor the impact of the COVID-19 pandemic on all aspects of our business.

To date, the COVID-19 pandemic has not had a significant adverse impact on our business and we continue to believe that our financial resources, the characteristics of our portfolio, including the diversity of our tenant base, both geographically and by industry, and the financial strength and resources of our tenants, will enable us to withstand the COVID-19 pandemic.

Federal Reserve recently raised interest rates in an effort to combat high inflation, which could result in negative consequences in the U.S.

economy, and concerns about a potential recession are becoming more pronounced.

It is unclear whether the U.S.

economy will be able to withstand such challenges and continue sustained growth.

A recession could adversely affect our financial condition and that of our tenants, could adversely impact the ability of our tenants to renew our leases or pay rent to us, would impair our ability to effectively deploy our capital or realize upon investments on favorable terms and may cause the values of our properties and of our securities to decline.

We could also be affected by any overall weakening of, or disruptions in, the financial markets.

The ultimate adverse impact of the COVID-19 pandemic, including the extent to which alternative work arrangements such as work from home will be continued and what impact that may have on demand for office space at our properties, and recently rising interest rates, is highly uncertain and subject to change.

As a result, we do not yet know the full extent of potential impacts on our business and operations, our tenants’ businesses and operations or the global economy as a whole.

For more information and risks relating to the COVID-19 pandemic on us and our business, see Part I, Item 1A, “Risk Factors”, of our 2021 Annual Report.

As of September 30, 2022, our wholly owned properties were comprised of 162 properties and we had noncontrolling ownership interests of 51% and 50% in two unconsolidated joint ventures that own three properties containing approximately 444,000 rentable square feet.

As of September 30, 2022, our properties are located in 31 states and the District of Columbia and contain approximately 21,211,000 rentable square feet.

As of September 30, 2022, our properties were leased to 276 different tenants with a weighted average remaining lease term (based on annualized rental income) of approximately 6.3 years.

government is our largest tenant, representing approximately 19.1% of our annualized rental income as of September 30, 2022.

The term annualized rental income as used herein is defined as the annualized contractual base rents from our tenants pursuant to our lease agreements as of September 30, 2022, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization.

Certain changes in office space utilization following the COVID-19 pandemic, including increased remote work arrangements, continue to impact the market.

The utilization and demand for office space continues to evolve and the ultimate impact of current trends on the demands for office space at our properties remains uncertain and subject to change.

Accordingly, we do not yet know the full extent of the impacts on our or our tenants’ businesses and operations.

In response to inflationary pressures, the U.S.

Federal Reserve increased the federal funds rate by 300 basis points over five consecutive meetings from March 2022 to September 2022 and has signaled that further increases are likely to occur.

These inflationary pressures and rising interest rates in the United States and globally have given rise to increasing concerns that the U.S.

economy is now in, or may soon enter, an economic recession and they have caused disruptions in the financial markets.

Sustained inflationary pressures, increased interest rates, an economic recession or continued or intensified disruptions in the financial markets could adversely affect our financial condition and that of our tenants, could adversely impact the ability of our tenants to renew our leases or pay rent to us, would impair our ability to effectively deploy our capital or realize upon investments on favorable terms, may restrict our access to, and would likely increase our cost of capital, and may cause the values of our properties and of our securities to decline.

For more information and risks relating to the COVID-19 pandemic, inflation and changes in market interest rates and their impacts on us and our business, see Part I, Item IA, “Risk Factors”, of our 2021 Annual Report.

Property Operations

Unless otherwise noted, the data presented in this section includes properties classified as held for sale as of June 30, 2022 and excludes three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests.

information regarding our properties classified as held for sale and our two unconsolidated joint ventures, see Note 3 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Occupancy data for our properties as of June 30, 2022 and 2021 was as follows (square feet in thousands):

Unless otherwise noted, the data presented in this section includes properties classified as held for sale as of September 30, 2022 and excludes three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests.

For more information regarding our properties classified as held for sale and our two unconsolidated joint ventures, see Note 3 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Occupancy data for our properties as of September 30, 2022 and 2021 was as follows (square feet in thousands):

All Properties (1)(2)

Comparable Properties (3)

September 30,

2022 2021 2022 2021

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90.7 % 89.0 % 93.6 % 93.1 %

(1) Based on properties we owned on June 30, 2022 and 2021, respectively.

(1) Based on properties we owned on September 30, 2022 and 2021, respectively.

(2) Includes one leasable land parcel.

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(5) Percent leased includes (i) space being fitted out for tenant occupancy pursuant to our lease agreements, if any, and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants, if any, as of the measurement date.

The average effective rental rate per square foot for our properties for the three and six months ended June 30, 2022 and 2021 are as follows:

Three Months Ended June 30, Six Months Ended June 30,

The average effective rental rate per square foot for our properties for the three and nine months ended September 30, 2022 and 2021 were as follows:

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

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(1) Average effective rental rate per square foot represents annualized total rental income during the period specified divided by the average rentable square feet leased during the period specified.

(2) Based on properties we owned on June 30, 2022 and 2021, respectively.

(3) Based on properties we owned continuously since April 1, 2021 and January 1, 2021, respectively;

(2) Based on properties we owned on September 30, 2022 and 2021, respectively.

(3) Based on properties we owned continuously since July 1, 2021 and January 1, 2021, respectively;

excludes properties classified as held for sale and properties undergoing significant redevelopment, if any, and three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests.

During the three and six months ended June 30, 2022, changes in rentable square feet leased and available for lease at our properties were as follows (square feet in thousands):

Three Months Ended June 30, 2022 Six Months Ended June 30, 2022

During the three and nine months ended September 30, 2022, changes in rentable square feet leased and available for lease at our properties were as follows (square feet in thousands):

Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022

Leased Available for Lease Total Leased Available for Lease Total

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End of period 19,236 1,975 21,211 19,236 1,975 21,211

(1) Based on leases entered during the three and six months ended June 30, 2022.

(1) Based on leases entered during the three and nine months ended September 30, 2022.

(2) Rentable square feet are subject to changes when space is remeasured or reconfigured for tenants.

Leases at our properties totaling approximately 592,000 and 1,445,000 rentable square feet expired during the three and six months ended June 30, 2022, respectively.

During the three and six months ended June 30, 2022, we entered into new and renewal leases as summarized in the following tables (square feet in thousands):

Three Months Ended June 30, 2022

Leases at our properties totaling approximately 643,000 and 2,088,000 rentable square feet expired during the three and nine months ended September 30, 2022, respectively.

During the three and nine months ended September 30, 2022, we entered into new and renewal leases as summarized in the following tables (square feet in thousands):

Three Months Ended September 30, 2022

New Leases Renewals Total

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$ 15.33 $ 4.27 $ 9.92

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

New Leases Renewals Total

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(1) Includes commitments made for leasing expenditures and concessions, such as tenant improvements, leasing commissions, tenant reimbursements and free rent.

During the three and six months ended June 30, 2022, changes in effective rental rates per square foot achieved for new leases and lease renewals at our properties that commenced during the three and six months ended June 30, 2022, when compared to prior effective rental rates per square foot in effect for the same space (and excluding space acquired vacant), were as follows (square feet in thousands):

Three Months Ended June 30, 2022 Six Months Ended June 30, 2022

During the three and nine months ended September 30, 2022, changes in effective rental rates per square foot achieved for new leases and lease renewals at our properties that commenced during the three and nine months ended September 30, 2022, when compared to prior effective rental rates per square foot in effect for the same space (and excluding space acquired vacant), were as follows (square feet in thousands):

Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022

Old Effective Rent Per Square Foot (1)

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(1) Effective rental rates include contractual base rents from our tenants pursuant to our lease agreements, plus straight line rent adjustments and estimated expense reimbursements to be paid to us, and exclude lease value amortization.

