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Item 7. Management’s Discussion and Analysis

2023-02-09 compared with 2022-02-03 · 150 added, 151 removed, 307 unchanged (50% of the section changed)

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Overview of 2022 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 Sun Belt markets, with a particular focus on Atlanta, Austin, Charlotte, Phoenix, Tampa, Dallas, and Nashville.

This strategy is based on a disciplined approach to capital allocation that includes opportunistic acquisitions, selective development projects, and timely dispositions of non-core assets with a goal of maintaining a portfolio of new and efficient properties with lower capital expenditure requirements.

This strategy is also based on a simple, flexible, and low-leveraged balance sheet that allows us to pursue compelling growth opportunities at the most advantageous points in the cycle.

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, Tampa, Phoenix, Charlotte, Dallas, and Nashville.

This strategy is based on a disciplined approach to capital allocation that includes opportunistic acquisitions, selective development, and timely dispositions of non-core assets with a goal of maintaining a portfolio of newer and more efficient properties with lower capital expenditure requirements.

This strategy is based on a simple, flexible, and low-leveraged balance sheet that allows us to pursue compelling growth opportunities at the most advantageous points in the cycle.

To implement this strategy, we utilize our strong local operating platforms within each of our major markets.

During 2021, we completed multiple strategic acquisitions of operating properties and land parcels and entered into two joint ventures.

We acquired 725 Ponce, a 372,000 square foot office property in Midtown Atlanta, for a gross price of $300.2 million;

Heights Union, a 294,000 square foot office property in Tampa, for a gross price of $144.8 million;

and our partners' 50% interest in 300 Colorado, a 369,000 square foot office building in downtown Austin, for a gross price of $162.5 million.

We also acquired a 0.7 acre land parcel in Atlanta for a gross price of $10.0 million related to a potential future development in Midtown Atlanta and a 0.2 acre land parcel in Atlanta, adjacent to our 3344, 3348, and 3350 operating properties, for a gross price of $8.0 million that is held in a 95% owned consolidated joint venture.

We entered into a 50/50 joint venture to develop Neuhoff, a mixed-use project in Nashville, which will include 448,000 square feet of office and retail space as well as 542 multi-family units, for an estimated investment of $281.3 million at our share.

In addition, we entered into a 50/50 joint venture to own 715 Ponce, a land parcel adjacent to 725 Ponce, with an initial contribution of $4.0 million.

During 2021, we completed multiple dispositions of operating properties and interests in joint ventures, using the proceeds to fund the investment activity mentioned above.

We sold 816 Congress, a 435,000 square foot office building in downtown Austin, for a gross price of $174.0 million;

One South at the Plaza, an 891,000 square foot office property in Charlotte, for a gross price of $271.5 million;

Burnett Plaza, a one million square foot office building in Fort Worth, for a gross price of $137.5 million;

and a 0.7 acre land parcel in Phoenix, adjacent to our 100 Mill development, to a hotel developer for a gross price of $6.4 million.

In addition, we sold our 50% investment in Dimensional Place, a 281,000 square foot office property in Charlotte, for a gross price of $60.8 million.

During 2022, we completed several financing-related activities.

In May 2022, we entered into the Fifth Amended and Restated Credit Agreement (the "Credit Facility").

The Credit Facility recasts the prior facility by, among other things, extending the maturity date from January 3, 2023 to April 30, 2027.

In September 2022, we entered into a floating-to-fixed interest rate swap with respect to the $350 million 2021 Term Loan that matures on August 30, 2024;

this swap effectively fixed the underlying SOFR rate at 4.23% for the remaining term of the loan.

In October 2022, we entered into the Delayed Draw Term Loan Agreement (the "2022 Term Loan") and borrowed the full $400 million available under the loan;

the loan matures on March 3, 2025.

In October 2022, we paid off, in full, our Legacy Union and Promenade Tower mortgages.

In December 2022, we refinanced the mortgages on our two Terminus properties in Atlanta with the existing lender.

Under the new non-cross-collateralized mortgages, the maturities were extended from January 2023 to January 2031, the combined principal increased to $221.0 million, and the interest rate is now 6.34%.

We were able to complete the above financing transactions in a challenging debt market.

As the Federal Reserve has continued to work towards managing inflation, in part by raising short-term interest rates, we have been subject to increasing costs for a portion of our borrowed capital.

This is mitigated by our strategy of maintaining a relatively low-levered balance sheet;

however, the impact of potential higher inflation and interest rates, if any, is uncertain.

In April 2022, we purchased our partner's 10% joint venture interest in HICO Avalon, LLC and HICO Avalon II, LLC, which own the 8000 and 10000 Avalon office properties.

In June 2022, one of our unconsolidated joint ventures sold a 3.0 acre land parcel in Uptown Dallas.

Our share of the gain from this transaction was $4.5 million.

In September 2022, we sold our 50% owned joint venture interest in Carolina Square Holdings LP ("Carolina Square"), which owns a mixed-use property in Chapel Hill, North Carolina, to our partner for a gross sales price of $105.0 million.

We recognized a gain of $56.3 million on this sale.

In 2022, we leased or renewed 2.0 million square feet of office space.

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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 decreased 0.5% on a straight-line basis and increased 3.5% on a cash-basis.

Our same property net operating income for the year was unchanged on a straight-line basis and increased 1.0% on a cash-basis.

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.

During 2021, many, but not all, of our tenants began to bring employees back to the office at least a few days a week, decreasing the time their teams were working remotely and increasing the physical occupancy at our properties.

