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Item 2. Management’s Discussion and Analysis

2023-04-26 compared with 2022-10-27 · 161 added, 262 removed, 305 unchanged (58% of the section changed)

3 unchanged sentences

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

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.

As of March 31, 2023, our wholly owned properties were comprised of 157 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 March 31, 2023, our properties are located in 30 states and the District of Columbia and contain approximately 20,895,000 rentable square feet.

As of March 31, 2023, our properties were leased to 267 different tenants with a weighted average remaining lease term (based on annualized rental income) of approximately 6.4 years.

government is our largest tenant, representing approximately 19.6% of our annualized rental income as of March 31, 2023.

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 March 31, 2023, 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 that accelerated during the COVID-19 pandemic, including increased remote work arrangements and tenants consolidating their real estate footprint, continue to impact the market.

The utilization and demand for office space continues to face headwinds 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 what the full extent of the impacts will be on our or our tenants’ businesses and operations nor the long-term outlook for leasing vacant space.

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.

Federal Reserve has increased the federal funds rate by 450 basis points since March 2022 and has indicated that there may be additional increases.

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

economy 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 and our tenants’ financial condition, could adversely impact the ability or willingness of our tenants to renew our leases or pay rent to us, would impair our ability to effectively deploy our capital or realize desirable returns on our investments, may restrict our access to, and would likely increase our cost of, capital and may cause the values of our properties and our securities to decline.

For more information about the risks relating to these dynamics and conditions and their impacts on us and our business, see Part I, Item IA, “Risk Factors”, of our 2022 Annual Report.

On April 11, 2023, we and DHC entered into the Merger Agreement, pursuant to which, on the terms and subject to the satisfaction or waiver of the conditions thereof, DHC will be merged with and into us, with us continuing as the surviving entity.

Upon the closing of the Merger, we would acquire DHC’s medical office and senior housing portfolios, which, as of December 31, 2022, consisted of 379 properties, including 105 medical office and life science properties containing approximately 8,811,000 rentable square feet, 264 senior living communities containing approximately 27,000 units and ten wellness centers containing approximately 812,000 rentable square feet.

The combined company is expected to be a REIT with a diversified tenant base, a broad portfolio, greater scale and strong growth potential.

For more information and risks relating to the Merger, see Note 10 to our Condensed Consolidated Financial Statements included in Part I, Item 1 and Part II, Item 1A “Risk Factors,” of this Quarterly Report on Form 10-Q.

Property Operations

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.

Unless otherwise noted, the data presented in this section includes properties classified as held for sale as of March 31, 2023 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 2 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):

Occupancy data for our properties as of March 31, 2023 and 2022 was as follows (square feet in thousands):

All Properties (1)

Comparable Properties (2)

September 30,

2023 2022 2023 2022

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90.5 % 88.8 % 93.5 % 94.4 %

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

(2) Includes one leasable land parcel.

(1) Based on properties we owned on March 31, 2023 and 2022, respectively.

(2) Based on properties we owned continuously since January 1, 2022;

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(4) 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 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

The average effective rental rate per square foot for our properties for the three months ended March 31, 2023 and 2022 were as follows:

Three Months Ended March 31,

Average effective rental rate per square foot (1) :

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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 September 30, 2022 and 2021, respectively.

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

(2) Based on properties we owned on March 31, 2023 and 2022, respectively.

(3) Based on properties we owned continuously since January 1, 2022;

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 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

During the three months ended March 31, 2023, changes in rentable square feet leased and available for lease at our properties were as follows (square feet in thousands):

Three Months Ended March 31, 2023

Leased Available for Lease Total

Beginning of period 19,004 1,965 20,969

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Lease renewals (1)

383 (383) — 1,272 (1,272) —

New leases (1)

223 (223) — 585 (585) —

Remeasurements (2)

— 19 19 (1) 18 17

End of period 18,905 1,990 20,895

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

(1) Based on leases entered during the three months ended March 31, 2023.