During the three and six months ended June 30, 2022 and 2021, amounts capitalized at our properties for lease related costs, building improvements and development, redevelopment and other activities were as follows:

Three Months Ended June 30, Six Months Ended June 30,

During the three and nine months ended September 30, 2022 and 2021, amounts capitalized at our properties for lease related costs, building improvements and development, redevelopment and other activities were as follows:

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

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(3) Development, redevelopment and other activities generally include capital expenditure projects that reposition a property or result in new sources of revenue.

In addition to the capital expenditures described above, we contributed $1,132 and $2,202 to one of our unconsolidated joint ventures during the three and six months ended June 30, 2022, respectively.

Also, as of June 30, 2022, we have estimated unspent leasing related obligations of $130,726, of which we expect to spend $82,543 over the next 12 months.

As of June 30, 2022, we had leases at our properties totaling approximately 1,913,000 rentable square feet that were scheduled to expire through June 30, 2023.

As of July 27, 2022, we expect tenants with leases totaling approximately 817,000 rentable square feet that are scheduled to expire through June 30, 2023, to not renew their leases upon expiration and we cannot be sure as to whether other tenants will renew their leases upon expiration.

As a result of the COVID-19 pandemic, its economic impact and the uncertainty of whether certain market practices and trends in response to the pandemic will be sustained or increased, including the extent to which alternative work arrangements such as work from home practices may be continued, overall leasing activity has been volatile and may remain so until office property market conditions meaningfully improve and stabilize for a sustained period.

However, we remain focused on proactive dialogues with our existing tenants and overall tenant retention.

Prevailing market conditions and government and other tenants’ needs at the time we negotiate and enter leases or lease renewals will generally determine rental rates and demand for leased space at our properties, and market conditions and our tenants’ needs are beyond our control.

In addition to the capital expenditures described above, we contributed $712 and $2,914 to one of our unconsolidated joint ventures during the three and nine months ended September 30, 2022, respectively.

Also, as of September 30, 2022, we had estimated unspent leasing related obligations of $137,420, of which we expect to spend $77,251 over the next 12 months.

As of September 30, 2022, we had leases at our properties totaling approximately 1,596,000 rentable square feet that were scheduled to expire through September 30, 2023.

As of October 26, 2022, we expect tenants with leases totaling approximately 696,000 rentable square feet that are scheduled to expire through September 30, 2023, not to renew their leases upon expiration and we cannot be sure as to whether other tenants will renew their leases upon expiration.

However, we continue to proactively engage with our existing tenants and are focused on our overall tenant retention.

Whenever we renew or enter into new leases for our properties, we intend to seek rents which are equal to or higher than our historical rents for the same properties;

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Also, we may experience material declines in our rental income due to vacancies upon lease expirations or early terminations or lower rents upon lease renewal or reletting.

Additionally, we may incur significant costs to renew our leases with current tenants or lease our properties to new tenants.

As of June 30, 2022, our lease expirations by year are as follows (square feet in thousands):

Additionally, we may incur significant costs and make significant concessions to renew our leases with current tenants or lease our properties to new tenants.

As of September 30, 2022, our lease expirations by year were as follows (square feet in thousands):

Number of Leases Expiring Leased

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Some of our leases allow the tenants to vacate the leased premises before the stated expirations of their leases with little or no liability.

As of June 30, 2022, tenants occupying approximately 3.9% of our rentable square feet and responsible for approximately 4.3% of our annualized rental income as of June 30, 2022 currently have exercisable rights to terminate their leases before the stated terms of their leases expire.

Also, in 2022, 2023, 2024, 2025, 2026, 2027, 2028, 2029, 2030, 2031, 2035, 2037 and 2040, early termination rights become exercisable by other tenants who currently occupy an additional approximately 0.9%, 3.4%, 2.6%, 4.0%, 1.3%, 0.8%, 1.5%, 0.5%, 0.7%, 0.1%, 0.4%, 0.1% and 0.3% of our rentable square feet, respectively, and contribute an additional approximately 0.9%, 4.2%, 2.9%, 7.8%, 1.6%, 1.2%, 1.6%, 1.0%, 0.9%, 0.1%, 0.5%, 0.2% and 0.4% of our annualized rental income, respectively, as of June 30, 2022.

In addition, as of June 30, 2022, pursuant to leases with 14 of our tenants, these tenants have rights to terminate their leases if their respective legislature or other funding authority does not appropriate rent amounts in their respective annual budgets.

These 14 tenants occupy approximately 6.2% of our rentable square feet and contribute approximately 6.9% of our annualized rental income as of June 30, 2022.

(2) Leased square feet is pursuant to leases existing as of June 30, 2022, and includes (i) space being fitted out for tenant occupancy pursuant to our lease agreements, if any, and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants, if any.

As of September 30, 2022, tenants occupying approximately 3.6% of our rentable square feet and responsible for approximately 3.5% of our annualized rental income as of September 30, 2022 had exercisable rights to terminate their leases before the stated terms of their leases expire.

Also, in 2023, 2024, 2025, 2026, 2027, 2028, 2029, 2030, 2031, 2035, 2037 and 2040, early termination rights become exercisable by other tenants who occupied an additional approximately 5.4%, 2.8%, 4.5%, 0.9%, 0.9%, 1.6%, 0.8%, 0.7%, 0.1%, 0.4%, 0.1% and 0.3% of our rentable square feet, respectively, and contributed an additional approximately 6.4%, 3.0%, 8.3%, 1.2%, 1.3%, 1.7%, 1.3%, 0.9%, 0.1%, 0.5%, 0.2% and 0.4% of our annualized rental income, respectively, as of September 30, 2022.

In addition, as of September 30, 2022, pursuant to leases with 10 of our tenants, these tenants had rights to terminate their leases if their respective legislature or other funding authority does not appropriate rent amounts in their respective annual budgets.

These 10 tenants occupied approximately 5.4% of our rentable square feet and contributed approximately 6.1% of our annualized rental income as of September 30, 2022.

(2) Leased square feet is pursuant to leases existing as of September 30, 2022, and includes (i) space being fitted out for tenant occupancy pursuant to our lease agreements, if any, and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants, if any.

Square feet measurements are subject to changes when space is remeasured or reconfigured for new tenants.

We generally will seek to renew or extend the terms of leases at properties with tenants when they expire.

Because of the capital many of our single tenants have invested in the properties they lease from us and because many of these properties appear to be of strategic importance to such tenants’ businesses, we believe that it is likely that these tenants will renew or extend their leases prior to when they expire.

However, recent shifts in workplace practices, including as a result of the COVID-19 pandemic, have resulted in a significant increase in alternative work arrangements, including work from home practices.

It is uncertain to what extent and how long work from home arrangements may continue, or if other hybrid work arrangements will continue or increase.

Despite these shifts in workplace practices, our recent leasing activity and negotiations for vacant or expiring space may suggest that there is an improving demand environment for office space.

However, if these

arrangements continue or increase, our tenants may not seek to renew or extend their leases when they expire, or may seek to renew their leases for less space than they currently occupy.

