Item 7. Management’s Discussion and Analysis
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the selected financial data and the consolidated financial statements and notes.
Overview of 2023 Performance and Company and Industry Trends
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. 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 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 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%. 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 signed in 2023, was $24.56 per square foot. 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 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
Our financial statements are prepared in accordance with GAAP as outlined in the Financial Accounting Standards Board’s ("FASB") Accounting Standards Codification ("ASC"), and the notes to consolidated financial statements include a summary of the significant accounting policies for the Company. The preparation of financial statements in accordance with GAAP requires the use of certain estimates, a change in which could materially affect revenues, expenses, assets, or liabilities. Some of our accounting policies are considered to be critical accounting policies, which are ones that are both important to the portrayal of our financial condition, results of operations, and cash flows, and ones that also require significant judgment or complex estimation processes. Our critical accounting policies are as follows:
Revenue Recognition
Most of our revenues are derived from operating leases and are reflected as rental property revenues on the accompanying consolidated statements of operations. Several judgments and estimates are included in the rental property revenue recognition process including the determination of lease term, ownership of tenant improvements, lease modifications, and lease terminations.
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Revenues derived from fixed lease payments, which exclude certain rental property revenue such as percentage rent and revenue related to the recovery of certain operating expenses from our tenants, are recognized on a straight-line basis over the term of the lease. We make significant assumptions and judgments in determining the lease term, including the judgments involved as to when a tenant has the right to use an underlying asset and assumptions when the lease provides the tenant with an extension or early termination option.
Most of our leases involve some form of improvements to leased space. We make significant judgments in reviewing various factors to assist in determining whether we or our tenants own the improvements. Those factors include, but are not limited to, whether or not the:
• Lease agreement’s terms obligate the tenant to construct or install specifically-identified assets (i.e., the leasehold improvements);
• Tenant’s failure to make specified improvements is an event of default under which the landlord can require the lessee to make those improvements or otherwise enforce the landlord’s rights to those assets (or a monetary equivalent);
• 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;
• Tenant is required to provide the landlord with evidence supporting the cost of tenant improvements before the landlord pays the tenant for the tenant improvements;
• Landlord is obligated to fund cost overruns for the construction of leasehold improvements;
• Leasehold improvements are unique to the tenant or could reasonably be used by the lessor to lease to other parties; and
• Economic life of the leasehold improvements is such that a significant residual value of the assets is expected to accrue to the benefit of the landlord at the end of the lease term.
If we determine the improvements are our assets, we capitalize the cost of the improvements and recognize depreciation expense associated with such improvements over the shorter of the estimated useful life or the term of the lease. 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 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 (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. If both of those conditions are not met, the amendment is accounted for as a lease modification. Most of our lease amendments result in a lease modification of our operating leases which will likely require us to reassess both the lease term and fixed lease payments, including considering any prepaid or accrued lease rentals relating to the original lease as a part of the lease payments for the modified lease.
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 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
The carrying values of our real estate assets are subject to several processes that involve a significant use of judgments and estimates. Those processes primarily include (i) purchase price allocations for acquired assets, (ii) depreciation and amortization, and (iii) impairment. The judgments and estimates used in each of these processes have a material impact on our financial condition, results of operations, and cash flows.
Purchase Price Allocations for Acquired Assets
We evaluate all real estate acquisitions to determine if the transactions qualify as an acquisition of assets or of a business 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
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property type, geographic concentration, or other factors. If we determine that substantially all of the fair value is concentrated in a single identifiable asset or group of similar assets, generally 90% of total fair value of assets acquired, we account for the acquisition as an acquisition of assets. If we determine that there is no single or group of assets that make up substantially all of the fair value of assets acquired, we then evaluate whether the acquired set of assets includes an input and substantial process which create an output. If we determine that an input and substantial process creating an output are present, we account for the acquisition as an acquisition of a business. We use considerable judgment in determining whether the acquisition of a pool of assets is an acquisition of assets or of a business. Because acquisition costs are expensed for an acquisition of a business and capitalized for an acquisition of assets, results of operations could be materially different based on our determinations.
For acquisitions that are accounted for as an acquisition of an asset, we record the acquired tangible and intangible assets and assumed liabilities based on each asset and liability's relative fair value at the acquisition date to the total purchase price plus capitalized acquisition costs. 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. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. The acquired assets and assumed liabilities for an acquired operating property generally include, but are not limited to: land, buildings, and identified tangible and intangible assets and liabilities associated with in-place leases, including tenant improvements, leasing costs, value of above-market and below-market leases, and value of acquired in-place leases.
The fair value of the above-market or below-market component of an acquired lease is based upon the present value (calculated using a market discount rate) of the difference between the contractual rents to be paid pursuant to the lease over its remaining term and management’s estimate of the rents that would be paid using fair market rental rates and rent escalations at the date of acquisition over the remaining term of the lease. An identifiable intangible asset or liability is recorded if there is an above-market or below-market lease at an acquired property. The amounts recorded for above-market leases are included in other assets on the balance sheets, and the amounts for below-market leases are included in other liabilities on the balance sheets. These amounts are amortized on a straight-line basis as an adjustment to rental income over the remaining term of the applicable leases.
The fair value of acquired in-place leases is derived based on our assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. This fair value is based on a variety of considerations including, but not necessarily limited to: (i) the value associated with avoiding the cost of originating the acquired in-place leases; (ii) the value associated with lost revenue related to tenant reimbursable operating costs estimated to be incurred during the assumed lease-up period; and (iii) the value associated with lost rental revenue from existing leases during the assumed lease-up period. Factors considered in performing these analyses include an estimate of the carrying costs during the expected lease-up periods, such as real estate taxes, insurance, and other operating expenses, current market conditions, and costs to execute similar leases, such as leasing commissions, legal, and other related expenses. The amounts recorded for in-place leases are included in intangible assets on the balance sheets. These amounts are amortized as an increase to depreciation and amortization expense over the remaining term of the applicable leases.
Depreciation and Amortization
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.
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. 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
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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 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.
In calculating the undiscounted net cash flows of an asset, we must estimate a number of inputs. We must estimate future rental rates, future capital expenditures, future operating expenses, and market capitalization rates for residual values, among other things. In addition, if there are alternative strategies for the future use of the asset, we assess the probability of each alternative strategy and perform a probability-weighted undiscounted cash flow analysis to assess the recoverability of the asset. We use considerable judgment in determining the alternative strategies and in assessing the probability of each strategy selected.
In determining the fair value of an asset, we exercise judgment on a number of factors. 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. The estimates and judgments used in the impairment process are highly subjective and susceptible to frequent change.
In addition to our real estate assets, we review each of our investments in unconsolidated joint ventures for impairment. As part of this analysis, we first determine whether there are any indicators of impairment at any property held in a joint venture investment. If indicators of impairment are present for any of our investments in joint ventures, we calculate the fair value of the investment. If the fair value of the investment is less than the carrying value of the investment, we determine whether the impairment is temporary or other than temporary. If we assess the impairment to be temporary, we do not record an impairment charge. If we conclude that the impairment is other than temporary, we record an impairment charge. We use considerable judgment in the determination of whether there are indicators of impairment present and in the assumptions, estimations, and inputs used in calculating the fair value of the investment.
Development Cost Capitalization
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 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. The determination of whether a project is probable requires judgment. If we determine that a project is probable, interest, general and administrative, and other expenses could be materially different than if we determine the project is not probable.
During the predevelopment period of a probable project and the period in which a project is under construction, we capitalize all direct and indirect costs associated with planning, developing, and constructing the project. Determination of what costs constitute direct and indirect project costs requires us, in some cases, to exercise judgment. If we determine certain costs to be direct or indirect project costs, amounts recorded in projects under development on the balance sheet and amounts recorded in general and administrative and other expenses on the statements of operations could be materially different than if we determine these costs are not directly or indirectly associated with the project.
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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
General
Net income available to common stockholders for the years ended 2023 and 2022 was $83.0 million and $166.8 million, respectively. We detail below material changes in the components of net income available to common stockholders for the year ended 2023 compared to 2022.
See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" from our 2022 Annual Report on Form 10-K for a comparison of 2022 to 2021 financial results.
Rental Property Revenues and Rental Property Operating Expenses
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 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. Certain items, such as interest expense, while included in net income, do not affect the operating performance of a real estate asset and are often incurred at the corporate level as opposed to the property level. 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, 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,
2023 2022 $ Change % Change
Rental Property Revenues
Same Property $ 743,081 $ 717,565 $ 25,516 3.6 %
Non-Same Property 48,623 33,482 15,141 45.2 %
Termination Fee Income 7,343 2,464 4,879 198.0 %
Total Rental Property Revenues $ 799,047 $ 753,511 $ 45,536 6.0 %
Rental Property Operating Expenses
Same Property $ 253,243 $ 251,190 $ 2,053 0.8 %
Non-Same Property 13,191 7,181 6,010 83.7 %
Total Rental Property Operating Expenses $ 266,434 $ 258,371 $ 8,063 3.1 %
Net Operating Income
Same Property NOI $ 489,838 $ 466,375 $ 23,463 5.0 %
Non-Same Property NOI 35,432 26,301 9,131 34.7 %
Total NOI $ 525,270 $ 492,676 $ 32,594 6.6 %
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
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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
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 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 $32.9 million, or 45.4%, between 2023 and 2022 primarily due to increases in the interest rates on our variable rate debt which rose from a weighted average rate of 5.43% at December 31, 2022 to 6.39% as of December 31, 2023. In addition, the issuance of the 2022 Term Loan in October 2022, refinancing of the mortgage loans on our Terminus operating properties in December 2022, and a higher average balance on our line of credit in 2023 resulted in increased interest expenses in 2023.
Depreciation and Amortization
Depreciation and amortization changed between the 2023 and 2022 periods as follows ($ in thousands):
Year Ended December 31,
2023 2022 $ Change % Change
Depreciation and Amortization
Same Property $ 288,200 $ 279,763 $ 8,437 3.0 %
Non-Same Property 26,249 15,266 10,983 71.9 %
Non-Real Estate Assets 448 558 (110) (19.7) %
Total Depreciation and Amortization $ 314,897 $ 295,587 $ 19,310 6.5 %
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.
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Income and Net Operating Income from Unconsolidated Joint Ventures
Income from unconsolidated joint ventures consisted of the following in 2023 and 2022 ($ in thousands):
Year Ended December 31,
2023 2022 $ Change % Change
Income from unconsolidated joint ventures $ 2,299 $ 7,700 $ (5,401) (70.1) %
Depreciation and amortization 1,931 3,927 (1,996) (50.8) %
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) %
Other income (140) (217) 77 35.5 %
Net operating income from unconsolidated joint ventures $ 5,824 $ 9,524 $ (3,700) (38.8) %
Net operating income:
Same Property $ 4,854 $ 4,801 $ 53 1.1 %
Non-Same Property 970 4,723 (3,753) (79.5) %
Net operating income from unconsolidated joint ventures $ 5,824 $ 9,524 $ (3,700) (38.8) %
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. 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. Since real estate values instead have historically risen or fallen with market conditions, many industry investors and analysts have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Thus, Nareit created FFO as a supplemental measure of REIT operating performance that excludes historical cost depreciation, among other items, from GAAP net income. 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 and FFO per share, along with other measures, as a performance measure for incentive compensation to our officers and other key employees.
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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):
Year Ended December 31,
2023 2022
Dollars Weighted Average Common Shares Per Share Amount Dollars Weighted Average Common Shares Per Share Amount
Net Income Available to Common Stockholders $ 82,963 151,714 $ 0.55 $ 166,793 150,113 $ 1.11
Noncontrolling interest related to unitholders 14 25 — 143 25 —
Conversion of unvested restricted stock units — 301 — — 281 —
Net Income — Diluted 82,977 152,040 0.55 166,936 150,419 1.11
Depreciation and amortization of real estate assets:
Consolidated properties 314,449 — 2.07 295,029 — 1.96
Share of unconsolidated joint ventures 1,931 — 0.01 3,927 — 0.03
Partners' share of real estate depreciation (1,070) — (0.01) (794) — (0.01)
Loss (gain) on sale of depreciated properties:
Consolidated properties 2 — — 9 — —
Share of unconsolidated joint ventures — — — (81) — —
Investments in unconsolidated joint ventures — — — (56,267) — (0.37)
Funds From Operations $ 398,289 152,040 $ 2.62 $ 408,759 150,419 $ 2.72
Net Operating Income
Company management evaluates the performance of its property portfolio in part based on NOI. NOI represents rental property revenues (excluding termination fees) less rental property operating expenses. NOI is not a measure of cash flows or operating results as measured by GAAP, is not indicative of cash available to fund cash needs, and should not be considered an alternative to cash flows as a measure of liquidity. All companies may not calculate NOI in the same manner. The Company considers NOI to be an appropriate supplemental measure to net income as it helps both management and investors understand the core operations of the Company's operating assets. NOI excludes corporate general and administrative expenses, interest expense, depreciation and amortization, impairments, gains/loss on sales of real estate, and other non-operating items.
The following table reconciles net income to NOI for consolidated properties for each period ($ in thousands):
Year Ended December 31,
2023
2022
Net Income $ 83,816 $ 167,445
Fee income (1,373) (6,119)
Termination fee income (7,343) (2,464)
Other income (2,454) (2,660)
General and administrative expenses 32,331 28,319
Interest expense 105,463 72,537
Depreciation and amortization 314,897 295,587
Reimbursed expenses 608 2,024
Other expenses 2,128 2,134
Income from unconsolidated joint ventures (2,299) (7,700)
Gain on sale of investment in unconsolidated joint ventures — (56,267)
Loss (gain) on investment property transactions (504) 9
Gain on extinguishment of debt — (169)
Net Operating Income $ 525,270 $ 492,676
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Liquidity and Capital Resources
Our primary short-term and long-term liquidity needs include the following:
• property operating expenses;
• property and land acquisitions;
• expenditures on development and redevelopment projects;
• building improvements, tenant improvements, and leasing costs;
• principal and interest payments on indebtedness;
• general and administrative costs; and
• common stock dividends and distributions to outside unitholders of CPLP.
We may satisfy these needs with one or more of the following:
• cash and cash equivalents on hand;
• net cash from operations;
• proceeds from the sale of assets;
• borrowings under our Credit Facility;
• proceeds from mortgage notes payable;
• proceeds from construction loans;
• proceeds from unsecured loans;
• proceeds from offerings of equity securities; and
• joint venture formations.
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 $6.0 million of cash and cash equivalents. We expect to have sufficient liquidity to meet our obligations for the foreseeable future.
Financial Condition
A key component of our strategy is to maintain a conservative balance sheet with leverage and liquidity that enables us to be positioned for future growth. In recent quarters, our leverage metrics which include net debt to EBITDA re (net income available to common stockholders plus interest expense, income tax expense, depreciation and amortization, losses (gains) on the disposition of depreciated property, and impairment), net debt to undepreciated assets, and net debt to total market capitalization, have consistently been among the strongest within our sector of public office REITs.
The following table sets forth information as of December 31, 2023 with respect to our outstanding contractual obligations and commitments ($ in thousands):
Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years
Contractual Obligations:
Company debt: (1)
Unsecured credit facility $ 185,100 $ — $ — $ 185,100 $ —
Unsecured senior notes 1,000,000 — 250,000 475,000 275,000
Term loans 750,000 — 350,000 400,000 —
Mortgage notes payable 526,968 79,087 226,881 — 221,000
Interest commitments (2) 469,474 119,019 222,186 88,216 40,053
Ground leases 185,058 2,095 7,640 4,032 171,291
Total contractual obligations $ 3,116,600 $ 200,201 $ 1,056,707 $ 1,152,348 $ 707,344
Commitments:
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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Credit Facility
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; a fixed charge coverage ratio of at least 1.50x; a secured leverage ratio of no more than 50%; and an overall leverage ratio of no more than 60%. 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 (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%. 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 $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.
