What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-10-30 compared with 2023-07-26 · 168 added, 197 removed, 385 unchanged (49% of the section changed)

3 unchanged sentences

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

As of June 30, 2023, our wholly owned properties were comprised of 155 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, 2023, our properties are located in 30 states and the District of Columbia and contain approximately 20,784,000 rentable square feet.

As of June 30, 2023, our properties were leased to 268 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 June 30, 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 June 30, 2023, plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization.

As of September 30, 2023, our wholly owned properties were comprised of 154 properties and we had noncontrolling ownership interests of 51% and 50% in two unconsolidated joint ventures that own three properties containing approximately 451,000 rentable square feet.

As of September 30, 2023, our properties are located in 30 states and the District of Columbia and contain approximately 20,705,000 rentable square feet.

As of September 30, 2023, our properties were leased to 263 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 20.0% of our annualized rental income as of September 30, 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 September 30, 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 duration and 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.

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 our properties.

In response to inflationary pressures, the U.S.

Federal Reserve has increased the federal funds rate by 525 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 concerns that the U.S.

The inflationary pressures and rising interest rates in the United States and globally, and global geopolitical hostilities and tensions, have given rise to 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.

On September 1, 2023, we and DHC mutually agreed to terminate the previously disclosed Merger Agreement and entered into the Termination Agreement.

For more information on our terminated merger with DHC, see Note 1 to our Condensed Consolidated Financial Statements.

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, senior housing and wellness center portfolios, which, as of March 31, 2023, consisted of 376 properties, including 105 medical office and life science properties containing approximately 8,809,000 rentable square feet, 261 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 Notes 1, 9 and 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 and our joint proxy statement/prospectus that is included in our registration statement on Form S-4 filed with the SEC, or the Form S-4.

Property Operations

Unless otherwise noted, the data presented in this section includes properties classified as held for sale as of June 30, 2023 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 September 30, 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 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, 2023 and 2022 was as follows (square feet in thousands):

Occupancy data for our properties as of September 30, 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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89.9 % 90.7 % 93.3 % 94.7 %

(1) Based on properties we owned on June 30, 2023 and 2022, respectively.

(1) Based on properties we owned on September 30, 2023 and 2022, respectively.

(2) 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.

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

(3) Subject to changes when space is remeasured or reconfigured for tenants.

(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 six months ended June 30, 2023 and 2022 were 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, 2023 and 2022 were as follows:

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

2023 2022 2023 2022

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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, 2023 and 2022, respectively.

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

During the three and six months ended June 30, 2023, 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, 2023 Six Months Ended June 30, 2023

(2) Based on properties we owned on September 30, 2023 and 2022, respectively.

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

During the three and nine months ended September 30, 2023, 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, 2023 Nine Months Ended September 30, 2023

Leased Available for Lease Total Leased Available for Lease Total

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End of period 18,621 2,084 20,705 18,621 2,084 20,705

(1) Represents additional rentable square feet resulting from the redevelopment of a property in Washington, D.C., which was completed and available for lease as of June 30, 2023.

(2) Based on leases entered during the three and six months ended June 30, 2023.

(1) Represents additional rentable square feet resulting from the redevelopment of a property in Washington, D.C., which was completed in June 2023.

(2) Based on leases entered during the three and nine months ended September 30, 2023.

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

During the three and six months ended June 30, 2023, we entered into new and renewal leases as summarized in the following table (square feet in thousands):

Three Months Ended June 30, 2023

During the three and nine months ended September 30, 2023, we entered into new and renewal leases as summarized in the following table (square feet in thousands):

Three Months Ended September 30, 2023

New Leases Renewals Total

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$ 13.84 $ 3.53 $ 5.89

Six Months Ended June 30, 2023

Nine Months Ended September 30, 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 six months ended June 30, 2023, 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, 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 June 30, 2023 Six Months Ended June 30, 2023

During the three and nine months ended September 30, 2023, 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, 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 September 30, 2023 Nine Months Ended September 30, 2023

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, 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 June 30, Six Months Ended June 30,

During the three and nine months ended September 30, 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 September 30, Nine Months Ended September 30,

2023 2022 2023 2022

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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 $1,500 and $3,763 to one of our unconsolidated joint ventures during the three and six months ended June 30, 2023, respectively.

Also, as of June 30, 2023, we had estimated unspent leasing related obligations of $151,798, of which we expect to spend $89,129 over the next 12 months.

As of June 30, 2023, we had leases at our properties totaling approximately 2,136,000 rentable square feet that were scheduled to expire through June 30, 2024.