Because of the capital many of our single tenants have invested in the properties they lease from us and because many of these properties appear to be of strategic importance to such tenants’ businesses, we believe that it is likely that most of these tenants will renew or extend their leases prior to when they expire.

However, increases in remote work and changes in space utilization may cause our tenants not to renew or extend their leases when they expire, or to seek to renew their leases for less space than they currently occupy.

If we are unable to extend or renew our leases, or we renew leases for reduced space, it may be time consuming and expensive to relet some of these properties.

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government had begun to shift its leasing strategy to include longer term leases and was actively exploring 10 to 20 year lease terms at renewal, in some instances.

However, the COVID-19 pandemic and its aftermath have had negative impacts on government budgets and resources.

Although there have been indications that certain of those impacts may not have been as negative as originally expected, it is unclear what the effect of these impacts will be on government demand for leasing office space.

Given the significant uncertainties, including as to the COVID-19 pandemic and its economic impact and the extent to which certain market trends, such as work from home practices, may continue or increase, we are unable to reasonably project what the financial impact of market conditions or changing government circumstances will be on the demand for leased space at our properties and our financial results for future periods.

As of June 30, 2022, we derive 22.1% of our annualized rental income from our properties located in the metropolitan Washington, D.C.

Given the significant uncertainties, including the extent to which remote or alternative work arrangements may continue or increase, we are unable to reasonably project what the financial impact of market conditions or changing government circumstances will be on the demand for leased space at our properties and our financial results for future periods.

As of September 30, 2022, we derived 22.4% of our annualized rental income from our properties located in the metropolitan Washington, D.C.

market area, which includes Washington, D.C., Northern Virginia and suburban Maryland.

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and/or (c) tenants with investment grade rated parent entities that do not guarantee the tenant’s lease obligations.

As of June 30, 2022, tenants contributing 52.4% of annualized rental income were investment grade rated (or their payment obligations were guaranteed by an investment grade rated parent) and tenants contributing an additional 11.0% of annualized rental income were subsidiaries of an investment grade rated parent (although these parent entities were not liable for the payment of rents).

As of June 30, 2022, tenants representing 1% or more of our total annualized rental income were as follows (square feet in thousands):

As of September 30, 2022, tenants contributing 52.4% of annualized rental income were investment grade rated (or their payment obligations were guaranteed by an investment grade rated parent) and tenants contributing an additional 10.6% of annualized rental income were subsidiaries of an investment grade rated parent (although these parent entities were not liable for the payment of rents).

As of September 30, 2022, tenants representing 1% or more of our total annualized rental income were as follows (square feet in thousands):

Tenant Credit Rating Sq.

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Not Rated 230 1.2 % 10,745 2.0 %

12 CommScope Holding Company Inc.

Non Investment Grade 228 1.1 % 9,370 1.7 %

12 CommScope Holding Company Inc Non Investment Grade 228 1.2 % 9,370 1.7 %

13 Sonoma Biotherapeutics, Inc.

Not Rated 84 0.4 % 7,468 1.4 %

14 State of Georgia Investment Grade 308 1.6 % 7,383 1.3 %

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For more information about our lease with Sonesta, see Note 10 to our Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q.

(2) In August 2022, we entered into an approximately 10-year lease with Sonoma Biotherapeutics, Inc.

at a property we own in Seattle, WA that is currently undergoing redevelopment.

The term of the lease is estimated to commence in the fourth quarter of 2023.

Disposition Activities

During the six months ended June 30, 2022, we sold six properties containing approximately 778,000 rentable square feet for an aggregate sales price of $77,720, excluding closing costs.

In July 2022, we sold a property located in Houston, TX containing approximately 206,000 rentable square feet for a sales price of $9,800, excluding closing costs.

During the nine months ended September 30, 2022, we sold 16 properties containing approximately 2,077,000 rentable square feet for an aggregate sales price of $195,920, excluding closing costs.

Based on current real estate market conditions, including rising interest rates, we expect the pace of our dispositions to moderate.

However, we continue to evaluate our portfolio to strategically recycle capital and are currently in various stages of marketing certain of our properties for sale.

As of July 27, 2022, we have entered into agreements to sell nine properties containing approximately 1,116,000 rentable square feet for an aggregate sales price of $109,800, excluding closing costs.

These sales are expected to occur before the end of the third quarter of 2022.

However, we continue to evaluate our portfolio to strategically recycle capital and are currently in various stages of marketing certain of our properties for sale, and we may decide to seek to sell additional properties in the future.

As of October 26, 2022, we have entered into agreements to sell five properties, including one leasable land parcel, containing approximately 338,000 rentable square feet for an aggregate sales price of $20,450, excluding closing costs.

These sales are expected to occur before the end of the fourth quarter of 2022.

However, these sales are subject to conditions;

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In June 2022, we redeemed, at par plus accrued interest, all $300,000 of our 4.00% senior unsecured notes due July 2022 using cash on hand and borrowings under our revolving credit facility.

In October 2022, we prepaid, at a discounted amount of $22,176 plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of $22,901, an annual interest rate of 4.80% and a maturity date in June 2023 using cash on hand and borrowings under our revolving credit facility.

Segment Information

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RESULTS OF OPERATIONS (amounts in thousands, except per share amounts)

Three Months Ended June 30, 2022, Compared to Three Months Ended June 30, 2021

Three Months Ended September 30, 2022, Compared to Three Months Ended September 30, 2021

Comparable Properties (1) Results

Three Months Ended June 30,

Three Months Ended September 30,

Non-Comparable

Properties Results

Three Months Ended June 30,

Three Months Ended September 30,

Consolidated Results

Three Months Ended June 30,

Three Months Ended September 30,

2022 2021 $ Change % Change 2022 2021 2022 2021 $ Change % Change

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Depreciation and amortization 52,988 59,533 (6,545) (11.0 %)

Loss on impairment of real estate 4,773 48,197 (43,424) (90.1 %)

Acquisition and transaction related costs 224 — 224 n/m

General and administrative 7,083 12,970 (5,887) (45.4 %)

Loss on impairment of real estate — (3) 3 n/m

General and administrative 6,564 448 6,116 n/m

Total other expenses 59,552 59,978 (426) (0.7 %)

Gain (loss) on sale of real estate (11,637) 114 (11,751) n/m

Gain on sale of real estate 16,925 36 16,889 n/m

Interest and other income 56 — 56 n/m

Interest expense (24,969) (26,929) 1,960 (7.3 %)

Loss on early extinguishment of debt (77) (11,794) 11,717 (99.3 %)

Loss before income tax benefit and equity in net losses of investees (15,413) (66,238) 50,825 (76.7 %)

Income tax benefit 190 121 69 57.0 %

Loss on early extinguishment of debt — (2,274) 2,274 n/m

Income before income tax expense and equity in net losses of investees 18,006 4,434 13,572 n/m

Income tax expense (90) (34) (56) 164.7 %

Equity in net losses of investees (952) (688) (264) 38.4 %

Net loss $ (16,056) $ (66,697) $ 50,641 (75.9 %)

Weighted average common shares outstanding (basic and diluted) 48,249 48,165 84 0.2 %

Net income $ 16,964 $ 3,712 $ 13,252 n/m

Weighted average common shares outstanding (basic) 48,286 48,211 75 0.2 %

Weighted average common shares outstanding (diluted) 48,286 48,244 42 0.1 %

Per common share amounts (basic and diluted):

Net loss $ (0.33) $ (1.38) $ 1.05 (76.1 %)

Net income $ 0.35 $ 0.08 $ 0.27 n/m

n/m - not meaningful

(1) Comparable properties consists of 153 properties we owned on June 30, 2022 and which we owned continuously since April 1, 2021 and excludes properties classified as held for sale and properties undergoing significant redevelopment, if any, and three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests.