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.

In March 2020, our tenants widely adopted remote working for their office employees in response to the COVID-19 pandemic.

The rental obligations under our leases were not materially affected by the COVID-19 pandemic.

Beginning in 2021 and increasingly in 2022, most of our tenants began to bring employees back to the office at least a few days a week, decreasing the time their teams were working remotely and increasing the physical occupancy at our properties.

Although the impact to our business of the COVID-19 pandemic was not severe, the long-term impact of the pandemic on our tenants, or prospective tenants, and the worldwide economy is still unfolding and remains uncertain.

Market Conditions

We believe that the Sun Belt region, and in particular the seven 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.

This migration, when combined with relatively low levels of new supply, has led to steady office absorption and positive rent growth, supporting healthy office fundamentals.

We believe that we are well positioned to benefit from, and ultimately outperform in, the current real estate environment.

Our Atlanta portfolio totals 7.9 million square feet, representing 39.8% of our Net Operating Income for the fourth quarter of 2021 and was 89.1% leased at December 31, 2021.

Market-wide Class A leasing activity in Atlanta represented 51.3% of total leasing activity in 2021 while representing only 40.7% of total inventory, and construction as a percentage of the total market square footage was 3.0% at December 31, 2021.

Atlanta recorded its highest annual total for construction completions in market history, delivering 3.4 million square feet of new product in 2021;

of which, 81% has already been leased.

We believe our portfolio of operating assets and land holdings for future development, which is well located primarily in the Midtown, Buckhead, and Central Perimeter submarkets, with direct access to mass transit, is well positioned to meet the strong demand in the market.

Even amidst economic headwinds, we believe the Sun Belt region, and in particular the seven Sun Belt markets in which we own properties, will continue to outperform the broader office sector as we continue to see a clear bifurcation between Sun Belt and Gateway market fundamentals.

In addition, as the flight to quality trend continues among office users, we believe our trophy portfolio is well positioned to benefit from, and ultimately outperform in, the current real estate environment.

Our Atlanta portfolio totals 8.2 million square feet, representing 36.4% of our Net Operating Income for the fourth quarter of 2022, and the office portion was 86.5% leased at December 31, 2022.

Market-wide Class A leasing activity in Atlanta represented 57.6% of total leasing activity in 2022 while representing only 41.6% of total inventory.

Atlanta recorded its highest annual absorption numbers since 2015 with over 1.0 million square feet of positive absorption in 2022.

However, elevated sublease availability coupled with tenant uncertainty due to the challenging economic environment may create headwinds heading into 2023.

We believe our portfolio of operating assets and land holdings for future development, which are well located primarily in the Midtown, Buckhead, and Central Perimeter submarkets, with direct access to mass transit, will continue to be well positioned as we see the flight to quality and flight to location trends continue.

Our Austin portfolio totals 4.6 million square feet, representing 31.1% of our Net Operating Income for the fourth quarter of 2022 and was 94.7% leased at December 31, 2022.

In addition, we have two projects under development in Austin.

Domain 9 is a 338,000 square foot project, located in the Domain submarket, and the office portion is 100% leased.

300 Colorado, a 369,000 square foot office property, is located in the central business district and is 88% leased.

Market-wide Class A leasing activity in Austin represented 55.8% of total leasing activity in 2021 while representing only 40.9% of total inventory, and construction as a percentage of the total market square footage was 13.1% at December 31, 2021.

Our portfolio is predominantly in the central business district and Domain submarket where vacancy is 18.7% and 6.0%, respectively.

We believe that our dominant presence in Austin, combined with strong demand for Class A office space, is favorable for our existing portfolio.

Our Charlotte portfolio totals 1.4 million square feet, representing 9.1% of our Net Operating Income for the fourth quarter of 2021 and was 96.3% leased at December 31, 2021.

Class A leasing activity in Charlotte represented 47.4% of total leasing activity in 2021 while representing only 41.5% of total inventory, and construction as a percentage of the total market square footage was 8.1% at December 31, 2021.

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

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 and South End where approximately 3.0 million square feet is currently under construction.

Our Tampa portfolio totals 2.0 million square feet, representing 9.0% of Net Operating Income for the fourth quarter of 2021 and was 93.1% leased at December 31, 2021.

Market-wide Class A leasing activity in Tampa represented 40.9% of total leasing activity in 2021 while representing only 26.5% of total inventory, and construction as a percentage of the total market square footage was 1.0% at December 31, 2021.

Metro-wide, the Tampa office market is experiencing low vacancy rates, and the Westshore submarket, where the majority of 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.

In addition, we have one 97% pre-leased project under development in Austin, Domain 9, which is a 338,000 square foot office building, located in the Domain submarket.

Market-wide Class A leasing activity in Austin represented 52.9% of total leasing activity in 2022 while representing only 42.9% of total inventory.

Total 2022 absorption was relatively flat year-over-year.

The Austin market continues to outperform relative to other major markets and has traditionally shown resiliency in uncertain economic conditions.

With our portfolio primarily located in the central business district and Domain submarkets, we believe our significant presence in Austin, combined with continued strong demand for Class A office space, will be favorable for our portfolio.

Our Tampa portfolio totals 2.0 million square feet, representing 9.7% of our Net Operating Income for the fourth quarter of 2022 and was 95.2% leased at December 31, 2022.

Market-wide Class A leasing activity in Tampa represented 46.4% of total leasing activity in 2022 while representing only 27.0% of total inventory.

