MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Funds From Operations The December 31, 2002 and 2001, depreciation adjusted cost of properties collateralizing the mortgage notes payable totaled $280,051,000 and $264,831,000, respectively. Certain loans are subject to financial covenant tests, the most significant of which are debt service coverage and loan to asset value requirements under the variable rate loans. The Company believes it is in compliance with all such covenants. Notes payable at December 31, 2002 and 2001, totaling $266,392,000 and $242,168,000, respectively, are guaranteed by members of The Saul Organization. The Company’s interest expense coverage ratio (calculated as operating income before interest expense, amortization of deferred debt expense and depreciation and amortization, divided by interest expense), increased to 2.78 during the past year, from 2.63 in 2001. enable the Company to access capital for future purchases of operating properties as opportunities arise. As of December 31, 2002, $46,750,000 was outstanding under the line, with interest calculated using LIBOR plus 1.625%. Loan availability is determined by operating income from the Company’s unencumbered properties, which, as of December 31, 2002 allowed the Company to borrow an additional $30,250,000 for general corporate use. An additional $48 million is available for funding working capital and operating property acquisitions supported by the unencumbered properties’ internal cash flow growth and operating income of future acquisitions. Also during 2002, the Company committed to replace its $42,000,000 construction loan used to finance the building of Washington Square at Old Town with a $42,500,000 permanent mortgage. The new permanent financing, closed in January 2003, matures in 15 years and requires monthly principal and interest payments based upon a 27.5 year amortization period and 6.01% interest rate. In September 2002, the Company assumed a $7,806,000 mortgage in conjunction with its acquisition of Kentlands Square shopping center. During 2002 the Company closed a new $125 million unsecured revolving credit facility to provide working capital and funds for acquisitions. The line has a three-year term and provides for an additional one- year extension at the Company’s option. The new line is a $55 million expansion of a prior revolver. The additional availability under the new facility will In 2002, the Company reported Funds From Operations (FFO) of $44,031,000 on a fully converted basis, representing a 9.7% increase over 2001 FFO of $40,141,000. The following table presents a reconciliation from income before minority interests to FFO:  34 For the Years Ended December 31, (In thousands) 2002 2001 2000 1999 1998 Income before minority interests $ 27,636 $  25,383 $  22,114 $ 21,220 $ 16,369 Subtract: Gain on sale of property (1,426) -  -  (553) -- Add:  Cumulative effect of change  in accounting method -- -- -- -- 771 Depreciation and amortization  of real property 17,821 14,758 13,534 12,163 12,578 FFO  1 $ 44,031 $ 40,141 $ 35,648 $ 32,830 $ 29,718 Average Shares and Units Used to  Compute FFO per Share  20,059 19,383 18,796 18,148 17,233 1 FFO is a widely accepted non-GAAP financial measure of operating performance for REITs. FFO is presented on a fully converted basis, and is defined by the National Association of Real Estate Investment Trusts as net income before gains or losses from property sales, extraordinary items, and before real estate depreciation and amortization. FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs, which is disclosed in the Consolidated Statements of Cash Flows for the applicable periods. There are no material legal or functional restrictions on the use of FFO. FFO should not be considered as an alternative to net income, as an indicator of the Company’s operating performance, or as an alternative to cash flows as a measure of liquidity. Management considers FFO a supplemental measure of operating performance and along with cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures and to fund other cash needs. FFO may not be comparable to similarly titled measures employed by other REITs.