(2) Our definition of net operating income, or NOI, and our reconciliation of net loss to NOI are included below under the heading “Non-GAAP Financial Measures.”

References to changes in the income and expense categories below relate to the comparison of consolidated results for the three months ended June 30, 2022, compared to the three months ended June 30, 2021.

(1) Comparable properties consists of 152 properties we owned on September 30, 2022 and which we owned continuously since July 1, 2021 and excludes properties classified as held for sale and properties undergoing significant redevelopment, if any, and three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests.

(2) Our definition of net operating income, or NOI, and our reconciliation of net income to NOI are included below under the heading “Non-GAAP Financial Measures.”

References to changes in the income and expense categories below relate to the comparison of consolidated results for the three months ended September 30, 2022, compared to the three months ended September 30, 2021.

Rental income.

The increase in rental income reflects an increase in rental income of $11,637 related to acquired properties and $3,399 related to comparable properties, offset by decreases in rental income of $7,125 as a result of property disposition activities and $3,694 for properties undergoing significant redevelopment.

The decrease in rental income reflects decreases in rental income of $7,112 as a result of property disposition activities and $3,632 for properties undergoing significant redevelopment, offset by increases in rental income of $770 related to comparable properties and $85 related to acquired properties.

The decrease in rental income for properties undergoing significant redevelopment is primarily due to the reduction in occupied space at a property located in Seattle, WA that began a redevelopment project in February 2022.

The increase in rental income for comparable properties is primarily due to $2,175 of early termination income recorded in the 2022 period related to a tenant that occupies a property located in Columbia, MD that vacated a portion of its space in May 2022 in conjunction with the early renewal of its remaining space, higher reimbursement revenue resulting from increased operating expenses due to higher building utilization levels in the 2022 period and operating expenses that were previously paid directly by a tenant that are now paid by us and reimbursed by the tenant pursuant to a lease amendment with that tenant effective in February 2022, as well as higher parking garage revenue as a result of higher parking volumes in the 2022 period.

The increase in rental income for comparable properties is primarily due to higher reimbursement revenue resulting from increased operating expenses due to higher building utilization levels in the 2022 period and operating expenses that were previously paid directly by certain of our tenants that are now being paid by and

reimbursed to us pursuant to lease amendments with those tenants executed in 2022.

Rental income includes non-cash straight line rent adjustments totaling $1,765 in the 2022 period and $3,924 in the 2021 period, and amortization of acquired real estate leases and assumed real estate lease obligations totaling $(204) in the 2022 period and $(447) in the 2021 period.

Real estate taxes.

The increase in real estate taxes primarily reflects an increase in real estate taxes of $2,652 related to acquired properties, offset by decreases of $829 for properties undergoing significant redevelopment, $743 related to property disposition activities and $409 for comparable properties.

Real estate taxes for comparable properties decreased primarily due to lower assessed values at certain of our properties in the 2022 period, partially offset by an increase related to real estate taxes that were previously paid directly by one of our tenants that are now being paid by us pursuant to a lease amendment with that tenant effective in February 2022.

The decrease in real estate taxes primarily reflects decreases of $2,491 for comparable properties, $875 related to property disposition activities and $325 for properties undergoing significant redevelopment, offset by an increase in real estate taxes of $38 related to acquired properties.

Real estate taxes for comparable properties decreased primarily due to lower assessed values at certain of our properties as a result of successful real estate tax appeals in the 2022 period, partially offset by an increase related to real estate taxes that were previously paid directly by certain of our tenants that are now being paid by us pursuant to lease amendments with those tenants executed in 2022.

Utility expenses.

The increase in utility expenses reflects increases in utility expenses of $1,414 for comparable properties and $27 for acquired properties, offset by decreases in utility expenses of $769 related to property disposition activities and $75 for properties undergoing significant redevelopment.

The increase in utility expenses for comparable properties is primarily due to increases in electricity usage as a result of higher building utilization levels in the 2022 period, higher rates at certain of our properties in the 2022 period and an increase related to utility expenses that were previously paid directly by one of our tenants that are now being paid by us pursuant to a lease amendment with that tenant effective in February 2022.

The increase in utility expenses for comparable properties is primarily due to increased building utilization levels at certain of our properties and the impact of inflation in the 2022 period, as well as utility expenses that were previously paid directly by certain of our tenants that are now being paid by us pursuant to lease amendments with those tenants executed in 2022.

Other operating expenses.

Other operating expenses consist of salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense, other direct costs of operating our properties and property management fees.

The increase in other operating expenses primarily reflects increases of $2,282 for acquired properties and $1,311 for comparable properties, offset by decreases of $1,571 related to property disposition activities and $423 for properties undergoing significant redevelopment.

The increase in other operating expenses for comparable properties is primarily due to increases in certain expenses as building utilization levels begin to rise, including parking garage and cleaning expenses, as well as higher landscape maintenance expenses at certain of our properties in the 2022 period and an increase related to other operating expenses that were previously paid directly by one of our tenants that are now being paid by us pursuant to a lease amendment with that tenant effective in February 2022.

The increase in other operating expenses primarily reflects increases of $3,268 for comparable properties and $32 for acquired properties, offset by decreases of $1,795 related to property disposition activities and $305 for properties undergoing significant redevelopment.

The increase in other operating expenses for comparable properties is primarily due to higher repairs and maintenance costs, higher cleaning expenses due to increased building utilization levels, increased insurance costs and an increase related to other operating expenses that were previously paid directly by certain of our tenants that are now being paid by us pursuant to lease amendments with those tenants executed in 2022.

Depreciation and amortization.

The increase in depreciation and amortization primarily reflects an increase of $6,275 for acquired properties, offset by decreases of $2,508 related to property disposition activities and $1,602 for comparable properties.

Depreciation and amortization for comparable properties declined due to certain leasing related assets becoming fully depreciated since April 1, 2021, partially offset by depreciation and amortization of improvements made to certain of our properties since April 1, 2021.

Loss on impairment of real estate.

We recorded a $4,773 loss on impairment of real estate in the 2022 period to reduce the carrying value of six properties to their estimated fair value less costs to sell.

We recorded a $48,197 loss on impairment of real estate in the 2021 period to reduce the carrying value of five properties to their estimated fair values less costs to sell.

Acquisition and transaction related costs.

Acquisition and transaction related costs represent costs related to an acquisition opportunity that did not materialize in the 2022 period.

The decrease in depreciation and amortization primarily reflects decreases of $2,886 for comparable properties, $2,612 related to property disposition activities and $1,063 for properties undergoing significant redevelopment, offset by an increase of $16 for acquired properties.

Depreciation and amortization for comparable properties declined due to certain leasing related assets becoming fully depreciated since July 1, 2021, partially offset by depreciation and amortization of improvements made to certain of our properties since July 1, 2021.

General and administrative.

General and administrative expenses consist of fees pursuant to our business management agreement, equity compensation expense, legal and accounting fees, Trustees’ fees and expenses, securities listing and transfer agency fees and other costs relating to our status as a publicly traded company.

The decrease in general and administrative expenses is primarily the result of $5,911 of estimated business management incentive fees recorded in the 2021 period.

Gain (loss) on sale of real estate.

