What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-02-11 compared with 2020-02-05 · 235 added, 193 removed, 265 unchanged (62% of the section changed)

2 unchanged sentences

Overview of 2020 Performance and Company and Industry Trends

Our strategy is to create value for our stockholders through ownership of the premier urban office portfolio in the Sunbelt markets of the United States, with a particular focus on Georgia, Texas, North Carolina, Arizona, and Florida.

Cousins Properties Incorporated ("Cousins") (and collectively, with its subsidiaries, the "Company," "we," "our," or "us") is a publicly traded (NYSE:

CUZ), self-administered, and self-managed real estate investment trust, or REIT.

Cousins conducts substantially all of its business through Cousins Properties, LP ("CPLP").

Cousins owns in excess of 99% of CPLP and consolidates CPLP.

CPLP owns Cousins TRS Services LLC, a taxable entity which owns and manages its own real estate portfolio and performs certain real estate related services for other parties.

Our strategy is to create value for our stockholders through ownership of the premier urban office portfolio in the Sun Belt markets, with a particular focus on Atlanta, Austin, Charlotte, Phoenix, Tampa, and Dallas.

This strategy is based on a disciplined approach to capital allocation that includes value-add acquisitions, selective development projects, and timely dispositions of non-core assets.

3 unchanged sentences

(“TIER”) in a stock-for-stock transaction (the "Merger").

As a result, we acquired an interest in nine operating office properties containing 5.8 million square feet of space, two office properties under development that are expected to add 620,000 square feet of space upon completion, and land parcels on which up to 2.5 million square feet of additional space may be developed.

Strategically, we believe that the Merger created an unmatched portfolio of trophy office assets balanced across the premier Sunbelt markets.

In addition, we believe that the Merger has enhanced our position in our existing markets of Austin and Charlotte, provided a strategic entry into Dallas, and balanced our exposure in Atlanta.

The Merger is also expected to enhance growth and to provide value-add opportunities as a result of TIER's active and attractive development portfolio and land bank.

As a result, we acquired an interest in nine operating office properties containing 5.8 million square feet of space, two office properties under development that are expected to add 620,000 square feet of space upon completion, and seven strategically located land parcels on which up to 2.5 mil lion square feet of additional space may be developed.

As a part of this transaction, we issued $650 million in senior unsecured debt at a weighted average interest rate of 3.88%, which effectively replaced the majority of the TIER debt assumed in the Merger.

In addition to the Merger, we engaged in a number of transactions during 2019 that both individually and collectively advanced our strategy.

On March 1, 2019, we entered into a series of agreements and executed related transactions with Norfolk Southern Railway Company ("NS") in which we sold land to NS, executed agreements to provide development and consulting services for NS's corporate headquarters that is being constructed on that land, and purchased a 370,000 square foot office building in Midtown Atlanta from NS ("1200 Peachtree") that is subject to a three-year market rate lease covering the entire building.

These transactions are not only accretive to earnings over the period of construction of NS’s new headquarters, but the addition of 1200 Peachtree at an attractive price in the growing Midtown Atlanta submarket provides an excellent opportunity to re-lease the space at attractive rates when NS moves to its new headquarters.

In June 2019, we entered into a 561,000 square foot lease with Truist Financial Corporation ("Truist") at Hearst Tower that enhanced the value of the building with a 15-year lease to a high credit tenant covering 58% of the building.

Included in the lease was an option for Truist to purchase the building for $455.5 million.

In late 2019, Truist notified us of their intent to exercise this option, and we expect to close on the sale of Hearst Tower at the end of the first quarter of 2020.

In October 2019, we purchased our partner’s interest in Terminus Office Holdings ("TOH") in a transaction that values Terminus 100 and Terminus 200 at $503 million.

At 83% leased and at a purchase price below replacement cost, we believe that this purchase provides an opportunity to create value through the lease-up of vacant space in one of the most highly amenitized office properties in Buckhead Atlanta.