Non-core, suburban office submarkets in Tampa were negatively impacted by flight to quality and sublease availability in 2022, but our portfolio, mainly located in the Westshore submarket, continues to benefit from positive net absorption and tenant demand.

Our Phoenix portfolio totals 1.6 million square feet, representing 8.9% of our Net Operating Income for the fourth quarter of 2022 and was 89.8% leased at December 31, 2022.

We have one project under development in Phoenix - 100 Mill, a 287,000 square foot project, is 81% leased.

Market-wide Class A leasing activity in Phoenix represented 38.3% of total leasing activity in 2021 while representing only 33.6% of total inventory, and construction as a percentage of the total market square footage was 2.2% at December 31, 2021.

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 8.6%.

Our Dallas portfolio totals 516,000 square feet, representing 3.0% of Net Operating Income for the fourth quarter of 2021 and was 91.3% leased at December 31, 2021.

Market-wide Class A leasing activity in Dallas represented 49.5% of total leasing activity in 2021 while representing only 44.0% of total inventory, and construction as a percentage of the total market square footage was 3.0% at December 31, 2021.

Our Nashville portfolio includes a mixed-used development of 448,000 square feet of commercial space and 542 residential units located in the Germantown submarket.

Market-wide Class A leasing activity in Nashville represented 61.1%

of total leasing activity in 2021 while representing only 33.1% of total inventory, and construction as a percentage of total market square footage was 10.2%.

Market-wide Class A leasing activity in Phoenix represented 38.2% of total leasing activity in 2022 while representing a proportionate 33.8% of total inventory.

During 2022 there was continued growth in sublease space in Phoenix and disproportionately more absorption in new supply compared to older product.

As Phoenix continues to be a leader in population and job growth across the nation, emphasis on high quality space should further drive the divide between new trophy office product and older vintage assets.

Our newly developed 100 Mill project, coupled with repositioning efforts underway at Hayden Ferry and Tempe Gateway, position our portfolio well to meet these trends.

Our Charlotte portfolio totals 1.4 million square feet, representing 8.8% of our Net Operating Income for the fourth quarter of 2022 and was 94.8% leased at December 31, 2022.

Class A leasing activity in Charlotte represented 56.6% of total leasing activity in 2022 while representing only 42.1% of total inventory.

Office vacancy spiked in 2022 with the consolidation of space from financial institutions alongside the delivery of Duke Energy Plaza.

Charlotte market employment hit an all-time high in 2022, a trend we expect to continue if Charlotte continues to be a target for large corporate relocations.

Our operating portfolio, located in the Uptown and South End submarkets, remains well leased and should continue to benefit from healthy economic fundamentals going forward.

Our Dallas portfolio totals 516,000 square feet, representing 2.3% of our Net Operating Income for the fourth quarter of 2022 and was 89.8% leased at December 31, 2022.

Market-wide Class A leasing activity in Dallas represented 57.7% of total leasing activity in 2022 while representing only 45.1% of total inventory.

Our Nashville portfolio includes a mixed-used development comprised of 448,000 square feet of commercial space and 542 residential units located in the Germantown submarket.

The commercial component of the development is expected to deliver in 2023 and leasing discussions with both potential office and retail tenants are underway.

Market-wide Class A leasing activity in Nashville represented 47.6% of total leasing activity in 2022 while representing only 33.6% of total inventory.

Critical Accounting Policies and Estimates

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• 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);

• Landlord must approve the plans prior to construction;

• 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;

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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.

Any portion of our asset funded by a tenant is recorded as deferred revenue to be recognized in rental over the term of the lease on a straight-line basis.

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.

Our determination of whether improvements are our assets or tenants' 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 increase in the lease payments that is commensurate with the standalone price for the additional right of use.

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

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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.

Tenants sometimes negotiate to terminate their lease prior to the end of the lease term.

Such negotiations generally require 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.

This fee income is reduced on a straight-line basis by any accrued straight-line rent receivable and any above- or below-market lease intangible assets or liabilities related to the lease projected at the date of tenant vacancy.

Real Estate Carrying Value

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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.

We evaluate all real estate acquisitions to determine if the transactions qualify as an acquisition of assets or of a business including cases in which we acquire a pool of properties of varying property types in different markets.

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.

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Depreciation and Amortization

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

We 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.

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

We 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.

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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 from cessation of major construction activity.

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 reaches economic occupancy of 90% or one year from cessation of major construction activity on the core building development.

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

Results of Operations For The Year Ended December 31, 2022

Our financial results for the year ended December 31, 2021 have been affected by the various acquisitions, dispositions, and development activities during 2021 as well as the Merger and transactions with Norfolk Southern Railway Company ("NS") in 2019.

Net income available to common stockholders for the year ended 2021 and 2020 was $278.6 million and $237.3 million, respectively.

Net income available to common stockholders for the years ended 2022 and 2021 was $166.8 million and $278.6 million, respectively.

We detail below material changes in the components of net income available to common stockholders for the year ended 2022 compared to 2021.

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The following results include the performance of our Same Property portfolios.

Our Same Property portfolios include office properties that were stabilized and owned by us for the entirety of each comparable reporting periods presented.

A stabilized property is one that has achieved 90% economic occupancy or has been substantially complete and owned by us for one year.

Our Same Property portfolios include office properties that were stabilized and owned by us for the entirety of each comparable reporting period presented.

A stabilized property is one that has achieved 90% economic occupancy or has been owned by us for one year and has reached one year from the cessation of any major construction activity on the core building development or redevelopment.