As of July 25, 2023, we expect tenants with leases totaling approximately 1,411,000 rentable square feet that are scheduled to expire through June 30, 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.

Includes capitalized interest and other operating costs of $1,978 and $8,691 for the three and nine months ended September 30, 2023, respectively, and $2,089 and $5,029 for the three and nine months ended September 30, 2022, respectively.

In addition to the capital expenditures described above, we contributed $3,763 to one of our unconsolidated joint ventures during the nine months ended September 30, 2023.

Also, as of September 30, 2023, we had estimated unspent leasing related obligations of $137,223, of which we expect to spend $73,666 over the next 12 months.

As of September 30, 2023, we had leases at our properties totaling approximately 2,614,820 rentable square feet that were scheduled to expire through September 30, 2024.

As of October 27, 2023, we expect tenants with leases totaling approximately 1,832,201 rentable square feet that are scheduled to expire through September 30, 2024, excluding space that has been re-leased and space for which we are in advanced negotiations to re-lease, 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 continue to proactively engage with our existing tenants and are focused on 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.

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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 June 30, 2023, our lease expirations by year were as follows (square feet in thousands):

As of September 30, 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 June 30, 2023, tenants occupying approximately 3.9% of our rentable square feet and responsible for approximately 3.8% of our annualized rental income as of June 30, 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, 2032, 2035, 2037 and 2040, early termination rights become exercisable by other tenants who occupied an additional approximately 2.3%, 2.8%, 3.7%, 1.5%, 0.9%, 3.4%, 0.9%, 0.8%, 0.6%, 0.3%, 0.9%, 0.1% and 0.3% of our rentable square feet, respectively, and contributed an additional approximately 2.6%, 3.0%, 7.2%, 2.0%, 1.4%, 3.9%, 1.4%, 1.0%, 0.5%, 0.6%, 1.2%, 0.2% and 0.4% of our annualized rental income, respectively, as of June 30, 2023.

In addition, as of June 30, 2023, pursuant to leases with 8 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 8 tenants occupied approximately 4.8% of our rentable square feet and contributed approximately 5.0% of our annualized rental income as of June 30, 2023.

(2) Leased square feet is pursuant to leases existing as of June 30, 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.

As of September 30, 2023, tenants occupying approximately 3.6% of our rentable square feet and responsible for approximately 3.6% of our annualized rental income as of September 30, 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, 2032, 2034, 2035, 2036, 2037 and 2040, early termination rights become exercisable by other tenants who occupied an additional approximately 1.0%, 2.6%, 2.6%, 1.6%, 1.3%, 3.9%, 0.8%, 0.9%, 0.6%, 0.3%, 0.2%, 0.9%, 0.1%, 0.1% and 0.3% of our rentable square feet, respectively, and contributed an additional approximately 1.1%, 2.9%, 5.0%, 2.2%, 1.6%, 4.4%, 1.4%, 1.0%, 0.5%, 0.6%, 0.6%, 1.2%, 0.3%, 0.2% and 0.4% of our annualized rental income, respectively, as of September 30, 2023.

In addition, as of September 30, 2023, pursuant to leases with nine 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 nine tenants occupied approximately 4.8% of our rentable square feet and contributed approximately 5.2% of our annualized rental income as of September 30, 2023.

(2) Leased square feet is pursuant to leases existing as of September 30, 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.

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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.

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 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, 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 June 30, 2023, we derived 22.4% of our annualized rental income from our properties located in the metropolitan Washington, D.C.

As of September 30, 2023, we derived 21.6% 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.

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.

government, including 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 or maintain or increase our rents when our leases expire.

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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, 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 9.8% 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, 2023, tenants representing 1% or more of our total annualized rental income were as follows (square feet in thousands):

As of September 30, 2023, tenants contributing 53.6% 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 10.4% 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, 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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Not Rated 596 3.2 % 19,216 3.6 %

4 Bank of America Corporation Investment Grade 577 3.1 % 18,159 3.4 %

5 IG Investments Holdings LLC Not Rated 339 1.8 % 17,303 3.3 %

6 State of California Investment Grade 519 2.8 % 15,893 3.0 %

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 %

7 Tyson Foods, Inc.

Investment Grade 248 1.3 % 11,954 2.3 %

9 CareFirst Inc.

Not Rated 207 1.1 % 11,622 2.1 %

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

11 Sonesta International Hotels Corporation (2)

Not Rated 230 1.2 % 10,745 2.0 %

9 Sonesta International Hotels Corporation Not Rated 234 1.3 % 10,745 2.0 %

10 CommScope Holding Company Inc.

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12 State of Georgia Investment Grade 308 1.7 % 7,345 1.4 %

13 Commonwealth of Massachusetts Investment Grade 212 1.1 % 7,269 1.4 %

14 PNC Bank Investment Grade 441 2.4 % 6,960 1.3 %

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exercising its option to terminate its lease at a property we own in Chicago, IL effective January 2025, prior to the stated lease expiration date of January 31, 2028.

