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 2024 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 2024, we completed two strategic acquisitions of operating properties and entered into one joint venture that acquired an operating property. We acquired Vantage South End, a 639,000 square foot lifestyle office property in South End Charlotte, for a purchase price of $328.5 million and Sail Tower, a 804,000 square foot lifestyle office property in Downtown Austin, for a purchase price of $521.8 million. We also acquired a 20% interest in a joint venture for $16.7 million that acquired Proscenium, a 525,000 square foot office property in Midtown Atlanta for a purchase price of $83.3 million. Finally, we acquired multiple investments in real estate debt during the year including two mezzanine real estate loans for $27.2 million, which are subordinated to the first priority mortgage loans and secured by pledges of equity interests, and one mortgage loan at par for $138.0 million, which was secured by the Saint Ann Court office property in Dallas.
During 2024, we completed several financing and equity market activities to fund the previously mentioned acquisitions, pay off maturing debt, and maintain a strategic mix of floating and fixed rate debt. We completed offerings of the 2032 Notes and the 2034 Notes, generating net proceeds of $397.9 million and $498.5 million, respectively, each after an original issue discount; issued 6,000,000 shares of common stock at $31.01 per share, and 9,500,000 shares of common stock at $29.765 per share, generating proceeds of $186.1 million and $282.8 million, net of underwriting discounts, respectively; repaid in full the $70.9 million remaining balance on the mortgage secured by our Domain 10 property in Austin; and entered into a floating-to-fixed interest rate swap on the remaining $200 million of the $400 million Term Loan maturing March 2025, fixing the underlying SOFR rate at 4.6675%.
During 2024, we leased or renewed 2.0 million square feet of office space. Our office operating portfolio was 91.6% percent leased as of December 31, 2024 and the weighted average economic occupancy during the fourth quarter of 2024 was 89.2%. 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 2024, was $28.17 per square foot. Cash-basis net effective rent per square foot increased 8.5% 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 5.1% on a straight-line basis and increased 4.8% on a cash-basis.
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:
29
Table of Contents
Revenue Recognition
Most of our revenues are derived from operating leases and are reflected as rental property revenues on the accompanying consolidated statements of operations. Several judgments and estimates are included in the rental property revenue recognition process including the determination of lease term, ownership of tenant improvements, lease modifications, and lease terminations.
Revenues derived from fixed lease payments, which exclude certain rental property revenue such as percentage rent and revenue related to the recovery of certain operating expenses from our tenants, are recognized on a straight-line basis over the term of the lease. We make significant assumptions and judgments in determining the lease term, including the judgments involved as to when a tenant has the right to use an underlying asset and assumptions when the lease provides the tenant with an extension or early termination option.
Most of our leases involve some form of improvements to leased space. We make significant judgments in reviewing various factors to assist in determining whether we or our tenants own the improvements. Those factors include, but are not limited to, whether or not the:
• Lease agreement’s terms obligate the tenant to construct or install specifically-identified assets (i.e., the leasehold improvements);
• Tenant’s failure to make specified improvements is an event of default under which the landlord can require the lessee to make those improvements or otherwise enforce the landlord’s rights to those assets (or a monetary equivalent);
• 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 generally 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 revenue 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
30
Table of Contents
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 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 asset or group of assets that make up substantially all of the fair value of gross 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 a substantive process that significantly contribute to the ability to create 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 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
31
Table of Contents
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-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
32
Table of Contents
what costs constitute direct and indirect project costs requires us, in some cases, to exercise judgment. If we determine certain costs to be direct or indirect project costs, amounts recorded in projects under development on the balance sheet and amounts recorded in general and administrative and other expenses on the statements of operations could be materially different than if we determine these costs are not directly or indirectly associated with the project.
Once a certain project is constructed and 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, 2024
General
Net income available to common stockholders for the years ended December 31, 2024 and 2023 was $46.0 million and $83.0 million, respectively. The decrease in net income is primarily attributable to increased depreciation expense. We detail below material changes in the components of net income available to common stockholders for the year ended 2024 compared to 2023.
See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" from our 2023 Annual Report on Form 10-K for a comparison of 2023 to 2022 financial results.
Rental Property Revenues, Rental Property Operating Expenses, and Net Operating Income
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 2024 versus 2023 comparison are from properties that were stabilized and owned as of January 1, 2023 through December 31, 2024.
Management evaluates the performance of its property portfolio, in part, based on Net Operating Income ("NOI"). NOI represents rental property revenues, less 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. We consider NOI to be an appropriate supplemental measure to net income as it helps both management and investors understand the core operations of our operating assets. NOI excludes corporate general and administrative expenses, interest expense, depreciation and amortization, impairments, gains/losses on sales of real estate, and other non-operating items. As a result, we use only those income and expense items that are incurred at the property level to evaluate a property's performance. Same Property NOI allows analysts, investors, and management to analyze continuing operations and evaluate the growth trend of our portfolio.
The following table reconciles net income to consolidated NOI for each of periods presented ($ in thousands):
Year Ended December 31,
2024
2023
Net Income $ 46,581 $ 83,816
Fee income (1,761) (1,373)
Termination fee income (3,405) (7,343)
Other income (7,224) (2,454)
General and administrative expenses 36,566 32,331
Interest expense 122,476 105,463
Depreciation and amortization 365,045 314,897
Reimbursed expenses 634 608
Other expenses 2,097 2,128
Loss (income) from unconsolidated joint ventures 2,796 (2,299)
Gain on investment property transactions (98) (504)
Net Operating Income $ 563,707 $ 525,270
33
Table of Contents
Consolidated rental property revenues, rental property operating expenses, and NOI changed between the 2024 and 2023 periods as follows ($ in thousands):
Year Ended December 31,
2024 2023 $ Change % Change
Rental Property Revenues
Same Property $ 802,470 $ 766,978 $ 35,492 4.6 %
Non-Same Property 41,898 24,726 17,172 69.4 %
Termination Fee Income 3,405 7,343 (3,938) (53.6) %
Total Rental Property Revenues $ 847,773 $ 799,047 $ 48,726 6.1 %
Rental Property Operating Expenses
Same Property $ 267,051 $ 257,873 $ 9,178 3.6 %
Non-Same Property 13,610 8,561 5,049 59.0 %
Total Rental Property Operating Expenses $ 280,661 $ 266,434 $ 14,227 5.3 %
Net Operating Income
Same Property NOI $ 535,419 $ 509,105 $ 26,314 5.2 %
Non-Same Property NOI 28,288 16,165 12,123 75.0 %
Total NOI $ 563,707 $ 525,270 $ 38,437 7.3 %
Same Property NOI represents Net Operating Income for those office properties that were stabilized and owned by us for the entirety of the 2023 and 2024 reporting periods presented. Same Property NOI allows analysts, investors, and management to analyze continuing operations and evaluate the growth trend of the Company's portfolio.
Same Property Rental Property Revenues and NOI increased between 2024 and 2023 primarily due to an increase in economic occupancy at our BriarLake Plaza, San Jacinto Center, and Promenade Tower office properties and increases in revenues recognized from tenant funded improvements owned by us. In addition, parking revenue from our Same Property portfolio increased between 2024 and 2023.
Non-Same Property Rental Property Revenues, Rental Property Operating Expenses, and NOI increased between 2024 and 2023 primarily due to the commencement of operations at our Domain 9 building in the first quarter of 2024, increased economic occupancy at our recently redeveloped Promenade Central operating property, and the acquisitions of Vantage South End and Sail Tower in December 2024. This increase is partially offset by a full building redevelopment at our Hayden Ferry 1 building, which began in the fourth quarter of 2023.
The following table details NOI from properties aggregated by market:
Year Ended December 31,
Market 2024
2023
$ Change % Change
Atlanta $ 194,837 $ 188,451 $ 6,386 3.4 %
Austin 191,758 170,103 21,655 12.7 %
Tampa 49,383 46,933 2,450 5.2 %
Phoenix 44,597 44,177 420 1.0 %
Charlotte 42,164 43,124 (960) (2.2) %
Dallas 13,937 13,074 863 6.6 %
Other (1) 22,363 14,666 7,697 52.5 %
Office NOI 559,039 520,528 38,511 7.4 %
Other Non-Office (2) 4,668 4,742 (74)
Total NOI $ 563,707 $ 525,270 $ 38,437
(1) Represents a non-core office property in Houston.
(2) Includes operations at land sites held for future development as well as a parking garage in Charlotte.