Same Property amounts for the 2022 versus 2021 comparison are from properties that were stabilized and owned as of January 1, 2021 through December 31, 2022.

We use Net Operating Income ("NOI"), a non-GAAP financial measure, to measure the operating performance of our properties.

NOI is also widely used by industry analysts and investors to evaluate performance.

NOI is widely used by industry analysts and investors to evaluate performance.

NOI, which is rental property revenues (excluding termination fees) less rental property operating expenses, excludes certain components from net income in order to provide results that are more closely related to a property's results of operations.

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Depreciation, amortization, and impairment are also excluded from NOI.

Same Property NOI allows analysts, investors, and management to analyze continuing operations and evaluate the growth trend of our portfolio.

Same Property NOI allows management, investors, and analysts to analyze continuing operations and evaluate the growth trend of our portfolio.

Rental property revenues, rental property operating expenses, and NOI changed between the 2022 and 2021 periods as follows ($ in thousands):

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Non-Same Property 26,784 30,428 (3,644) (12.0) %

3344 Peachtree Legal Expense Recovery — (1,817) 1,817 (100) %

Total Rental Property Operating Expenses $ 258,371 $ 259,461 $ (1,090) (0.4) %

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Non-Same Property NOI 72,893 54,596 18,297 33.5 %

3344 Peachtree Legal Expense Recovery — 1,817 (1,817) (100) %

Total NOI $ 492,676 $ 474,497 $ 18,179 3.8 %

Same Property rental property revenues increased between 2021 and 2020 primarily due to the increased occupancy at Corporate Center and 3344 Peachtree, offset by a decrease in occupancy at 3350 Peachtree.

Same property rental property operating expenses increased between 2021 and 2020 primarily due to an Atlanta real estate tax credit received in 2020 and an increase in physical occupancy.

Revenues of Non-Same Property increased between 2021 and 2020 primarily as a result of the stabilization of operations at the recently completed developments at the Domain and 10000 Avalon and the addition of The RailYard in December 2020, 725 Ponce in July 2021, Heights Union in October 2021, and 300 Colorado in December 2021, partially offset by the sale of Hearst Tower in 2020 and the sales of One South at the Plaza, Burnett Plaza, and 816 Congress in 2021.

Fee income decreased $2.7 million (14.6%) between 2021 and 2020 primarily driven by timing of fee income related to the 2019 transactions with NS.

Same Property Revenues increased $2.4 million, or 0.4%, between 2022 and 2021 primarily due to increased occupancy at our Terminus, Buckhead Plaza, and Domain office properties and a related increase in revenues recognized from tenant funded tenant improvements.

Our tenants are increasingly funding capital improvements at our buildings in excess of their tenant improvement allowances as they look to highly amenitized and creative office spaces to attract employees back into the office.

These Same Property revenue increases are partially offset by a decrease in economic occupancy at our Promenade Tower and 3350 Peachtree office properties while under partial redevelopment.

Same Property Operating Expenses increased $2.6 million, or 1.1%, between 2022 and 2021 primarily due to an increase in physical occupancy at our properties, partially offset by a decrease in real estate taxes as well as expenses at our 3350 Peachtree office property under partial redevelopment.

Non-Same Property Revenues increased $14.7 million, or 17.2%, between 2022 and 2021 primarily due to the 2021 acquisitions of 725 Ponce and Heights Union and the consolidation of 300 Colorado upon purchase of our partners' interests in the venture in the fourth quarter of 2021, which were partially offset by the 2022 commencement of a full building redevelopment project at Promenade Central and the 2021 sales of Burnett Plaza, 816 Congress, and One South at the Plaza.

Non-Same Property Operating Expenses decreased $3.6 million, or 12.0% between 2022 and 2021 primarily due to the 2021 sales of Burnett Plaza, 816 Congress, and One South at the Plaza, partially offset by the 2021 acquisitions of 725 Ponce and Heights Union and the consolidation of 300 Colorado upon purchase of our partners' interests in the venture in the fourth quarter of 2021.

The decrease in Non-Same Property Operating Expenses is also due to refunds of real estate taxes for two previously sold properties.

Termination Fee Income decreased $2.6 million, or 51.7%, between 2022 and 2021 primarily due to the termination of a large tenant in December of 2021.

Fee income decreased $9.4 million, or 60.7%, between 2022 and 2021 primarily due to declining development activities as we reached the completion of the Norfolk Southern transactions during the third quarter of 2022.

The Norfolk Southern transactions are described in further detail in note 3 to the consolidated financial statements in this Form 10-K.

General and Administrative Expenses

General and administrative expenses increased $2.3 million (8.5%) between 2021 and 2020 primarily driven by changes in stock compensation expense related to liability-classified awards, most of which became fully earned as of December 31, 2021.

General and administrative expenses decreased $1.0 million, or 3.4%, between 2022 and 2021 primarily due to changes in stock compensation expense tied to reductions in our stock price for awards accounted for using updated fair market values.

Interest Expense

Interest expense, net of amounts capitalized, increased $6.4 million (10.6%) between 2021 and 2020 primarily due to a decrease in interest capitalized in 2021 as a result of the start of preliminary operational activity for projects completing development in the second and third quarters of 2021 and an increase in interest related to the increased borrowings from the amended and restated Term Loan and an increase in our average outstanding balance on our Line of Credit, partially offset by lower interest rates compared to 2020.