We will receive an early termination fee of approximately $8,600.

(2) In June 2021, we entered into a 30-year lease with Sonesta.

The lease relates to the redevelopment of a property we own in Washington, D.C to a mixed use and Sonesta's lease relates to the hotel component of the property.

We substantially completed the redevelopment in June 2023 and the Sonesta lease is estimated to commence in August 2023.

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.

We are amortizing termination fees of approximately $1,400 per quarter through January 2025 as a result of this early termination.

(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.

The term of the lease is estimated to commence in the first quarter of 2024.

Disposition Activities

During the six months ended June 30, 2023, we sold five properties containing approximately 296,000 rentable square feet for an aggregate sales price of $13,075, 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 July 25, 2023, we have entered into an agreement to sell one property containing approximately 80,000 rentable square feet for a sales price of $10,500, excluding closing costs.

During the nine months ended September 30, 2023, we sold six properties containing approximately 376,000 rentable square feet for an aggregate sales price of $23,575, excluding closing costs.

The net proceeds from these sales were used to repay amounts outstanding under our revolving credit facility.

We continue to evaluate our portfolio 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 27, 2023, we have entered into agreements to sell two properties containing approximately 177,000 rentable square feet for an aggregate sales price of $21,299, 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.

In addition, our pending 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.

For more information about our disposition activities, see Note 3 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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

Three Months Ended June 30, 2023, Compared to Three Months Ended June 30, 2022

Three Months Ended September 30, 2023, Compared to Three Months Ended September 30, 2022

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,

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

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Total operating expenses 49,558 48,779 779 1.6 % 105 3,358 49,663 52,137 (2,474) (4.7 %)

Net operating income (loss) (2)

Net operating income (2)

$ 82,797 $ 82,990 $ (193) (0.2 %) $ 901 $ 2,556 83,698 85,546 (1,848) (2.2 %)

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Depreciation and amortization 52,266 52,988 (722) (1.4 %)

Loss on impairment of real estate — 4,773 (4,773) n/m

Acquisition and transaction related costs 16,135 — 16,135 n/m

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Total other expenses 74,121 59,552 14,569 24.5 %

Loss on sale of real estate (2,305) (11,637) 9,332 (80.2 %)

Gain on sale of real estate 244 16,925 (16,681) (98.6 %)

Interest and other income 281 56 225 n/m

Interest expense (26,525) (26,515) (10) n/m

Loss on early extinguishment of debt — (77) 77 n/m

Loss before income tax (expense) benefit and equity in net losses of investees (11,340) (15,413) 4,073 (26.4 %)

Income tax (expense) benefit (211) 190 (401) n/m

Interest expense (28,835) (24,969) (3,866) 15.5 %

(Loss) income before income tax expense and equity in net losses of investees (18,733) 18,006 (36,739) n/m

Income tax expense (95) (90) (5) 5.6 %

Equity in net losses of investees (765) (952) 187 (19.6 %)

Net loss $ (12,242) $ (16,056) $ 3,814 (23.8 %)

Net (loss) income $ (19,593) $ 16,964 $ (36,557) n/m

Weighted average common shares outstanding (basic and diluted) 48,403 48,286 117 0.2 %

Per common share amounts (basic and diluted):

Net loss $ (0.25) $ (0.33) $ 0.08 (24.2 %)

Net (loss) income $ (0.41) $ 0.35 $ (0.76) n/m

n/m - not meaningful

(1) Comparable properties consists of 148 properties we owned on June 30, 2023 and which we owned continuously since April 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 June 30, 2023, compared to the three months ended June 30, 2022.

(1) Comparable properties consists of 147 properties we owned on September 30, 2023 and which we owned continuously since July 1, 2022 and excludes two properties classified as held for sale, five properties undergoing significant redevelopment 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) 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, 2023, compared to the three months ended September 30, 2022.

Rental income.

The decrease in rental income reflects a decrease in rental income of $7,841 as a result of property disposition activities, partially offset by increases in rental income of $509 for comparable properties and $13 for properties undergoing significant redevelopment.