We recorded an $11,637 net loss on sale of real estate resulting from the sale of two properties in the 2022 period.

The increase in general and administrative expenses is primarily the result of the reversal of $6,627 of previously accrued estimated business management incentive fees in the 2021 period, partially offset by a decrease in base business management fees resulting from a decrease in average total market capitalization in the 2022 period compared to the 2021 period.

Gain on sale of real estate.

We recorded a $16,925 net gain on sale of real estate resulting from the sale of 10 properties in the 2022 period.

Interest and other income.

Interest and other income reflects interest earned, if any, on cash balances invested.

The increase in interest and other income is primarily due to the effect of higher interest rates earned on cash balances invested in the 2022 period compared to the 2021 period.

Interest expense.

The decrease in interest expense reflects financing activities since May 2021, which included the redemption of $910,000 of senior unsecured notes with a weighted average interest rate of 4.7% and the repayment of two mortgage notes totaling approximately $96,000 with a weighted average interest rate of 3.7%, as well as higher capitalized interest in the 2022 period, partially offset by the issuance of $1,050,000 of senior unsecured notes with a weighted average interest rate of 2.9%, as well as a higher average balance outstanding under our revolving credit facility and higher weighted average interest rates on borrowings during the 2022 period compared to the 2021 period.

The decrease in interest expense reflects financing activities since July 1, 2021, which included the redemption of $600,000 of senior unsecured notes with a weighted average interest rate of 4.1% and the repayment of a mortgage note with a principal balance of approximately $25,000 with an interest rate of 4.2%, as well as higher capitalized interest in the 2022 period, partially offset by the issuance of $750,000 of senior unsecured notes with a weighted average interest rate of 3.0%, as well as higher weighted average interest rates on borrowings under our revolving credit facility during the 2022 period compared to the 2021 period.

Loss on early extinguishment of debt.

We recorded a loss on early extinguishment of debt of $77 in the 2022 period from the write off of unamortized discounts and debt issuance costs associated with the redemption of our senior unsecured notes due July 2022.

We recorded a loss on early extinguishment of debt of $11,794 in the 2021 period from prepayment fees incurred and the write off of unamortized discounts and debt issuance costs associated with the prepayment of one mortgage note and the redemption of our senior unsecured notes due 2046.

Income tax benefit.

Income tax benefit is primarily the result of operating income earned in jurisdictions where we are subject to state income taxes and can fluctuate based on the timing of our income, including as a result of gains or losses on the sale of real estate.

We recorded a loss on early extinguishment of debt of $2,274 in the 2021 period from prepayment fees incurred and the write off of unamortized discounts associated with the prepayment of our senior unsecured notes due 2022.

Income tax expense.

Income tax expense is primarily the result of operating income earned in jurisdictions where we are subject to state income taxes and can fluctuate based on the timing of our income, including as a result of gains or losses on the sale of real estate.

Equity in net losses of investees.

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The increase in equity in net losses of investees is primarily due to reductions in occupied space at properties owned by our unconsolidated joint ventures in the 2022 period.

Net loss and net loss per basic and diluted common share decreased in the 2022 period compared to the 2021 period primarily as a result of the changes noted above.

RESULTS OF OPERATIONS (amounts in thousands, except per share amounts)

Six Months Ended June 30, 2022, Compared to Six Months Ended June 30, 2021

Net income and net income per basic and diluted common share increased in the 2022 period compared to the 2021 period primarily as a result of the changes noted above.

Nine Months Ended September 30, 2022, Compared to Nine Months Ended September 30, 2021

Comparable Properties (1) Results

Six Months Ended June 30,

Nine Months Ended September 30,

Non-Comparable

Properties Results

Six Months Ended June 30,

Nine Months Ended September 30,

Consolidated Results

Six Months Ended June 30,

Nine Months Ended September 30,

2022 2021 $ Change % Change 2022 2021 2022 2021 $ Change % Change

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Total other expenses 212,390 259,535 (47,145) (18.2 %)

Gain (loss) on sale of real estate (9,488) 54,118 (63,606) (117.5 %)

Interest and other income 17 7 10 142.9 %

Gain on sale of real estate 7,437 54,154 (46,717) (86.3 %)

Interest and other income 73 7 66 n/m

Interest expense (78,923) (84,728) 5,805 (6.9 %)

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n/m - not meaningful

(1) Comparable properties consists of 153 properties we owned on June 30, 2022 and which we owned continuously since January 1, 2021 and excludes properties classified as held for sale and properties undergoing significant redevelopment, if any, and three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests.

(1) Comparable properties consists of 150 properties we owned on September 30, 2022 and which we owned continuously since January 1, 2021 and excludes properties classified as held for sale and properties undergoing significant redevelopment, if any, and three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests.

(2) Our definition of NOI and our reconciliation of net loss to NOI are included below under the heading “Non-GAAP Financial Measures.”

References to changes in the income and expense categories below relate to the comparison of consolidated results for the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

References to changes in the income and expense categories below relate to the comparison of consolidated results for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

Rental income.

The increase in rental income reflects increases in rental income of $23,479 for acquired properties and $2,830 for comparable properties, offset by decreases of $14,174 related to property disposition activities and $5,088 for properties undergoing significant redevelopment.

The increase in rental income for comparable properties is primarily due to termination fee revenue received, higher reimbursement revenue resulting from increased operating expenses due to higher building utilization levels in the 2022 period and operating expenses that were previously paid directly by a tenant that are now paid by us and reimbursed by the tenant pursuant to a lease amendment with that tenant effective in February 2022, as well as higher parking garage revenue as a result of higher parking volumes in the 2022 period, partially offset by reductions in occupied space at certain of our properties.

The decrease in rental income reflects decreases in rental income of $21,240 related to property disposition activities and $8,719 for properties undergoing significant redevelopment, offset by increases in rental income of $22,732 for acquired properties and $4,385 for comparable properties.

The increase in rental income for comparable properties is primarily due to higher reimbursement revenue resulting from increased operating expenses due to higher building utilization levels in the

2022 period and operating expenses that were previously paid directly by certain of our tenants that are now being paid by and reimbursed to us pursuant to lease amendments with those tenants executed in 2022, termination fee revenue received and higher parking garage revenue as a result of higher parking volumes in the 2022 period, partially offset by reductions in occupied space at certain of our properties.

The decrease in rental income for properties undergoing significant redevelopment is primarily due to reductions in occupied space at properties located in Washington, D.C.

and Seattle, WA that began

redevelopment projects during 2021 and 2022, respectively, partially offset by termination fee revenue at the Seattle, WA property related to the termination of the former tenant’s lease in February 2022 prior to the commencement of the redevelopment.

and Seattle, WA that began redevelopment projects during April 2021 and February 2022, respectively, partially offset by termination fee revenue at the Seattle, WA property related to the termination of the former tenant’s lease in February 2022 prior to the commencement of the redevelopment.

Rental income includes non-cash straight line rent adjustments totaling $7,226 in the 2022 period and $13,128 in the 2021 period, and amortization of acquired real estate leases and assumed real estate lease obligations totaling $(780) in the 2022 period and $(1,836) in the 2021 period.

Real estate taxes.

The increase in real estate taxes primarily reflects an increase in real estate taxes of $4,841 for acquired properties, offset by decreases in real estate taxes of $1,737 for properties undergoing significant redevelopment, $1,322 related to property disposition activities and $620 for comparable properties.