Interest expense, net of amounts capitalized, increased $5.5 million, or 8.2%, between 2022 and 2021 primarily due to increases in interest rates on our variable rate debt, the issuance of a $400 million term loan, and an increase in the average outstanding balance on our line of credit, partially offset by an increase in capitalized interest expense as a result of development and redevelopment activities.

Depreciation and Amortization

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Total Depreciation and Amortization $ 295,587 $ 288,092 $ 7,495 2.6 %

Depreciation and amortization of Same Property increased between 2021 and 2020 primarily due to the accelerated depreciation of tenant improvements owned by us resulting from an early termination at the Domain.

Depreciation and amortization of Non-Same Property decreased between 2021 and 2020 primarily due to the sales of One South at the Plaza and Burnett Plaza in 2021, partially offset by the recently completed developments at the Domain and 10000 Avalon and the additions of The RailYard in December 2020 and 725 Ponce in July 2021.

Income from Unconsolidated Joint Ventures

Same Property depreciation and amortization decreased between 2022 and 2021 primarily due to a decrease related to the intangible in-place lease assets recognized upon the acquisition of properties as more of those assets became fully amortized.

This is partially offset by an increase in the depreciation of tenant improvements that are owned by us and were placed into service in 2022.

Non-Same Property depreciation and amortization increased between 2022 and 2021 primarily due to the 2021 acquisitions of 725 Ponce and Heights Union, and the consolidation of 300 Colorado upon purchase of our partners' interests in the venture of the fourth quarter of 2021, partially offset by the 2021 sales of 816 Congress and One South at the Plaza and suspending depreciation in 2022 for a full building redevelopment project at our Promenade Central property.

Income and Net Operating Income from Unconsolidated Joint Ventures

Income from unconsolidated joint ventures consisted of the following in 2022 and 2021 ($ in thousands):

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2022 2021 $ Change % Change

Income from unconsolidated joint ventures $ 7,700 $ 6,801 $ 899 13.2 %

Depreciation and amortization 3,927 9,674 (5,747) (59.4) %

Net loss (gain) on sale of investment property (81) 39 (120) 307.7 %

Gain on sale of undepreciated property (4,478) — (4,478) N/A

Interest expense 2,603 2,911 (308) (10.6) %

Other expense 70 46 24 52.2 %

Termination fee income — (81) 81 100.0 %

Other income (217) (167) (50) (29.9) %

Net operating income from unconsolidated joint ventures $ 9,524 $ 19,223 $ (9,699) (50.5) %

Net operating income:

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Non-Same Property 4,993 14,891 (9,898) (66.5) %

Termination fee income 81 9 72 800 %

Other income 121 61 60 98 %

Depreciation and amortization (9,674) (8,740) (934) (11) %

Interest expense (2,911) (2,071) (840) (41) %

Net gain (loss) on sale of investment property (39) (148) 109 74 %

Income from unconsolidated joint ventures $ 6,801 $ 7,947 $ (1,146) (14) %

Income from unconsolidated joint ventures decreased between 2021 and 2020 primarily due to increased interest from the issuance of the Carolina Square $135.7 million non-recourse mortgage note which was used to fund the repayment in full of its $77.5 million construction loan and an increase in depreciation expense from 300 Colorado which began operations in 2021 prior to being consolidated.

Gain on Sales of Investments in Unconsolidated Joint Ventures

The gain on sales of investments in unconsolidated joint ventures for the year ended December 31, 2021 primarily includes the sale of our interest in the Dimensional Place joint venture.

The gain on investment property transactions for the year ended December 31, 2020 primarily includes the sale of our interests in the Wildwood Associates and Gateway Village joint ventures.

Gain on Investment Property Transactions

The gain on investment property transactions for the year ended December 31, 2021 primarily includes the sales of 816 Congress in December 2021, One South at the Plaza in July 2021, and Burnett Plaza in April 2021, as well as the gain resulting from the consolidation of 300 Colorado in December 2021.

The gain on investment property transactions for the year ended December 31, 2020 primarily includes the sale of Hearst Tower.

The combined sales prices of the 816 Congress, One South at the Plaza, and Burnett Plaza dispositions in 2021 and the Hearst Tower and Woodcrest dispositions in 2020 represented weighted average capitalization rates of 5.4% and 5.1%, respectively.

Capitalization rates are calculated by dividing projected annualized NOI by the sales price.

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests includes the outside parties' share of the net income of CPLP as well as that of certain other consolidated entities.

Net income attributable to noncontrolling interests decreased $426,000 (51.0%) between 2021 and 2020 primarily driven by the redemption of 1.7 million limited partnership units in CPLP completed in the first quarter of 2020, partially offset by the increase in net income in 2021.

Net operating income from unconsolidated joint ventures $ 9,524 $ 19,223 $ (9,699) (50.5) %

Income from unconsolidated joint ventures increased between 2022 and 2021 primarily due to a gain from the sale of a 3.0 acre land parcel in Uptown Dallas in June 2022, partially offset by the sale of our interest in the Carolina Square venture in 2022 and Dimensional Fund Advisors venture in 2021.

Funds from Operations

The table below shows Funds from Operations Available to Common Stockholders (“FFO”), a non-GAAP financial measure, and the related reconciliation to net income available to common stockholders for the Company.

The table below shows Funds from Operations Available to Common Stockholders (“FFO”), a non-GAAP financial measure, and the related reconciliation from net income available to common stockholders for the Company.

The Company calculates FFO in accordance with Nareit's definition, which is net income available to common stockholders (computed in accordance with GAAP), excluding extraordinary items, cumulative effect of change in accounting principle and gains on sale or impairment on depreciable property, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures to reflect FFO on the same basis.