The increase in rental income for comparable properties is primarily due to an increase in reimbursement revenue resulting from higher operating expenses, partially offset by reductions in occupied space at certain of our properties and lower early termination income recorded in the 2023 period.

Rental income declined $5,440 as a result of our property disposition activities, partially offset by increases of $532 from new leases at properties undergoing significant redevelopment and $586 for comparable properties as a result of increased termination fee revenue and recovery of allowances for bad debts in the 2023 period, partially offset by increased vacancies and lower rents from lease renewals at certain of our properties in the 2023 period.

Rental income includes non-cash straight line rent adjustments totaling $8,691 in the 2023 period and $1,765 in the 2022 period, and amortization of acquired real estate leases and assumed real estate lease obligations totaling $56 in the 2023 period and $(204) in the 2022 period.

Real estate taxes.

The decrease in real estate taxes primarily reflects a decrease of $1,093 related to property disposition activities, partially offset by increases of $383 for comparable properties and $28 for properties undergoing significant redevelopment.

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.

Real estate taxes for non-comparable properties declined $1,001 as a result of successful tax appeals at certain properties undergoing significant redevelopment and $939 related to property disposition activities, and declined $217 for comparable properties primarily due to successful tax appeals at certain of our properties in the 2023 period.

Utility expenses.

The decrease in utility expenses primarily reflects a decrease of $429 related to property disposition activities, partially offset by increases of $324 for comparable properties and $27 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 executed in 2022 with those tenants.

Utility expenses declined $465 related to our property disposition activities and $240 for comparable properties as a result of higher utility expenses in the 2022 period for expenses previously paid directly by a certain tenant that were paid by us pursuant to a lease amendment executed in 2022 with that tenant, partially offset by an increase of $179 for properties undergoing significant redevelopment due to the related lease-up of the properties.

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 $1,893 for comparable properties and $50 for properties undergoing significant redevelopment, partially offset by a decrease of $1,806 related to property disposition activities.

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, as well as other operating expenses that were previously paid directly by certain of our tenants that are now being paid by us pursuant to lease amendments executed in 2022 with those tenants.

Other operating expenses increased $1,236 for comparable properties and $259 for properties undergoing significant redevelopment due to the related lease-up of the properties, partially offset by a decrease of $1,286 related to property disposition activities.

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 $2,413 for comparable properties, $1,995 related to property disposition activities and $1,527 for properties undergoing significant redevelopment.

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

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 values less costs to sell.

Depreciation and amortization for comparable properties declined $2,694 due to certain leasing related assets becoming fully depreciated since July 1, 2022, partially offset by depreciation and amortization of improvements made to certain of our properties since July 1, 2022.

Depreciation and amortization for properties undergoing significant redevelopment increased $1,175 due to the substantial completion of our 20 Mass Ave.

redevelopment in Washington, D.C.

in June 2023 and $797 related to our property disposition activities.

Acquisition and transaction related costs.

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 Notes 1, 9 and 10 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and our joint proxy statement/prospectus that is included in the Form S-4.

Acquisition and transaction related costs in the 2023 period consist of costs incurred in connection with our terminated merger with DHC and related transactions.

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

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 a decrease in base business management fees resulting from a decrease in average total market capitalization and a decrease in share based compensation in the 2023 period compared to the 2022 period.

Loss on sale of real estate.

We recorded a $2,305 net loss on sale of real estate resulting from the sale of two properties in the 2023 period.

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

Gain on sale of real estate.

We recorded a $244 gain on sale of real estate resulting from the sale of one property in the 2023 period.

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.

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Interest expense.

The increase in interest expense reflects higher average amounts outstanding and higher average interest rates on borrowings under our revolving credit facility, as well as the issuance of four mortgage notes with an aggregate principal balance of $108,120 and a weighted average interest rate of 7.9% during the 2023 period, partially offset by the redemption of $300,000 of our senior unsecured notes with an interest rate of 4.0% in June 2022, higher capitalized interest and the repayment of two mortgage notes since July 1, 2022 with an aggregate principal balance of approximately $73,000 and a weighted average interest rate of 4.0%.

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.

Income tax (expense) benefit.

Income tax (expense) 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.

The increase in interest expense reflects higher average interest rates on borrowings under our revolving credit facility and higher average amounts outstanding, as well as the issuance of six mortgage notes with an aggregate principal balance of $177,320 and a weighted average interest rate of 7.8% during 2023, partially offset by the repayment of two mortgage notes since July 1, 2022 with an aggregate principal balance of approximately $73,000 and a weighted average interest rate of 4.0%.