The decrease in real estate taxes primarily reflects decreases in real estate taxes of $2,200 related to property disposition activities, $2,062 for properties undergoing significant redevelopment and $43 for comparable properties, offset by an increase in real estate taxes of $1,814 for acquired properties.

Real estate taxes for comparable properties decreased primarily due to lower assessed values at certain of our properties in the 2022 period, partially offset by an increase related to real estate taxes that were previously paid directly by certain of our tenants that are now being paid by us pursuant to lease amendments with those tenants executed in 2022.

Utility expenses.

The increase in utility expenses reflects increases in utility expenses of $2,288 for comparable properties and $865 for acquired properties, offset by decreases of $1,333 related to property disposition activities and $280 for properties undergoing significant redevelopment.

The increase in utility expenses for comparable properties is primarily due to increases in electricity and water usage as a result of higher building utilization levels in the 2022 period, higher rates at certain of our properties in the 2022 period and an increase related to utility expenses that were previously paid directly by one of our tenants that are now being paid by us pursuant to a lease amendment with that tenant effective in February 2022.

The increase in utility expenses for comparable properties is primarily due to increases in electricity usage as a result of higher building utilization levels at certain of our properties and the impact of inflation in the 2022 period, as well as utility expenses that were previously paid directly by certain of our tenants that are now being paid by us pursuant to lease amendments with those tenants executed in 2022.

Other operating expenses.

The increase in other operating expenses primarily reflects increases in other operating expenses of $4,310 for acquired properties and $2,812 for comparable properties, offset by decreases of $3,013 related to property disposition activities and $586 for properties undergoing significant redevelopment.

The increase in other operating expenses for comparable properties is primarily due to increases in certain expenses as building utilization levels begin to rise, including parking garage and cleaning expenses, higher landscape maintenance expenses at certain of our properties in the 2022 period and an increase related to other operating expenses that were previously paid directly by one of our tenants that are now being paid by us pursuant to a lease amendment with that tenant effective in February 2022.

The increase in other operating expenses primarily reflects increases in other operating expenses of $5,834 for comparable properties and $4,575 for acquired properties, offset by decreases of $4,794 related to property disposition activities and $892 for properties undergoing significant redevelopment.

The increase in other operating expenses for comparable properties is primarily due to increases in certain expenses as building utilization levels rise, including cleaning and parking garage expenses, higher repairs and maintenance and landscape maintenance expenses at certain of our properties in the 2022 period and an increase related to other operating expenses that were previously paid directly by certain of our tenants that are now being paid by us pursuant to lease amendments with those tenants executed in 2022.

Depreciation and amortization.

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Loss on impairment of real estate.

We recorded a $21,820 loss on impairment of real estate to reduce the carrying value of seven properties to their estimated fair values less costs to sell in the 2022 period.

We recorded a $21,820 loss on impairment of real estate in the 2022 period, including an adjustment of $6,957 to reduce the carrying value of seven properties to their estimated fair values less costs to sell and an adjustment of $14,863 to reduce the carrying value of one property that was held and used as of March 31, 2022 to its estimated fair value.

We recorded a $55,854 loss on impairment of real estate in the 2021 period to reduce the carrying value of six properties to their estimated fair values less costs to sell.

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General and administrative .

The decrease in general and administrative expenses is primarily the result of $11,111 of estimated business management incentive fees recorded in the 2021 period, a state franchise tax refund received in the 2022 period and the expiration of an office lease in January 2021 for which we were the lessee, partially offset by an increase in base business management fees resulting from an increase in average total market capitalization in the 2022 period compared to the 2021 period.

Gain (loss) on sale of real estate.

We recorded a $9,488 net loss on sale of real estate resulting from the sale of six properties in the 2022 period.

We recorded a $54,118 net gain on sale of real estate resulting from the sale of two properties in the 2021 period.

The decrease in general and administrative expenses is primarily the result of estimated business management incentive fees of $4,484 recorded in the 2021 period, a state franchise tax refund received in the 2022 period and a decrease in base business management fees resulting from a decrease in average total market capitalization in the 2022 period compared to the 2021 period.

Gain on sale of real estate.

We recorded a $7,437 net gain on sale of real estate resulting from the sale of 16 properties in the 2022 period.

We recorded a $54,154 net gain on sale of real estate resulting from the sale of four properties and a warehouse facility adjacent to a property we owned in the 2021 period.

Interest and other income.

Interest and other income reflects interest earned, if any, on cash balances invested.

The increase in interest and other income is primarily due to the effect of higher interest rates earned on cash balances invested in the 2022 period compared to the 2021 period.

Interest expense.

The decrease in interest expense reflects financing activities since January 1, 2021, which included the redemption of $910,000 of senior unsecured notes with a weighted average interest rate of 4.7% and the repayment of two mortgage notes totaling approximately $96,000 with a weighted average interest rate of 3.7%, as well as higher capitalized interest in the 2022 period, partially offset by the issuance of $1,050,000 of senior unsecured notes with a weighted average interest rate of 2.9%, as well as higher weighted average interest rates on borrowings under our revolving credit facility during the 2022 period compared to the 2021 period.

Loss on early extinguishment of debt.

We recorded a loss on early extinguishment of debt of $14,068 in the 2021 period from prepayment fees incurred and the write off of unamortized discounts and debt issuance costs associated with the prepayment of one mortgage note and the redemption of our senior unsecured notes due 2022 and 2046.

Income tax expense.

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The increase in equity in net losses of investees is primarily due to reductions in occupied space at properties owned by our unconsolidated joint ventures in the 2022 period.

Net loss and net loss per basic and diluted common share increased in the 2022 period compared to the 2021 period primarily as a result of the changes noted above.

Net loss and net loss per basic and diluted common share decreased in the 2022 period compared to the 2021 period primarily as a result of the changes noted above.

Non-GAAP Financial Measures

We present certain “non-GAAP financial measures” within the meaning of the applicable rules of the Securities and Exchange Commission, or SEC, including the calculations below of NOI, funds from operations, or FFO, and normalized funds from operations, or Normalized FFO.

These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net loss as indicators of our operating performance or as measures of our liquidity.

These measures should be considered in conjunction with net loss as presented in our condensed consolidated statements of comprehensive income (loss).

We consider these non-GAAP measures to be appropriate supplemental measures of operating performance for a REIT, along with net loss.

These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income (loss) as indicators of our operating performance or as measures of our liquidity.

These measures should be considered in conjunction with net income (loss) as presented in our condensed consolidated statements of comprehensive income (loss).

We consider these non-GAAP measures to be appropriate supplemental measures of operating performance for a REIT, along with net income (loss).

We believe these measures provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation and amortization expense, they may facilitate a comparison of our operating performance between periods and with other REITs and, in the case of NOI, reflecting only those income and expense items that are generated and incurred at the property level may help both investors and management to understand the operations of our properties.

Net Operating Income

The calculation of NOI excludes certain components of net loss in order to provide results that are more closely related to our property level results of operations.

The calculation of NOI excludes certain components of net income (loss) in order to provide results that are more closely related to our property level results of operations.

We calculate NOI as shown below.

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Other real estate companies and REITs may calculate NOI differently than we do.

