10-K 1 form10-kdecember312012.htm 10-K Form 10-K December 31, 2012
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________
FORM 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-11312 
___________________________________________________
COUSINS PROPERTIES INCORPORATED
(Exact name of registrant as specified in its charter)
Georgia
58-0869052
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)
191 Peachtree Street NE, Suite 500, Atlanta, Georgia
30303-1740
(Address of principal executive offices)
(Zip Code)
(404) 407-1000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of Exchange on which registered
Common Stock ($1 par value)
New York Stock Exchange
 
 
7.75% Series A Cumulative Redeemable
Preferred Stock ($1 par value)
New York Stock Exchange
 
 
7.50% Series B Cumulative Redeemable
Preferred Stock ($1 par value)
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
___________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý    No ¨ 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of June 29, 2012, the aggregate market value of the common stock of Cousins Properties Incorporated held by non-affiliates was $705,136,928 based on the closing sales price as reported on the New York Stock Exchange. As of February 6, 2013, 104,182,579 shares of common stock were outstanding. 
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s proxy statement for the annual stockholders meeting to be held on May 7, 2013 are incorporated by reference into Part III of this Form 10-K.
 




Table of Contents
 
PART I
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 1B.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item X.
 
 
PART II
 
Item 5.
 
 
 
Item 6.
 
 
 
Item 7.
 
 
 
Item 7A.
 
 
 
Item 8.
 
 
 
Item 9.
 
 
 
Item 9A.
 
 
 
Item 9B.
PART III
 
Item 10.
 
 
 
Item 11.
 
 
 
Item 12.
 
 
 
Item 13.
 
 
 
Item 14.
 
 
PART IV
 
Item 15.
 
 



FORWARD-LOOKING STATEMENTS
Certain matters contained in this report are “forward-looking statements” within the meaning of the federal securities laws and are subject to uncertainties and risks, as itemized in Item 1A included in this Form 10-K. These forward-looking statements include information about possible or assumed future results of the Company's business and the Company's financial condition, liquidity, results of operations, plans and objectives. They also include, among other things, statements regarding subjects that are forward-looking by their nature, such as:
the Company's business and financial strategy;
the Company's ability to obtain future financing arrangements;
future acquisitions and future dispositions of operating assets;
future development and redevelopment opportunities;
future dispositions of land and other non-core assets;
projected operating results;
market and industry trends;
future distributions;
projected capital expenditures; and
interest rates.
The forward-looking statements are based upon management's beliefs, assumptions and expectations of the Company's future performance, taking into account information currently available. These beliefs, assumptions and expectations may change as a result of possible events or factors, not all of which are known. If a change occurs, the Company's business, financial condition, liquidity and results of operations may vary materially from those expressed in forward-looking statements. Actual results may vary from forward-looking statements due to, but not limited to, the following:
the availability and terms of capital and financing;
the ability to refinance indebtedness as it matures;
the failure of purchase, sale or other contracts to ultimately close;
the availability of buyers and adequate pricing with respect to the disposition of assets;
risks and uncertainties related to national and local economic conditions, the real estate industry in general and the commercial real estate markets in particular;
changes to the Company's strategy with regard to land and other non-core holdings that require impairment losses to be recognized;
the effects of the sale of the Company's third party management business;
leasing risks, including the ability to obtain new tenants or renew expiring tenants, and the ability to lease newly developed and/or recently acquired space;
the financial condition of existing tenants;
volatility in interest rates and insurance rates;
the availability of sufficient investment opportunities;
competition from other developers or investors;
the risks associated with real estate developments and acquisitions (such as construction delays, cost overruns and leasing risk);
the loss of key personnel;
the potential liability for uninsured losses, condemnation or environmental issues;
the potential liability for a failure to meet regulatory requirements;
the financial condition and liquidity of, or disputes with, joint venture partners;
any failure to comply with debt covenants under credit agreements; and
any failure to continue to qualify for taxation as a real estate investment trust.
The words “believes,” “expects,” “anticipates,” “estimates,” “plans,” “may,” “intend,” “will,” or similar expressions are intended to identify forward-looking statements. Although the Company believes its plans, intentions and expectations reflected in any forward-looking statements are reasonable, the Company can give no assurance that such plans, intentions or expectations will be achieved. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of future events, new information or otherwise, except as required under U.S. federal securities laws.

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PART I
Item 1.
Business
Corporate Profile
Cousins Properties Incorporated (the “Registrant” or “Cousins”) is a Georgia corporation, which, since 1987, has elected to be taxed as a real estate investment trust (“REIT”). Cousins Real Estate Corporation, including its subsidiaries, (“CREC”) is a taxable entity wholly-owned by the Registrant, which is consolidated with the Registrant. CREC owns, develops and manages its own real estate portfolio and performs certain real estate related services for other parties. The Registrant, its subsidiaries and CREC combined are hereafter referred to as the “Company.” The Company has been a public company since 1962, and its common stock trades on the New York Stock Exchange under the symbol “CUZ.”
Company Strategy
The Company’s strategy is to generate stockholder returns through the acquisition, development, ownership and management of high-quality office and retail properties in the Sunbelt with particular focus on Georgia, Texas and North Carolina. The Company also owns relatively small interests in residential and commercial land tracts held for investment. The Company intends to focus on increasing the value in its current portfolio through lease-up, cost control and superior customer service, as well as making opportunistic investments in office properties within its core markets. The Company’s long-term strategy also includes continuing to recycle capital not invested in its core markets or property types, continuing to reduce its holdings of residential and commercial land and diversifying its holdings geographically among its core markets. Through this capital recycling and other capital sources, the Company expects to maintain its leverage near its current levels.
2012 Significant Activities
The following is a summary of the Company’s 2012 activities by business line and in the financing area.
Office
As of December 31, 2012, the Company owned directly, or through joint ventures, 14 operating office properties totaling 7.8 million square feet. The Company maintains expertise in the development of office properties and its strategy is to also seek to opportunistically acquire operating office properties within its core markets. These acquisitions may take the form of operationally or financially distressed properties that are well-located and to which the Company’s leasing and management expertise could add value over time. During 2012, the Company had the following activity in its office property portfolio:
Executed new or renewed existing leases covering 724,000 square feet.
Acquired 2100 Ross Avenue, a 844,000 square foot Class A office building in the Arts District submarket of Dallas, Texas for $59.2 million.
Sold Galleria 75, a 111,000 square foot office building in Atlanta, Georgia for $9.2 million, generating a gain of $569,000.
Sold Cosmopolitan Center, a 51,000 square foot office building in Atlanta, Georgia, for $7.0 million, generating a gain of $2.1 million.
Through Ten Peachtree Place Associates, sold Ten Peachtree Place, a 260,000 square foot office building in Atlanta, Georgia. The Company's share of the proceeds from this transaction was $5.1 million, and the Company recognized a gain of $7.3 million.
Through CP Venture Two LLC, sold Presbyterian Medical Plaza, a 69,000 square foot office building in Charlotte, North Carolina. The Company's share of the proceeds from this transaction was $450,000, and the Company recognized a gain of $167,000.
Sold its interest in the joint venture that owns Palisades West, a 373,000 square foot office building in Austin, Texas, for $64.8 million, generating a gain of $23.3 million.
Subsequent to year end, purchased the remaining interest in the venture that owns Terminus 200, purchased Post Oak Central, a 1.3 million square foot Class A office building in Houston Texas, and sold 50% of the Company's interest in Terminus 100 and Terminus 200. The transactions valued Terminus 100 at $209.2 million, Terminus 200 at $164.0 million and Post Oak Central at $232.6 million.
Retail

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As of December 31, 2012, the Company owned directly or through joint ventures 16 operating retail centers totaling 3.7 million square feet. The Company developed most of the retail properties it currently owns. Similar to its strategy for office properties, the Company may seek to opportunistically acquire retail properties within its core markets. During 2012, the Company had the following activity in its retail property portfolio:
Executed new or renewed existing leases covering 445,000 square feet.
Commenced operations at Mahan Village, a 147,000 square foot shopping center, anchored by Publix and Academy Sports, in Tallahassee, Florida.
Commenced operations at Emory Point, a mixed-use project in Atlanta, Georgia, which consists of 443 apartment units and 80,000 square foot of retail space in a joint venture with Gables Residential.
Sold The Avenue Collierville, a 511,000 square foot retail center in Memphis, Tennessee, for $55.0 million. The Company recorded an impairment loss of $12.2 million on this center prior to the sale.
Sold The Avenue Forsyth, a 524,000 square foot retail center in Atlanta, Georgia, for $119.0 million, generating a gain of $4.5 million.
Sold The Avenue Webb Gin, a 322,000 square foot retail center in Atlanta, Georgia, for $59.6 million, generating a gain of $3.6 million.
Third Party Management
During 2012, the Company sold its third party management and leasing business to Cushman & Wakefield. Under the terms of the agreement, the Company has the potential to receive up to $15.4 million in gross sales proceeds, of which approximately 63.5% was received at closing. The Company recognized a gain on this transaction of $7.5 million and will recognize additional gains if and when additional consideration is earned.
Fee Income
The Company generates fee income from development projects with third parties and from management and leasing agreements with its unconsolidated joint ventures. During 2012, the Company received $4.5 million from a participation interest related to a contract that the Company assumed in the acquisition of an entity several years ago. Under this contract, the Company is entitled to receive a portion of the proceeds from the sale of the project and from payments received from a related seller-financed note.
Residential and Commercial Land
As a result of its decision to effectively exit the residential land business over time, the Company sold the majority of its interests in CL Realty, L.L.C. ("CL Realty") and Temco Associates, LLC ("Temco") to its partner in these ventures for $23.5 million in 2012. In 2012, the Company also changed is strategy with respect to its commercial land holdings to more aggressively liquidate these properties. As a result, the Company sold acres of residential and commercial land at 12 locations for total proceeds of $28.8 million in 2012.
As of December 31, 2012, the Company owned, directly or through joint ventures, 6,162 acres of residential and commercial land.
Financing Activities
The Company’s financing strategy is to provide capital to fund its investment activities, while maintaining, over time, a relatively conservative leverage ratio with debt maturity dates which are staggered. Historically, the Company has generated capital using credit facilities, construction loans or mortgage notes payable secured by underlying properties. The Company has also raised capital through the sale of assets, the contribution of assets into joint ventures and the issuance of equity securities. During 2012, the Company had the following financing activities:
 
Amended its $350 million Credit Facility, extending the maturity from August 2012 to February 2016 with a one-year extension under certain situations and adding an accordion feature that allows it to increase capacity under the Credit Facility to $500 million.
Obtained a mortgage note payable secured by 191 Peachtree Tower for $100 million, maturing October 1, 2018, at a 3.35% fixed interest rate.
Prepaid, without penalty, the 100/200 North Point Center East office building mortgage note.