As noted above, in the Merger, we added two active development projects to our development pipeline:

Domain 10 and Domain 12 in Austin.

Domain 12 is 100% leased and on track to deliver in the first half of 2020.

With the execution of an expansion with Amazon in the third quarter of 2019, we increased the percent leased of Domain 10 from 63% upon acquisition to 98%.

Domain 10 is scheduled to deliver in late 2020.

We continued to make progress on our existing development projects that include 120 West Trinity in Decatur, Georgia, 10000 Avalon in Atlanta, and 300 Colorado in Austin.

These projects are on track to deliver in 2020 and early 2021 and the office portion of these properties is a combined 77% pre-leased.

We commenced development of 100 Mill, a 287,000 square foot office property in Tempe, Arizona.

This project has estimated construction costs of $153 million , is scheduled for delivery in early 2022, and is 44% pre-leased.

In the first quarter of 2019, Dimensional Place, a 281,000 square foot office building in Charlotte commenced operations.

We continue to look for additional development opportunities with our robust land bank.

We believe that this merger created a company with an attractive portfolio of trophy office assets balanced across the premier Sun Belt markets.

We believe that the Merger has enhanced our position in our existing markets of Austin and Charlotte, provided a strategic entry into Dallas, and balanced our exposure in Atlanta.

The Merger is also enhancing growth and providing value-add opportunities as a result of TIER's active and attractive development portfolio and land bank.

As of December 31, 2020, our portfolio of real estate assets consisted of interests in 36 operating properties (35 office and one mixed-use), containing 19.4 million square feet space, and five projects (four office and one mixed-use) under active development.

During 2020, we completed multiple strategic acquisitions in our Charlotte market.

During the fourth quarter, we purchased The RailYard, a 329,000 square foot operating property, for $201.3 million, including acquisition costs.

In addition to The RailYard, we also acquired South End Station, a 3.4 acre parcel of land, and 303 Tremont, a 2.4 acre parcel of land, in the South End submarket for a combined gross purchase price of $46.9 million.

During the second quarter, we purchased a 1,550 space parking garage adjacent to multiple of our properties for $85.3 million, including acquisition costs.

We believe that collectively the investments create an advantageous concentration with compelling synergies in one of the best submarkets in the Sun Belt.

During 2020, we completed multiple dispositions of operating properties and interests in joint ventures.

The most significant dispositions were as follows:

• In March 2020, we sold Hearst Tower, a 966,000 square foot office property in Charlotte, to Truist Financial Corporation ("Truist") for gross sales proceeds of $455.5 million upon execution of the purchase option included in the 561,000 square foot lease signed with Truist in 2019.

• In March 2020, we sold our interest in Charlotte Gateway Village, LLC ("Gateway"), a 50-50 joint venture with Bank of America Corporation ("BOA"), to BOA for $52.2 million which represented a 17% internal rate of return on our invested capital, as stipulated in the partnership agreement.

• In February 2020, we sold Woodcrest, a 386,000 square foot non-core office property in Cherry Hill, New Jersey that was acquired in the Merger, for a gross sales price of $25.3 million.

In 2020, we leased or renewed 1.4 million square feet of office space.

2 unchanged sentences

Cash basis net effective rent represents net rent at the end of the term paid by the prior tenant compared to the net rent at the beginning of the term paid by the current tenant.

Our same property net operating income for the year increased 2.6% on a GAAP basis and 4.8% on a cash basis.

Our same property net operating income for the year decreased 0.5% and increased 0.7% on a cash basis.

As a result of the COVID-19 pandemic, we have entered into lease amendments with certain tenants to provide payment deferrals without lease extensions.

Table of C ontents

In addition, due to state and local regulations responding to the COVID-19 pandemic, we have seen changes in physical occupancy at our properties which is materially impacting net operating income from parking.

Our same property cash basis net operating income adjusted for payment deferrals and excluding parking for the year increased 4.5%.