The following table presents the reconciliation of net loss to NOI for the three and six months ended June 30, 2022 and 2021:

Three Months Ended June 30, Six Months Ended June 30,

The following table presents the reconciliation of net income (loss) to NOI for the three and nine months ended September 30, 2022 and 2021:

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Net loss $ (16,056) $ (66,697) $ (29,463) $ (28,837)

Net income (loss) $ 16,964 $ 3,712 $ (12,499) $ (25,125)

Equity in net losses of investees 952 688 2,631 1,664

Income tax expense (benefit) (190) (121) 341 314

Loss before income tax expense (benefit) and equity in net losses of investees (15,413) (66,238) (27,443) (27,547)

Income tax expense 90 34 431 348

Income (loss) before income tax expense and equity in net losses of investees 18,006 4,434 (9,437) (23,113)

Loss on early extinguishment of debt — 2,274 77 14,068

1 unchanged sentence

Interest and other income (56) — (73) (7)

(Gain) loss on sale of real estate 11,637 (114) 9,488 (54,118)

Gain on sale of real estate (16,925) (36) (7,437) (54,154)

General and administrative 6,564 448 19,353 24,690

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Other real estate companies and REITs may calculate FFO and Normalized FFO differently than we do.

The following table presents the reconciliation of net loss to FFO and Normalized FFO for the three and six months ended June 30, 2022 and 2021:

Three Months Ended June 30, Six Months Ended June 30,

The following table presents the reconciliation of net income (loss) to FFO and Normalized FFO for the three and nine months ended September 30, 2022 and 2021:

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Net loss $ (16,056) $ (66,697) $ (29,463) $ (28,837)

Net income (loss) $ 16,964 $ 3,712 $ (12,499) $ (25,125)

Depreciation and amortization:

2 unchanged sentences

Loss on impairment of real estate — (3) 21,820 55,854

(Gain) loss on sale of real estate 11,637 (114) 9,488 (54,118)

Gain on sale of real estate (16,925) (36) (7,437) (54,154)

FFO 53,802 63,951 175,146 158,240

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Normalized FFO $ 53,802 $ 59,598 $ 175,447 $ 176,792

Weighted average common shares outstanding (basic and diluted) 48,249 48,165 48,246 48,163

Weighted average common shares outstanding (basic) 48,286 48,211 48,260 48,179

Weighted average common shares outstanding (diluted) 48,286 48,244 48,260 48,179

FFO per common share (basic and diluted) $ 1.11 $ 1.33 $ 3.63 $ 3.28

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• our ability to purchase additional properties which produce cash flows from operations in excess of our cost of acquisition capital and property operating and capital expenses.

On July 14, 2022, we announced a regular quarterly cash distribution of $0.55 per common share ($2.20 per common share per year).

On October 13, 2022, we announced a regular quarterly cash distribution of $0.55 per common share ($2.20 per common share per year).

We determine our distribution payout ratio with consideration for our expected capital expenditures as well as cash flows from operations and payment of debt obligations.

We expect to accretively grow our property portfolio through our capital recycling program, pursuant to which we plan to selectively sell certain properties from time to time to fund future acquisitions and to manage leverage at levels we believe appropriate with a goal of (1) improving the asset quality of our portfolio by reducing the average age of our properties, lengthening the weighted average term of our leases and increasing the likelihood of retaining our tenants and (2) increasing our cash available for distribution.

During the six months ended June 30, 2022, we sold six properties for an aggregate sales price of $77,720, excluding closing costs.

In July 2022, we sold one property for a sales price of $9,800, excluding closing costs.

During the nine months ended September 30, 2022, we sold 16 properties for an aggregate sales price of $195,920, excluding closing costs.

Based on current real estate market conditions, including rising interest rates, we expect the pace of our dispositions to moderate.

However, we continue to evaluate our portfolio to strategically recycle capital and are currently in various stages of marketing certain of our properties for sale.

As of July 27, 2022, we have entered into agreements to sell nine properties for an aggregate sales price of $109,800, excluding closing costs.

As of October 26, 2022, we have entered into agreements to sell five properties, including one leasable land parcel, for an aggregate sales price of $20,450, excluding closing costs.

W e continue to carefully consider our capital allocation strategy and believe we are well positioned to opportunistically recycle and deploy capital.

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The following is a summary of our sources and uses of cash flows for the periods presented, as reflected in our condensed consolidated statements of cash flows:

Six Months Ended June 30,

Nine Months Ended September 30,

Cash, cash equivalents and restricted cash at beginning of period $ 84,515 $ 56,855

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Cash, cash equivalents and restricted cash at end of period $ 15,525 $ 56,020

The decrease in cash provided by operating activities for the 2022 period compared to the 2021 period was primarily a result of unfavorable changes in working capital in the 2022 period, partially offset by an increase in NOI as a result of property acquisitions.

The decrease in cash used in investing activities in the 2022 period compared to the 2021 period is primarily due to higher acquisition activity in the 2021 period, partially offset by lower cash proceeds received from the sales of properties and increased capital expenditures in the 2022 period related to our two redevelopment projects in Washington D.C.

The decrease in cash provided by operating activities for the 2022 period compared to the 2021 period was primarily a result of unfavorable changes in working capital in the 2022 period.

The increase in cash provided by investing activities in the 2022 period compared to the 2021 period is primarily due to higher acquisition activity in the 2021 period, partially offset by increased capital expenditures in the 2022 period related to our two redevelopment projects in Washington D.C.

and Seattle, WA.

The increase in cash used in financing activities in the 2022 period compared to the 2021 period is a result of net debt repayment activity in the 2022 period that included the redemption of all $300,000 of our 4.00% senior unsecured notes due July 2022 and the repayment of a mortgage note with a principal balance of approximately $25,000, which was partially offset by borrowing activity under our revolving credit facility to facilitate these payments, compared to the issuance of $300,000 of 2.650% senior unsecured notes due 2026 and net borrowing activity under our revolving credit facility to fund acquisition activity in the 2021 period, partially offset by the redemption of all $310,000 of our 5.875% senior unsecured notes due 2046 and the repayment of a mortgage note with a principal balance of $71,000.

The increase in cash used in financing activities in the 2022 period compared to the 2021 period is a result of net debt repayment activity in the 2022 period that included the redemption of all $300,000 of our 4.00% senior unsecured notes due July 2022 and the repayment of a mortgage note with a principal balance of approximately $25,000, which was partially offset by borrowing activity under our revolving credit facility to facilitate these payments, compared to the aggregate issuance of $1,050,000 of senior notes in the 2021 period, partially offset by the aggregate redemption of $610,000 of senior unsecured notes and the repayment of $71,000 of mortgage debt.

Our Investment and Financing Liquidity and Resources (dollar amounts in thousands, except per share amounts)

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The maturity date of our revolving credit facility is January 31, 2023 and, subject to our payment of an extension fee and meeting certain other conditions, we have the option to extend the stated maturity date of our revolving credit facility by two additional six month periods.

We currently intend to exercise the first of our two extension options in advance of the January 31, 2023 maturity date.

We can borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity.

We are required to pay interest at a rate of LIBOR plus a premium, which was 110 basis points per annum at June 30, 2022, on the amount outstanding under our revolving credit facility.

We also pay a facility fee on the total amount of lending

commitments under our revolving credit facility, which was 25 basis points per annum at June 30, 2022.

We are required to pay interest at a rate of LIBOR plus a premium, which was 110 basis points per annum at September 30, 2022, on the amount outstanding under our revolving credit facility.

We also pay a facility fee on the total amount of lending commitments under our revolving credit facility, which was 25 basis points per annum at September 30, 2022.

Both the interest rate premium and facility fee are subject to adjustment based upon changes to our credit ratings.

As of June 30, 2022, the annual interest rate payable on borrowings under our revolving credit facility was 2.4%.