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CF Murfreesboro Associates, a joint venture in which the Company has a 50% interest, entered into an agreement to amend its existing loan to extend the maturity date to December 31, 2013, decrease the capacity of the loan from $113.2 million to $97.5 million and decrease the interest paid on the loan to LIBOR plus 2.5% beginning August 2013.
Environmental Matters
The Company’s business operations are subject to various federal, state and local environmental laws and regulations governing land, water and wetlands resources. Among these are certain laws and regulations under which an owner or operator of real estate could become liable for the costs of removal or remediation of certain hazardous or toxic substances present on or in such property. Such laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of such substances, or the failure to properly remediate such substances, may subject the owner to substantial liability and may adversely affect the owner’s ability to develop the property or to borrow using such real estate as collateral.
The Company typically manages this potential liability through performance of Phase I Environmental Site Assessments and, as necessary, Phase II environmental sampling, on properties it acquires or develops, although no assurance can be given that environmental liabilities do not exist, that the reports revealed all environmental liabilities or that no prior owner created any material environmental condition not known to the Company. In certain situations, the Company has also sought to avail itself of legal and regulatory protections offered by federal and state authorities to prospective purchasers of property. Where applicable studies have resulted in the determination that remediation was required by applicable law, the necessary remediation is typically incorporated into the acquisition or development activity of the relevant property. The Company is not aware of any environmental liability that the Company’s management believes would have a material adverse effect on the Company’s business, assets or results of operations.
Certain environmental laws impose liability on a previous owner of a property to the extent that hazardous or toxic substances were present during the prior ownership period. A transfer of the property does not necessarily relieve an owner of such liability. Thus, although the Company is not aware of any such situation, the Company may be liable in respect to properties previously sold. The Company believes that it and its properties are in compliance in all material respects with all applicable federal, state and local laws, ordinances and regulations governing the environment.
Competition
The Company owns several different real estate products, most of which are located in markets that include other real estate products of the same or similar type. The Company competes with other real estate owners with similar properties located in its markets, and distinguishes itself to tenants/buyers primarily on the basis of location, rental rates/sales prices, services provided, reputation and the design and condition of the facilities. The Company also competes with other real estate companies, financial institutions, pension funds, partnerships, individual investors and others when attempting to acquire and develop properties.
Executive Offices; Employees
The Registrant’s executive offices are located at 191 Peachtree Street, Suite 500, Atlanta, Georgia 30303-1740. On December 31, 2012, the Company employed 159 people.
Available Information
The Company makes available free of charge on the “Investor Relations” page of its website, www.cousinsproperties.com, its filed and furnished reports on Forms 10-K, 10-Q and 8-K, and all amendments thereto, as soon as reasonably practicable after the reports are filed with or furnished to the Securities and Exchange Commission (the “SEC”).
The Company’s Corporate Governance Guidelines, Director Independence Standards, Code of Business Conduct and Ethics, and the Charters of the Audit Committee, the Investment Committee and the Compensation, Succession, Nominating and Governance Committee of the Board of Directors are also available on the “Investor Relations” page of the Company’s website. The information contained on the Company’s website is not incorporated herein by reference. Copies of these documents (without exhibits, when applicable) are also available free of charge upon request to the Company at 191 Peachtree Street, Suite 500, Atlanta, Georgia 30303-1740, Attention: Cameron Golden, Investor Relations. Mr. Golden may also be reached by telephone at (404) 407-1984 or by facsimile at (404) 407-1002. In addition, the SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC at www.sec.gov.

Item 1A.
Risk Factors

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Set forth below are the risks we believe investors should consider carefully in evaluating an investment in the securities of Cousins Properties Incorporated.
General Risks of Owning and Operating Real Estate
Our ownership of commercial real estate involves a number of risks, the effects of which could adversely affect our business.
General economic and market risks. In periods during, or following, a general economic decline or recessionary climate, our assets may not generate sufficient cash to pay expenses, service debt or cover maintenance, and, as a result, our results of operations and cash flows may be adversely affected. Several factors may adversely affect the economic performance and value of our properties. These factors include, among other things:
changes in the national, regional and local economic climate;
local real estate conditions such as an oversupply of properties or a reduction in demand for properties;
the attractiveness of our properties to tenants or buyers;
competition from other available properties;
changes in market rental rates and related concessions granted to tenants such as free rent, tenant allowances and tenant improvement allowances; and
the need to periodically repair, renovate and re-lease space.
While the trends in the real estate industry, and the broader U. S. economy, appear to be showing signs of improvement, economic conditions within some of our markets, such as unemployment, continue to lag national averages and may, as a result, adversely affect our business, financial condition, results of operations and the ability of our tenants and other parties to satisfy their contractual obligations to us. Uncertain economic conditions may adversely impact current tenants in our various markets and, accordingly, could affect their ability to pay rents owed to us pursuant to their leases. In periods of economic uncertainty, tenants are more likely to close less profitable locations and/or to declare bankruptcy; and, pursuant to various bankruptcy laws, leases may be rejected and thereby terminated. Furthermore, our ability to sell or lease our properties at favorable rates, or at all, may be negatively impacted by general or local economic conditions.
Our ability to collect rent from tenants may affect our ability to pay for adequate maintenance, insurance and other operating costs (including real estate taxes). Also, the expense of owning and operating a property is not necessarily reduced when circumstances such as market factors cause a reduction in income from the property. If a property is mortgaged and we are unable to meet the mortgage payments, the lender could foreclose on the mortgage and take title to the property. In addition, interest rate levels, the availability of financing, changes in laws and governmental regulations (including those governing usage, zoning and taxes) may adversely affect our financial condition.
Impairment risks. We regularly review our real estate assets for impairment, and based on these reviews we may record impairment losses that have an adverse effect on our results of operations. Negative or uncertain market and economic conditions, as well as market volatility, increase the likelihood of incurring impairment losses. In the current environment, if management decides to sell a real estate asset or reduces its estimates of future cash flows on a real estate asset, the risk of impairment increases. The magnitude of and frequency with which these charges occur could materially and adversely affect our business, financial condition and results of operations.
Leasing risk. Our operating revenues are dependent upon entering into leases with and collecting rents from our tenants. In uncertain economic times, tenants whose leases are expiring may desire to decrease the space they lease and/or may be unwilling to continue their lease. When leases expire or are terminated, replacement tenants may not be available upon acceptable terms and market rental rates may be lower than the previous contractual rental rates. Also, during uncertain economic conditions, our tenants may approach us for additional concessions in order to remain open and operating. The granting of these concessions may adversely affect our results of operations and cash flows to the extent that they result in reduced rental rates, additional capital improvements, or allowances paid to or on behalf of the tenants.
Tenant and property concentration risk. As of December 31, 2012, our top 20 tenants represented approximately 43% of our annualized base rental revenues. While no single tenant accounts for more than 5% of our annualized base rental revenues, the loss of one or more of these tenants could have a significant negative impact on our results of operations or financial condition if a suitable replacement tenant is not secured in a timely fashion.
In addition, for the three months ended December 31, 2012, 56% of the Company’s net operating income was derived from four properties in Atlanta, Georgia: Terminus 100, 191 Peachtree Tower, The American Cancer Society Center and Promenade. Subsequent to year end, the Company reduced its exposure to the Atlanta, Georgia market by selling 50% of Terminus 100 and

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acquiring Post Oak Central in Houston, Texas. Even with this reduced exposure, any adverse economic conditions impacting the Atlanta area generally, or in its Downtown, Midtown or Buckhead submarkets specifically, could adversely affect the operations of one or all of these properties which, in turn, could adversely affect our overall results of operations and financial condition.
Uninsured losses and condemnation costs. Accidents, earthquakes, terrorism incidents and other losses at our properties could adversely affect our operating results. Casualties may occur that significantly damage an operating property, and insurance proceeds may be less than the total loss incurred by us. Although we maintain casualty insurance under policies we believe to be adequate and appropriate, including rent loss insurance on operating properties, some types of losses, such as those related to the termination of longer-term leases and other contracts, generally are not insured. Certain types of insurance may not be available or may be available on terms that could result in large uninsured losses. Property ownership also involves potential liability to third parties for such matters as personal injuries occurring on the property. Such losses may not be fully insured. In addition to uninsured losses, various government authorities may condemn all or parts of operating properties. Such condemnations could adversely affect the viability of such projects.
Environmental issues. Environmental issues that arise at our properties could have an adverse effect on our financial condition and results of operations. Federal, state and local laws and regulations relating to the protection of the environment may require a current or previous owner or operator of real estate to investigate and clean up hazardous or toxic substances or petroleum product releases at a property. If determined to be liable, the owner or operator may have to pay a governmental entity or third parties for property damage and for investigation and clean-up costs incurred by such parties in connection with the contamination, or perform such investigation and clean-up itself. Although certain legal protections may be available to prospective purchasers of property, these laws typically impose clean-up responsibility and liability without regard to whether the owner or operator knew of or caused the presence of the regulated substances. Even if more than one person may have been responsible for the release of regulated substances at the property, each person covered by the environmental laws may be held responsible for all of the clean-up costs incurred. In addition, third parties may sue the owner or operator of a site for damages and costs resulting from regulated substances emanating from that site. We are not currently aware of any environmental liabilities at locations that we believe could have a material adverse effect on our business, assets, financial condition or results of operations. Unidentified environmental liabilities could arise, however, and could have an adverse effect on our financial condition and results of operations.
Joint venture structure risks. Similar to other real estate companies, we have interests in various joint ventures (including partnerships and limited liability companies) and may in the future invest in real estate through such structures. Our venture partners may have rights to take actions over which we have no control, or the right to withhold approval of actions that we propose, either of which could adversely affect our interests in the related joint ventures and in some cases our overall financial condition and results of operations. These structures involve participation by other parties whose interests and rights may not be the same as ours. For example, a venture partner might have economic and/or other business interests or goals which are incompatible with our business interests or goals and that venture partner may be in a position to take action contrary to our interests. In addition, such venture partners may default on their obligations, which could have an adverse impact on the financial condition and operations of the joint venture. Such defaults may result in our fulfilling their obligations that may, in some cases, require us to contribute additional capital to the ventures. Furthermore, the success of a project may be dependent upon the expertise, business judgment, diligence and effectiveness of our venture partners in matters that are outside our control. Thus, the involvement of venture partners could adversely impact the development, operation, ownership or disposition of the underlying properties.
Liquidity risk. Real estate investments are relatively illiquid and can be difficult to sell and convert to cash quickly, especially if market conditions are not favorable. As a result, our ability to sell one or more of our properties, whether in response to any changes in economic or other conditions or in response to a change in strategy, may be limited. In the event we want to sell a property, we may not be able to do so in the desired time period, the sales price of the property may not meet our expectations or requirements, and we may be required to record an impairment loss on the property as a result.
Compliance or failure to comply with federal, state and local regulatory requirements could result in substantial costs.
Our properties are subject to various federal, state and local regulatory requirements, such as the Americans with Disabilities Act and state and local fire, health and life safety requirements. Compliance with these regulations may involve upfront expenditures and/or ongoing costs. If we fail to comply with these requirements, we could incur fines or other monetary damages. We do not know whether existing requirements will change or whether compliance with existing or future requirements will require significant unanticipated expenditures that will affect our cash flows and results of operations.
Any failure to timely sell land holdings could result in additional impairment charges and adversely affect our results of operations.
We maintain holdings of non-income producing land. Our current strategy includes continuing to reduce our holdings of land. As a part of this strategy, we expect to liquidate land to generate capital as opposed to holding the land for future development

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or capital appreciation. This strategy carries the risk that we will sell the land for less than our basis requiring us to record impairment losses.
Financing Risks
At certain times, interest rates and other market conditions for obtaining capital are unfavorable, and, as a result, we may be unable to raise the capital needed to invest in acquisition or development opportunities, maintain our properties or otherwise satisfy our commitments on a timely basis, or we may be forced to raise capital at a higher cost or under restrictive terms, which could adversely affect returns on our investments, our cash flows and results of operations.
We finance our acquisition and development projects through one or more of the following: our Credit Facility, permanent mortgages, proceeds from the sale of assets, construction loans, joint venture equity, issuance of common stock and issuance of preferred stock. Each of these sources may be constrained from time to time because of market conditions, and the related cost of raising this capital may be unfavorable at any given point in time. These sources of capital, and the risks associated with each, include the following:
 
Credit facilities. Terms and conditions available in the marketplace for credit facilities vary over time. We can provide no assurance that the amount we need from our Credit Facility will be available at any given time, or at all, or that the rates and fees charged by the lenders will be reasonable. We incur interest under our Credit Facility at a variable rate. Variable rate debt creates higher debt service requirements if market interest rates increase, which would adversely affect our cash flow and results of operations. Our Credit Facility contains customary restrictions, requirements and other limitations on our ability to incur indebtedness, including restrictions on total debt outstanding, restrictions on secured recourse debt outstanding, and requirements to maintain minimum fixed charge coverage ratios. Our continued ability to borrow under our Credit Facility is subject to compliance with these covenants.
 