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Investments in unconsolidated joint ventures (56,267) — (0.37) (13,083) — (0.09)

Impairment — — — 14,829 — 0.10

Funds From Operations $ 408,759 150,419 $ 2.72 $ 409,201 148,891 $ 2.75

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Interest expense 72,537 67,027

Impairment — 14,829

Depreciation and amortization 295,587 288,092

Transaction costs — 428

Other expenses 2,134 2,131

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Gain on sale of investment in unconsolidated joint ventures (56,267) (13,083)

Gain on investment property transactions (152,547) (90,125)

Loss (gain) on investment property transactions 9 (152,547)

Gain on extinguishment of debt (169) —

Net Operating Income $ 492,676 $ 474,497

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Our primary short-term and long-term liquidity needs include the following:

• property operating expenses;

• property and land acquisitions;

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• joint venture formations.

Our material cash needs for 2022 include $223.8 million of unfunded tenant improvements and construction obligations and $102.4 million of debt maturities.

Those and other 2022 cash needs are expected to be met by a combination of some or all of the sources noted above.

Our material cash needs for 2023 include $181.1 million of unfunded tenant improvements and construction costs.

This and other 2023 cash needs are expected to be met by a combination of some or all of the sources noted above.

Financial Condition

A key component of our strategy is to maintain a conservative balance sheet with leverage and liquidity that enables us to be positioned for future growth.

Our leverage metrics at December 31, 2021, which include net debt to EBITDA re , net debt to undepreciated assets, and net debt to total market capitalization, were among the strongest within our sector of public office REITs.

In recent quarters, our leverage metrics which include net debt to EBITDA re , net debt to undepreciated assets, and net debt to total market capitalization, have consistently been among the strongest within our sector of public office REITs.

As of December 31, 2022, we had $56.6 million outstanding under our Credit Facility with the ability to borrow an additional $943.4 million.

We also had $10.2 million in cash, cash equivalents, and restricted cash on hand at December 31, 2021.

We also had $5.1 million in cash and cash equivalents and no restricted cash on hand at December 31, 2022.

The following table sets forth information as of December 31, 2022 with respect to our outstanding contractual obligations and commitments ($ in thousands):

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Unsecured senior notes 1,000,000 — 250,000 225,000 525,000

Term loan 350,000 — 350,000 — —

Term loans 750,000 — 750,000 — —

Mortgage notes payable 535,241 8,274 85,842 220,125 221,000

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Total commitments $ 181,270 $ 181,103 $ — $ — $ 167

(1) Interest on variable rate obligations is based on rates effective as of December 31, 2021.

(1) Interest on variable rate obligations is based on balances and effective rates as of December 31, 2022.

Credit Facility

Our $1 billion Credit Facility matures on January 3, 2023.

Our $1 billion Credit Facility matures on April 30, 2027.

The Credit Facility contains financial covenants that require, among other things, the maintenance of an unencumbered interest coverage ratio of at least 1.75x;

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We are in compliance with all covenants of the Credit Facility.

We expect to negotiate a new credit facility prior to the current maturity date which will have a borrowing capacity that meets or exceeds the current facility and extends the maturity date.

The interest rate applicable to the Credit Facility varies according to our leverage ratio, and may, at our election, be determined based on either (1) the current LIBOR plus a spread of between 1.05% and 1.45%, or (2) the greater of Bank of America's prime rate, the federal funds rate plus 0.50%, or the one-month LIBOR plus 1.0% (the "Base Rate"), plus a spread of between 0.10% or 0.45%, based on leverage.

At December 31, 2021, the Credit Facility's spread over LIBOR was 1.05%.

The amount that we may draw under the Credit Facility is a defined calculation based on the Company's unencumbered assets and other factors.

The interest rate applicable to the Credit Facility varies according to our leverage ratio, and may, at our election, be determined based on either (i) the Daily Secured Overnight Financing Rate ("SOFR") or Term SOFR, plus a SOFR adjustment of 0.10% ("Adjusted SOFR") and a spread of between 0.90% and 1.40%, or (ii) the greater of Bank of America's prime rate, the federal funds rate plus 0.50%, Term SOFR, plus a SOFR adjustment of 0.10% and 1.00%, or 1.00%, plus a spread of between 0.00% and 0.40%, based on leverage.

In addition to the interest rate, the Credit Facility is also subject to a facility fee of 0.15% to 0.30%, depending on leverage, on the entire $1 billion capacity.

At December 31, 2022, the Credit Facility's spread over Adjusted SOFR was 0.90%, and the facility fee spread was 0.15%.

The amount that we may draw under the Credit Facility is a defined calculation based on our unencumbered assets and other factors.

The total available borrowing capacity under the Credit Facility was $943.4 million at December 31, 2022.

On June 28, 2021, we entered into an Amended and Restated Term Loan Agreement (the "Term Loan") that amended the former term loan agreement.

Under the Term Loan, we have borrowed $350 million that matures on August 30, 2024 with options to, on up to four successive occasions, extend the maturity date for an additional 180 days.

The Term Loan has financial covenants consistent with those of the Credit Facility.

The interest rate applicable to the Term Loan varies according to our leverage ratio and may, at our election, be determined based on either (1) the Eurodollar Rate Loans plus a spread of between 1.05% and 1.65%, (2) the current LIBOR Daily Floating plus a spread of between 1.05% and 1.65%, or (3) the

interest rate applicable to Base Rate Loans plus a spread of between 0.05% and 0.65%.