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

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

Rentable square feet leased 223 383 606

Weighted average rental rate change (by rentable square feet) 59.1 % 0.2 % 21.6 %

Tenant leasing costs and concession commitments (1)

$ 33,957 $ 9,056 $ 43,013

Tenant leasing costs and concession commitments per rentable square foot (1)

$ 152.13 $ 23.66 $ 70.98

Weighted (by square feet) average lease term (years) 9.9 5.5 7.2

Total leasing costs and concession commitments per rentable square foot per year (1)

$ 15.33 $ 4.27 $ 9.92

Nine Months Ended September 30, 2022

During the three months ended March 31, 2023, we entered into new and renewal leases as summarized in the following table (square feet in thousands):

Three Months Ended March 31, 2023

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 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

During the three months ended March 31, 2023, changes in effective rental rates per square foot achieved for new leases and lease renewals at our properties that commenced during the three months ended March 31, 2023, 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 March 31, 2023

Old Effective Rent Per Square Foot (1)

New Effective Rent Per Square Foot (1)

Rentable Square Feet Old Effective Rent Per Square Foot (1)

New Effective Rent Per Square Foot (1)

Rentable Square Feet

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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 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

During the three months ended March 31, 2023 and 2022, amounts capitalized at our properties for lease related costs, building improvements and development, redevelopment and other activities were as follows:

Three Months Ended March 31,

Lease related costs (1)

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Building improvements (2)

8,585 9,267 16,070 21,558

Recurring capital expenditures 17,623 11,447

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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 $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.

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, all of which factors are beyond our control.

In addition to the capital expenditures described above, we contributed $2,263 to one of our unconsolidated joint ventures during the three months ended March 31, 2023.

Also, as of March 31, 2023, we had estimated unspent leasing related obligations of $139,874, of which we expect to spend $84,834 over the next 12 months.

As of March 31, 2023, we had leases at our properties totaling approximately 1,734,000 rentable square feet that were scheduled to expire through March 31, 2024.

As of April 25, 2023, we expect tenants with leases totaling approximately 1,184,000 rentable square feet that are scheduled to expire through March 31, 2024, not to renew or to downsize their leased space upon expiration, and we cannot be sure as to whether other tenants will renew their leases upon expiration.

However, we are in advanced discussions to re-lease certain of this space to new tenants, some of which may offset expected vacancies, and we continue to proactively engage with our existing tenants and are focused on our overall tenant retention.

Prevailing market conditions and our 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, all of which factors are beyond our control.

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;

however, our ability to maintain or increase the rents for our current properties will depend in large part upon market conditions, which are beyond our control.

We cannot be sure of the rental rates which will result from our ongoing negotiations regarding lease renewals or any new or renewed leases we may enter.

We cannot be sure of the rental rates that will result from our ongoing negotiations regarding lease renewals or any new or renewed leases we may enter.

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 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):

As of March 31, 2023, 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 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.

As of March 31, 2023, tenants occupying approximately 2.8% of our rentable square feet and responsible for approximately 2.8% of our annualized rental income as of March 31, 2023 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 3.8%, 2.8%, 3.7%, 1.2%, 0.9%, 3.2%, 0.9%, 0.8%, 0.1%, 0.9%, 0.1% and 0.3% of our rentable square feet, respectively, and contributed an additional approximately 4.0%, 3.0%, 7.2%, 1.6%, 1.4%, 3.7%, 1.3%, 0.9%, 0.1%, 1.2%, 0.2% and 0.4% of our annualized rental income, respectively, as of March 31, 2023.

In addition, as of March 31, 2023, 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 5.5% of our rentable square feet and contributed approximately 6.2% of our annualized rental income as of March 31, 2023.

(2) Leased square feet is pursuant to leases existing as of March 31, 2023, 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 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.

However, market and economic factors, along with increases in remote work, changes in space utilization and government spending and budget priorities, 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.

We believe that recent government budgetary and spending priorities and enhancements in technology have resulted in a decrease in government office use for employees.

Furthermore, over the past several years, government tenants have reduced their space utilization per employee and consolidated government tenants into existing government owned properties.

Over the past several years, government tenants have reduced their space utilization per employee and consolidated government tenants into existing government owned properties.

This activity has reduced the demand for government leased space.