Mortgage financing. The availability of financing in the mortgage markets is dependent upon various conditions, including the willingness of mortgage lenders to lend at any given point in time. Interest rates and loan-to-value ratios may also be volatile, and we may from time to time elect not to proceed with mortgage financing due to unfavorable terms offered by lenders. This could adversely affect our ability to finance acquisition or development activities. In addition, if a property is mortgaged to secure payment of indebtedness and we are unable to make the mortgage payments, the lender may foreclose, resulting in loss of income and asset value.
We may not be able to refinance debt secured by our properties at the same levels or on the same terms, which could adversely affect our business, financial condition and results of operations. Further, at the time a loan matures, the property may be worth less than the loan amount and, as a result, the Company may determine not to refinance the loan and permit foreclosure, generating a loss to the Company.

Property sales. Real estate markets tend to experience market cycles. Because of such cycles, the potential terms and conditions of sales, including prices, may be unfavorable for extended periods of time. In addition, our status as a REIT limits our ability to sell properties, and this may affect our ability to liquidate an investment. As a result, our ability to raise capital through property sales in order to fund our acquisition and development projects or other cash needs could be limited. In addition, mortgage financing on a property may prohibit prepayment and/or impose a prepayment penalty upon the sale of that property, which may decrease the proceeds from a sale or refinancing or make the sale or refinancing impractical.

Construction loans. Construction loans generally relate to specific assets under construction and fund costs above an initial equity amount deemed acceptable to the lender. Terms and conditions of construction facilities vary, but they generally carry a term of two to five years, charge interest at variable rates, require the lender to be satisfied with the nature and amount of construction costs prior to funding and require the lender to be satisfied with the level of pre-leasing prior to closing. Construction loans frequently require a portion of the loan to be recourse to the Company in addition to being recourse to the the equity in the asset. While construction lending is generally competitive and offered by many financial institutions, there may be times when these facilities are not available or are only available upon unfavorable terms which could have an adverse effect on our ability to fund development projects or on our ability to achieve the returns we expect.

Joint ventures. Joint ventures, including partnerships or limited liability companies, tend to be complex arrangements, and there are only a limited number of parties willing to undertake such investment structures. There is no guarantee that we will be able to undertake these ventures at the times we need capital.


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Common stock. We have sold common stock from time to time to raise capital. The market price of our common stock may decline as a result the sale of our common stock in the market after such offerings, or the perception that such sales may occur. We can also provide no assurance that conditions will be favorable for future issuances of common stock when we need the capital, which could have an adverse effect on our ability to fund acquisition and development activities.

Preferred stock. The availability of preferred stock at favorable terms and conditions is dependent upon a number of factors including the general condition of the economy, the overall interest rate environment, the condition of the capital markets and the demand for this product by potential holders of the securities. We can provide no assurance that conditions will be favorable for future issuances of preferred stock when we need the capital, which could have an adverse effect on our ability to fund acquisition and development activities.
Covenants contained in our Credit Facility and mortgages could restrict or hinder our operational flexibility, which could adversely affect our results of operations.
Our Credit Facility imposes financial and operating covenants on us. These covenants may be modified from time to time, but covenants of this type typically include restrictions and limitations on our ability to incur debt, as well as limitations on the amount of our unsecured debt, limitations on distributions to stockholders, and limitations on the amount of joint venture activity in which we may engage. These covenants may limit our flexibility in making business decisions. In addition, our Credit Facility contains financial covenants that, among other things, require that our earnings, as defined, exceed our fixed charges, as defined, by a specified amount and a covenant that requires our net worth, as defined, to be above a specified dollar amount. If we incur significant losses, such as impairment losses, we are at greater risk of violating our net worth covenant. If we fail to comply with these covenants, our ability to borrow may be impaired, which could potentially make it more difficult to fund our capital and operating needs. Our failure to comply with such covenants could cause a default, and we may then be required to repay our outstanding debt with capital from other sources. Under those circumstances, other sources of capital may not be available to us or may be available only on unattractive terms, which could materially and adversely affect our financial condition and results of operations. In addition, the cross default provision on the Credit Facility may affect business decisions on other mortgage debt.
Some of our property mortgages contain customary negative covenants, including limitations on our ability, without the lender’s prior consent, to further mortgage that property, to modify existing leases or to sell that property. Compliance with these covenants and requirements could harm our operational flexibility and financial condition.
Our degree of leverage could limit our ability to obtain additional financing or affect the market price of our securities.
Total debt as a percentage of either total asset value or total market capitalization is often used by analysts to gauge the financial health of equity REITs such as us. If our degree of leverage is viewed unfavorably by lenders or potential joint venture partners, it could affect our ability to obtain additional financing. In general, our degree of leverage could also make us more vulnerable to a downturn in business or the economy. In addition, changes in our debt to market capitalization ratio, which is in part a function of our stock price, or to other measures of asset value used by financial analysts, may have an adverse effect on the market price of our equity securities.
Real Estate Acquisition and Development Risks
We face risks associated with the development of real estate, such as delay, cost overruns and the possibility that we are unable to lease a portion of the space that we build, which could adversely affect our results.
While our overall development activities are lower than in past years, we currently have two active development projects. Development activities contain certain inherent risks. Although we seek to minimize risks from commercial development through various management controls and procedures, development risks cannot be eliminated. Some of the key factors affecting development of commercial property are as follows:
The availability of sufficient development opportunities. Absence of sufficient development opportunities could result in our experiencing slower growth in earnings and cash flows. Development opportunities are dependent upon a wide variety of factors. Availability of these opportunities can be volatile as a result of, among other things, economic conditions and product supply/demand characteristics in a particular market.

Abandoned predevelopment costs. The development process inherently requires that a large number of opportunities be pursued with only a few actually being developed and constructed. We may incur significant costs for predevelopment activity for projects that are later abandoned, which would directly affect our results of operations. For projects that are later abandoned, the Company must expense certain costs, such as salaries, that would have otherwise been capitalized. We have procedures and controls in place that are intended to minimize this risk, but it is likely that we will incur predevelopment expense on subsequently abandoned projects on an ongoing basis.

8



Project costs. Construction and leasing of a project involves a variety of costs that cannot always be identified at the beginning of a project. Costs may arise that have not been anticipated or actual costs may exceed estimated costs. These additional costs can be significant and could adversely impact our return on a project and the expected results of operations upon completion of the project. Also, construction costs vary over time based upon many factors, including the demand for building materials. We attempt to mitigate the risk of unanticipated increases in construction costs on our development projects through guaranteed maximum price contracts and pre-ordering of certain materials, but we may be adversely affected by increased construction costs on our current and future projects.

Leasing risk. The success of a commercial real estate development project is heavily dependent upon entering into leases with acceptable terms within a predefined lease-up period. Although our policy is to achieve pre-leasing goals (which vary by market, product type and circumstances) before committing to a project, it is expected that not all the space in a project will be leased at the time we commit to the project. If the additional space is not leased on schedule and upon the expected terms and conditions, our returns, future earnings and results of operations from the project could be adversely impacted. Whether or not tenants are willing to enter into leases on the terms and conditions we project and on the timetable we expect will depend upon a number of factors, many of which are outside our control. These factors may include:
general business conditions in the local or broader economy or in the tenants’ or prospective tenants’ industries;
supply and demand conditions for space in the marketplace; and
level of competition in the marketplace.

Reputation risks. We have historically developed and managed our real estate portfolio and believe that we have built a positive reputation for quality and service with our lenders, joint venture partners and tenants. If we were viewed as developing underperforming properties, suffered sustained losses on our investments, defaulted on a significant level of loans or experienced significant foreclosure or deed in lieu of foreclosure of our properties, our reputation could be damaged. In addition, our strategic disposition of many of our retail projects may negatively impact our relationships with retail tenants in other parts of our portfolio. Damage to our reputation could make it more difficult to successfully develop or acquire properties in the future and to continue to grow and expand our relationships with our lenders, joint venture partners and tenants, which could adversely affect our business, financial condition and results of operations.

Governmental approvals. All necessary zoning, land-use, building, occupancy and other required governmental permits and authorization may not be obtained, may only be obtained subject to onerous conditions or may not be obtained on a timely basis resulting in possible delays, decreased profitability and increased management time and attention.

We may face risks associated with property acquisitions.
In the current market environment, development opportunities may be limited. Therefore, we may invest more heavily in property acquisitions, including the acquisition and redevelopment of operationally or financially distressed properties. The risks associated with property acquisitions are generally the same as those described above for real estate development. However, certain additional risks may be present for property acquisitions and redevelopment projects, including:
we may have difficulty finding properties that are consistent with our strategy and that meet our standards;
we may have difficulty negotiating with new or existing tenants;
the extent of competition for a particular market for attractive acquisitions may hinder our desired level of property acquisitions or redevelopment projects;
the actual costs and timing of repositioning or redeveloping acquired properties may be greater than our estimates;
the occupancy levels, lease-up timing and rental rates may not meet our expectations;
the acquired property may be in a market that is unfamiliar to us and could present additional unforeseen business challenges;
acquired properties may fail to perform as expected;

9


the timing of property acquisitions may lag the timing of property dispositions, leading to periods of time where projects proceeds are not invested as profitably as we desire;
we may be unable to obtain financing for acquisitions on favorable terms or at all; and
we may be unable to quickly and efficiently integrate new acquisitions into our existing operations, and significant levels of management’s time and attention could be involved in these projects, diverting their time from our day-to-day operations.
Any of these risks could have an adverse effect on our results of operations and financial condition. In addition, we may acquire properties subject to liabilities, and with no or limited recourse against the prior owners or other third parties. As a result, if a liability were asserted against us based upon ownership of those properties, we might have to pay substantial sums to settle or contest it, which could adversely affect our business, results of operations and cash flow.
General Business Risks
We are dependent upon the services of certain key personnel, the loss of any of whom could adversely impair our ability to execute our business.
One of our objectives is to develop and maintain a strong management group at all levels. At any given time, we could lose the services of key executives and other employees. None of our key executives or other employees is subject to employment contracts. Further, we do not carry key person insurance on any of our executive officers or other key employees. The loss of services of any of our key employees could have an adverse effect upon our results of operations, financial condition and our ability to execute our business strategy.
In addition, we have reduced our personnel over the past three years as we implement our strategy of simplification and focus on core office assets in our primary markets. In the second half of 2012, 20 individuals were terminated or retired, including two Vice Presidents, six Senior Vice Presidents and one Executive Vice President. While we believe that the workload and institutional knowledge held by these individuals will be absorbed by existing personnel, and we have changed roles, policies and procedures to minimize the risk that the departure of these individuals will have an adverse impact on operations, we can provide no assurance that the departure of these individuals will not adversely impact our results of operations and financial condition.
Our restated and amended articles of incorporation contain limitations on ownership of our stock, which may prevent a change in control that might otherwise be in the best interests of our stockholders.
Our restated and amended articles of incorporation impose limitations on the ownership of our stock. In general, except for certain individuals who owned stock at the time of adoption of these limitations, and except for persons that are granted waivers by our Board of Directors, no individual or entity may own more than 3.9% of the value of our outstanding stock. The ownership limitation may have the effect of delaying, inhibiting or preventing a transaction or a change in control that might involve a premium price for our stock or otherwise be in the best interest of our stockholders.
We experience fluctuations and variability in our operating results on a quarterly basis and in the market price of our common stock and, as a result, our historical performance may not be a meaningful indicator of future results.
Our operating results have fluctuated greatly in the past, due to, among other things, volatility in land sales, property sales, residential lot sales and impairment losses. We are currently engaged in a strategy to simplify our business and focus our resources on Class A office properties in our primary markets which we expect to make our operating results less volatile over time. However, in the near term, we continue to anticipate future fluctuations in our quarterly results, which does not allow for predictability in the market by analysts and investors. Therefore, our historical performance may not be a meaningful indicator of our future results.
The market prices of shares of our common stock have been, and may continue to be, subject to fluctuation due to many events and factors such as those described in this report including:
actual or anticipated variations in our operating results, funds from operations or liquidity;
the general reputation of real estate as an attractive investment in comparison to other equity securities and/or the reputation of the product types of our assets compared to other sectors of the real estate industry;
the general stock and bond market conditions, including changes in interest rates or fixed income securities;
changes in tax laws;
changes to our dividend policy;
changes in market valuations of our properties;