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.

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.

Six Months Ended June 30, 2023, Compared to Six Months Ended June 30, 2022

Net (loss) income.

Net (loss) income and net (loss) income 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.

Nine Months Ended September 30, 2023, Compared to Nine Months Ended September 30, 2022

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,

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

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Total operating expenses 144,045 137,746 6,299 4.6 % 2,545 14,164 146,590 151,910 (5,320) (3.5 %)

Net operating income (loss) (2)

$ 252,389 $ 257,061 $ (4,672) (1.8 %) $ 801 $ 17,382 253,190 274,443 (21,253) (7.7 %)

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Total other expenses 203,523 212,390 (8,867) (4.2 %)

Gain (loss) on sale of real estate 243 (9,488) 9,731 (102.6 %)

Gain on sale of real estate 487 7,437 (6,950) (93.5 %)

Interest and other income 782 73 709 n/m

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Loss on early extinguishment of debt — (77) 77 n/m

Loss before income tax expense and equity in net losses of investees (10,922) (27,443) 16,521 (60.2 %)

Loss before income tax expense and equity in net losses of investees (29,655) (9,437) (20,218) n/m

Income tax expense (336) (431) 95 (22.0 %)

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n/m - not meaningful

(1) Comparable properties consists of 148 properties we owned on June 30, 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.

(1) Comparable properties consists of 147 properties we owned on September 30, 2023 and which we owned continuously since January 1, 2022 and excludes two properties classified as held for sale, five properties undergoing significant redevelopment 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, 2023, compared to the six months ended June 30, 2022.

References to changes in the income and expense categories below relate to the comparison of consolidated results for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.

Rental income.

The decrease in rental income primarily reflects decreases in rental income of $16,989 related to property disposition activities and $6,290 for properties undergoing significant redevelopment, partially offset by an increase of $1,028 f or 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 for non-comparable properties declined $22,443 as a result of our property disposition activities and $5,757 for properties undergoing significant redevelopment due to termination fee revenue in the 2022 period and increased vacancy at a property that began a redevelopment project in February 2022, partially offset by an increase of $1,627 for comparable properties as a result of decreased amortization of acquired real estate leases in the 2023 period and an increase in reimbursement revenue resulting from higher operating expenses, partially offset by lower termination fee revenue and increased vacancies at certain of our properties in the 2023 period.

Rental income includes non-cash straight line rent adjustments totaling $17,120 in the 2023 period and $7,226 in the 2022 period, and amortization of acquired real estate leases and assumed real estate lease obligations totaling $196 in the 2023 period and $(780) in the 2022 period.

Real estate taxes.

The decrease in real estate taxes primarily reflects decreases of $2,446 related to property disposition activities and $185 for properties undergoing significant redevelopment, partially offset by an increase of $637 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.

Real estate taxes for non-comparable properties declined $3,384 related to our property disposition activities and $1,187 for properties undergoing significant redevelopment as a result of successful tax appeals at certain properties undergoing significant redevelopment, partially offset by an increase of $420 for comparable properties primarily due to successful tax appeals in the 2022 period.

Utility expenses.

The increase in utility expenses primarily reflects an increase of $1,528 for comparable properties, partially offset by decreases in utility expenses of $1,190 related to property disposition activities and $21 for properties undergoing significant redevelopment.

Utility expenses declined $1,655 related to our property disposition activities, partially offset by increases of $1,289 for comparable properties and $157 for properties undergoing significant redevelopment due to the related lease-up of those properties.

Other operating expenses.

The decrease in other operating expenses primarily reflects decreases of $4,162 related to property disposition activities and $358 for properties undergoing significant redevelopment, partially offset by an increase of $3,351 for comparable properties.

Other operating expenses for non-comparable properties declined $5,450 related to our property disposition activities and $100 for properties undergoing significant redevelopment, partially offset by an increase of $4,590 for comparable properties due to the impact of inflation in the 2023 period, higher repairs and maintenance costs and higher insurance costs, as well as other operating expenses that were previously paid directly by certain of our tenants that are now being paid by us pursuant to lease amendments executed in 2022 with those tenants, partially offset by lower snow removal costs in the 2023 period.

Depreciation and amortization.

The decrease in depreciation and amortization primarily reflects decreases of $6,705 for comparable properties, $4,939 related to property disposition activities and $3,068 for properties undergoing significant redevelopment.