On a regular basis we review and, as appropriate, revise our corporate contingency plan, which addresses the steps necessary to respond to an unexpected interruption of business, including the unavailability of our corporate office space.

Since March 2020, in accordance with the advice of the CDC due to the threat presented by the ongoing COVID-19 pandemic, our tenants widely adopted remote working for their office employees, and we increased our janitorial cleaning protocols in our buildings.

The rental obligations under our leases have not been materially affected by the COVID-19 pandemic to date, and any requests for rent adjustments are addressed on a case-by-case basis.

We also have worked closely with essential vendors, including the contractors and others involved in our development projects, to assess potential impact of appropriate and necessary distancing measures upon our operations and our development delivery timelines.

Although the impact to our business of the COVID-19 pandemic has not been severe to date, the long-term impact of the pandemic on our tenants or prospective tenants and the world-wide economy is uncertain and will depend on the scope, severity, and duration of the pandemic.

A prolonged economic downturn resulting from the pandemic could adversely affect many of our tenants or prospective tenants, which could, in turn, adversely impact our business, financial condition, and results of operations.

Market Conditions

We believe that the Sunbelt region, and in particular the six core Sunbelt markets in which we operate, possess some of the most attractive economic and real estate fundamentals in the nation.

We believe that the Sun Belt region, and in particular the six core Sun Belt markets in which we operate, possess some of the most attractive economic and real estate fundamentals in the nation.

Our markets are located in states that lead the nation in new job growth and net migration as residents relocate from the Northeast, Midwest, and West Coast to our markets.

2 unchanged sentences

Our Atlanta portfolio totals 7.2 million square feet, representing 35.0% of our Net Operating Income for the fourth quarter of 2020 and was 90.7% leased at December 31, 2020.

In addition, we had two projects under development in Atlanta at December 31, 2019, one office property and one mixed use property, in which we hold 90% and 20% interests, respectively.

Job growth in Atlanta for the year ended December 31, 2019 was 2.2%, above the national average, and construction as a percentage of the total market square footage was 2.6% at year end.

In addition, we h ad two projects under development i n Atlanta at December 31, 2020, one office property and one mixed-use property, in which we hold 90% and 20% interests, respectively.

Decline in nonfarm employment in Atlanta for the year ended December 31, 2020 was 3.0%, below the national average of 6.0%, and construction as a percentage of the total market square footage was 2.0% at year end.

Our portfolio is well located, primarily in the Midtown, Buckhead, and Central Perimeter submarkets, with direct access to mass transit.

Our Austin portfolio totals 4.4 million square feet, representing 27.1% of our Net Operating Income for the fourth quarter of 2020 and was 94.3% leased at December 31, 2020.

In addition, we have three projects under development in Austin, one owned in a 50-50 joint venture and two wholly-owned that together total 978,000 square feet and are a combined 95% leased.

Job growth in Austin for the year ended December 31, 2019 was 2.7% and construction as a percentage of the total market square footage was 9.1%.

In addition, we have two projects under development in Austin, one owned in a 50-50 joint venture and one wholly-owned that together total 658,000 square feet and are a combined 92% leased.

Decline in nonfarm employment in Austin for the year ended December 31, 2020 was 1.1%, below the national average of 6.0%, and construction as a percentage of the total market square footage was 7.6%.

Our portfolio is predominantly in the central business district and Northwest submarket where vacancy is 10.5% and 9.3%, respectively.

We believe that our dominant presence in Austin, combined with strong job growth and low unemployment are favorable for our existing portfolio.

We believe that our dominant presence in Austin, combined with strong employment relative to the rest of the nation is favorable for our existing portfolio.

Our Charlotte portfolio totals 2.6 million square feet, representing 11.2% of our Net Operating Income for the fourth quarter of 2020 and was 83.8% leased at December 31, 2020.

Job growth in Charlotte for the year ended December 31, 2019 was 2.4% and construction as a percentage of the total market square footage was 5.1%.