10


adverse market reaction to the amount of our outstanding debt at any time, the amount of our maturing debt and our ability to refinance such debt on favorable terms;
any failure to comply with existing debt covenants;
any foreclosure or deed in lieu of foreclosure of our properties;
additions or departures of key executives and other employees;
actions by institutional stockholders;
uncertainties in world financial markets;
the realization of any of the other risk factors described in this report; and
general market and economic conditions.
Many of the factors listed above are beyond our control. Those factors may cause market prices of shares of our common stock to decline, regardless of our financial performance, condition and prospects. The market price of shares of our common stock may fall significantly in the future, and it may be difficult for our stockholders to resell our common stock at prices they find attractive, or at all.
If our future operating performance does not meet projections of our analysts or investors, our stock price could decline.
Several independent securities analysts publish quarterly and annual projections of our financial performance. These projections are developed independently by third-party securities analysts based on their own analyses, and we undertake no obligation to monitor, and take no responsibility for, such projections. Such estimates are inherently subject to uncertainty and should not be relied upon as being indicative of the performance that we anticipate for any applicable period. Our actual revenues and net income may differ materially from what is projected by securities analysts. If our actual results do not meet analysts’ guidance, our stock price could decline significantly.
Federal Income Tax Risks
Any failure to continue to qualify as a REIT for federal income tax purposes could have a material adverse impact on us and our stockholders.
We intend to operate in a manner to qualify as a REIT for federal income tax purposes. Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code (the “Code”), for which there are only limited judicial or administrative interpretations. Certain facts and circumstances not entirely within our control may affect our ability to qualify as a REIT. In addition, we can provide no assurance that legislation, new regulations, administrative interpretations or court decisions will not adversely affect our qualification as a REIT or the federal income tax consequences of our REIT status.
If we were to fail to qualify as a REIT, we would not be allowed a deduction for distributions to stockholders in computing our taxable income. In this case, we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Unless entitled to relief under certain Code provisions, we also would be disqualified from operating as a REIT for the four taxable years following the year during which qualification was lost. As a result, we would be subject to federal and state income taxes which could adversely affect our results of operations and distributions to stockholders. Although we currently intend to operate in a manner designed to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause us to revoke the REIT election.
In order to qualify as a REIT, under current law, we generally are required each taxable year to distribute to our stockholders at least 90% of our net taxable income (excluding any net capital gain). To the extent that we do not distribute all of our net capital gain or distribute at least 90%, but less than 100%, of our other taxable income, we are subject to tax on the undistributed amounts at regular corporate rates. In addition, we are subject to a 4% nondeductible excise tax to the extent that distributions paid by us during the calendar year are less than the sum of the following:
85% of our ordinary income;
95% of our net capital gain income for that year; and
100% of our undistributed taxable income (including any net capital gains) from prior years.
We generally intend to make distributions to our stockholders to comply with the 90% distribution requirement to avoid corporate-level tax on undistributed taxable income and to avoid the nondeductible excise tax. Distributions could be made in cash, stock or in a combination of cash and stock. Differences in timing between taxable income and cash available for distribution could require us to borrow funds to meet the 90% distribution requirement, to avoid corporate-level tax on undistributed taxable

11


income and to avoid the nondeductible excise tax. Satisfying the distribution requirements may also make it more difficult to fund new investment or development projects.
Certain property transfers may be characterized as prohibited transactions, resulting in a tax on any gain attributable to the transaction.
From time to time, we may transfer or otherwise dispose of some of our properties. Under the Code, any gains resulting from transfers or dispositions, from other than our taxable REIT subsidiary, that are deemed to be prohibited transactions would be subject to a 100% tax on any gain associated with the transaction. Prohibited transactions generally include sales of assets that constitute inventory or other property held for sale to customers in the ordinary course of business. Since we acquire properties primarily for investment purposes, we do not believe that our occasional transfers or disposals of property are deemed to be prohibited transactions. However, whether or not a transfer or sale of property qualifies as a prohibited transaction depends on all the facts and circumstances surrounding the particular transaction. The Internal Revenue Service may contend that certain transfers or disposals of properties by us are prohibited transactions. While we believe that the Internal Revenue Service would not prevail in any such dispute, if the Internal Revenue Service were to argue successfully that a transfer or disposition of property constituted a prohibited transaction, we would be required to pay a tax equal to 100% of any gain allocable to us from the prohibited transaction. In addition, income from a prohibited transaction might adversely affect our ability to satisfy the income tests for qualification as a REIT for federal income tax purposes.
Disclosure Controls and Internal Control over Financial Reporting Risks
Our business could be adversely impacted if we have deficiencies in our disclosure controls and procedures or internal control over financial reporting.
The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations. While management will continue to review the effectiveness of our disclosure controls and procedures and internal control over financial reporting, there can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives at all times. Deficiencies, including any material weakness, in our internal control over financial reporting which may occur in the future could result in misstatements of our results of operations, restatements of our financial statements, a decline in our stock price, or otherwise materially adversely affect our business, reputation, results of operations, financial condition or liquidity.

Item 1B.
Unresolved Staff Comments
Not applicable.

Item 2.
Properties
The following table sets forth certain information related to operating properties in which the Company has an ownership interest. Information presented in note 5 to the consolidated financial statements provides additional information related to the Company’s joint ventures. Except as noted, all information presented is as of December 31, 2012 ($ in thousands):
 

12


Property Description
Metropolitan
Area
 
Rentable
Square
Feet
 
Company’s
Ownership
Interest
 
End of Period
Leased
 
Weighted
Average
Occupancy  (1)
 
Company's
Share of
Debt
 
Annualized
Base Rents (2)
I. OFFICE PROPERTIES
 
 
 
 
 
 
 
 
 
 
 
 
 
191 Peachtree Tower
Atlanta
 
1,222,000

 
100.00
%
 
87
%
 
82
%
 
$
100,000

 
 
The American Cancer Society Center
Atlanta
 
996,000

 
100.00
%
 
82
%
 
83
%
 
134,243

 
 
Promenade (5)
Atlanta
 
775,000

 
100.00
%
 
73
%
 
66
%
 

 
 
Terminus 100
Atlanta
 
655,000

 
100.00
%
 
96
%
 
95
%
 
136,123

 
 
Terminus 200 (3)
Atlanta
 
566,000

 
20.00
%
 
88
%
 
88
%
 
14,868

 
 
North Point Center East (4)
Atlanta
 
540,000

 
100.00
%
 
91
%
 
85
%
 

 
 
Emory University Hospital Midtown Medical Office Tower
Atlanta
 
358,000

 
50.00
%
 
99
%
 
97
%
 
23,248

 
 
Meridian Mark Plaza
Atlanta
 
160,000

 
100.00
%
 
98
%
 
97
%
 
26,194

 
 
Inhibitex (6)
Atlanta
 
51,000

 
100.00
%
 
%
 
50
%
 

 
 
GEORGIA
 
 
5,323,000

 
 
 
 
 
 
 
434,676

 
 
Gateway Village (3)
Charlotte
 
1,065,000

 
50.00
%
 
100
%
 
100
%
 
34,121

 
 
NORTH CAROLINA
 
 
1,065,000

 
 
 


 
 
 
34,121

 
 
2100 Ross Avenue
Dallas
 
844,000

 
100.00
%
 
65
%
 
66
%
 

 
 
The Points at Waterview
Dallas
 
203,000

 
100.00
%
 
90
%
 
89
%
 
15,651

 
 
TEXAS
 
 
1,047,000

 
 
 
 
 
 
 
15,651

 
 
Lakeshore Park Plaza (5)
Birmingham
 
197,000

 
100.00
%
 
98
%
 
95
%
 

 
 
600 University Park Place (5)
Birmingham
 
123,000

 
100.00
%
 
98
%
 
93
%
 

 
 
ALABAMA
 
 
320,000

 
 
 
 
 
 
 

 
 
TOTAL OFFICE PROPERTIES
 
 
7,755,000

 
 
 
 
 
 
 
$
484,448

 
$
101,808

II. RETAIL PROPERTIES
 
 
 
 
 
 
 
 
 
 
 
 
 
North Point MarketCenter
Atlanta
 
401,000

 
10.32
%
 
100
%
 
97
%
 

 
 
The Avenue West Cobb
Atlanta
 
256,000

 
11.50
%
 
94
%
 
95
%
 

 
 
The Avenue East Cobb
Atlanta
 
230,000

 
11.50
%
 
86
%
 
85
%
 
4,073

 
 
The Avenue Peachtree City
Atlanta
 
183,000

 
11.50
%
 
92
%
 
90
%
 

 
 
Emory Point
Atlanta
 
80,000

 
75.00
%
 
82
%
 
79
%
 
7,180

 
 
GEORGIA
 
 
1,150,000

 
 
 
 
 
 
 
11,253

 
 
The Avenue Murfreesboro
Nashville
 
751,000

 
50.00
%
 
88
%
 
87
%
 
47,270

 
 
Mt. Juliet Village (3)
Nashville
 
91,000

 
50.50
%
 
80
%
 
80
%
 
3,106

 
 
Creek Plantation Village (3)
Chattanooga
 
78,000

 
50.50
%
 
98
%
 
92
%
 
2,803

 
 
The Shops of Lee Village (3)
Nashville
 
74,000

 
50.50
%
 
89
%
 
81
%
 
3,069

 
 
TENNESSEE
 
 
994,000

 
 
 
 
 
 
 
56,248

 
 
The Avenue Viera
Viera
 
332,000

 
11.50
%
 
96
%
 
95
%
 

 
 
Viera MarketCenter
Viera
 
178,000

 
11.50
%
 
94
%
 
95
%
 

 
 
Mahan Village (5)
Tallahassee
 
147,000

 
100.00
%
 
88
%
 
55
%
 
13,027

 
 
Highland City Town Center (3)
Lakeland
 
96,000

 
50.50
%
 
87
%
 
87
%
 
5,286

 
 
FLORIDA
 
 
753,000

 
 
 
 
 
 
 
18,313

 
 
Greenbrier MarketCenter
Chesapeake
 
376,000

 
10.32
%
 
100
%
 
100
%
 

 
 
VIRGINIA
 
 
376,000

 
 
 


 
 
 

 
 
Tiffany Springs MarketCenter
Kansas City
 
238,000

 
88.50
%
 
87
%
 
84
%
 

 
 
MISSOURI
 
 
238,000

 
 
 


 
 
 

 
 
Los Altos MarketCenter
Long Beach
 
157,000

 
10.32
%
 
100
%
 
93
%
 

 
 
CALIFORNIA
 
 
157,000

 
 
 


 
 
 

 
 
TOTAL RETAIL PROPERTIES
 
 
3,668,000

 
 
 
 
 
 
 
$
85,814

 
$
17,567

III. APARTMENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
Emory Point
Atlanta
 
404,000

 
75.00
%
 
30
%
 
21
%
 
25,456

 
 
GEORGIA
 
 
 
 
 
 
 
 
 
 
 
 
 
TOTAL PORTFOLIO
 
 
11,827,000

 
 
 
 
 
 
 
$
595,718

 
 
 
(1)
Weighted average economic occupancy is calculated as the percentage of the property for which revenue was recognized during 2012. If the property was purchased during the year, average economic occupancy is calculated from the date of purchase forward.

13


(2)
Annualized base rents represents the sum of the annualized rent each tenant is paying as of the end of the reporting period. If a tenant is not paying rent due to a free rent concession, annualized base rent is calculated based on the annualized base rent the tenant will pay in the first period it is required to pay rent.
(3)
This property is owned through a joint venture with a third party who has contributed equity, but the equity ownership and the allocation of the results of operations and/or gain on sale may be disproportionate.
(4)
This property contains four buildings - 100 North Point Center East, 200 North Point Center East, 333 North Point Center East and 555 North Point Center East.
(5)
This property is shown as 100% as it is owned through a consolidated joint venture. The joint venture is with a third party who has contributed equity and the joint venture partner may receive distributions from the venture in connection with its equity ownership.
(6)
This property is classified as held for sale as of December 31, 2012.