The decrease in depreciation and amortization primarily reflects decreases of $9,401 for comparable properties, $4,142 related to our property disposition activities and $1,891 for properties undergoing significant redevelopment.

Depreciation and amortization for comparable properties decreased 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.

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Acquisition and transaction related costs.

Acquisition and transaction related costs consist of costs in the 2023 period incurred in connection with our terminated merger with DHC and related transactions.

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

General and administrative.

Gain (loss) on sale of real estate.

We recorded a $243 net gain on sale of real estate resulting from the sale of five properties in the 2023 period.

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

Gain on sale of real estate.

We recorded a $487 net gain on sale of real estate resulting from the sale of six properties in the 2023 period.

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

Interest and other income.

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Interest expense.

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, higher capitalized interest in the 2023 period and the repayment of three mortgage notes since January 1, 2022 with an aggregate principal balance of approximately $98,000 and a weighted average interest rate of 4.2%, partially offset by higher average amounts outstanding and higher average interest rates on borrowings under our

revolving credit facility, as well as the issuance of four mortgage notes with an aggregate principal balance of $108,120 and a weighted average interest rate of 7.9% during the 2023 period.

The increase in interest expense reflects higher average amounts outstanding and higher average interest rates on borrowings under our revolving credit facility, as well as the issuance of six mortgage notes with an aggregate principal balance of $177,320 and a weighted average interest rate of 7.8% during the 2023 period, partially offset by the redemption of our $300,000 senior unsecured notes with an interest rate of 4.0% in June 2022, higher capitalized interest in the 2023 period and the repayment of three mortgage notes since January 1, 2022 with an aggregate principal balance of approximately $98,000 and a weighted average interest rate of 4.1%.

Loss on early extinguishment of debt.

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

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.

Net loss and net loss per basic and diluted common share increased 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 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.

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).

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

These measures should be considered in conjunction with net (loss) income 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) income.

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 income (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 (loss) income 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, 2023 and 2022:

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

The following table presents the reconciliation of net (loss) income to NOI for the three and nine months ended September 30, 2023 and 2022:

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

2023 2022 2023 2022

Net loss $ (12,242) $ (16,056) $ (12,688) $ (29,463)

Net (loss) income $ (19,593) $ 16,964 $ (32,281) $ (12,499)

Equity in net losses of investees 765 952 2,290 2,631

Income tax expense (benefit) 211 (190) 241 341

Loss before income tax expense (benefit) and equity in net losses of investees (11,340) (15,413) (10,922) (27,443)

Income tax expense 95 90 336 431

(Loss) income before income tax expense and equity in net losses of investees (18,733) 18,006 (29,655) (9,437)

Loss on early extinguishment of debt — — — 77

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Interest and other income (281) (56) (782) (73)

(Gain) loss on sale of real estate 2,305 11,637 (243) 9,488

Gain on sale of real estate (244) (16,925) (487) (7,437)

General and administrative 5,720 6,564 17,430 19,353

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We calculate FFO and Normalized FFO as shown below.

FFO is calculated on the basis defined by The National Association of Real Estate Investment Trusts, which is net income (loss), calculated in accordance with GAAP, plus real estate depreciation and amortization of consolidated properties and our proportionate share of the real estate depreciation and amortization of unconsolidated joint venture properties, but excluding impairment charges on real estate assets and any gain or loss on sale of real estate, as well as certain other adjustments currently not applicable to us.

FFO is calculated on the basis defined by The National Association of Real Estate Investment Trusts, which is net (loss) income, calculated in accordance with GAAP, plus real estate depreciation and amortization of consolidated properties and our proportionate share of the real estate depreciation and amortization of unconsolidated joint venture properties, but excluding impairment charges on real estate assets and any gain or loss on sale of real estate, as well as certain other adjustments currently not applicable to us.

In calculating Normalized FFO, we adjust for the other items shown below and include business management incentive fees, if any, only in the fourth quarter versus the quarter when they are recognized as an expense in accordance with GAAP due to their quarterly volatility not necessarily being indicative of our core operating performance and the uncertainty as to whether any such business management incentive fees will be payable when all contingencies for determining such fees are known at the end of the calendar year.