34
Table of Contents
NOI for the Austin market increased $21.7 million, or 12.7%, between 2024 and 2023 primarily due to the commencement of operations at our Domain 9 building in the first quarter of 2024 as well as an increase in revenues recognized from tenant funded improvements owned by us. NOI from Other markets increased $7.7 million, or 52.5%, between 2024 and 2023 primarily due to the an increase in economic occupancy at our BriarLake Plaza office property in Houston.
Other Income
Other income increased $4.8 million, or 194.4%, between 2024 and 2023 primarily due to the interest income from the two mezzanine loans and the Saint Ann Court mortgage loan acquired in 2024. These transactions are described in further detail in note 5 to the consolidated financial statements in this Form 10-K.
General and Administrative Expenses
General and administrative expenses increased $4.2 million, or 13.1%, between 2024 and 2023 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 $17.0 million, or 16.1%, between 2024 and 2023. T his increase is primarily due to the issuances of the $500 million and $400 million public unsecured senior notes in August and December of 2024, respectively, and decreases in capitalized interest as we finished construction on the core building and began operations at our Domain 9 building in the first quarter of 2024.
Depreciation and Amortization
Depreciation and amortization changed between the 2024 and 2023 periods as follows ($ in thousands):
Year Ended December 31,
2024 2023 $ Change % Change
Depreciation and Amortization
Same Property $ 325,254 $ 300,349 $ 24,905 8.3 %
Non-Same Property 39,330 14,100 25,230 178.9 %
Non-Real Estate Assets 461 448 13 2.9 %
Total Depreciation and Amortization $ 365,045 $ 314,897 $ 50,148 15.9 %
Same Property depreciation and amortization increased between 2024 and 2023 primarily due to an increase of assets in service during the current period, primarily from tenant improvements.
Non-Same Property depreciation and amortization increased between 2024 and 2023 primarily due to completion of development at Domain 9 and a full building redevelopment at Promenade Central, the Sail Tower Acquisition and the Vantage Acquisition in December 2024, as well as changes in the estimated useful lives of buildings and improvements at some of our operating properties. These increases were partially offset by our suspension of depreciation related to our full building redevelopment at our Hayden Ferry 1 building, which began in the fourth quarter of 2023.
35
Table of Contents
Income and Net Operating Income from Unconsolidated Joint Ventures
Income (loss) from unconsolidated joint ventures consisted of the following in 2024 and 2023 ($ in thousands):
Year Ended December 31,
2024 2023 $ Change % Change
Income (loss) from unconsolidated joint ventures $ (2,796) $ 2,299 $ (5,095) (221.6) %
Depreciation and amortization 4,745 1,931 2,814 145.7 %
Interest expense 4,484 1,676 2,808 167.5 %
Other expense 316 58 258 444.8 %
Other income (132) (140) 8 5.7 %
Net operating income from unconsolidated joint ventures $ 6,617 $ 5,824 $ 793 13.6 %
Net operating income:
Same Property $ 4,693 $ 4,853 $ (160) (3.3) %
Non-Same Property 1,924 971 953 98.1 %
Net operating income from unconsolidated joint ventures $ 6,617 $ 5,824 $ 793 13.6 %
The change in income (loss) from unconsolidated joint ventures was driven by increases in unconsolidated depreciation and amortization as well as unconsolidated interest expense. Unconsolidated depreciation and amortization expense increased between 2024 and 2023 primarily due to development activities winding down and initial operations beginning at our joint venture's Neuhoff property in the fourth quarter of 2023 and the acquisition of Proscenium in August 2024. Unconsolidated interest expense increased between 2024 and 2023 primarily due to a reduction in capitalized interest at our Neuhoff joint venture as portions of its development project were completed in 2024 as well as the June 2023 refinance of the mortgage on the property in our Crawford Long joint venture.
Non-Same Property NOI from unconsolidated joint ventures increased between 2024 and 2023 primarily due to the acquisition of Proscenium in August 2024.
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 depreciation and amortization related to real estate, gains and losses from sales of depreciable property, gains and losses from changes in control and impairment of depreciable real estate, 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.
36
Table of Contents
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, 2024 and 2023 ($ in thousands, except per share information):
Year Ended December 31,
2024 2023
Dollars Weighted Average Common Shares Per Share Amount Dollars Weighted Average Common Shares Per Share Amount
Net Income Available to Common Stockholders $ 45,962 153,413 $ 0.30 $ 82,963 151,714 $ 0.55
Noncontrolling interest related to unitholders 8 25 — 14 25 —
Potentially dilutive common shares — 2 — — — —
Conversion of unvested restricted stock units — 575 — — 301 —
Net Income — Diluted 45,970 154,015 0.30 82,977 152,040 0.55
Depreciation and amortization of real estate assets:
Consolidated properties 364,584 — 2.37 314,449 — 2.07
Share of unconsolidated joint ventures 4,745 — 0.03 1,931 — 0.01
Partners' share of real estate depreciation (1,106) — (0.01) (1,070) — (0.01)
Loss (gain) on sale of depreciated properties:
Consolidated properties (101) — — 2 — —
Funds From Operations $ 414,092 154,015 $ 2.69 $ 398,289 152,040 $ 2.62
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 2025 include $95.8 million of unfunded tenant improvements and development costs. As of December 31, 2024, we had $112.3 million drawn under our Credit Facility with the ability to borrow the remaining $887.7 million, as well as $7.3 million of cash and cash equivalents. We expect to have sufficient liquidity to meet our obligations for the foreseeable future.
37
Table of Contents
Financial Condition
A key component of our strategy is to maintain a conservative balance sheet with leverage and liquidity that enables us to be positioned for future growth. In recent quarters, our leverage metrics which include net debt to EBITDA re (net income available to common stockholders plus interest expense, income tax expense, depreciation and amortization, losses (gains) on the disposition of depreciated property, and impairment), net debt to undepreciated assets, and net debt to total market capitalization, have consistently been among the strongest within our sector of public office REITs.
The following table sets forth information as of December 31, 2024 with respect to our outstanding contractual obligations and commitments ($ 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 $ 112,332 $ — $ 112,332 $ — $ —
Public senior unsecured notes 900,000 — — — 900,000
Privately placed senior unsecured notes 1,000,000 250,000 225,000 525,000 —
Term loans 650,000 — 650,000 — —
Mortgage notes payable 447,882 6,755 220,127 — 221,000
Interest commitments (2) 701,135 122,028 202,155 161,148 215,804
Ground leases 179,286 1,958 4,016 4,044 169,268
Total contractual obligations $ 3,990,635 $ 380,741 $ 1,413,630 $ 690,192 $ 1,506,072
Commitments:
Unfunded tenant improvements and development obligations
$ 111,764 $ 95,771 $ 15,993 $ — $ —
Unfunded commitments on investments in real estate debt 7,781 7,781 — — —
Total commitments $ 119,545 $ 103,552 $ 15,993 $ — $ —
(1) Amounts presented assume we exercise all available extension options.
(2) Interest on variable rate obligations is based on balances and effective rates as of December 31, 2024.
Credit Facility
On May 2, 2022, we entered into a Fifth Amended and Restated Credit Agreement (the "Credit Facility") under which we may borrow up to $1 billion if certain conditions are satisfied. The Credit Facility contains financial covenants that require, among other things, the maintenance of 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%. The Credit Facility matures on April 30, 2027.
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 0.725% 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%, and 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 an annual facility fee of 0.125% to 0.30%, depending on our credit rating and leverage ratio, on the entire $1 billion capacity. There can be no assurance that we will maintain any particular rating in the future and if our credit ratings decrease, then we may be subject to higher applicable spreads.
In April 2024, we notified the administrative agent of the Credit Facility of our receipt of corporate investment grade ratings. These ratings reduced the Credit Facility's Adjusted SOFR spread and facility fee range effective April 17, 2024. Changes in our investment grade ratings may result in additional adjustments to the applicable spread and facility fee. Prior to April 17, 2024, the applicable spread was between 0.90% and 1.40% and the facility fee range was 0.15% to 0.30%, depending on leverage.
38
Table of Contents
At December 31, 2024, the Credit Facility's interest rate spread over Adjusted SOFR was 0.775%, 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 $887.7 million at December 31, 2024. Any 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 a Delayed Draw Term Loan Agreement (the "2022 Term Loan") and borrowed the full $400 million available under the loan. The loan had an initial maturity of March 3, 2025 with four consecutive options to extend the maturity date for an additional six months each. In December 2024, we exercised the first of the four six month extension options, extending the maturity date to September 3, 2025. Under the 2022 Term Loan the interest rate applicable varies according to our credit rating and 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 0.80% and 1.60%, 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%, and 1.00%, (iv) or 1.00%, plus a spread of between 0.00% and 0.65%, based on leverage. There can be no assurance that we will maintain any particular rating in the future and if our credit ratings decrease, then we may be subject to higher applicable spreads. The covenants under the 2022 Term Loan are the same as the Credit Facility. At December 31, 2024, the spread over the underlying SOFR rates was 0.85% for the 2022 Term Loan.