Our historical experience with respect to properties of the type we own that are majority leased to government tenants has been that government tenants frequently renew leases to avoid the costs and disruptions that may result from relocating their operations.

However, efforts to manage space utilization rates may result in our tenants exercising early termination rights under our leases, vacating our properties upon expiration of our leases in order to relocate, or renewing their leases for less space than they currently occupy.

Our historical experience with respect to properties of the type we own that are majority leased to government tenants has been that government tenants have generally renewed leases for mission critical space to avoid the costs and disruptions that may result from relocating their operations.

However, efforts to manage space utilization rates may result in our tenants exercising early termination rights under our leases, vacating our properties upon expiration of our leases in order to relocate to government owned properties or consolidated leased space within a market, or renewing their leases for less space than they currently occupy.

Also, our government tenants’ desire to reconfigure leased office space to manage utilization per employee may require us to spend significant amounts for tenant improvements, and tenant relocations are often more prevalent in those circumstances.

Increasing uncertainty with respect to government agency budgets and funding to implement relocations, consolidations and reconfigurations has resulted in delayed decisions by some of our government tenants and their reliance on short term lease renewals;

however, activity prior to the outbreak of the COVID-19 pandemic suggested that the U.S.

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.

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.

Increasing uncertainty with respect to government agency budgets and funding to implement relocations, consolidations and reconfigurations has, in some instances, resulted in delayed decisions by some of our government tenants

and greater focus on short term lease renewals.

Given the significant uncertainties, including the extent to which remote or alternative work arrangements and tenants consolidating their real estate footprint 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 March 31, 2023, we derived 22.3% 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.

A downturn in economic conditions in this area could result in reduced demand from tenants for our properties or reduce the rents that our tenants in this area are willing to pay when our leases expire or terminate and when renewal or new terms are negotiated.

Additionally, in recent years there has been a decrease in demand for new leased office space by the U.S.

Current economic conditions in this area or a possible recession, including as a result of current inflationary conditions or otherwise, could reduce demand from tenants for our properties, reduce rents that our tenants in this area are willing to pay when our leases expire and increase lease concessions for new leases and renewals.

Additionally, there has been a decrease in demand for new leased office space by the U.S.

government in the metropolitan Washington, D.C.

market area, and that could increase competition for government tenants and adversely affect our ability to retain government tenants when our leases expire.

market area, and that could increase competition for government tenants and adversely affect our ability to retain government tenants or maintain or increase our rents when our leases expire.

Our manager, RMR, employs a tenant review process for us.

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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 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):

As of March 31, 2023, tenants contributing 53.1% 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 9.9% 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 March 31, 2023, 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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4 IG Investments Holdings LLC Not Rated 338 1.8 % 17,281 3.2 %

5 Bank of America Corporation Investment Grade 577 3.0 % 15,766 2.9 %

5 State of California Investment Grade 519 2.7 % 15,970 2.9 %

6 Bank of America Corporation Investment Grade 577 3.1 % 15,911 2.9 %

7 Commonwealth of Massachusetts Investment Grade 311 1.6 % 12,260 2.3 %

8 Tyson Foods, Inc.

Investment Grade 248 1.3 % 11,954 2.2 %

9 CareFirst Inc.

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10 Northrop Grumman Corporation Investment Grade 337 1.8 % 10,795 2.0 %

10 Tyson Foods, Inc.

Investment Grade 248 1.3 % 11,042 2.0 %

11 Sonesta International Hotels Corporation (1)

Not Rated 230 1.2 % 10,745 2.0 %

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

12 CommScope Holding Company Inc.

Non Investment Grade 228 1.2 % 9,466 1.7 %

13 Sonoma Biotherapeutics, Inc.

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Investment Grade 468 2.5 % 6,484 1.2 %

20 Leidos Holdings Inc.

Investment Grade 159 0.8 % 6,117 1.1 %

20 Automatic Data Processing, Inc.

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Investment Grade 250 1.3 % 6,043 1.1 %

22 Leidos Holdings Inc.

Investment Grade 159 0.8 % 5,950 1.1 %

23 Primerica, Inc.

Investment Grade 344 1.8 % 5,441 1.0 %

Total 10,790 56.9 % $ 335,985 61.9 %

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Disposition Activities

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.