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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, 2023 and 2022:

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

The following table presents the reconciliation of net (loss) income to FFO and Normalized FFO for the three and nine months ended September 30, 2023 and 2022:

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

2023 2022 2023 2022

Net loss $ (12,242) $ (16,056) $ (12,688) $ (29,463)

Net (loss) income $ (19,593) $ 16,964 $ (32,281) $ (12,499)

Depreciation and amortization:

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Loss on impairment of real estate — — — 21,820

(Gain) loss on sale of real estate 2,305 11,637 (243) 9,488

Gain on sale of real estate (244) (16,925) (487) (7,437)

FFO 33,269 53,802 125,329 175,146

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

On October 12, 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.

In April 2023, we reduced our quarterly cash distribution to the current level of $0.25 per common share to increase financial flexibility.

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 six months ended June 30, 2023, we sold five properties for an aggregate sales price of $13,075 , 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 July 25, 2023, we have entered into an agreement to sell one property for a sales price of $10,500, excluding closing costs.

During the nine months ended September 30, 2023, we sold six properties for an aggregate sales price of $23,575 , excluding closing costs.

W e 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 October 27, 2023, we have entered into agreements to sell two properties for an aggregate sales price of $21,299, 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.

In addition, our pending 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.

W e continue to carefully consider our capital allocation strategy to position us 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 $ 12,249 $ 84,515

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Cash, cash equivalents and restricted cash at end of period $ 39,628 $ 15,525

The decrease in cash provided by operating activities for the 2023 period compared to the 2022 period was primarily due to decreases in NOI in the 2023 period due to property dispositions and an increase in costs incurred in connection with the Merger and related transactions.

The increase in cash used in investing activities in the 2023 period compared to the 2022 period was primarily due to lower proceeds received from property sales in the 2023 period and increased capital expenditures in the 2023 period related to our redevelopment project in Seattle, WA.

The increase in cash provided by financing activities in the 2023 period was primarily due to the redemption of $300,000 of our senior unsecured notes in the 2022 period and the issuance of $108,120 of mortgage notes and decreased distributions to our common shareholders in the 2023 period.

The decrease in cash provided by operating activities for the 2023 period compared to the 2022 period was primarily due to decreases in NOI in the 2023 period due to property dispositions, reductions in occupied space at certain of our properties and an increase in costs incurred in connection with the terminated merger with DHC and related transactions.

The change from cash flow provided by investing activities in the 2022 period to cash flows used in investing activities in the 2023 period was primarily due to lower proceeds received from property sales in the 2023 period and increased capital expenditures in the 2023 period related to our redevelopment activities.

The change from cash flow used in financing activities in the 2022 period to cash flows provided by financing activities in the 2023 period was primarily due to the redemption of $300,000 of our senior unsecured notes in the 2022 period and the issuance of $177,320 of mortgage notes and decreased distributions to our common shareholders in the 2023 period.

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

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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 145 basis points per annum at June 30, 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 30 basis points per annum at June 30, 2023.

We are required to pay interest at a rate of SOFR plus a premium, which was 145 basis points per annum at September 30, 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 30 basis points per annum at September 30, 2023.

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

As of June 30, 2023, the annual interest rate payable on borrowings under our revolving credit facility was 6.6%.

As of June 30, 2023 and July 25, 2023, we had $240,000 and $230,000, respectively, outstanding under our revolving credit facility, and $510,000 and $520,000, respectively, available for borrowing.

As of September 30, 2023, the annual interest rate payable on

borrowings under our revolving credit facility was 6.9%.

As of September 30, 2023 and October 27, 2023, we had $200,000 and $205,000, respectively, outstanding under our revolving credit facility, and $550,000 and $545,000, respectively, available for borrowing, subject to meeting required financial covenants.

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.

We are currently in discussion with our lenders regarding a new revolving credit facility.

We are also evaluating different options to repay our maturing senior notes, including new financings and potential property sales.

While our plans could be impacted by factors outside of our control, including unfavorable market, economic and commercial real estate conditions, we believe based on our current discussions and history of working with our lenders that it is probable that these plans will allow us to repay our maturing debt.

Mortgage Notes Issuances

During the six months ended June 30, 2023, we issued four mortgage notes with an aggregate principal balance of $108,120 and a weighted average interest rate of 7.863%.

During the nine months ended September 30, 2023, we issued six mortgage notes with an aggregate principal balance of $177,320 and a weighted average interest rate of 7.8%.

The net proceeds from these mortgage loans were used to repay amounts outstanding under our revolving credit facility.

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In June 2023, we repaid at maturity, a mortgage note secured by one property with an outstanding principal balance of $50,000 and an annual interest rate of 3.7% using cash on hand and borrowings under our revolving credit facility.