Lease Expirations
OFFICE
As of December 31, 2012, the Company’s office portfolio included 14 operating office properties. The weighted average remaining lease term of these office properties was approximately six years as of December 31, 2012. Most of the major tenant leases in these properties provide for pass through of operating expenses and contractual rents which escalate over time. The leases expire as follows:
 

2013
 

2014
 

2015
 

2016
 

2017
 

2018
 

2019
 

2020
 
2021
 

2022 &
Thereafter
 

Total
Company Share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Square Feet Expiring
341,823

 
324,807

 
507,656

 
855,524

 
653,729

 
333,857

 
338,038

 
290,306

 
502,502

 
1,429,527

 
5,577,769

% of Leased Space
6
%
 
6
%
 
9
%
 
15
%
 
12
%
 
6
%
 
6
%
 
5
%
 
9
%
 
26
%
 
100
%
Annual Contractual Rent ($000’s) (1)
$
6,684

 
$
6,734

 
$
11,268

 
$
16,194

 
$
15,742

 
$
9,208

 
$
8,260

 
$
7,889

 
$
12,707

 
$
34,017

 
$
128,703

Annual Contractual Rent/Sq. Ft. (1)
$
19.55

 
$
20.73

 
$
22.20

 
$
18.93

 
$
24.08

 
$
27.58

 
$
24.43

 
$
27.17

 
$
25.29

 
$
23.80

 
$
23.07

RETAIL
As of December 31, 2012, the Company's retail portfolio included 16 operating retail properties. The weighted average remaining lease term of these retail properties was approximately nine years as of December 31, 2012. Most of the major tenant leases in these properties provide for pass through of operating expenses and contractual rents which escalate over time. The leases expire as follows:
 

2013
 

2014
 

2015
 

2016
 

2017
 

2018
 

2019
 

2020
 
2021
 

2022 &
Thereafter
 

Total
Company Share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Square Feet Expiring (2)
44,332

 
51,254

 
55,863

 
66,176

 
90,812

 
214,923

 
150,656

 
32,593

 
19,027

 
363,070

 
1,088,706

% of Leased Space
4
%
 
5
%
 
5
%
 
6
%
 
8
%
 
20
%
 
14
%
 
3
%
 
2
%
 
33
%
 
100
%
Annual Contractual Rent($000’s) (1)
$
911

 
$
952

 
$
1,047

 
$
1,226

 
$
1,908

 
$
4,420

 
$
2,971

 
$
624

 
$
527

 
$
3,844

 
$
18,430

Annual Contractual Rent/Sq. Ft. (1)
$
20.55

 
$
18.58

 
$
18.75

 
$
18.53

 
$
21.01

 
$
20.57

 
$
19.72

 
$
19.16

 
$
27.71

 
$
10.59

 
$
16.93

(1)
Annual Contractual Rent shown is the estimated rate in the year of expiration. It includes the minimum contractual rent paid by the tenant which, in most of the office leases, includes a base year of operating expenses.
(2)
Certain leases contain termination options, with or without penalty, if co-tenancy clauses or sales volume levels are not achieved. The expiration date per the lease is used for these leases in the above table, although early termination is possible.

14



Development Pipeline
As of December 31, 2012, the Company had the following projects under development ($ in thousands):
 
Project (1)
Metropolitan
Area
 
Company’s
Ownership
Interest

Estimated
Project
Cost (2)
 
Project
Cost
Incurred to
Date
 
Number of
Apartment
Units/Square
Feet
 
Percent
Leased
 
Actual
Opening (3)
 
Estimated
Stabilization (4)
Emory Point (Phase I)
Atlanta, GA
 
75
%

$
102,300

 
$
83,238

 
 
 
 
 
 
 
 
Apartments
 
 
 
 
 
 
 
 
443

 
30
%
 
3Q 12
 
2Q 14
Retail
 
 
 
 
 
 
 
 
80,000

 
82
%
 
4Q 12
 
4Q 13
Mahan Village
Tallahassee, FL
 
100
%
(5)
$
25,800

 
$
23,909

 
 
 
 
 
 
 
 
Retail
 
 
 
 
 
 
 
 
147,000

 
88
%
 
3Q 12
 
3Q 13
(1)
This schedule shows projects currently under active development through the point of stabilization. Amounts included in the estimated project cost column represent the estimated costs of the project through stabilization. Significant estimation is required to derive these costs and the final costs may differ from these estimates. The projected stabilization dates are also estimates and are subject to change as the project proceeds through the development process.
(2)
Amount represents 100% of the estimated project cost. The projects are being funded with a combination of equity from the partners and $61.1 million and $15.0 million of construction loans for Emory Point and Mahan Village, respectively. As of December 31, 2012, $43.5 million and $13.0 million were outstanding under the Emory Point and Mahan Village loans, respectively.
(3)
Actual opening represents the quarter within which the first retail space was open for operations and the quarter that the first apartment unit was occupied.
(4)
Estimated stabilization represents the quarter within which the Company estimates it will achieve 90% economic occupancy.
(5)
Company's ownership interest is shown at 100% as Mahan Village is owned in a joint venture which is consolidated with the Company.

Inventory of Land Held
As of December 31, 2012, the Company owned the following land holdings either directly or indirectly through joint ventures:
 

15


Property Description
Metropolitan Area
 
Company's Ownership Interest
 
Developable Land Area (Acres)
 
 
 
 
 
 
COMMERCIAL
 
 
 
 
 
Jefferson Mill Business Park
Atlanta
 
100.00
%
 
123

Wildwood Office Park
Atlanta
 
50.00
%
 
40

North Point
Atlanta
 
100.00
%
 
37

Wildwood Office Park
Atlanta
 
100.00
%
 
23

The Avenue Forsyth-Adjacent Land
Atlanta
 
100.00
%
 
11

549 / 555 / 557 Peachtree Street
Atlanta
 
100.00
%
 
1

Georgia
 
 
 
 
235

Round Rock Land
Austin
 
100.00
%
 
60

Research Park V
Austin
 
100.00
%
 
6

Texas
 
 
 
 
66

Highland City Town Center-Outparcels (1) (2) (3)
Lakeland
 
50.50
%
 
55

Florida
 
 
 
 
55

The Shops of Lee Village-Outparcels (2) (3)
Nashville
 
50.50
%
 
6

The Avenue Murfreesboro-Outparcels (2) (3)
Nashville
 
50.00
%
 
5

Tennessee
 
 
 
 
11

Tiffany Springs MarketCenter-Outparcels (2)
Kansas City
 
100.00
%
 
12

Missouri
 
 
 
 
12

TOTAL COMMERCIAL LAND HELD
 
 
 
 
379

COMPANY’S SHARE OF TOTAL
 
 
 
 
325

COST BASIS OF COMMERCIAL LAND
 
 
 
 
$
64,124

COMPANY’S SHARE OF COST BASIS OF COMMERCIAL LAND
 
 
 
 
$
38,002

 
 
 
 
 
 
RESIDENTIAL (4)
 
 
 
 
 
Paulding County
Atlanta
 
50.00
%
 
5,565

Blalock Lakes
Atlanta
 
100.00
%
 
2,800

Callaway Gardens (5)
Atlanta
 
100.00
%
 
218

The Lakes at Cedar Grove
Atlanta
 
100.00
%
 
25

Longleaf at Callaway
Atlanta
 
100.00
%
 
4

Georgia
 
 
 
 
8,612

Padre Island
Corpus Christi
 
50.00
%
 
15

Texas
 
 
 
 
15

TOTAL RESIDENTIAL LAND HELD
 
 
 
 
8,627

COMPANY’S SHARE OF TOTAL
 
 
 
 
5,837

COST BASIS OF RESIDENTIAL LAND
 
 
 
 
$
27,434

COMPANY’S SHARE OF COST BASIS OF RESIDENTIAL LAND
 
 
 
 
$
21,335

 
 
 
 
 
 
GRAND TOTAL COMPANY'S SHARE OF ACRES
 
 
 
 
6,162

GRAND TOTAL COMPANY'S SHARE OF COST BASIS OF LAND HELD
 
 
 
 
$
59,337

 
(1)
Land is adjacent to an existing retail center and is anticipated to either be sold to a third party or developed as an additional phase of the retail center.
(2)
Land relates to outparcels available for sale or ground lease, which are included in the basis of the related operating property.
(3)
This project is owned through a joint venture with a third party who has contributed equity, but the equity ownership and the allocation of the results of operations and/or gain on sale most likely will be disproportionate.

16


(4)
Residential represents land that may be sold to third parties as lots are in large tracts for residential or commercial development.
(5)
Company's ownership interest is shown at 100% as Callaway Gardens is owned by a joint venture which is consolidated with the Company. The partner is entitled to a share of the profits after the Company's capital is recovered.
Other Investments
The Company owns a leasehold interest in the air rights over the approximately 365,000 square foot CNN Center parking facility in Atlanta, Georgia, adjoining the headquarters of Turner Broadcasting System, Inc. and Cable News Network. The air rights are developable for additional parking or for certain other uses. The Company’s net carrying value of this interest is $0.

Item 3.
Legal Proceedings
The Company is subject to various legal proceedings, claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters using the latest information available. The Company records a liability for litigation if an unfavorable outcome is probable and the amount of loss or range of loss can be reasonably estimated. If an unfavorable outcome is probable and a reasonable estimate of the loss is a range, the Company accrues the best estimate within the range. If no amount within the range is a better estimate than any other amount, the Company accrues the minimum amount within the range. If an unfavorable outcome is probable but the amount of the loss cannot be reasonably estimated, the Company discloses the nature of the litigation and indicates that an estimate of the loss or range of loss cannot be made. If an unfavorable outcome is reasonably possible and the estimated loss is material, the Company discloses the nature and estimate of the possible loss of the litigation. The Company does not disclose information with respect to litigation where an unfavorable outcome is considered to be remote or where the estimated loss would not be material. Based on current expectations, such matters, both individually and in the aggregate, are not expected to have a material adverse effect on the liquidity, results of operations, business or financial condition of the Company.

Item 4.
Mine Safety Disclosures
Not applicable.

Item X.
Executive Officers of the Registrant
The Executive Officers of the Registrant as of the date hereof are as follows:
 
Name
Age
 
Office Held
Lawrence L. Gellerstedt III
56

 
President and Chief Executive Officer
Gregg D. Adzema
48

 
Executive Vice President and Chief Financial Officer
Michael I. Cohn
52

 
Executive Vice President
John S. McColl
50

 
Executive Vice President
J. Thad Ellis
52

 
Senior Vice President
John D. Harris, Jr.
53

 
Senior Vice President, Chief Accounting Officer and Assistant Secretary
Pamela F. Roper
39

 
Senior Vice President, General Counsel and Corporate Secretary
Family Relationships
There are no family relationships among the Executive Officers or Directors.
Term of Office
The term of office for all officers expires at the annual stockholders’ meeting. The Board retains the power to remove any officer at any time.

Business Experience

17


Mr. Gellerstedt was appointed President and Chief Executive officer and Director in July 2009. From February 2009 to July 2009, Mr. Gellerstedt served as President and Chief Operating Officer. From May 2008 to February 2009, Mr. Gellerstedt served as Executive Vice President and Chief Development Officer. From July 2005 to May 2008, Mr. Gellerstedt served as Senior Vice President and President of the Office/Multi-Family Division.
Mr. Adzema was appointed Executive Vice President and Chief Financial Officer in November 2010. Prior to joining the Company, Mr. Adzema served as Chief Investment Officer of Hayden Harper Inc., an investment advisory and hedge fund company, from October 2009 to November 2010. Mr. Adzema served as Executive Vice President-Investments with Grubb Properties, Inc., a real estate development and management company, from August 2005 to September 2008.
Mr. Cohn was appointed Executive Vice President in December 2011. From August 2010 to December 2011, Mr. Cohn served as Executive Vice President-Retail Investments, Leasing and Asset Management. Prior to joining the Company, Mr. Cohn served as Senior Managing Director of Faison Southeast, a real estate development and management company, from October 2002 to July 2010.
Mr. McColl was appointed Executive Vice President in December 2011. From February 2010 to December 2011, Mr. McColl served as Executive Vice President-Development, Office Leasing and Asset Management. From May 1997 to February 2010, Mr. McColl served as Senior Vice President.
Mr. Ellis was appointed Senior Vice President in December 2011. From August 2006 to December 2011, Mr. Ellis served as Senior Vice President-Client Services.
Mr. Harris was appointed Senior Vice President and Chief Accounting Officer in February 2005. In May 2005, Mr. Harris was appointed Assistant Secretary.
Ms. Roper was appointed Senior Vice President, General Counsel and Corporate Secretary in October 2012. From February 2008 to October 2012, Ms. Roper served as Senior Vice President, Associate General Counsel and Assistant Secretary. From August 2003 to February 2008, Ms. Roper served as Vice President, Associate General Counsel and Assistant Secretary.

PART II
Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters
Market Information
The high and low sales prices for the Company’s common stock and dividends declared per common share were as follows:

2012 Quarters
 
2011 Quarters

First
 
Second
 
Third
 
Fourth
 
First
 
Second
 
Third
 
Fourth
High
$
7.81

 
$
8.05

 
$
8.49

 
$
8.57

 
$
8.79

 
$
9.09

 
$
9.19

 
$
6.85

Low
$
6.37

 
$
6.85

 
$
7.44

 
$
7.67

 
$
7.72

 
$
8.06

 
$
5.76

 
$
5.25

Dividends
$
0.045

 
$
0.045

 
$
0.045

 
$
0.045

 
$
0.045

 
$
0.045

 
$
0.045

 
$
0.045

Payment Date
2/23/2012

 
5/30/2012

 
8/24/2012

 
12/21/2012

 
2/22/2011

 
5/27/2011

 
8/25/2011

 
12/22/2011

Holders
The Company’s common stock trades on the New York Stock Exchange (ticker symbol CUZ). On February 6, 2013, there were 878 common stockholders of record.
Purchases of Equity Securities
For information on the Company’s equity compensation plans, see note 7 of the accompanying consolidated financial statements, which is incorporated herein.
The Company purchased the following common shares during the fourth quarter of 2012:
 

18


 

Total Number
of Shares
Purchased (1)
 

Average Price
Paid per Share (1)
October 1 - 31
1,995

 
$
8.15

November 1 - 30

 

December 1 - 31

 

 
1,995

 
$
8.15

 
(1)
Activity for the fourth quarter of 2012 related to the remittances of shares for income taxes due for restricted stock vesting.

Performance Graph
The following graph compares the five-year cumulative total return of the Company’s Common Stock with the NYSE Composite Index, the FTSE NAREIT Equity Index and the SNL US REIT Office Index. The graph assumes a $100 investment in each of the indices on December 31, 2007 and the reinvestment of all dividends.


COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE COMPANIES, PEER
GROUPS, INDUSTRY INDICES AND/OR BROAD MARKETS
 

19



Fiscal Year Ended
Index
12/31/2007
 
12/31/2008
 
12/31/2009
 
12/31/2010
 
12/31/2011
 
12/31/2012
Cousins Properties Incorporated
100.00

 
67.04

 
38.85

 
43.15

 
33.99

 
45.31

NYSE Composite Index
100.00

 
60.85

 
78.24

 
88.88

 
85.62

 
99.45

FTSE NAREIT Equity Index
100.00

 
62.27

 
79.70

 
101.99

 
110.45

 
130.39

SNL US REIT Office Index
100.00

 
56.85

 
77.94

 
94.53

 
93.68

 
107.32


Item 6.
Selected Financial Data
The following selected financial data sets forth consolidated financial and operating information on a historical basis. This data has been derived from the Company’s consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto. The data below has been restated for discontinued operations detailed in note 9 of the consolidated financial statements. In addition, note 6 of the consolidated financial statements provides information on impairment losses recognized in 2012, 2011 and 2010. In all four quarters of 2010 and in the last three quarters of 2009, the common stock dividends were paid in a combination of cash and stock. The following table reflects the total dividend, both cash and stock, paid.
 

20



For the Years Ended December 31,

2012
 
2011
 
2010
 
2009
 
2008

($ in thousands, except per share amounts)
Rental property revenues
$
125,609

 
$
105,596

 
$
101,715

 
$
100,560

 
$
100,447

Fee income
17,797

 
13,821

 
14,444

 
11,840

 
26,742

Land and multi-family sales
3,310

 
7,679

 
36,956

 
33,687

 
12,187

Other
1,562

 
1,950

 
1,119

 
1,661

 
3,750

Total revenues
148,278

 
129,046

 
154,234

 
147,748

 
143,126

Rental property operating expenses
54,518

 
44,912

 
43,441

 
46,102

 
39,410

General and administrative expenses
24,351

 
24,166

 
28,517

 
26,198

 
29,985

Depreciation and amortization
43,559

 
34,580

 
36,688

 
33,653

 
31,863

Land and multi-family cost of sales
1,833

 
5,378

 
28,956

 
27,821

 
9,403

Interest expense
23,933

 
27,784

 
37,180

 
39,759

 
27,602

Impairment losses
488

 
100,131

 
2,554

 
40,512

 
2,100

Other expenses
12,009

 
10,778

 
11,693

 
21,706

 
12,396

Total expenses
160,691

 
247,729

 
189,029

 
235,751

 
152,759

Loss on extinguishment of debt and interest rate swaps
(94
)
 
(74
)
 
(9,827
)
 
(2,766
)
 

Benefit (provision) for income taxes from operations
(91
)
 
186

 
1,079

 
(4,341
)
 
8,770

Income (loss) from unconsolidated joint ventures
39,258

 
(18,299
)
 
9,493

 
(68,697
)
 
9,721

Gain on sale of investment properties
4,053

 
3,494

 
1,948

 
168,539

 
6,240

Income (loss) from continuing operations
30,713

 
(133,376
)
 
(32,102
)
 
4,732

 
15,098

Discontinued operations
17,206

 
9,909

 
20,069

 
24,815

 
9,827

Net income (loss)
47,919

 
(123,467
)
 
(12,033
)
 
29,547

 
24,925

Net income attributable to noncontrolling interests
(2,191
)
 
(4,958
)
 
(2,540
)
 
(2,252
)
 
(2,378
)
Preferred dividends
(12,907
)
 
(12,907
)
 
(12,907
)
 
(12,907
)
 
(14,957
)
Net income (loss) available to common stockholders
$
32,821

 
$
(141,332
)
 
$
(27,480
)
 
$
14,388

 
$
7,590

Net income (loss) from continuing operations attributable to controlling interest per common share—basic and diluted
$
0.15

 
$
(1.46
)
 
$
(0.47
)
 
$
(0.16
)
 
$
0.01

Net income (loss) per common share—basic and diluted
$
0.32

 
$
(1.36
)
 
$
(0.27
)
 
$
0.22

 
$
0.15

Dividends declared per common share
$
0.18

 
$
0.18

 
$
0.36

 
$
0.74

 
$
1.36

Total assets (at year-end)
$
1,124,242

 
$
1,235,535

 
$
1,371,282

 
$
1,491,552

 
$
1,693,795

Notes payable (at year-end)
$
425,410

 
$
539,442

 
$
509,509

 
$
590,208

 
$
942,239

Stockholders’ investment (at year-end)
$
620,342

 
$
603,692

 
$
760,079

 
$
787,411

 
$
466,723

Common shares outstanding (at year-end)
104,090

 
103,702

 
103,392

 
99,782

 
51,352


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 2012 Performance and Company and Industry Trends
The Company made progress in 2012 with executing its strategy of producing returns through the acquisition, development and management of trophy office and retail assets in the Sunbelt with particular focus on Georgia, Texas and North Carolina. In implementing this strategy, the Company had goals for 2012 that included simplifying its business through the sale of non-core assets, leasing vacant space and investing in opportunistic acquisitions and development projects within its core markets. The

21


Company was successful in meeting these goals and management believes that the Company is appropriately positioned for the future.
Sale of Non-core Assets
During 2012, the Company sold $401.2 million in non-core assets. This amount included the sale of three retail lifestyle centers, two of which were in Atlanta, Georgia and one of which was in Memphis, Tennessee. The Company also sold its interests in five office properties. Two of these office properties were purchased initially for their location and land value for which development opportunities never materialized. Three of these office properties were sold out of joint ventures for strategic reasons or pursuant to buy-out provisions within the joint venture agreements. The Company also sold the majority of its interests in CL Realty LLC and Temco Associates, two joint ventures formed for residential lot and land development, to its partner. The Company reduced its holdings of commercial land as well by selling 98 acres in 2012. In addition to these real estate asset sales, the Company sold its third party management and leasing business.
The results of the 2012 sales activities are significant. The percentage of net operating income generated by retail projects decreased from 30% for the fourth quarter of 2011 to 16% for the fourth quarter of 2012. Square footage of properties owned and operated in Georgia decreased from 7.7 million as of December 31, 2011 to 6.5 million as of December 31, 2012. The remaining office assets in Georgia are primarily held in three strategic submarkets: Buckhead, Midtown and Downtown, while most of the remaining retail assets in Georgia are owned in joint ventures in which the Company owns only a small interest. In addition, the Company decreased the its share of the carrying amount of commercial and residential land from $115.9 million at December 31, 2011 to $59.3 million at December 31, 2012 and land as a percentage of the Company's total assets decreased from 9.4% as of December 31, 2011 to 5.3% as of December 31, 2012.
These non-core asset sales also allowed the Company to end 2012 with no amount outstanding under its unsecured Credit Facility and with $176.9 million of cash on its balance sheet. While dilutive in the short term, this financial position provides the Company with significant capacity to invest in the Company's core markets. The Company has also exited the residential lot development business, the third party management and leasing business, the condominium development business and the industrial development business, thereby, allowing the Company to eliminate the costs associated with managing and operating these operations and allowing management to focus its efforts on the Company's core businesses.
Leasing Activity
In 2012, the Company leased or renewed 724,000 square feet of office space. As a result of this activity, the same property office portfolio increased from 89% leased at December 31, 2011 to 91% leased at December 31, 2012. This improvement is attributable primarily to activity at 191 Peachtree where 102,000 square feet of net new leasing has taken this building from 82% leased at the beginning of the year to 87% leased at year end. Also, outside of the same property portfolio, Promenade, which was acquired in the fourth quarter of 2011, improved from 63% leased at the beginning of the year to 73% leased at year end.
The Company's retail portfolio also improved during the year as the Company leased or renewed 445,000 square feet of retail space. The same property retail portfolio increased from 88% leased at the beginning of the year to 90% leased at year end. This increase was driven by leasing activity at The Avenue Forsyth, which sold in the fourth quarter. The Company increased percentage leased at The Avenue Forsyth from 89% at the beginning of the year to 93% at the time of sale, which resulted in a more favorable valuation of this asset upon sale. Some of this square footage leased also occurred at Tiffany Springs Marketcenter, where the leasing percentage increased from 83% to 87% during the year.
The long term prospects for the Company's markets remain strong. Each of the Company's markets is projecting job growth over the next five years higher than the national average with the Texas markets projected to be the strongest. Current unemployment in the Atlanta and Charlotte markets is higher than the national average, but all other markets are lower than the nation overall. Office absorption was positive in each market with Houston being the strongest. Rental rates have been stable over the past year - within the Company's portfolio, the highest net rents are in Austin and the lowest are in the North Fulton sub-market of Atlanta.
With respect to retail, overall Black Friday sales trends were positive, showing a 13% increase in spending. Consumer confidence reached a four and a half year high in November. Comparable same store sales at the Company's retail properties were up 0.8% for the year, which is consistent with national trends. While the Company's retail portfolio is smaller than at the beginning of 2012, management believes there is positive momentum for maintaining and increasing revenues from these remaining properties.
Opportunistic Investments
The Company's investment strategy is to purchase trophy office assets or locate opportunistic development or re-development properties in its core markets to which it can add value through relationships, capital or market expertise. During 2012, the Company

22


purchased one well-located property in Dallas, Texas with upside potential, completed two development projects and created a future development pipeline. After year-end, the Company added a trophy property in Houston, Texas to its portfolio.
In the third quarter of 2012, the Company purchased 2100 Ross Avenue, an 844,000 square foot, Class A office building in the Arts District of Dallas, Texas. The Company purchased this property for $70 per square foot which represents an amount that is below management's estimate of replacement cost. The property was acquired at a price that provides an attractive immediate return on investment; and at 65% leased, provides the opportunity for the Company to increase its returns as vacant space is leased.
In the second half of 2012, the Company began operations at Emory Point, a mixed use development adjacent to Emory University and the Centers for Disease Control in Atlanta, Georgia. The project contains 80,000 square feet of retail and 443 apartment units. The retail portion was 82% leased and the apartment portion was 30% leased at year end. The Company is in the pre-development stage for a second phase of Emory Point.
The Company also began operations at Mahan Village, a 147,000 square foot shopping center anchored by Publix and Academy Sports in Tallahassee, Florida. This property was 88% leased at year end. This opportunity was sourced through a relationship where the Company stepped into the place of the original developer. With the opening of Mahan Village, the Company's retail portfolio now contains five Publix-anchored shopping centers.
Subsequent to year end, the Company consummated a series of transactions that resulted in the purchase of a trophy asset in the Galleria submarket of Houston, Texas, and the contribution of its interests in the assets at its Terminus project into a 50-50 joint venture. The Company first purchased the interest of its joint venture partner in Terminus 200, then contributed Terminus 100 and Terminus 200 to the new joint venture with JP Morgan. In addition, the Company purchased Post Oak Central, a 1.3 million square foot Class A office complex in Houston, from an affiliate of JP Morgan. Post Oak Central was 92% leased upon closing of the transaction and provides the Company with a high quality asset with significant redevelopment potential in a desirable Houston sub-market, thereby increasing the Company's exposure to the Texas market.
In addition to a second phase of Emory Point, the Company has another potential development that it hopes to commence in 2013. Third and Colorado is a proposed office building in downtown Austin, Texas. The Company is in the pre-leasing stage. If this project moves forward, the Company estimates total project costs will be approximately $130 million.
Going forward, the Company expects to continue selling land and other non-core assets in order to further simplify its business platform. Leasing of vacant space represents a significant opportunity to improve results of operations and enhance the value of the Company's real estate holdings and is an important focus for 2013. The Company also plans to source new development and acquisition projects that it expects to enhance value to shareholders over time. With the capital generated from the sales activities in 2012, management believes that the Company is well positioned to implement its strategy.
Critical Accounting Policies
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as outlined in the Financial Accounting Standards Board’s Accounting Standards Codification, 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 the Company’s accounting policies are considered to be critical accounting policies, which are ones that are both important to the portrayal of a company’s financial condition and results of operations, and ones that also require significant judgment or complex estimation processes. The Company’s critical accounting policies are as follows:
Real Estate Assets
Cost Capitalization. The Company is involved in all stages of real estate ownership, including development. Prior to the point a project becomes probable of being developed (defined as more likely than not), the Company expenses predevelopment costs. After management determines the project is probable, all subsequently incurred predevelopment costs, as well as interest, real estate taxes and certain internal personnel and associated costs directly related to the project under development, are capitalized in accordance with accounting rules. If the Company abandons development of a project that had earlier been deemed probable, the Company charges all previously capitalized costs to expense. If this occurs, the Company’s predevelopment expenses could rise significantly. The determination of whether a project is probable requires judgment by management. If management determines that a project is probable, interest, general and administrative and other expenses could be materially different than if management determines the project is not probable.
During the predevelopment period of a probable project and the period in which a project is under construction, the Company capitalizes all direct and indirect costs associated with planning, developing, leasing and constructing the project. Determination of what costs constitute direct and indirect project costs requires management, in some cases, to exercise judgment. If management

23


determines 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 comprehensive income could be materially different than if management determines these costs are not directly or indirectly associated with the project.
Once a project is constructed and deemed substantially complete and held for occupancy, carrying costs, such as real estate taxes, interest, internal personnel and associated costs, are expensed as incurred. Determination of when construction of a project is substantially complete and held available for occupancy requires judgment. The Company considers projects and/or project phases to be both substantially complete and held for occupancy at the earlier of the date on which the project or phase reached economic occupancy of 90% or one year after it is substantially complete. The Company’s judgment of the date the project is substantially complete has a direct impact on the Company’s operating expenses and net income for the period.
Operating Property Acquisitions. Upon acquisition of an operating property, the Company records the acquired tangible and intangible assets and assumed liabilities at fair value at the acquisition date. 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 lease.
The fair value of land is derived from comparable sales of land within the same submarket and/or region. The fair value of buildings, tenant improvements and leasing costs are based upon current market replacement costs and other relevant market rate information.
The fair value of the above-market or below-market component of an acquired in-place lease is based upon the present value (calculated using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining term and (ii) management’s estimate of the rents that would be paid using fair market rental rates and rent escalations at the date of acquisition over the remaining term of the lease. In-place leases at acquired properties are reviewed at the time of acquisition to determine if contractual rents are above or below current market rents for the acquired property, and an identifiable intangible asset or liability is recorded if there is an above-market or below-market lease.

The fair value of acquired in-place leases is derived based on management’s assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. This fair value is based on a variety of considerations including, but not necessarily limited to: (1) the value associated with avoiding the cost of originating the acquired in-place leases; (2) the value associated with lost revenue related to tenant reimbursable operating costs estimated to be incurred during the assumed lease-up period; and (3) the value associated with lost rental revenue from existing leases during the assumed lease-up period. Factors considered in performing these analyses include an estimate of the carrying costs during the expected lease-up periods, such as real estate taxes, insurance and other operating expenses, current market conditions, and costs to execute similar leases, such as leasing commissions, legal and other related expenses.
The amounts recorded for above-market and in-place 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 determination of the fair value of the acquired tangible and intangible assets and assumed liabilities of operating property acquisitions requires significant judgments and assumptions about the numerous inputs discussed above. The use of different assumptions in these fair value calculations could significantly affect the reported amounts of the allocation of the acquisition related assets and liabilities and the related amortization and depreciation expense recorded for such assets and liabilities. In addition, since the value of above-market and below-market leases are amortized as either a reduction or increase to rental income, respectively, the judgments for these intangibles could have a significant impact on reported rental revenues and results of operations.
Depreciation and Amortization. The Company depreciates or amortizes operating real estate assets over their estimated useful lives using the straight-line method of depreciation. Management uses judgment when estimating the life of real estate assets and when allocating certain indirect project costs to projects under development. Historical data, comparable properties and replacement costs are some of the factors considered in determining useful lives and cost allocations. The use of different assumptions for the estimated useful life of assets or cost allocations could significantly affect depreciation and amortization expense and the carrying amount of the Company's real estate assets.
Impairment. Management reviews its real estate assets on a property-by-property basis for impairment. This review includes the Company’s operating properties and the Company’s land holdings.

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The first step in this process is for management to use judgment to determine whether an asset is considered to be held and used or held for sale, in accordance with accounting guidance. In order to be considered a real estate asset held for sale, management 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 management determines that an asset is held for sale, it must record an impairment loss if the fair value less costs to sell is less than the carrying amount. All real estate assets not meeting the held for sale criteria are considered to be held and used.
In the impairment analysis for assets held and used, management must use judgment to determine whether there are indicators of impairment. For operating properties, these indicators could include a decline in a property’s leasing percentage, a current period operating loss or negative cash flows combined with a history of losses at the property, a decline on lease rates for that property or others in the property’s market, 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.
If management determines that an asset that is held and used has indicators of impairment, it 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, the Company must reduce the carrying amount of the asset to fair value.
In calculating the undiscounted net cash flows of an asset, management must estimate a number of inputs. For operating properties, management must estimate future rental rates, expenditures for future leases, future operating expenses and market capitalization rates for residual values, among other things. For land holdings, management must estimate future sales prices as well as operating income, carrying costs and residual capitalization rates for land held for future development. In addition, if there are alternative strategies for the future use of the asset, management must assess the probability of each alternative strategy and perform a probability-weighted undiscounted cash flow analysis to assess the recoverability of the asset. Management must 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, management exercises judgment on a number of factors. Management may determine fair value by using a discounted cash flow calculation or by utilizing comparable market information. Management must determine an appropriate discount rate to apply to the cash flows in the discounted cash flow calculation. Management must use judgment in analyzing comparable market information because no two real estate assets are identical in location and price.
The estimates and judgments used in the impairment process are highly subjective and susceptible to frequent change. If management determines that an asset is held and used, the results of operations could be materially different than if it determines that an asset is held for sale. Different assumptions management uses in the calculation of undiscounted net cash flows of a project, including the assumptions associated with alternative strategies and the probabilities associated with alternative strategies, could cause a material impairment loss to be recognized when no impairment is otherwise warranted. Management’s assumptions about the discount rate used in a discounted cash flow estimate of fair value and management’s judgment with respect to market information could materially affect the decision to record impairment losses or, if required, the amount of the impairment losses.
Recoveries from Tenants
Recoveries from tenants for operating expenses are determined on a calendar year and on a lease by lease basis. The most common types of cost reimbursements in our leases are common area maintenance, real estate taxes and insurance, for which the tenant pays its pro rata share in excess of a base year amount, if applicable. The computation of these amounts is complex and involves numerous judgments, including the interpretation of terms and other customer lease provisions. Leases are not uniform in dealing with such cost reimbursements and there are many variations in the computation. Many tenants make monthly fixed payments of these operating expenses. We accrue income related to these payments each month. We make monthly accrual adjustments, positive or negative, to recorded amounts to our best estimate of the annual amounts to be billed and collected with respect to the cost reimbursements. After the end of the calendar year, we compute each customer's final cost reimbursements and, after considering amounts paid by the tenant during the year, issue a bill or credit for the appropriate amount to the tenant. The differences between the amounts billed less previously received payments and the accrual adjustments are recorded as increases or decreases to revenues when the final bills are prepared, which occurs during the first half of the subsequent year.
Revenue Recognition – Valuation of Receivables
Notes and accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The Company reviews its receivables regularly for potential collection problems in computing the allowance to record against its receivables. This review requires management to make certain judgments regarding collectibility, notwithstanding the fact that ultimate collections are inherently difficult to predict. Economic conditions fluctuate over time, and the Company has tenants in many different industries which experience changes in economic health, making collectibility prediction difficult. Therefore, certain receivables currently deemed collectible could become uncollectible, and those reserved could ultimately be collected. A