During the three months ended March 31, 2023, we sold three properties containing approximately 89,000 rentable square feet for a sales price of $5,350, excluding closing costs.

As a result of current commercial real estate market conditions, including rising interest rates, the pace of our dispositions has moderated and we expect that trend to continue until commercial real estate industry conditions generally, and office market conditions specifically, improve.

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;

accordingly, we cannot be sure that we will complete these sales or that these sales will not be delayed or the terms will not change.

As of April 25, 2023, we have entered into an agreement to sell one property containing approximately 107,000 rentable square feet for a sales price of $4,900, excluding closing costs.

We cannot be sure we will sell any properties we are marketing for sale for prices in excess of their carrying values or otherwise.

In addition, our pending sale is subject to conditions;

accordingly, we cannot be sure that we will complete this sale or that this sale will not be delayed or the terms will not change.

For more information about our disposition activities, see Note 2 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Financing Activities

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.

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

Three Months Ended March 31, 2023, Compared to Three Months Ended March 31, 2022

Comparable Properties (1) Results

Three Months Ended September 30,

Three Months Ended March 31,

Non-Comparable

Properties Results

Three Months Ended September 30,

Three Months Ended March 31,

Consolidated Results

Three Months Ended September 30,

Three Months Ended March 31,

2023 2022 $ Change % Change 2023 2022 2023 2022 $ Change % Change

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Total operating expenses 47,990 45,114 2,876 6.4 % 660 5,759 48,650 50,873 (2,223) (4.4 %)

Net operating income (2)

Net operating income (loss) (2)

$ 84,447 $ 87,151 $ (2,704) (3.1 %) $ (675) $ 9,330 83,772 96,481 (12,709) (13.2 %)

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Loss on impairment of real estate — 17,047 (17,047) n/m

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

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

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 — (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 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 income $ 0.35 $ 0.08 $ 0.27 n/m

n/m - not meaningful

(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 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 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 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 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 $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 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 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.

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 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 $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.

Equity in net losses of investees represents our proportionate share of losses from our investments in two unconsolidated joint ventures.

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 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

Nine Months Ended September 30,

Non-Comparable

Properties Results

Nine Months Ended September 30,

Consolidated Results

Nine Months Ended September 30,

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

Rental income $ 364,924 $ 360,539 $ 4,385 1.2 % $ 61,429 $ 68,656 $ 426,353 $ 429,195 $ (2,842) (0.7 %)

Operating expenses:

Real estate taxes 38,814 38,857 (43) (0.1 %) 10,828 13,276 49,642 52,133 (2,491) (4.8 %)

Utility expenses 17,854 15,566 2,288 14.7 % 2,817 3,565 20,671 19,131 1,540 8.0 %

Other operating expenses 68,606 62,772 5,834 9.3 % 12,991 14,102 81,597 76,874 4,723 6.1 %

Total operating expenses 125,274 117,195 8,079 6.9 % 26,636 30,943 151,910 148,138 3,772 2.5 %

$ 239,650 $ 243,344 $ (3,694) (1.5 %) $ 34,793 $ 37,713 274,443 281,057 (6,614) (2.4 %)

Other expenses:

Depreciation and amortization 170,993 178,991 (7,998) (4.5 %)

Loss on impairment of real estate 21,820 55,854 (34,034) (60.9 %)

Acquisition and transaction related costs 3,218 — 3,218 n/m

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Interest expense (25,231) (27,439) 2,208 (8.0 %)

Loss on early extinguishment of debt (77) (14,068) 13,991 (99.5 %)

Loss before income tax expense and equity in net losses of investees (9,437) (23,113) 13,676 (59.2 %)

Income (loss) before income tax expense and equity in net losses of investees 418 (12,030) 12,448 (103.5 %)

Income tax expense (30) (531) 501 (94.4 %)

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(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 nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

(1) Comparable properties consists of 151 properties we owned on March 31, 2023 and which we owned continuously since January 1, 2022 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 March 31, 2023, compared to the three months ended March 31, 2022.

