## MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

Operating expenses, consisting primarily of repairs and maintenance, utilities, payroll, insurance and other property related expenses, increased $1,612,000 (19.0%) to $10,115,000 in 2002 from $8,503,000 in 2001. Approximately 40% of the property operating expense increase resulted from the commencement of operations at Washington Square and 25% of the increase resulted from snow removal expenses sustained as a result of two snow storms impacting many of the Company’s properties in December 2002. 

The provision for credit losses decreased $196,000 (31.8%) to $421,000 in 2002 from $617,000 in the 2001 year. The credit loss provision in 2002 represented a return to historic levels, comparable to $467,000 recorded in 2000. The credit loss provision in 2001 was elevated due primarily to three retail tenants and an office tenant in bankruptcy. In 2002, no significant tenants declared bankruptcy impairing the collectibility of rents receivable. 

Real estate taxes increased $795,000 (11.0%) to $8,021,000 in 2002 from $7,226,000 in 2001. Thirty-four percent of the increase in real estate tax expense in 2002 resulted from the commencement of operations at Washington Square, while approximately 36% resulted from increased taxes at the Company’s two Washington, DC office properties. 

Interest expense increased $193,000 (0.8%) to $25,113,000 for 2002 from $24,920,000 reported for 2001. The minor variance resulted from the net of increased interest paid on permanent fixed rate financing for recently developed and redeveloped properties, offset by interest expense savings from lower interest rates on the Company’s variable rate debt. 

Amortization of deferred debt expense increased $159,000 (28.1%) to $725,000 for 2002 compared to $566,000 for 2001. The increase resulted from the amortization of additional loan costs associated with extending the maturity of the Washington Square construction loan to January 2003 and costs associated with refinancing the Company’s unsecured line of credit during the third quarter of 2002. 

Depreciation and amortization expense increased $3,063,000 (20.8%) from $14,758,000 in 2001 to $17,821,000 in 2002. Nearly half of the change or $1,311,000, resulted from assets retired based upon a comprehensive review of real estate asset records and the Company’s revision of the assets’ estimated useful lives. The balance of the change reflects increased depreciation expense on developments and acquisitions placed in service during the past 12 months. 

General and administrative expense, which consists of payroll, administrative and other overhead expenses, was $5,537,000 for 2002, an increase of $1,202,000 (27.7%) over 2001. Forty percent of the expense increase in 2002 compared to 2001 resulted from increased corporate office rent, 15% resulted from the write-off of abandoned property acquisition costs, 15% resulted from increased payroll and 10% resulted from increased legal expense. 

The Company recognized a gain on the sale of real estate of $1,426,000 in 2002. There were no property sale gains reported in 2001. In 1999, the District of Columbia condemned and purchased the Company’s Park Road property as part of an assemblage of parcels for a neighborhood revitalization project. The Company disputed the original purchase price awarded by the District. The gain represents additional net proceeds the Company was awarded upon settlement of the dispute. 