At December 31, 2021, the Term Loan's spread over LIBOR was 1.05%.

We are in compliance with all covenants of the Term Loan.

On October 3, 2022, we entered into the Delayed Draw Term Loan Agreement (the "2022 Term Loan") and borrowed the full $400 million available under the loan.

The loan matures on March 3, 2025 with four consecutive extension options for six months each.

The interest rate provisions are the same as the 2021 Term Loan, and the covenants are the same as the Credit Facility.

On June 28, 2021, we entered into the Amended and Restated Term Loan Agreement (the "Term Loan") that amended the former term loan agreement.

Under the Term Loan, we have borrowed $350 million that matures on August 30, 2024 with four consecutive extension options for 180 days each.

On September 19, 2022, we entered into the First Amendment to the 2021 Term Loan.

This amendment aligns covenants and available interest rates, including the addition of SOFR, to that of the Credit Facility.

Under the terms of this First Amendment, the interest rate applicable to the 2021 Term Loan varies according to our leverage ratio and may, at our election, be determined based on either (1) the Daily SOFR or Term SOFR, plus a SOFR adjustment of 0.10% ("Adjusted SOFR") and a spread of between 1.05% and 1.65%, or (2) the greater of Bank of America's prime rate, the federal funds rate plus 0.50%, Term SOFR, plus a SOFR adjustment of 0.10% and 1.00%, or 1.00%, plus a spread of between 0.05% and 0.65%, based on leverage.

On September 27, 2022, we entered into a floating-to-fixed interest rate swap with respect to the $350 million 2021 Term Loan through the maturity date of August 30, 2024.

This swap effectively fixed the underlying SOFR rate at 4.23%.

At December 31, 2022, the 2021 and 2022 Term Loan's spread over Adjusted SOFR rate was 1.05%.

We are in compliance with all covenants of our Term Loans.

Unsecured Senior Notes

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Secured Mortgage Notes

In June 2021, the Company executed a collateral substitution for the mortgage previously secured by the Company's 816 Congress property in Austin.

The mortgage is now secured by the Company's Domain 10 property in Austin.

In December 2022, we refinanced the mortgages on our two Terminus properties in Atlanta with the lender.

In October 2022, we paid off, in full, our Legacy Union One and Promenade Tower mortgages.

In June 2021, we executed a collateral substitution for the mortgage previously secured by our 816 Congress property in Austin.

The mortgage is now secured by our Domain 10 property in Austin.

All other terms of the note were unchanged.

On February 3, 2020, the Company prepaid in full, without penalty, the $23.0 million Meridian Mark Plaza mortgage note.

As of December 31, 2021, the Company had $661.5 million outstanding on seven non-recourse mortgage notes.

As of December 31, 2022, we had $535.2 million outstanding on five non-recourse mortgage notes.

All interest rates on the secured mortgage notes are fixed.

Assets with depreciated carrying values of $1.1 billion were pledged as security on these mortgage notes payable.

Assets with depreciated carrying values of $910.2 million were pledged as security on these mortgage notes payable.

Joint Venture Commitments and Debt

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At December 31, 2022, our unconsolidated joint ventures had aggregate outstanding indebtedness to third parties of $178.8 million.

This debt represents mortgage or construction loans, most of which are non-recourse to us.

This debt represents mortgage or construction loans, all of which are non-recourse to us.

In addition, in certain instances, we provide “non-recourse carve-out guarantees” on these non-recourse loans.

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Many of our non-recourse mortgages contain covenants which, if not satisfied, could result in acceleration of the maturity of the debt.

We expect to either refinance the non-recourse mortgages at maturity or repay the mortgages with proceeds from asset sales, debt, or other capital sources.

We are in compliance with all covenants of our existing non-recourse mortgages.

75% of our debt bears interest at a fixed rate.

Our variable-interest debt instruments, including our Credit Facility and Term Loan, may use LIBOR, SOFR, or other indexes as allowed as a benchmark for establishing the rate.

LIBOR has been the subject of regulatory guidance and proposals for reform and in March 2021, the United Kingdom's Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after June 30, 2023.

These reforms may cause LIBOR to no longer be provided or to perform differently than in the past.

Recent proposals for LIBOR reforms may result in the establishment of new methods of calculating LIBOR or the establishment of one or more alternative benchmark rates.

If LIBOR is no longer widely available, or otherwise at our option, our variable-interest debt instruments, including our Credit Facility and term loan facilities, provide for alternate interest rate calculations as mentioned above.

There can be no assurances as to what alternative interest rates may be and whether such interest rates will be more or less favorable than LIBOR and any other unforeseen impacts of the potential discontinuation of LIBOR.

The Company intends to continue monitoring the developments with respect to the planned phasing out of LIBOR after 2022 and work with

its lenders to ensure any transition away from LIBOR will have minimal impact on its financial condition, but can provide no assurances regarding the impact of the discontinuation of LIBOR.

expect to either refinance the non-recourse mortgages at maturity or repay the mortgages with proceeds from asset sales, debt, or other capital sources.

We are in compliance with all covenants of our existing unsecured debt and non-recourse mortgages.

Future Capital Requirements

To meet capital requirements for future investment activities over the long-term, we intend to actively manage our portfolio of properties and strategically sell assets to exit our non-core holdings and reposition our portfolio of income-producing assets.

We expect to continue to utilize cash retained from operations as well as third-party sources of capital such as indebtedness to fund future commitments as well as utilize construction facilities for some development assets, if available and under appropriate terms.