As of June 30, 2023, our debt maturities (other than our revolving credit facility), consisting of senior unsecured notes and mortgage notes, were as follows:

As of September 30, 2023, our debt maturities (other than our revolving credit facility), consisting of senior unsecured notes and mortgage notes, were as follows:

Year Debt Maturities

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however, certain of our mortgages will require payments of principal and interest after a specified date through maturity.

In addition to our debt obligations, as of June 30, 2023, we had estimated unspent leasing related obligations of $151,798, of which we expect to spend $89,129 over the next 12 months.

In addition to our debt obligations, as of September 30, 2023, we had estimated unspent leasing related obligations of $137,223, of which we expect to spend $73,666 over the next 12 months.

We substantially completed the redevelopment of a property located in Washington, D.C.

containing approximately 427,000 rentable square feet in June 2023.

The total project costs associated with this redevelopment, including lease related costs that will continue to be incurred subsequent to the substantial completion date, will be approximately $227,000.

As of June 30, 2023, we had incurred $177,165 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.

We currently estimate the total project costs associated with this redevelopment, including lease related costs that will continue to be incurred subsequent to the substantial completion date, to be approximately $227,000.

As of September 30, 2023, we had incurred $182,839 related to this project.

In August 2023, a 30-year lease for approximately 230,000 rentable square feet commenced at this property that is approximately 25.1% higher than the prior rental rate for the same space, making the redevelopment project 55% 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.

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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 $162,000 and completion of the redevelopment in the fourth quarter of 2023.

As of June 30, 2023, we had incurred $97,727 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.

We currently estimate the total project costs associated with this redevelopment to be approximately $162,000 and completion of the redevelopment in the first quarter of 2024.

As of September 30, 2023, we had incurred $117,873 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 any revolving credit facility we may then have, 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.

When significant amounts are outstanding under our revolving credit facility or the maturities of our indebtedness approach, we expect to explore refinancing alternatives.

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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.

Our overall financing strategy for the Merger is to separately secure loans on certain of the secured bridge facility collateral properties on more favorable terms.

As of June 30, 2023, we have issued mortgage loans with an aggregate principal amount of $108,120, and as a result have amended the commitment letter to reduce the aggregate principal amount of the senior secured bridge facility to $259,880.

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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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 six months ended June 30, 2023, we paid quarterly distributions to our shareholders totaling $38,851 using cash on hand and borrowings under our revolving credit facility.

On July 13, 2023, we declared a regular quarterly distribution payable to shareholders of record on July 24, 2023 of $0.25 per share, or approximately $12,150.

We expect to pay this distribution on or about August 17, 2023 using cash on hand and borrowings under our revolving credit facility.

During the nine months ended September 30, 2023, we paid quarterly distributions to our shareholders totaling $50,998 using cash on hand and borrowings under our revolving credit facility.

On October 12, 2023, we declared a regular quarterly distribution payable to shareholders of record on October 23, 2023 of $0.25 per share, or approximately $12,200.

We expect to pay this distribution on or about November 16, 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 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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In July 2023, the maturity date of the mortgage loan secured by the property owned by our unconsolidated joint venture, in which we have a 50% interest, was extended by three years at the same interest rate.

In October 2023, our joint venture partner that has a 50% equity interest in the 1750 H Street, NW joint venture failed to fund a $600 capital call.

We are currently evaluating our options regarding this funding and there can be no assurance that we will be successful pursuing any remedies available to us under the joint venture agreement.

We do not control the activities that are most significant to these joint ventures and, as a result, we account for our investments in these joint ventures under the equity method of accounting.

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, 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.

Other than these joint ventures, as of September 30, 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 June 30, 2023 consisted of $240,000 of borrowings outstanding under our revolving credit facility, an outstanding principal balance of $2,212,000 of public issuances of senior unsecured notes and mortgage notes with an outstanding principal balance $108,120.

Our principal debt obligations as of September 30, 2023 consisted of $200,000 of borrowings outstanding under our revolving credit facility, an outstanding principal balance of $2,212,000 of public issuances of senior unsecured notes and mortgage notes with an outstanding principal balance $177,320.

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, 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.

As of September 30, 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 notes are non-recourse, subject to certain limited exceptions, and do not contain any material financial covenants.

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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+.

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, or S&P, 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.

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

In September 2023, following the termination of the merger with DHC, Moody’s downgraded our senior unsecured debt rating from Ba3 to B2 and S&P downgraded our senior unsecured debt rating from BB+ to BB.

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 9 and 10 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” in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A 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.

In addition, see the section captioned “Risk Factors” in Part I, Item 1A 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