As of June 30, 2022 and July 27, 2022, we had $230,000 and $200,000, respectively, outstanding under our revolving credit facility, and $520,000 and $550,000, respectively, available for borrowing.

As of September 30, 2022, the annual interest rate payable on borrowings under our revolving credit facility was 3.9%.

As of September 30, 2022 and October 26, 2022, we had $135,000 and $145,000, respectively, outstanding under our revolving credit facility, and $615,000 and $605,000, respectively, available for borrowing.

Our credit agreement includes a feature under which the maximum borrowing availability may be increased to up to $1,950,000 in certain circumstances.

Our credit agreement provides that, with certain exceptions, a subsidiary of ours is required to guaranty our obligations under our $750,000 revolving credit facility only if that subsidiary has separately incurred debt (other than nonrecourse debt), within the meaning specified in our credit agreement, or provided a guarantee of debt incurred by us or any of our other subsidiaries.

During the six months ended June 30, 2022, we repaid the following mortgage note and senior unsecured notes:

Mortgage Note Prepayment

Since January 1, 2022, we repaid the following mortgage notes and senior unsecured notes:

Mortgage Note Prepayments

In April 2022, we prepaid, at par plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of $24,863, an annual interest rate of 4.22% and a maturity date in July 2022 using cash on hand.

Senior Unsecured Note Redemption

In June 2022, we redeemed, at par plus accrued interest, all $300,000 of our 4.00% senior unsecured notes due July 2022 using cash on hand and borrowings under our revolving credit facility.

As of June 30, 2022, our debt maturities (other than our revolving credit facility), consisting of senior unsecured notes and mortgage notes, are as follows:

As of September 30, 2022, our debt maturities (other than our revolving credit facility), consisting of senior unsecured notes and mortgage notes, were as follows:

Year Debt Maturities

1 unchanged sentence

Total $ 2,284,901

(1) In October 2022, we prepaid, at a discounted amount of $22,176 plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of $22,901, an annual interest rate of 4.80% and a maturity date in June 2023 using cash on hand and borrowings under our revolving credit facility.

None of our unsecured debt obligations require sinking fund payments prior to their maturity dates.

Our $73,018 in mortgage debts generally require monthly payments of principal and interest through maturity.

In addition to our debt obligations, as of June 30, 2022, we have estimated unspent leasing related obligations of $130,726, of which we expect to spend $82,543 over the next 12 months.

Our mortgage debts generally require monthly payments of principal and interest through maturity.

In addition to our debt obligations, as of September 30, 2022, we had estimated unspent leasing related obligations of $137,420, of which we expect to spend $77,251 over the next 12 months.

We are currently in the process of redeveloping a property located in Washington, D.C.

We currently estimate the total project costs associated with this redevelopment will be approximately $215,000 and completion of the redevelopment in the second quarter of 2023.

As of June 30, 2022, we have incurred approximately $103,198 related to this project.

As of September 30, 2022, we had incurred approximately $125,667 related to this project.

In June 2021, we entered into a 30-year lease for approximately 230,000 rentable square feet at this property that is approximately 25.1% higher than the prior rental rate for the same space, making the redevelopment project 54% pre-leased.

See Note 10 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding this lease and related redevelopment costs.

See Note 10 to

our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding this lease and related redevelopment costs.

We are also in the process of redeveloping a three-property campus located in Seattle, WA containing approximately 300,000 rentable square feet.

This project includes the repositioning of two properties from office to life science and maintaining the third building for office use.

This project includes the repositioning of two properties from office to life science and maintaining the third property for office use.

We currently estimate the total project costs associated with this redevelopment will be approximately $162,000 and completion of the redevelopment in the second quarter of 2023.

As of June 30, 2022, we have incurred approximately $16,707 related to this project.

As of September 30, 2022, we had incurred approximately $27,934 related to this project.

In August 2022, we entered into an approximately 10-year lease for approximately 84,000 rentable square feet at one of the life science properties that is approximately 109.0% higher than the prior rental rate for the same space, making the redevelopment project 28% pre-leased.

We currently expect to use cash balances, borrowings under our revolving credit facility, net proceeds from property sales, incurrences or assumptions of mortgage debt and net proceeds from offerings of debt or equity securities to fund our future operations, capital expenditures, distributions to our shareholders and property acquisitions.

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We intend to conduct our business in a manner that will afford us reasonable access to capital for investment and financing activities, but we cannot be sure that we will be able to successfully carry out this intention.

For instance, it is uncertain what the duration and severity of the COVID-19 pandemic, increasing interest rates, inflation and a possible recession, and their ultimate economic impact will be.

A protracted and extensive economic downturn may cause a decline in financing availability and increased costs for financings.

Further, such conditions could also disrupt capital markets and limit our access to financing from public sources.

During the six months ended June 30, 2022, we paid quarterly distributions to our shareholders totaling $53,268 using cash on hand.

On July 14, 2022, we declared a regular quarterly distribution payable to shareholders of record on July 25, 2022 of $0.55 per share, or approximately $26,700.

We expect to pay this distribution on or about August 18, 2022 using cash on hand and borrowings under our revolving credit facility.

For instance, it is uncertain what the ultimate impacts of inflationary pressures, rising interest rates or an economic recession will be.

A protracted and extensive economic recession or continued or intensified disruptions in capital markets could limit our access to financing from public sources and would likely increase our cost of capital.

During the nine months ended September 30, 2022, we paid quarterly distributions to our shareholders totaling $79,919 using cash on hand and borrowings under our revolving credit facility.

On October 13, 2022, we declared a regular quarterly distribution payable to shareholders of record on October 24, 2022 of $0.55 per share, or approximately $26,700.

We expect to pay this distribution on or about November 17, 2022 using cash on hand and borrowings under our revolving credit facility.

For more information regarding the distributions we paid and declared during 2022, see Note 8 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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For more information on the financial condition and results of operations of these joint ventures, see Note 3 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Other than these joint ventures, as of June 30, 2022, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Other than these joint ventures, as of September 30, 2022, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Debt Covenants (dollars in thousands)

Our principal debt obligations at June 30, 2022 consisted of $230,000 of borrowings outstanding under our revolving credit facility, an aggregate outstanding principal balance of $2,212,000 of public issuances of senior unsecured notes and mortgage notes with an aggregate outstanding principal balance of $73,018, that were assumed in connection with certain of our acquisitions.

Our principal debt obligations at September 30, 2022 consisted of $135,000 of borrowings outstanding under our revolving credit facility, an aggregate outstanding principal balance of $2,212,000 of public issuances of senior unsecured notes and mortgage notes with an aggregate outstanding principal balance of $72,901, that were assumed in connection with certain of our acquisitions.

Also, the three properties owned by two joint ventures in which we own 51% and 50% interests secure two additional mortgage notes.

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Our credit agreement and our senior unsecured notes indentures and their supplements also contain a number of covenants, including those that restrict our ability to incur debts, including debts secured by mortgages on our properties, in excess of calculated amounts, require us to comply with certain financial covenants and, in the case of our credit agreement, restrict our ability to make distributions to our shareholders under certain circumstances.

As of June 30, 2022, we believe we were in compliance with the terms and conditions of our respective covenants under our credit agreement and senior unsecured notes indentures and their supplements.

As of September 30, 2022, we believe we were in compliance with the terms and conditions of our respective covenants under our credit agreement and senior unsecured notes indentures and their supplements.

Our mortgage notes are non-recourse, subject to certain limited exceptions, and do not contain any material financial covenants.

17 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis