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Item 7. Management’s Discussion and Analysis

2024-02-07 compared with 2023-02-09 · 129 added, 160 removed, 297 unchanged (49% of the section changed)

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Overview of 2023 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, Tampa, Phoenix, Charlotte, Dallas, and Nashville.

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

To implement this disciplined approach, we maintain a simple, flexible, and low-leveraged balance sheet, which allows us to pursue compelling growth opportunities at the most advantageous points in the cycle.

We utilize our strong local operating platforms within each of our major markets to implement this strategy.

During 2023, we completed two financial transactions.

In April 2023, we entered into a floating-to-fixed interest rate swap on $200 million of our $400 million Term Loan with an original maturity of March 2025, fixing the underlying daily Secured Overnight Financing Rate ("SOFR") at 4.298% through maturity.

In May 2023, we refinanced the mortgage loan for our Medical Offices at Emory Hospital property in Atlanta, which is owned in a 50-50 joint venture with Emory University.

The new $83 million mortgage loan matures in June 2032 and has a fixed interest rate of 4.80%.

The proceeds were used to pay off the existing $62 million mortgage that matured on June 1, 2023.

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.

As the Federal Reserve has continued to work toward 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.

The weighted average net effective rent per square foot, representing base rent excluding operating expense reimbursements and leasing costs, for new or renewed non-amenity leases with terms greater than one year, was $23.39 per square foot.

In September 2023, we sold a 10.4 acre land parcel outside of Atlanta for a gross sales price of $4.25 million and recorded a gain of $507,000.

During 2023, we leased or renewed 1.7 million square feet of office space.

Our operating portfolio was 90.9% percent leased as of December 31, 2023 and the weighted average economic occupancy during the fourth quarter of 2023 was 87.6%.

Cash-basis net effective rent per square foot increased 5.8% on spaces that had been previously occupied in the past year.

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 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.

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

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 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.

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.

Our same property net operating income for the year increased 5.0% on a straight-line basis and increased 4.2% on a cash-basis.

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

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

Critical Accounting Policies and Estimates

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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 and any above- or below-market lease intangible assets or liabilities related to the lease projected at the date of tenant vacancy.

This fee income is adjusted 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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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.

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.

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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.

For acquisitions that are accounted for as an acquisition of a business, we record the acquired tangible and intangible assets and assumed liabilities at fair value at the acquisition date.

For acquisitions that are accounted for as an acquisition of a business, 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.

Fair value is based on estimated cash flow projections that utilize available market information and discount and/or capitalization rates as appropriate.

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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.

This review includes our operating properties, properties under development, and land holdings (including any capitalized predevelopment costs).

The first step in this process is for us to determine whether an asset is considered to be held-for-investment 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 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.

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-for-investment.

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

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 future 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.

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

If we determine that an asset that is held-for-investment 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 reduce the carrying amount of the asset to fair value.

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

We may determine fair value by using a discounted cash flow calculation or by utilizing comparable market information.

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

We may determine fair value by using an undiscounted cash flow calculation or by utilizing comparable market information.

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

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

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Development Cost Capitalization

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

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

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.

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 or redevelopment, are capitalized in accordance with accounting rules.

If we abandon development or redevelopment 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.

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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 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.

Once a certain project is constructed 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 held available for occupancy requires judgment.

We consider projects and/or project phases to be 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, which may occur prior to economic stabilization.

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

Results of Operations For The Year Ended December 31, 2023

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Rental Property Revenues and Rental Property Operating Expenses

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 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.

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

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

Same Property amounts for the 2023 versus 2022 comparison are from properties that were stabilized and owned as of January 1, 2022 through December 31, 2023.

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

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

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

NOI is also 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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As a result, we use only those income and expense items that are incurred at the property level to evaluate a property's performance.

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

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):

Depreciation, amortization, gains or losses on sales of depreciated investment assets, 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.

Consolidated rental property revenues, rental property operating expenses, and NOI changed between the 2023 and 2022 periods as follows ($ in thousands):

Year Ended December 31,

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Total NOI $ 525,270 $ 492,676 $ 32,594 6.6 %

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.

Same Property Revenues increased $25.5 million, or 3.6%, between 2023 and 2022 primarily due to an increase in economic occupancy at our Domain and Buckhead Plaza office properties and related increases in revenues recognized from tenant-funded improvements owned by us.

Our tenants are increasingly funding capital improvements at our buildings in

excess of their tenant improvement allowances as they trend toward highly amenitized and creative office spaces to attract employees back into the office.

Same Property Operating Expenses increased $2.1 million, or 0.8%, between 2023 and 2022 primarily due to an increase in economic occupancy at our Domain and Buckhead Plaza office properties and increased operating expenses at our 3350 Peachtree office property as we completed a partial redevelopment of the property in 2023.

Non-Same Property Revenues and operating expenses increased between 2023 and 2022 primarily due to operations at our 100 Mill and Heights Union operating properties as they reached stabilization in 2022 and commencement of operations following a full building redevelopment project at our Promenade Central operating property in November 2022.

These increases are partially offset by a decrease in revenues related to the write-down of net assets associated with SVB Financial Group's ("SVB Financial") bankruptcy and the impact of the rejection in bankruptcy of SVB Financial's lease at our Hayden Ferry 1 operating property.

For more information related to this write-down, see note 13 to the consolidated financial statements in this Form 10-K.

Hayden Ferry 1 was moved to Non-Same Property during 2023 due to the removal of the property from operations for a full building redevelopment in the fourth quarter of 2023.

Termination Fee Income increased $4.9 million, or 198.0%, between 2023 and 2022 and is recorded based on the timing of termination notices or negotiated agreements and expected move outs.

The increase in termination fee income is driven by an increase in negotiated early terminations that were largely contemporaneous with the timing of leases executed with replacement tenants for the same leased space.

Fee income decreased $4.7 million, or 77.6%, between 2023 and 2022 primarily due to the completion of the Norfolk Southern transactions during the third quarter of 2022.

The Norfolk Southern transactions are described in further detail in note 13 to the consolidated financial statements in this Form 10-K.

General and Administrative Expenses

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.

General and administrative expenses increased $4.0 million, or 14.2%, between 2023 and 2022 primarily due to increases in stock compensation expense and an increase in expenses related to annual performance-based compensation paid in cash.

Interest Expense

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.

Interest expense, net of amounts capitalized, increased $32.9 million, or 45.4%, between 2023 and 2022 primarily due to increases in the interest rates on our variable rate debt which rose from a weighted average rate of 5.43% at December 31, 2022 to 6.39% as of December 31, 2023.

In addition, the issuance of the 2022 Term Loan in October 2022, refinancing of the mortgage loans on our Terminus operating properties in December 2022, and a higher average balance on our line of credit in 2023 resulted in increased interest expenses in 2023.

Depreciation and Amortization

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Total Depreciation and Amortization $ 314,897 $ 295,587 $ 19,310 6.5 %

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.

Same Property depreciation and amortization increased between 2023 and 2022 primarily due to the timing of accelerated depreciation related to the shortening of estimated useful lives of lease-related assets, including tenant improvements, resulting from early termination of leases and an increase in tenant improvements being placed into service.

Non-Same Property depreciation and amortization increased between 2023 and 2022 primarily due to increased depreciation at our 100 Mill and Heights Union operating properties as they reached stabilization in 2022 and at our Promenade Central operating property following a full building redevelopment project completed in November 2022.

Income and Net Operating Income from Unconsolidated Joint Ventures

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Depreciation and amortization 1,931 3,927 (1,996) (50.8) %

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

Gain on sale of undepreciated property — (4,478) 4,478 100.0 %

Gain on sale of depreciated investment property, net — (81) 81 100.0 %

Interest expense 1,676 2,603 (927) (35.6) %

Other expense 58 70 (12) (17.1) %

Termination fee income — (81) 81 100.0 %

Other income (140) (217) 77 35.5 %

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Net operating income from unconsolidated joint ventures $ 5,824 $ 9,524 $ (3,700) (38.8) %

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.

Income from unconsolidated joint ventures decreased between 2023 and 2022 primarily due to gain on the sale of a land parcel by a joint venture in 2022 and decreases in income and depreciation and amortization as a result of the sale of our interest in the Carolina Square joint venture in September 2022.

Non-Same Property NOI from unconsolidated joint ventures decreased between 2023 and 2022 primarily due to the sale of our interest in the Carolina Square joint venture in September 2022.

Gain on Sales of Investments in Unconsolidated Joint Ventures and Investment Properties

In September 2022, we sold our 50% joint venture interest in Carolina Square Holdings LP ("Carolina Square") for a gross sales price of $105.0 million and recognized a gain of $56.3 million on the sale.

Funds from Operations

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.

FFO is used by industry analysts and investors as a supplemental measure of a REIT’s operating performance.

We calculate FFO as defined by the National Association of Real Estate Investment Trusts ("Nareit"), which is net income (loss) available to common stockholders (computed in accordance with GAAP), excluding extraordinary items, cumulative effect of change in accounting principle, and gains or losses from sales of depreciable real property, plus depreciation and amortization of real estate assets, impairment on depreciable investment property and after adjustments for unconsolidated partnerships and joint ventures to reflect FFO on the same basis.

FFO is used by industry analysts and investors as a supplemental measure of an equity REIT’s operating performance.

Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time.

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Thus, Nareit created FFO as a supplemental measure of REIT operating performance that excludes historical cost depreciation, among other items, from GAAP net income.

The use of FFO, combined with the required primary GAAP presentations, has been fundamentally beneficial, improving the understanding of operating results of REITs among the investing public and making comparisons of REIT operating results more meaningful.

Our management believes that the use of FFO, combined with the required primary GAAP presentations, has been fundamentally beneficial, improving the understanding of operating results of REITs among the investing public and making comparisons of REIT operating results more meaningful.

Our management evaluates operating performance in part based on FFO.

Additionally, our management uses FFO, along with other measures, to assess performance in connection with evaluating and granting incentive compensation to our officers and other key employees.

Additionally, our management uses FFO and FFO per share, along with other measures, as a performance measure for incentive compensation to our officers and other key employees.

The reconciliations of net income available to common stockholders to FFO and earnings per share to FFO per share are as follows for the years ended December 31, 2023 and 2022 ($ in thousands, except per share information):

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Noncontrolling interest related to unitholders 14 25 — 143 25 —

Conversion of stock options — — — — 1 —

Conversion of unvested restricted stock units — 301 — — 281 —

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Other income (2,454) (2,660)

Reimbursed expenses 2,024 2,476

General and administrative expenses 32,331 28,319

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Depreciation and amortization 314,897 295,587

Reimbursed expenses 608 2,024

Other expenses 2,128 2,134

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• property and land acquisitions;

• expenditures on development projects;

• expenditures on development and redevelopment projects;

• building improvements, tenant improvements, and leasing costs;

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• joint venture formations.

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.

Our material capital expenditure commitments for 2024 include $109.6 million of unfunded tenant improvements and development costs.

As of December 31, 2023, we had $185.1 million drawn under our Credit Facility with the ability to borrow the remaining $814.9 million, as well as $6.0 million of cash and cash equivalents.

We expect to have sufficient liquidity to meet our obligations for the foreseeable future.

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.

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

In recent quarters, our leverage metrics which include net debt to EBITDA re (net income available to common stockholders plus interest expense, income tax expense, depreciation and amortization, losses (gains) on the disposition of depreciated property, and impairment), 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.