We may also generate capital through the issuance of securities that include common or preferred stock, warrants, debt securities, depository shares or the issuance of CPLP limited partnership units.

We expect to continue to utilize cash retained from operations, as well as third-party sources of capital such as indebtedness, to fund future commitments and to utilize construction financing facilities for some development assets, if available and under appropriate terms.

We may also generate capital through the issuance of securities that include common or preferred stock, warrants, debt securities, or the issuance of CPLP limited partnership units.

Our business model also includes raising or recycling capital which can assist in meeting obligations and funding development and acquisition activity.

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Cash Flows from Operating Activities.

Cash provided by operating activities increased $38.4 million between the 2021 and 2020 periods primarily due to net cash received from operations at the recently stabilized developments at the Domain and 10000 Avalon and the addition of The RailYard in November 2020, 725 Ponce in July 2021, Heights Union in October 2021, and 300 Colorado in December 2021 partially offset by the sale of Hearst Tower in 2020 and the sales of One South at the Plaza, Burnett Plaza, and 816 Congress in 2021.

Cash provided by operating activities decreased $24.3 million between 2022 and 2021 primarily due to cash received from operations of the One South at the Plaza, Burnett Plaza, and 816 Congress operating properties sold in 2021, partially offset by the timing of payments of property taxes and other payables and cash received from a full year of operations of 725 Ponce, Heights Union, and our partners' interest in 300 Colorado acquired in 2021.

Cash Flows from Investing Activities.

Cash used in investing activities increased $58.6 million between the 2021 and 2020 periods primarily due to cash used in the purchase of 725 Ponce, Heights Union, and our partners interest in 300 Colorado, partially offset by the cash received from the sales of 816 Congress, Burnett Plaza, and One South at the Plaza in 2021.

Cash used in investing activities increased $143.4 million between 2022 and 2021.

Cash used in investing activities was higher in 2022 primarily due to an increase in building and tenant improvements over the prior year, which was partially offset by the 2022 sale of our interest in Carolina Square.

Cash used in investing activities was lower in 2021 primarily due to proceeds from property dispositions (816 Congress, Burnett Plaza, One South at the Plaza, and our interest in Gateway Village) exceeding cash paid for property acquisitions (725 Ponce, Heights Union, and our partners' interest in 300 Colorado.)

Cash Flows from Financing Activities.

Cash flows used in financing activities decreased $35.7 million between the 2021 and 2020 periods primarily due to the $250 million repayment of our prior Term Loan and issuance of the $350 million Amended and Restated Term Loan in 2021 offset partially by repayment of the 300 Colorado construction loan assumed in the acquisition.

Cash flows used in financing activities decreased $158.7 million between 2022 and 2021.

In 2022, an increase in net repayments on our Credit Facility, an increase in repayments of mortgage notes and our purchase of non-controlling interests were largely offset by proceeds from the issuance of the $400 million 2022 Term Loan and of $103.1 million from the issuance of common stock.

In 2021, the $100 million of net proceeds from the $250 million repayment of our prior term loan and issuance of the $350 million Term Loan only partially offset our recurring dividends and mortgage payments.

Capital Expenditures.

We incur capital expenditures related to our real estate assets that include the acquisition of properties, the development of new properties, the redevelopment of existing or newly purchased properties, leasing costs for new or replacement tenants, and ongoing property repairs and maintenance.

We incur capital expenditures related to our real estate assets that include the acquisition of properties, the development of new properties, the redevelopment of existing or newly purchased properties, and direct leasing costs for new or replacement tenants.

Capital expenditures for assets we develop or acquire and then hold and operate are included in the property acquisition, development, and tenant asset expenditures line item within investing activities on the statements of cash flows.

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Capitalized salaries 8,040 7,332

Accrued capital expenditures adjustment (15,367) 25,745

Change in accrued capital expenditures (43,745) (15,367)

Total property acquisition, development and tenant asset expenditures $ 342,241 $ 787,810

Capital expenditures increased $168.2 million between December 31, 2021 and 2020 primarily due to the acquisitions of 725 Ponce, Heights Union, our partners' interest in 300 Colorado, and the start of development of a new office property at the Domain, partially offset by a decrease in building improvements at operating properties and decrease in land purchases.

Tenant improvements and leasing costs, as well as related capitalized personnel costs, are a function of the number and size of executed new leases or renewals of existing leases.

Capital expenditures decreased $445.6 million between 2022 and 2021 primarily due to the acquisitions of properties and land held for investment, including, 725 Ponce, Heights Union, and our partners' interest in 300 Colorado in 2021.

This decrease from asset acquisitions is partially offset by an increase in capital expenditures on building improvements including significant redevelopments of properties and an increase in our capital expenditures related to tenant improvements and leasing costs, which are a function of the number, size, and timing of occupancy of executed new leases or renewals of existing leases.

The amount of tenant improvements and leasing costs on a per square foot basis for 2022 and 2021 was as follows:

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We funded these dividends with cash provided by operating activities.

We expect to fund our future quarterly common dividends with cash provided by operating activities, also using proceeds from investment property sales, distributions from unconsolidated joint ventures, and indebtedness, if necessary.

We expect to fund our future quarterly common dividends with cash provided by operating activities, proceeds from investment property sales, distributions from unconsolidated joint ventures, and indebtedness, if necessary.

On a quarterly basis, we review the amount of our common dividend in light of current and projected future cash provided by operating activities and also consider the requirements needed to maintain our REIT status.

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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-K

Item 7. Management’s Discussion and Analysis