Term Loans
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 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 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 (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 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
At December 31, 2023, we had $1 billion in unsecured senior notes outstanding that were issued in five tranches with maturity dates that range from 2025 to 2029. 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, 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 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%,
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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. Assets with depreciated carrying values of $888.4 million were pledged as security on these mortgage notes payable.
Joint Venture Commitments and Debt
We have a number of off balance sheet joint ventures with varying structures, as described in note 5 to our consolidated financial statements. The joint ventures in which we have an interest are involved in the ownership and/or development of real estate. A venture will fund capital requirements or operational needs with cash from operations or financing proceeds. If additional capital is deemed necessary, a venture may request a contribution from the partners, and we will evaluate such request. Except as previously discussed, based on the nature of the activities conducted in these ventures, management cannot estimate with any degree of accuracy amounts that we may be required to fund in the short- or long-term. However, management does not believe that additional funding of these ventures will have a material adverse effect on our financial condition or results of operations.
At December 31, 2023, our unconsolidated joint ventures had aggregate outstanding indebtedness to third parties of $302.1 million. 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.
Other Debt Information
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.
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, 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.
Our business model also includes raising or recycling capital which can assist in meeting obligations and funding development and acquisition activity. If one or more sources of capital are not available when required, we may be forced to reduce the number of projects we acquire or develop and/or raise capital on potentially unfavorable terms, or we may be unable to raise capital, which could have an adverse effect on our financial position or results of operations.
Cash Flows
We report and analyze our cash flows based on operating activities, investing activities, and financing activities. Cash and cash equivalents totaled $6.0 million and $5.1 million at December 31, 2023 and 2022, respectively. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Cash Flows" from our 2022 Annual Report on Form 10-K for a discussion of the changes in cash flows between 2022 and 2021.
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The following table sets forth the changes in cash flows ($ in thousands):
Year Ended December 31, $ Change
2023 2022
Net cash provided by operating activities $ 368,362 $ 365,166 $ 3,196
Net cash used in investing activities (295,735) (334,499) 38,764
Net cash used in financing activities (71,725) (35,690) (36,035)
The reasons for significant increases and decreases in cash flows between the periods are as follows:
Cash Flows from Operating Activities. 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 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 increased $36.0 million between 2023 and 2022. The increase in cash used is primarily driven by a reduction in proceeds from the 2022 issuance of common stock and issuance of the 2022 Term Loan. This increase is partially offset by a decrease in cash used in repayments of mortgage notes and a decrease in net repayments on our Credit Facility in 2023.
Capital Expenditures. We incur capital expenditures related to our real estate assets that include the acquisition of properties, the development of new properties, the redevelopment of existing or newly purchased properties, and direct leasing costs for new or replacement tenants.
Capital expenditures for assets we develop or acquire and then hold and operate are included in the property acquisition, development, and tenant asset expenditures line item within investing activities on the statements of cash flows. Components of expenditures included in this line item for the years ended December 31, 2023 and 2022 are as follows ($ in thousands):
2023 2022
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
Capitalized interest and salaries 20,888 23,440
Total property acquisition, development and tenant asset expenditures $ 279,519 $ 342,241
(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.
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The weighted average leasing costs on a per square foot basis for leases signed during 2023 and 2022 were as follows:
2023 2022
New leases $13.41 $12.60
Renewal leases $9.36 $9.07
Expansion leases $6.12 $11.71
Total $10.59 $10.69
The amounts of leasing costs on a per square foot basis vary by lease and by market.
Dividends. 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 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. In addition, we have certain covenants under our Credit Facility which could limit the amount of common dividends paid. In general, common dividends of any amount can be paid as long as leverage, as defined in our credit agreements, is less than 60% and we are not in default under our facility. Certain conditions also apply in which we can still pay common dividends if leverage is above that amount. We routinely monitor the status of our common dividend payments in light of the covenants of our credit agreements.