Decline in nonfarm employment in Charlotte for the year ended December 31, 2020 was 5.4%, below the national average of 6.0%, and construction as a percentage of the total market square footage was 6.1%.

Our portfolio is located in the Uptown and South End submarkets where rent growth has significantly surpassed the national average.

The overall market has benefitted from Charlotte's strong population growth, which has increased at three times the national rate over the past decade.

The overall market has benefited from Charlotte's strong population growth, which has increased at three times the national rate over the past decade.

Strong demand and favorable economics have spurred a high level of new development across the market, specifically in Uptown where approximately 2.7 million square feet is currently under construction.

Our Phoenix portfolio totals 1.3 million square feet, representing 7.9% of our Net Operating Income for the fourth quarter of 2020 and was 94.2% leased at December 31, 2020.

Job growth in Phoenix for the year ended December 31, 2019 was 2.6% and construction as a percentage of the total market square footage was 1.7%.

Decline in nonfarm employment in Phoenix for the year ended December 31, 2020 was 2.6%, below the national average of 6.0%, and construction as a percentage of the total market square footage was 1.5%.

Phoenix has experienced population growth at more than twice the national average, more than two-thirds of which was from new residents from outside the metropolitan area.

Our portfolio is located in the Tempe submarket, in close proximity to Arizona State University and its 80,000 students, where Class A office vacancy is 5.4%.

Table of C ontents

Our Tampa portfolio totals 1.7 million square feet, representing 7.8% of Net Operating Income for the fourth quarter of 2020 and was 93.4% leased at December 31, 2020.

Job growth in Tampa for the year ended December 31, 2019 was 2.2%, and construction as a percentage of the total market square footage was 1.6%.

Decline in nonfarm employment in Tampa for the year ended December 31, 2020 was 4.0%, below the national average of 6.0%, and construction as a percentage of the total market square footage was 1.3%.

Metro-wide, the Tampa office market is experiencing low vacancy rates, and the Westshore submarket, where our portfolio is located, continues to achieve some of the highest rents in the metropolitan area, in part due to its central location and proximity to the Tampa airport.

Our Dallas portfolio totals 516,000 square feet, representing 3.1% of Net Operating Income for the fourth quarter of 2020 and was 94.5% leased at December 31, 2020.

Job growth in Dallas for the year ended December 31, 2019 was 2.1%, and construction as a percentage of the total market square footage was 4.0%.

Decline in nonfarm employment in Dallas for the year ended December 31, 2020 was 2.5%, below the national average of 6.0%, and construction as a percentage of the total market square footage was 1.9%.

Critical Accounting Policies

3 unchanged sentences

Our critical accounting policies are as follows:

Development Cost Capitalization

We are involved in all stages of real estate ownership, including development.

Prior to the point at which a project becomes probable of being developed (defined as more likely than not), we expense predevelopment costs.

After we determine a project is probable, all subsequently incurred predevelopment costs, as well as interest and real estate taxes on qualifying assets and certain internal personnel and associated costs directly related to the project under development, are capitalized in accordance with accounting rules.

If we abandon development of a project that had earlier been deemed probable, we charge all previously capitalized costs to expense.

If this occurs, our predevelopment expenses could rise significantly.

The determination of whether a project is probable requires judgment.

If we determine that a project is probable, interest, general and administrative, and other expenses could be materially different than if we determine the project is not probable.

During the predevelopment period of a probable project and the period in which a project is under construction, we capitalize all direct and indirect costs associated with planning, developing, and constructing the project.

Determination of what costs constitute direct and indirect project costs requires us, in some cases, to exercise judgment.

If we determine certain costs to be direct or indirect project costs, amounts recorded in projects under development on the balance sheet and amounts recorded in general and administrative and other expenses on the statements of operations could be materially different than if we determine these costs are not directly or indirectly associated with the project.

Once a certain project is constructed and deemed substantially complete and ready for occupancy, carrying costs, such as real estate taxes, interest, internal personnel costs, and associated costs, are expensed as incurred.