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 initial maturity date of March 3, 2025. This swap fixed the underlying SOFR rate at 4.298%. On January 26, 2024, we entered into a floating-to-fixed rate swap with respect to the remaining $200 million of the $400 million 2022 Term Loan through the initial maturity date of March 3, 2025. This swap fixed the underlying SOFR rate at 4.6675% (see note 10 to the consolidated financial statements). These two swaps fix the underlying SOFR rate for the full $400 million at a weighted average of 4.483%.
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 have borrowed $350 million with an initial maturity of August 30, 2024 with four consecutive options to extend the maturity date for an additional 180 days each. In August 2024, we paid down $100 million of the $350 million outstanding and exercised the first of our four 180 day extension options, extending the maturity date on the remaining $250 million to February 26, 2025. In December 2024, we exercised the second of our four 180 day extension options, extending the maturity date on the remaining $250 million to August 25, 2025. 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 credit rating and 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 0.85% 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%, and 1.00%, (iv) or 1.00%, plus a spread of between 0.00% and 0.65%, based on leverage. At December 31, 2024, the spread over the underlying SOFR rates was 1.00% for the 2021 Term Loan.
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 initial maturity date of August 30, 2024. This swap effectively fixed the underlying SOFR rate at 4.234% (see note 10 to the consolidated financial statements). This swap has expired, and the loan has reverted to the underlying variable SOFR rate.
In April 2024, we notified the administrative agent of the 2022 Term Loan and 2021 Term Loan of our receipt of corporate investment grade ratings received. These ratings reduced the Adjusted SOFR spread range, effective April 17, 2024. Changes in our investment grade ratings may result in additional adjustments to the applicable spread in the future. Prior to April 17, 2024, the applicable spread was between 1.05% and 1.65% for both the 2022 Term Loan and 2021 Term Loan, depending on leverage.
39
Table of Contents
Unsecured Senior Notes
In December 2024, CPLP issued $400 million in aggregate principal amount of 5.375% senior unsecured notes. Upon issuance of the 2032 Notes, CPLP received net proceeds of $397.9 million dollars after an original issue discount of $2.1 million resulting in an effective interest rate is 5.464%. The 2032 Notes are fully and unconditionally guaranteed by us. The proceeds were used to fund part of the purchase prices for the Sail Tower Acquisition and the Vantage Acquisition in December 2024. The 2032 Notes had issuance costs of $3.6 million and mature on February 15, 2032.
In August 2024, CPLP issued $500 million in aggregate principal amount of 5.875% senior unsecured notes. Upon issuance of the 2034 Notes, CPLP received net proceeds of $498.5 million dollars after an original issue discount of $1.5 million resulting in an effective interest rate is 5.912%. The 2034 Notes are fully and unconditionally guaranteed by us. The proceeds were used primarily to repay $373.8 million outstanding on the Credit Facility and repay $100 million of the $350 million outstanding on the 2021 Term Loan. The 2034 Notes had issuance costs of $5.3 million and mature on October 1, 2034. The 2032 Notes and the 2034 Notes are sometimes referred to herein as the "public senior unsecured notes."
The public senior unsecured notes are subject to certain typical covenants that, subject to certain exceptions, include (a) a limitation on the ability of the Company and CPLP to, among other things, incur additional secured and unsecured indebtedness; (b) a limitation on the ability of the Company and CPLP to merge, consolidate, sell, lease or otherwise dispose of their properties and assets substantially as an entirety; and (c) a requirement that the Company maintain a pool of unencumbered assets. To avoid any such limitations, these covenants require, among other things, maintaining the following financial metrics as defined in the agreement: unencumbered debt ratio of at least 150%; an EBITDA to debt service ratio of at least 1.50x; a secured leverage ratio of no more than 40%; and an overall leverage ratio of no more than 60%.