The following table sets forth information as of December 31, 2023 with respect to our outstanding contractual obligations and commitments ($ in thousands):

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Total contractual obligations $ 3,116,600 $ 200,201 $ 1,056,707 $ 1,152,348 $ 707,344

Unfunded tenant improvements and construction obligations $ 181,270 $ 181,103 $ — $ — $ 167

Unfunded tenant improvements and development obligations

$ 109,578 $ 109,578 $ — $ — $ —

Total commitments $ 109,578 $ 109,578 $ — $ — $ —

(1) Amounts presented above assume we exercise all available extension options.

(2) Interest on variable rate obligations is based on balances and effective rates as of December 31, 2023.

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and an overall leverage ratio of no more than 60%.

The Credit Facility also contains customary representations and warranties and affirmative and negative covenants, as well as customary events of default.

The amounts outstanding under the Credit Facility may be accelerated upon the occurrence of any events of default.

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

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.

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 Daily SOFR or Term SOFR, plus a SOFR adjustment of 0.10% ("Adjusted SOFR") and a spread of between 0.90% and 1.40%, or (2) the greater of (i) Bank of America's prime rate, (ii) the federal funds rate plus 0.50%, (iii) Term SOFR, plus a SOFR adjustment of 0.10%, plus 1.00%, or (iv) 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.

We have elected to determine the interest rate based on the Daily SOFR, plus a SOFR adjustment of 0.10% and a spread of between 0.90% and 1.40%.

At December 31, 2023, the Credit Facility's spread over Adjusted SOFR was 0.90%, and the facility fee spread was 0.15%.

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The total available borrowing capacity under the Credit Facility was $814.9 million at December 31, 2023.

The amounts outstanding under the Credit Facility may be accelerated upon the occurrence of any events of default.

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 loan matures on March 3, 2025 with four consecutive options to extend the maturity date for an additional 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 April 19, 2023, we entered into a floating-to-fixed rate swap with respect to $200 million of the $400 million 2022 Term Loan through the maturity date of March 3, 2025.

This swap fixed the underlying SOFR rate at 4.298% (see note 9 of the Notes to Consolidated Financial Statements within this Form 10-K).

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

Under the 2021 Term Loan, we borrowed $350 million that matures on August 30, 2024 with four consecutive options to extend the maturity date for an additional 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.

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 (i) Bank of America's prime rate, (ii) the federal funds rate plus 0.50%, (iii) Term SOFR, plus a SOFR adjustment of 0.10%, plus 1.00%, or (iv) 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.

This swap fixed the underlying SOFR rate at 4.234% (see note 9 of the Notes to Consolidated Financial Statements within this Form 10-K).

We have elected to determine the interest rate based on the Daily SOFR, plus a SOFR adjustment of 0.10% and a spread of between 0.90% and 1.40%.

At December 31, 2023, the Term Loans' spread over the underlying Adjusted SOFR rates was 1.05%.

Unsecured Senior Notes

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The weighted average fixed interest rates on these notes is 3.91%.

The unsecured senior notes contain financial covenants that are consistent with those of our Credit Facility.

The senior notes also contain customary representations and warranties and affirmative and negative covenants, as well as customary events of default.

We are in compliance with all covenants of the unsecured senior notes.

The unsecured senior notes contain financial covenants that are consistent with those of our Credit Facility, with the exception of a secured leverage ratio of no more than 40%.

The senior notes also contain customary representations and warranties, both affirmative and negative covenants, and customary events of default.

Secured Mortgage Notes

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.

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

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 from $178.9 million.

The interest rate for each mortgage increased to 6.34%,

from a combined weighted average interest rate of 4.67%.

These mortgages are neither cross-collateralized nor cross-defaulted.

In October 2022, we paid off, in full, our Legacy Union One and Promenade Tower mortgages with remaining principal balances of $66.0 million and $86.3 million, respectively.

These mortgages had interest rates of 4.24% and 4.27%, respectively.

As of December 31, 2023, we had $527.0 million outstanding on five non-recourse mortgage notes with a weighted average interest rate of 4.68%.

All interest rates on the secured mortgage notes are fixed.

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Other Debt Information

Our existing mortgage debt is primarily non-recourse, fixed-rate mortgage notes secured by various real estate assets.