Determination of when construction of a project is substantially complete and held available for occupancy requires judgment.

We consider projects and/or project phases to be both substantially complete and held for occupancy at the earlier of the date on which the project or phase reached economic occupancy of 90% or one year after its initial occupancy.

Our judgment of the date the project is substantially complete has a direct impact on our operating expenses and net income for the period.

We evaluate all real estate acquisitions to determine if the transactions qualify as an acquisition of assets or of a business within the framework of ASU 2017-01 and guidance in ASC 805, "Business Combinations".

Generally, the acquisition of operating properties will not meet the definition of a business.

Revenue Recognition

Most of our revenues are derived from operating leases and are reflected as rental property revenues on the accompanying consolidated statements of operations.

Several judgments and estimates are included in the rental property revenue recognition process including the determination of lease term, ownership of tenant improvements, lease modifications, and lease terminations.

Revenues derived from fixed lease payments, which exclude certain rental property revenue such as percentage rent and revenue related to the recovery of certain operating expenses from our tenants, are recognized on a straight-line basis over the term of the lease.

We make significant assumptions and judgments in determining the lease term, including the judgments involved as to when a tenant has the right to use an underlying asset and assumptions when the lease provides the tenant with an extension or early termination option.

Most of our leases involve some form of improvements to leased space.

We make significant judgments in reviewing various factors to assist in determining whether we or our tenants own the improvements.

Those factors include, but are not limited to, whether or not the:

• Lease agreement’s terms obligate the tenant to construct or install specifically identified assets (i.e., the leasehold improvements);

• Tenant’s failure to make specified improvements is an event of default under which the landlord can require the lessee to make those improvements or otherwise enforce the landlord’s rights to those assets (or a monetary equivalent);

• Tenant is permitted to alter or remove the leasehold improvements without the landlord’s consent or without compensating the landlord for any lost utility or diminution in fair value;

• Tenant is required to provide the landlord with evidence supporting the cost of tenant improvements before the landlord pays the tenant for the tenant improvements;

• Landlord is obligated to fund cost overruns for the construction of leasehold improvements;

• Leasehold improvements are unique to the tenant or could reasonably be used by the lessor to lease to other parties;

• Economic life of the leasehold improvements is such that a significant residual value of the assets is expected to accrue to the benefit of the landlord at the end of the lease term.

If we determine the improvements are our assets, we capitalize the cost of the improvements and recognize depreciation expense associated with such improvements over the shorter of the estimated useful life or the term of the lease.

If the improvements are tenant assets, we defer the cost of improvements funded by us as a lease incentive asset and amortize it as a reduction of rental revenue over the term of the lease.

Our determination of whether improvements are our assets or tenant assets also affects when we commence revenue recognition in connection with a lease.

We periodically enter into amendments to our leases.

When a lease is amended, we need to determine whether (1) an additional right of use not included in the original lease is being granted as a result of the modification and (2) there is an

Table of C ontents

increase in the lease payments that is commensurate with the standalone price for the additional right of use.

If both of those conditions are met, the amendment is accounted for as a separate contract.

If both of those conditions are not met, the amendment is accounted for as a lease modification.

Most of our lease amendments result in a lease modification of our operating leases which will likely require us to reassess both the lease term and fixed lease payments, including considering any prepaid or accrued lease rentals relating to the original lease as a part of the lease payments for the modified lease.

Termination options in some of our leases allow the customer to terminate the lease prior to the end of the lease term under certain circumstances.

Termination options require advance notification from the tenant and payment of a termination fee that reimburses us for a portion of the remaining rent under the original lease term and the undepreciated lease inception costs such as commissions, tenant improvements and lease incentives.

Termination fee income, included in rental property revenue, is recognized on a straight-line basis from the date of the executed termination agreement through lease expiration when the amount of the fee is determinable and collectability of the fee is reasonably assured.