At December 31, 2024, we had $1.9 billion aggregate principal amount of unsecured senior notes outstanding, including $1 billion outstanding principal amount of senior unsecured notes issued in a private placement of five tranches. These unsecured senior notes have maturity dates that range from 2025 to 2034 and the weighted average fixed interest rates on these notes is 4.74%. The senior unsecured notes issued in the private placement are sometimes referred to herein as the privately placed senior unsecured 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 November 2024, we repaid, in full, our Domain 10 mortgage with a remaining principal balance of $70.9 million. This mortgage had an interest rate of 3.75%.
As of December 31, 2024, we had $447.9 million outstanding on four non-recourse mortgage notes with a weighted average interest rate of 4.85%. All interest rates on the secured mortgage notes are fixed. Assets with depreciated carrying values of $702.7 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 6 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, 2024, our unconsolidated joint ventures had aggregate outstanding indebtedness to third parties of $357.0 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, public and private unsecured debt, non-recourse mortgages, construction loans, the sale of assets,
40
Table of Contents
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 $7.3 million and $6.0 million at December 31, 2024 and 2023, respectively. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Cash Flows" from our 2023 Annual Report on Form 10-K for a discussion of the changes in cash flows between 2023 and 2022.
The following table sets forth the changes in cash flows ($ in thousands):
Year Ended December 31, $ Change
2024 2023
Net cash provided by operating activities $ 400,233 $ 368,362 $ 31,871
Net cash used in investing activities (1,305,402) (295,735) (1,009,667)
Net cash provided by (used in) financing activities 906,471 (71,725) 978,196
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 $31.9 million between 2024 and 2023 primarily due to increased economic occupancy and the end of rent abatement periods at our 100 Mill, San Jacinto Center, and Tempe Gateway office properties; the commencement of operations at our Domain 9 office property in 2024; the timing and amount of interest payments; and the timing of property tax payments and the timing of receipt of rent payments from tenants; all partially offset by the suspension of operations related to our full building redevelopment of Hayden Ferry 1 that began in the fourth quarter of 2023.
Cash Flows from Investing Activities. Cash used in investing activities increased $1.0 billion between 2024 and 2023. Cash used in investing activities was higher in 2024 primarily due to the Sail Tower Acquisition and the Vantage Acquisition for an aggregate price of $838.0 million in December 2024 and the acquisitions of investments in real estate debt for $167.2 million during 2024.
Cash Flows from Financing Activities. Cash flows provided by financing activities increased $978.2 million between 2024 and 2023. The increase in cash provided by financing activities is primarily driven by the proceeds from the 2024 issuances of common stock and public unsecured senior notes. This increase is partially offset by cash used in repayments of the Domain 10 mortgage note, $100 million of the $350 million 2021 Term Loan, and an increase in net repayments on our Credit Facility in 2024.
41
Table of Contents
Capital Expenditures. We incur capital expenditures for the development of new properties, the redevelopment of existing or newly purchased properties, building improvements, direct leasing costs for new or replacement tenants, and capitalized interest and salaries. Components of expenditures included in this line item for the years ended December 31, 2024 and 2023 are as follows ($ in thousands):
2024 2023
Projects under development (1) $ 24,105 $ 53,670
Operating properties—redevelopment 46,479 41,066
Operating properties—building improvements 31,760 26,878
Operating properties—leasing costs 135,506 137,017
Capitalized interest and salaries 14,881 20,888
Total capital expenditures $ 252,731 $ 279,519
(1) Includes initial leasing costs.
Capital expenditures decreased $26.8 million between 2024 and 2023 primarily due to decre ases in projects under development activities and related capitalized interest and salaries due to the Domain 9 development commencing initial operations in the first quarter of 2024. These decreases are partially offset by the following: (i) increased spending on operating property redevelopments compared to 2023 with the commencement of a full building redevelopment of Hayden Ferry 1 in the fourth quarter of 2023, partially offset by the renovations at 3350 Peachtree and Promenade Central which were substantially completed in 2023, and (ii) an increased spending on building improvements.
The weighted average leasing costs on a per square foot basis for leases signed during 2024 and 2023 were as follows:
2024 2023
New leases $12.30 $13.41
Renewal leases $9.70 $9.36
Expansion leases $13.16 $6.12
All signed leases $11.60 $10.59
The amounts of leasing costs on a per square foot basis vary by lease and by market.
Dividends. We paid common dividends of $195.4 million and $194.3 million in 2024 and 2023, respectively. We funded these dividends with cash provided by operating activities. We also 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.