Rental income.

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 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.

The decrease in rental income reflects decreases in rental income of $8,801 as a result of property disposition activities and $6,303 for properties undergoing significant redevelopment, partially offset by an increase in rental income of $172 for comparable properties.

The decrease in rental income for properties undergoing significant redevelopment is primarily due to termination fee revenue in the 2022 period and the reduction in occupied space at a property located in Seattle, WA that began a redevelopment project after the former tenant’s lease was terminated in February 2022.

Rental income includes non-cash straight line rent adjustments totaling $4,173 in the 2023 period and $2,686 in the 2022 period, and amortization of acquired real estate leases and assumed real estate lease obligations totaling $79 in the 2023 period and $(343) in the 2022 period.

Real estate taxes.

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.

The decrease in real estate taxes primarily reflects decreases of $1,353 related to property disposition activities and $215 for properties undergoing significant redevelopment, partially offset by an increase of $256 for comparable properties.

Real estate taxes for comparable properties increased primarily due to refunds received in the 2022 period as a result of successful real estate tax appeals for certain of our properties.

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 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.

The increase in utility expenses reflects an increase in utility expenses of $1,178 for comparable properties, partially offset by decreases in utility expenses of $734 related to property disposition activities and $49 for properties undergoing significant redevelopment.

The increase in utility expenses for comparable properties is primarily due to the impact of inflation in the 2023 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 $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.

The decrease in other operating expenses primarily reflects decreases of $2,340 related to property disposition activities and $408 for properties undergoing significant redevelopment, partially offset by an increase of $1,442 for comparable properties.

The increase in other operating expenses for comparable properties is primarily due to the impact of inflation in the 2023 period, higher repairs and maintenance costs and higher insurance costs.

Depreciation and amortization.

The decrease in depreciation and amortization primarily reflects decreases of $14,702 related to property disposition activities, $5,362 for comparable properties and $1,116 for properties undergoing significant redevelopment, offset by an increase of $13,182 for acquired properties.

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

The decrease in depreciation and amortization primarily reflects decreases of $4,263 for comparable properties, $2,974 related to property disposition activities and $1,540 for properties undergoing significant redevelopment.

Depreciation and amortization for comparable properties declined due to certain leasing related assets becoming fully depreciated since January 1, 2022, partially offset by depreciation and amortization of improvements made to certain of our properties since January 1, 2022.

Loss on impairment of real estate.

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.

We recorded a $2,184 loss on impairment of real estate to reduce the carrying value of one property to its estimated fair value less costs to sell and a $14,863 loss on impairment of real estate to reduce the carrying value of one property that was held and used to its estimated fair value in the 2022 period.

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.

Acquisition and transaction related costs consist of costs related to our evaluation of potential acquisitions, dispositions and other strategic transactions, including costs incurred in connection with the Merger and related transactions.

For more information regarding the Merger, see Note 10 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

General and administrative.

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.

The increase in general and administrative expenses is primarily the result of a state franchise tax refund received in the 2022 period, as well as higher legal, accounting and other professional services costs in the 2023 period, partially offset by a decrease in base business management fees resulting from a decrease in average total market capitalization in the 2023 period compared to the 2022 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.

We recorded a $2,548 gain on sale of real estate resulting from the sale of three properties in the 2023 period.

We recorded a $2,149 net gain on sale of real estate resulting from the sale of four properties in the 2022 period.

Interest and other income.

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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 $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 $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.

The decrease in interest expense reflects the redemption of our $300,000 senior unsecured notes with an interest rate of 4.0% in June 2022, the repayment of two mortgage notes since April 1, 2022 with an aggregate principal balance of approximately $48,000 and an average interest rate of 4.5% and higher capitalized interest in the 2023 period, partially offset by higher average amounts outstanding and higher average interest rates on borrowings under our revolving credit facility during the 2023 period.

Income tax expense.

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Equity in net losses of investees represents our proportionate share of losses from our investments in two unconsolidated joint ventures.

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 2023 period compared to the 2022 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.

We present certain “non-GAAP financial measures” within the meaning of the applicable rules of the 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 income (loss) as indicators of our operating performance or as measures of our liquidity.