This fee income is reduced on a straight-line basis by any accrued straight-line rent receivable related to the lease projected at the date of tenant vacancy.

Real Estate Carrying Value

The carrying values of our real estate assets are subject to several processes that involve a significant use of judgments and estimates.

Those processes primarily include (i) purchase price allocations for acquired assets, (ii) depreciation and amortization and (iii) impairment.

The judgments and estimates used in each of these processes have a material impact on our financial condition, results of operations and cash flows.

Purchase Price Allocations for Acquired Assets

We evaluate all real estate acquisitions to determine if the transactions qualify as an acquisition of assets or of a business.

In cases where we acquire a pool of properties of varying property types in different markets, we must determine whether the acquisition qualifies as an asset acquisition or an acquisition of a business.

In making this determination, we first must evaluate whether substantially all of the assets are concentrated in a single identifiable asset or group of similar identifiable assets.

For purposes of this review, we separate the assets acquired based on their unique and different risk characteristics, which may be by property type, geographic concentration, or other factors.

If we determine that substantially all of the fair value is concentrated in a single identifiable asset or group of similar assets, generally 90% of total fair value of assets acquired, we account for the acquisition as an acquisition of assets.

If we determine that there is no single or group of assets that make up substantially all of the fair value of assets acquired, we then evaluate whether the acquired set of assets include an input and substantial process which create an output as outlined in ASC 805.

If we determine that there is no single or group of assets that make up substantially all of the fair value of assets acquired, we then evaluate whether the acquired set of assets includes an input and substantial process which create an output.

If we determine that an input and substantial process creating an output are present, we account for the acquisition as an acquisition of a business.

Otherwise, we account for the acquisition as an acquisition of assets.

We use considerable judgment in determining whether the acquisition of a pool of assets is an acquisition of assets or of a business.

Because acquisition costs are expensed for an acquisition of a business and capitalized for an acquisition of assets, results of operations could be materially different based on these determinations.

Because acquisition costs are expensed for an acquisition of a business and capitalized for an acquisition of assets, results of operations could be materially different based on our determinations.

For acquisitions that are accounted for as an acquisition of an asset, we record the acquired tangible and intangible assets and assumed liabilities based on each asset and liability's relative fair value at the acquisition date to the total purchase price plus capitalized acquisition costs.

4 unchanged sentences

land, buildings, and identified tangible and intangible assets and liabilities associated with in-place leases, including tenant improvements, leasing costs, value of above-market and below-market leases, and value of acquired in-place leases.

The fair value of land is derived from comparable sales of land within the same submarket and/or region.

The fair value of buildings, tenant improvements, and leasing costs are based upon current market replacement costs and other relevant market rate information.

The fair value of the above-market or below-market component of an acquired lease is based upon the present value (calculated using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining term and (ii) management’s estimate of the rents that would be paid using fair market rental rates and rent escalations at the date of acquisition over the remaining term of the lease.

The fair value of the above-market or below-market component of an acquired lease is based upon the present value (calculated using a market discount rate) of the difference between the contractual rents to be paid pursuant to the lease over its remaining term and management’s estimate of the rents that would be paid using fair market rental rates and rent escalations at the date of acquisition over the remaining term of the lease.

An identifiable intangible asset or liability is recorded if there is an above-market or below-market lease at an acquired property.

The amounts recorded for above-market leases are included in other assets on the balance sheets, and the amounts for below-market leases are included in other liabilities on the balance sheets.

These amounts are amortized on a straight-line basis as an adjustment to rental income over the remaining term of the applicable leases.

The fair value of acquired in-place leases is derived based on our assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased.

This fair value is based on a variety of considerations including, but not necessarily limited to:

(1) the value associated with avoiding the cost of originating the acquired in-place leases;

(2) the value associated with lost revenue related to tenant reimbursable operating costs estimated to be incurred during the assumed lease-up period;

and (3) the value associated with lost rental revenue from existing leases during the assumed lease-up period.

