Donatelli Smith VITAL STATISTICS: First Potomac Realty Trust HEADQUARTERS ADDRESS: 7600 Wisconsin Avenue, 11th Floor Bethesda, Maryland 20814 TELEPHONE: 301.986.9200 WEB SITE: www.first-potomac.com TICKER: NYSE: FPO KEY EXECUTIVES: Douglas Donatelli, president and CEO; Nicholas Smith, chief investment officer; Barry Bass, CFO 52-WEEK HIGH: $31.71 52-WEEK LOW: $24.70

By Jennifer D. Duell

First Potomac Realty Trust (NYSE: FPO) is built on the old adage that "real estate is a local business." The REIT owns industrial and flex properties exclusively in the Greater Washington, D.C. region and has done so since the company was founded in 1997 as a limited partnership by Douglas Donatelli, president and CEO, and Nicholas Smith, chief investment officer.

"We think real estate is a local game, and that's why our best business strategy is to be regionally focused," Donatelli says. "It's tough to own properties in different locations and do it well."

Donatelli contends that the Washington, D.C. region is often overlooked from an industrial real estate standpoint, despite being very attractive. The region is composed of approximately 475 million square feet of industrial and flex property.

"Being a local company bodes well because you know the ins and outs of your market," Donatelli says, pointing out that First Potomac's executive team has decades of experience in the local real estate market. "Maintaining a regional presence is the way to go, and Washington, D.C. is one of the best markets to be in."

In particular, Donatelli points to the fact that the U.S. government leases 15 percent of the company's space, while government contractors occupy another 15 percent. "The government tenant base is very nice to have," he says.

Today, First Potomac boasts a $1.5 billion, 10 million-square-foot portfolio, five times more space than it owned when it went public in 2003. The REIT has a market share of 2.3 percent, according to Smith. "When we founded the company, we saw that there was no dominant industry owner in this region," he says. "There's plenty of room to grow."

Growing Up

In October 2006, First Potomac celebrated its third anniversary as a publicly traded REIT with a portfolio that was 88.7 percent leased and a stock price hovering right around $31 per share.

"Going public radically changed the growth trajectory that we were on," Donatelli says. "As a public company, we have more flexibility and ready access to capital."

Over the past three years, First Potomac's employment base has grown from 20 people to 120 people. "We're a fast growing organization, so we've brought on people who are highly energetic and willing to share their opinions."

Gateway 270 West is a six-building complex located in Clarksburg, Md., totaling more than 250,000 square feet.

The IPO also enabled First Potomac to make acquisitions that it wouldn't have been able to do as a limited partnership, Donatelli says. Previously, the company had focused on fairly small industrial and flex transactions—deals ranging between $15 million and $20 million. "It's hard to have joint ventures of that size," Smith says. "We thought that by taking the company public we would be able to do more transactions and far larger deals."

First Potomac's growth strategy focuses on acquisitions of $30 million or less, and it has averaged one acquisition per month since going public. Over the past three years, the REIT has closed 36 acquisitions totaling $700 million. For the first nine months of 2006, net income was $9.3 million, compared with net income of $3.1 million for the prior-year period. During the same period in 2006, FFO grew 31 percent over the prior-year period to $27.3 million, according to first Potomac's third quarter earnings report filed with the SEC.

In 2006, the REIT closed its largest transaction ever—the $39.5 million acquisition of Gateway 270 West, a six-building flex/office property totaling 254,625 square feet, in Clarksburg, Md. Located on 35 acres in a rapidly growing submarket, Gateway 270 West was 55 percent leased to 10 tenants at the time of acquisition.

"We've been able to take on more risk as we grow. It has allowed us to gain acquisitions that offer opportunities for deeper value-added, redevelopment and development," Smith says.

Although development has never been a big portion of First Potomac's investment activity, the REIT increasingly is interested in it, according to Smith. "Having development capability is important because it allows us to deal with growing tenants and to control competition near our properties," he says, adding that First Potomac may do $30 million worth of development in 2007.

Ramping Up Acquisitions

Although First Potomac hasn't announced its 2007 investment goals, Donatelli says that the company hopes to maintain "the same sort of acquisition pace" it had in 2006. The REIT had a 2006 acquisition target of $175 million to $275 million, and as of early January, it had closed on approximately $195 million worth of deals.

"We've been growing through acquisitions, but trying to anticipate what we're going to buy is sheer guesswork," Donatelli says, adding that the REIT has been "very disciplined" in its acquisition activity by keeping an eye on cap rates and replacement cost. "We want to make sure that the acquisitions we're making today are not made at the top of the market. When we look back, we want to be happy with our acquisitions."

Smith says that competition for industrial and flex property in the area has been slowly increasing over the last three to four years. "The prices people are willing to pay don't make a lot of sense to us," he admits. "We've stayed out of those fierce bidding wars by buying properties off-market, but meeting acquisition targets is not something we can count on."

First Potomac also plans to ramp up disposition activity in 2007, according to Smith. "We're going through our portfolio to see what other properties we should sell," he says.

Beyond portfolio changes, First Potomac will focus on its property management and leasing in 2007, Smith says. "Because we manage and lease everything in house, we've had to staff the management and leasing team," he says. "We're committed to being the best landlord. We want to make sure that our tenants' needs are being met so they never want to go anywhere else."