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

The following table presents the reconciliation of net loss to NOI for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

Net loss $ (446) $ (13,407)

Equity in net losses of investees 834 846

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Income (loss) before income tax expense and equity in net losses of investees 418 (12,030)

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

Interest expense 25,231 27,439

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

The following table presents the reconciliation of net loss to FFO and Normalized FFO for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

Net loss $ (446) $ (13,407)

Depreciation and amortization:

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Acquisition and transaction related costs 3,218 —

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

Estimated business management incentive fees — (6,627) — 4,484

Normalized FFO $ 52,746 $ 62,722

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

Weighted average common shares outstanding (basic and diluted) 48,336 48,243

FFO per common share (basic and diluted) $ 1.02 $ 1.30

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

On April 13, 2023, we announced a regular quarterly cash distribution of $0.25 per common share ($1.00 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 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.

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.

We reduced our quarterly cash distribution to increase financial flexibility through the closing of the Merger.

Following the Merger, we expect the combined company’s annual distribution will remain at $1.00 per common share per year.

Pursuant to our capital recycling program, we selectively sell certain properties from time to time to manage leverage levels and to acquire new properties or portfolios with a goal of improving our asset diversification, our geographical footprint and the average age of our properties, lengthening the weighted average term of our leases and increasing tenant retention.

During the three months ended March 31, 2023, we sold three properties for a sales price of $5,350, excluding closing costs.

As a result of current real estate market conditions, including rising interest rates, the pace of our dispositions has moderated and we expect that trend to continue until commercial real estate industry conditions generally, and office market conditions specifically, improve.

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 April 25, 2023, we have entered into an agreement to sell one property for a sales price of $4,900, excluding closing costs.

W e continue to carefully consider our capital allocation strategy to position us to opportunistically recycle and deploy capital.

Our future purchases of properties cannot be accurately projected because such purchases depend upon purchase opportunities which come to our attention and our ability to successfully complete the acquisitions.

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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:

Nine Months Ended September 30,

Three Months Ended March 31,

Cash, cash equivalents and restricted cash at beginning of period $ 12,249 $ 84,515

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Cash, cash equivalents and restricted cash at end of period $ 23,344 $ 99,058

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 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.

The increase in cash provided by operating activities for the 2023 period compared to the 2022 period was primarily due to favorable changes in working capital, partially offset by decreases in NOI at certain of our properties in the 2023 period.

The increase in cash used in investing activities in the 2023 period compared to the 2022 period was primarily due to increased capital expenditures in the 2023 period related to our two redevelopment projects in Washington D.C.

and Seattle, WA, as well as lower proceeds received from property sales in the 2023 period.

The increase in cash provided by financing activities in the 2023 period was primarily due to higher borrowings under our revolving credit facility to fund capital improvements at our properties in the 2023 period.

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

In order to fund acquisitions and to meet cash needs that may result from our desire or need to make distributions or pay operating or capital expenses, we maintain a $750,000 revolving credit facility.

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.

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

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 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.

In March 2023, we amended our credit agreement to, among other things, replace LIBOR with SOFR as the benchmark interest rate for calculating interest payable on amounts outstanding under our revolving credit facility.

We are required to pay interest at a rate of SOFR plus a premium, which was 110 basis points per annum at March 31, 2023, 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 March 31, 2023.

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

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.

Effective April 1, 2023, based upon changes to our credit ratings, the

interest rate premium and facility fee increased to 145 basis points per annum and 30 basis points per annum, respectively.

As of March 31, 2023, the annual interest rate payable on borrowings under our revolving credit facility was 6.0%.

As of March 31, 2023 and April 25, 2023, we had $245,000 and $260,000, respectively, outstanding under our revolving credit facility, and $505,000 and $490,000, 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.

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

Mortgage Note Prepayments

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

As of March 31, 2023, our debt maturities (other than our revolving credit facility), consisting of senior unsecured notes and one mortgage note, were as follows:

Year Debt Maturities

2023 $ 50,000

2028 and thereafter 562,000

Total $ 2,262,000

(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 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.