(i) the value associated with avoiding the cost of originating the acquired in-place leases;

(ii) the value associated with lost revenue related to tenant reimbursable operating

Table of C ontents

costs estimated to be incurred during the assumed lease-up period;

and (iii) the value associated with lost rental revenue from existing leases during the assumed lease-up period.

Factors considered in performing these analyses include an estimate of the carrying costs during the expected lease-up periods, such as real estate taxes, insurance, and other operating expenses, current market conditions, and costs to execute similar leases, such as leasing commissions, legal, and other related expenses.

The amounts recorded for above-market leases are included in other assets on the balance sheets, and the amounts for below-market leases are included in other liabilities on the balance sheets.

These amounts are amortized on a straight-line basis as an adjustment to rental income over the remaining term of the applicable leases.

The amounts recorded for in-place leases are included in intangible assets on the balance sheets.

These amounts are amortized as an increase to depreciation and amortization expense over the remaining term of the applicable leases.

The determination of the fair value of the acquired tangible and intangible assets and assumed liabilities of acquisitions requires significant judgment about the numerous inputs discussed above.

The use of different assumptions in these fair value calculations could significantly affect the reported amounts of the allocation of the acquisition related assets and liabilities and the related amortization and depreciation expense recorded for such assets and liabilities.

In addition, since the values of above-market and below-market leases are amortized as either a reduction or increase to rental income, respectively, the judgments for these intangibles could have a significant impact on reported rental revenues and results of operations.

Depreciation and Amortization

We depreciate or amortize operating real estate assets over their estimated useful lives using the straight-line method of depreciation.

We also depreciate or amortize operating real estate assets over their estimated useful lives using the straight-line method of depreciation.

We use judgment when estimating the useful life of real estate assets and when allocating certain indirect project costs to projects under development, which are amortized over the useful life of the property once it becomes operational.

Historical data, comparable properties, and replacement costs are some of the factors considered in determining useful lives and cost allocations.

The use of different assumptions for the estimated useful life of assets or cost allocations could significantly affect depreciation and amortization expense and the carrying amount of our real estate assets.

We review our real estate assets on a property-by-property basis for impairment.

We also review our real estate assets on an asset group basis for impairment.

We identify an asset group based on the lowest level of identifiable cash flows and take into consideration such things as shared expenses and amenities.

This review includes our operating properties, properties under development, and land holdings.

The first step in this process is for us to determine whether an asset is considered to be held and used or held for sale, in accordance with accounting guidance.

The first step in this process is for us to determine whether an asset is considered to be held and used or held for sale.

In order to be considered a real estate asset held for sale, we must, among other things, have the authority to commit to a plan to sell the asset in its current condition, have commenced the plan to sell the asset, and have determined that it is probable that the asset will sell within one year.

If we determine that an asset is held for sale, we must record an impairment loss if the fair value less costs to sell is less than the carrying amount.

If we determine that an asset is held for sale, we record an impairment if the fair value less costs to sell is less than the carrying amount.

All real estate assets not meeting the held for sale criteria are considered to be held and used.

In the impairment analysis for assets held and used, we must determine whether there are indicators of impairment.

For operating properties, these indicators could include a decline in a property’s leasing percentage;

a current period operating loss or negative cash flows combined with a history of losses at the property;

a decline in lease rates for that property or others in the property’s market;

a significant change in the market value of the property;

or an adverse change in the financial condition of significant tenants.

For operating properties, these indicators could include a reduction in our estimated hold period, a significant decline in a property’s leasing percentage, a current period operating loss or negative cash flows combined with a history of losses at the property, a significant decline in lease rates for that property or others in the property’s market, a significant change in the market value of the property, or an adverse change in the financial condition of significant tenants.

For land holdings, indicators could include an overall decline in the market value of land in the region, a decline in development activity for the intended use of the land, or other adverse economic and market conditions.