Our existing mortgage debt is solely non-recourse, fixed-rate mortgage notes secured by various real estate assets.

We expect to either refinance our non-recourse mortgage loans at maturity or repay the mortgage loans with other capital sources, includin g ou r credit facility, unsecured debt, non-recourse mortgages, construction loans, the sale of assets, joint venture equity, the issuance of common stock, the issuance of preferred stock, or the issuance of units of CPLP.

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

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 and to utilize construction financing facilities for some development assets, if available and under appropriate terms.

To meet capital requirements for future investment activities, 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 also 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.

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We report and analyze our cash flows based on operating activities, investing activities, and financing activities.

Cash, cash equivalents, and restricted cash totaled $5.1 million and $10.2 million at December 31, 2022 and 2021, respectively.

Cash and cash equivalents totaled $6.0 million and $5.1 million at December 31, 2023 and 2022, respectively.

Management's Discussion and Analysis of Financial Condition and Results of Operations - Cash Flows" from our 2022 Annual Report on Form 10-K for a discussion of the changes in cash flows between 2022 and 2021.

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Cash Flows from Operating Activities.

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 provided by operating activities increased $3.2 million between 2023 and 2022 primarily due to the timing of payments of operating liabilities and receipt of payments from tenants.

Cash Flows from Investing Activities.

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 used in investing activities decreased $38.8 million between 2023 and 2022.

Cash used in investing activities was lower in 2023 primarily due to decreases in capital expenditures driven by the following:

the Domain 9 development project nearing final phases of construction at the end of 2023;

significant redevelopment activities in 2022 being completed in 2023;

decreases in cash paid for building improvements;

offset by increases in expenditures for tenant improvements;

and other leasing costs in 2023.

The net decrease in capital expenditures is in addition to a decrease in contributions to joint ventures as development activities at our Neuhoff project were increasingly funded by the joint venture's construction loan in 2023.

These decreases are partially offset by a decrease in cash provided in 2023 related to the 2022 sale of our interest in Carolina Square.

Cash Flows from Financing Activities.

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.

Cash flows used in financing activities increased $36.0 million between 2023 and 2022.

The increase in cash used is primarily driven by a reduction in proceeds from the 2022 issuance of common stock and issuance of the 2022 Term Loan.

This increase is partially offset by a decrease in cash used in repayments of mortgage notes and a decrease in net repayments on our Credit Facility in 2023.

Capital Expenditures.

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Components of expenditures included in this line item for the years ended December 31, 2023 and 2022 are as follows ($ in thousands):

Acquisition of properties $ — $ 524,271

Projects under development (1) $ 53,670 $ 124,717

Operating properties—redevelopment 41,066 63,244

Operating properties—building improvements 26,878 33,726

Operating properties—leasing costs 137,017 97,114

Purchase of land held for investment — 18,267

Capitalized interest 15,400 6,257

Capitalized salaries 8,040 7,332

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

Capitalized interest and salaries 20,888 23,440

Total property acquisition, development and tenant asset expenditures $ 279,519 $ 342,241

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:

(1) Includes initial leasing costs.

Capital expenditures decreased $62.7 million between 2023 and 2022 primarily due to decreased development activities at our Domain 9 property as it nears final stages of development and the significant redevelopment projects in 2022 being completed in 2023.

This decrease is partially offset by an increase in our capital expenditures related to leasing costs which include tenant improvements and other leasing costs (primarily contingent commissions) and are a function of the number, size, and timing of occupancy of executed new leases or renewals of existing leases.

The weighted average leasing costs on a per square foot basis for leases signed during 2023 and 2022 were as follows:

New leases $13.41 $12.60

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Expansion leases $6.12 $11.71

The amounts of tenant improvement and leasing costs on a per square foot basis vary by lease and by market.

Total $10.59 $10.69

The amounts of leasing costs on a per square foot basis vary by lease and by market.

We paid common dividends of $194.3 million and $192.3 million in 2023 and 2022, respectively.

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, 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 will be used, 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