Our $50,000 mortgage note requires monthly payments of interest only through maturity.

In addition to our debt obligations, as of March 31, 2023, we had estimated unspent leasing related obligations of $139,874, of which we expect to spend $84,834 over the next 12 months.

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

containing approximately 340,000 rentable square feet.

Upon completion, the property will contain approximately 430,000 rentable square feet.

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

As of March 31, 2023, we had incurred $164,417 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 9 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 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 September 30, 2022, we had incurred approximately $27,934 related to this project.

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

As of March 31, 2023, we had incurred $74,493 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.

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We may also seek to participate in additional joint venture or other arrangements that may provide us with additional sources of financing.

Although we cannot be sure that we will be successful in consummating any particular type of financing, we believe that we will have access to financing, such as debt and equity offerings, to fund future acquisitions and capital expenditures and to pay our obligations.

our obligations.

We currently have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for such securities.

In connection with the execution of the Merger Agreement, we entered into a commitment letter, dated as of April 11, 2023, with JPM, pursuant to which JPM has committed to provide, subject to the terms and conditions of the commitment letter, a senior secured bridge facility to us in an aggregate principal amount of $368,000.

As a condition to the Merger, we have agreed to either extend or replace our existing credit agreement, on terms that, among other things, would not be reasonably likely to be materially adverse to the business, operations or financial condition of us after giving effect to the Merger and would not delay or prevent the consummation of the Merger.

In addition, in connection with the closing of the Merger, we expect to pay off DHC’s credit facility and to assume $2,350,000 of principal amount of DHC’s unsecured senior notes.

Our ability to obtain, and the costs of, our future debt financings will depend primarily on credit market conditions and our creditworthiness.

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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 ultimate impacts of inflationary pressures, rising interest rates or an economic recession will be.

For instance, it is uncertain what the ultimate impacts of inflationary pressures, rising or sustained high interest rates or any 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.

During the three months ended March 31, 2023, we paid quarterly distributions to our shareholders totaling $26,710 using cash on hand and borrowings under our revolving credit facility.

On April 13, 2023, we declared a regular quarterly distribution payable to shareholders of record on April 24, 2023 of $0.25 per share, or approximately $12,100.

We expect to pay this distribution on or about May 18, 2023 using cash on hand and borrowings under our revolving credit facility.

For more information regarding the distributions we paid and declared during 2023, see Note 7 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 2 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 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.

Other than these joint ventures, as of March 31, 2023, 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 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.

Our principal debt obligations at March 31, 2023 consisted of $245,000 of borrowings outstanding under our revolving credit facility, an outstanding principal balance of $2,212,000 of public issuances of senior unsecured notes and a mortgage note with an outstanding principal balance of $50,000, that was assumed in connection with an acquisition.

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 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.

As of March 31, 2023, 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 note is non-recourse, subject to certain limited exceptions, and does not contain any material financial covenants.

Neither our credit agreement nor our senior unsecured notes indentures and their supplements contain provisions for acceleration which could be triggered by our credit ratings.

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Accordingly, if that credit rating is downgraded, our interest expense and related costs under our credit agreement would increase.

In March 2023, Moody’s Investors Service, or Moody’s, downgraded our senior unsecured debt rating from Ba1 to Ba2 and S&P Global Ratings downgraded our senior unsecured debt rating from BBB- to BB+.

As a result, the interest rate premium under our revolving credit facility increased 35 basis points effective April 1, 2023.

In April 2023, following the announcement of the Merger, Moody’s downgraded our senior unsecured debt rating from Ba2 to Ba3.

Our credit agreement has cross default provisions to other indebtedness that is recourse of $25,000 or more and indebtedness that is non-recourse of $50,000 or more.

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For more information about these and other such relationships and related person transactions, see Notes 8 and 9 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our 2022 Annual Report, our definitive Proxy Statement for our 2023 Annual Meeting of Shareholders and our other filings with the SEC.

In addition, see the section captioned “Risk Factors” of our 2021 Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships.

In addition, see the section captioned “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item IA of our 2022 Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships.

We may engage in additional transactions with related persons, including businesses to which RMR or its subsidiaries provide management services.

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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