For projects under development, indicators could include material budget overruns without a corresponding funding source, significant delays in construction, occupancy, or stabilization schedule, regulatory changes or economic trends that have a significant impact on the market, or an adverse change in the financial condition of a significant tenant.

If we determine that an asset that is held and used has indicators of impairment, we must determine whether the undiscounted cash flows associated with the asset exceed the carrying amount of the asset.

If the undiscounted cash flows are less than the carrying amount of the asset, we must reduce the carrying amount of the asset to fair value.

If the undiscounted cash flows are less than the carrying amount of the asset, we reduce the carrying amount of the asset to fair value.

In calculating the undiscounted net cash flows of an asset, we must estimate a number of inputs.

For operating properties, we must estimate future rental rates, expenditures for future leases, future operating expenses, and market capitalization rates for residual values, among other things.

For land holdings, we must estimate future sales prices as well as operating income, carrying costs, and residual capitalization rates for land held for future development.

For projects under development, we must estimate the cost to complete construction, time period of lease-up, future rental rates, expenditures for future leases, future operating expenses, market capitalization rates for residual values, and future sales price, among other things.

In addition, if there are alternative strategies for the future use of the asset, we must assess the probability of each alternative strategy and perform a probability-weighted undiscounted cash flow analysis to assess the recoverability of the asset.

We must use considerable judgment in determining the alternative strategies and in assessing the probability of each strategy selected.

We must estimate future rental rates, future capital expenditures, future operating expenses, and market capitalization rates for residual values, among other things.

In addition, if there are alternative strategies for the future use of the asset, we assess the probability of each alternative strategy and perform a probability-weighted undiscounted cash flow analysis to assess the recoverability of the asset.

We use considerable judgment in determining the alternative strategies and in assessing the probability of each strategy selected.

In determining the fair value of an asset, we exercise judgment on a number of factors.

1 unchanged sentence

We must determine an appropriate discount rate to apply to the cash flows in the discounted cash flow calculation.

We must use judgment in analyzing comparable market information because no two real estate assets are identical in location and price.

We use judgment in analyzing comparable market information because no two real estate assets are identical in location and price.

The estimates and judgments used in the impairment process are highly subjective and susceptible to frequent change.

If we determine that an asset is held and used, the results of operations could be materially different than if we determine that an asset is held for sale.

Different assumptions we use in the calculation of undiscounted net cash flows of a project, including the assumptions associated with alternative strategies and the probabilities associated with alternative strategies, could cause a material impairment loss to be recognized when no impairment is otherwise warranted.

Our assumptions about the discount rate used in a discounted cash flow estimate of fair value and our judgment with respect to market information could materially affect the decision to record impairment losses or, if required, the amount of the impairment losses.

In addition to our real estate assets, we review each of our investments in unconsolidated joint ventures for impairment.

1 unchanged sentence

If indicators of impairment are present for any of our investments in joint ventures, we calculate the fair value of the investment.

If the fair value of the investment is less than the carrying value of the investment, we must determine whether the impairment is temporary or other than temporary, as outlined in GAAP.

If we assesses the impairment to be temporary, we do not record an impairment charge.

If the fair value of the investment is less than the carrying value of the investment, we determine whether the impairment is temporary or other than temporary.

If we assess the impairment to be temporary, we do not record

Table of C ontents

an impairment charge.

If we conclude that the impairment is other than temporary, we record an impairment charge.

We use considerable judgment in the determination of whether there are indicators of impairment present and in the assumptions, estimations, and inputs used in calculating the fair value of the investment.

These judgments are similar to those outlined above in the impairment of real estate assets.

We also use judgment in making the determination as to whether the impairment is temporary or other than temporary by considering, among other things, the length of time that the impairment has existed, the financial condition of the joint venture, and the ability and intent of the holder to retain the investment long enough for a recovery in market value.

Our judgment as to the fair value of the investment or on the conclusion of the nature of the impairment could have a material impact on our financial condition, results of operations, and cash flows.