25


change in judgments made could result in an adjustment to the allowance for doubtful accounts with a corresponding effect on net income.
Income Taxes – Valuation Allowance
The Company establishes a valuation allowance against deferred tax assets if, based on the available evidence, it is more likely than not that such assets will not be realized. The realization of a deferred tax asset ultimately depends on the existence of sufficient taxable income in either the carryback or carryforward periods under tax law. The Company periodically assesses the need for valuation allowances for deferred tax assets based on the "more-likely-than-not" realization threshold criterion. In the assessment, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment requires considerable judgment by management and includes, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, its experience with operating loss and tax credit carryforwards and tax planning alternatives. If management determines that the Company requires a valuation allowance on its deferred tax assets, income tax expense or benefit could be materially different than if management determines no such valuation allowance is necessary.
Investment in Joint Ventures
The Company holds ownership interests in a number of joint ventures with varying structures. Management evaluates all of its joint ventures and other variable interests to determine if the entity is a variable interest entity (“VIE”), as defined in accounting rules. If the venture is a VIE, and if management determines that the Company is the primary beneficiary, the Company consolidates the assets, liabilities and results of operations of the VIE. The Company quarterly reassesses its conclusions as to whether the entity is a VIE and whether consolidation is appropriate as required under the rules. For entities that are not determined to be VIEs, management evaluates whether or not the Company has control or significant influence over the joint venture to determine the appropriate consolidation and presentation. Generally, entities under the Company’s control are consolidated, and entities over which the Company can exert significant influence, but does not control, are accounted for under the equity method of accounting.
Management uses judgment to determine whether an entity is a VIE, whether the Company is the primary beneficiary of the VIE and whether the Company exercises control over the entity. If management determines that an entity is a VIE with the Company as primary beneficiary or if management concludes that the Company exercises control over the entity, the balance sheets and statements of comprehensive income would be significantly different than if management concludes otherwise. In addition, VIEs require different disclosures in the notes to the financial statements than entities that are not VIEs. Management may also change its conclusions and, thereby, change its balance sheets, statements of comprehensive income and notes to the financial statements, based on facts and circumstances that arise after the original consolidation determination is made. These changes could include additional equity contributed to entities, changes in the allocation of cash flow to entity partners and changes in the expected results within the entity.
Management performs an impairment analysis of the recoverability of its investments in joint ventures on a quarterly basis. As part of this analysis, management first determines whether there are any indicators of impairment in any joint venture investment. If indicators of impairment are present for any of the Company’s investments in joint ventures, management calculates the fair value of the investment. If the fair value of the investment is less than the carrying value of the investment, management must determine whether the impairment is temporary or other than temporary, as defined by GAAP. If management assesses the impairment to be temporary, the Company does not record an impairment charge. If management concludes that the impairment is other than temporary, the Company records an impairment charge.
Management uses considerable judgment in the determination of whether there are indicators of impairment present and in the assumptions, estimations and inputs used in calculating the fair value of the investment. These judgments are similar to those outlined above in the impairment of real estate assets. Management also uses judgment in making the determination as to whether the impairment is temporary or other than temporary. The Company utilizes guidance provided by the SEC in making the determination of whether the impairment is temporary. The guidance indicates that companies consider the length of time that the impairment has existed, the financial condition of the joint venture and the ability and intent of the holder to retain the investment long enough for a recovery in market value. Management’s judgment as to the fair value of the investment or on the conclusion of the nature of the impairment could have a material impact on the results of operations and financial condition of the Company.
Discussion of New Accounting Pronouncements
In June 2011, the FASB issued new guidance related to the presentation of other comprehensive income (“OCI”). The new guidance requires, among other items, the presentation of the components of net income and OCI in one continuous statement or in two separate but consecutive statements. In 2012, the Company reclassified OCI from the statements of equity to the statements of comprehensive income. As the requirement pertains to presentation and disclosure only, adoption of this guidance did not have a material effect on results of operations or financial condition.
Results of Operations For The Three Years Ended December 31, 2012

26


General
The Company's financial results have historically been significantly affected by purchase and sale transactions. Accordingly, the Company's historical financial statements may not be indicative of future operating results.
Rental Property Revenues
Rental property revenues increased $20.0 million (19%) between 2012 and 2011 as a result of the following:
Increase of $15.1 million as a result of the Promenade acquisition in 2011;
Increase of $4.8 million as a result of the 2100 Ross acquisition;
Increase of $1.4 million at 191 Peachtree Tower as a result of an increase in average economic occupancy;
Increase of $353,000 at 600 University as a result of an increase in average economic occupancy;
Increase of $351,000 at Mahan Village as a result of the commencement of operations;
Decrease of $2.5 million at 555 North Point as a result of the termination of a lease in 2011. The vacated space has been re-leased to a tenant whose lease commenced in the fourth quarter of 2012;
Decrease of $495,000 at American Cancer Society Center (“ACS Center”) as a result of a decrease in average economic occupancy; and
Decrease of $399,000 at Terminus 100 as a result of lower recoverable expense revenues and a slight decrease in average economic occupancy.
Rental property revenues increased $3.9 million (4%) between 2011 and 2010 as a result of the following:
Increase of $1.6 million as a result of the Promenade acquisition in 2011;
Increase of $1.0 million at 191 Peachtree Tower as a result of an increase in average economic occupancy and an increase in parking revenues;
Increase of $854,000 at ACS Center as a result of an increase in average economic occupancy;
Increase of $830,000 at Terminus 100 due to an increase in average economic occupancy and an increase in parking revenues; and
Decrease of $369,000 at 600 University Park Place as a result of a decrease in average economic occupancy.
Rental Property Operating Expenses
Rental property operating expenses increased $9.6 million (21%) between 2012 and 2011 as a result of the following:
Increase of $7.0 million as a result of the 2011 acquisition of Promenade;
Increase of $3.3 million as a result of the 2100 Ross acquisition; and
Decrease of $670,000 at Terminus 100 as a result of lower bad debt expense and lower utilities.
Rental property operating expenses increased $1.5 million (3%) between 2011 and 2010 primarily as a result of the 2011 Promenade acquisition.
Fee Income
Fee income increased approximately $4.0 million (29%) between 2012 and 2011. This increase is primarily due to the receipt of a $4.5 million participation interest related to a contract that the Company assumed in the acquisition of an entity several years ago. Under this contract, the Company is entitled to receive a portion of the proceeds from the sale of a project that the entity developed and from payments received from a related seller-financed note. The Company may receive additional proceeds under this contract in future periods. Partially offsetting this amount were lower leasing fees earned in 2012 from MSREF/Terminus200 LLC (“MSREF/T200”) and Ten Peachtree Place Associates, which was sold in 2012.
Fee income decreased $623,000 (4%) between 2011 and 2010. This decrease is primarily the result of a decrease in leasing fees from Palisades West LLC and MSREF/T200 as a result of these properties no longer being in the lease-up stage and, therefore, signing fewer leases.
Multi-Family Residential Sales and Cost of Sales

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Multi-family residential unit sales and cost of sales decreased significantly in both 2012 and 2011. The Company has been liquidating its holdings of unsold multi-family units over the past three years and has commenced no new multi-family residential development projects during that time. In 2012, 2011 and 2010, the Company sold two, five and 75 units at 10 Terminus Place. In future periods, the Company does not expect to recognize any significant revenues or expenses from multi-family residential sales.
General and Administrative Expenses
General and administrative expenses decreased approximately $958,000 (4%) between 2012 and 2011 as a result of the following:
Decrease in employee salaries and benefits, other than stock-based compensation, of approximately $3.2 million due to a decrease in the number of corporate employees between 2012 and 2011;
Increase in stock-based compensation expense of $3.1 million primarily due to an increase in the Company's stock price between years;
Increase in capitalized salaries of $734,000 as a result of increased development activity; and
Decrease in professional fees of $477,000 as a result of the Company's simpler structure and cost cutting measures.
G&A expense decreased approximately $4.4 million (15%) between 2011 and 2010 as a result of the following:
Decrease in employee salaries and benefits, other than stock-based compensation, of approximately $1.7 million primarily due to a decrease in the number of corporate employees between 2011 and 2010;
Decrease in stock-based compensation expense of $1.7 million primarily due to a decline in the Company's stock price between years;
Decrease of $298,000 due to a decrease in professional fees as a result of the Company's simpler structure and cost cutting measures; and
Increase of $327,000 in board of director's expenses, mainly due to a change in director compensation in 2011.
Separation Expenses
Separation expenses increased $1.8 million between 2012 and 2011 and decreased approximately $848,000 between 2011 and 2010. The Company had reductions in force in each of the years presented, which varied by number of employees and positions between years. In 2012, the Company executed a strategic re-organization in connection with the sale of its third party management business and overall simplification of its business. As a result, in the last half of 2012, the Company terminated or experienced the retirement of 20 corporate level individuals and recorded severance expense as a result. Separation expenses in 2010 related primarily to the retirement of the Company's Chief Financial Officer.
Interest Expense
Interest expense decreased $3.9 million (14%) between 2012 and 2011 as a result of the following:
Lower interest expense related to lower average borrowings under the Credit Facility resulting from asset sales during 2012;
Lower interest expense as a result of the prepayment of the 100/200 North Point mortgage loan in 2012;
Lower interest expense as a result of the repayment of the 600 University Place mortgage loan, the 333/555 North Point mortgage loan and the Lakeshore Park Plaza mortgage loan in 2011;
Lower interest expense due to higher capitalized interest in 2012; and
Higher interest expense related to a new mortgage loan on 191 Peachtree Tower that closed in the first quarter of 2012.
Interest expense decreased $9.4 million (25%) between 2011 and 2010 as a result of the following:
Lower interest expense related to the repayment of $56.2 million of higher cost fixed-rate mortgage debt using proceeds from the lower-rate Credit Facility;
Lower interest expense as a result of the termination of two interest rate swaps in 2010 which had effectively fixed certain variable-rate debt at a rate higher than the variable rate paid in 2011;

28


Lower interest expense from the Terminus 100 mortgage note payable, which was refinanced in 2010 at a lower interest rate and a $40.0 million reduction in principal; and
Higher interest expense due to higher average amounts outstanding under the Credit Facility, mainly due to 2011 equity contributions to construct Emory Point and Mahan Village and to acquire Promenade in 2011, partially offset by proceeds from asset sales.
Depreciation and Amortization
Depreciation and amortization increased approximately $9.0 million (26%) between 2012 and 2011 as a result of the following:
Increase of $6.8 million as a result of the Promenade acquisition in 2011;
Increase of $2.3 million as a result of the 2100 Ross acquisition;
Increase of $427,000 at ACS Center as a result of the amortization of additional second generation tenant assets;
Increase of $420,000 at 191 Peachtree Tower as a result of the amortization of additional second generation tenant assets;
Decrease of $1.0 million at 555 North Point Center East due to accelerated amortization recognized in 2011 of tenant assets for a tenant that terminated its lease prior to the originally scheduled end date; and
Decrease of $385,000 related to corporate assets that became fully amortized during the year.
Depreciation and amortization decreased approximately $2.1 million (6%) between 2011 and 2010 as a result of the following:
Decrease of $2.4 million from 191 Peachtree Tower due to accelerated amortization in 2010 of tenant assets for a tenant that terminated its lease prior to the originally scheduled end date, partially offset by higher tenant improvement amortization from increased occupancy;
Decrease of $843,000 from Terminus 100 due to accelerated amortization in 2010 of retail tenants that terminated their leases prior to the originally scheduled end date;
Increase of $727,000 at 555 North Point Center East, due to accelerated amortization of tenant assets for a tenant that terminated its lease prior to the originally scheduled end date;
Increase of $713,000 from the 2011 acquisition of Promenade; and
Increase of $418,000 from increased occupancy at the ACS Center.
Impairment Losses
During 2012, the Company incurred an impairment loss of $488,000 on its investment in Verde Realty (“Verde”), a cost method investment in a non-public real estate investment trust, as a result of a merger of Verde into another company at a price per share less than the Company's carrying amount.
During 2011, management began a strategic review and analysis of its residential and land businesses, as well as certain of its operating properties, in an attempt to determine the most effective way to maximize the value of its holdings. In February 2012, the Company determined that it would liquidate its holdings of certain non-core assets in bulk on a more accelerated timeline and at lower prices than initially planned and re-deploy this capital, primarily into office properties within its core markets. As part of this process, in the fourth quarter of 2011, the Company revised the cash flow projections for its residential holdings as well as two operating properties that were being held for long term investment opportunities. The cash flow revisions reflected a higher probability that the Company would sell the assets in the short term than holding them for long term investment and development opportunities. These cash flow revisions indicated that the undiscounted cash flows of 12 residential and land projects, as well as two operating properties, were less than their carrying amounts, and the Company recorded impairment losses of $104.3 million to adjust these carrying amounts to fair value. The Company reclassified $7.6 million of these amounts to discontinued operations in 2012. Earlier in 2011, the Company recorded an other-than-temporary impairment loss of $3.5 million on its investment in Verde to adjust the carrying amount of the Company's investment to fair value, as a result of an analysis performed in connection with Verde's withdrawal of its proposed public offering.
During 2010, the Company recorded an impairment loss of $2.0 million on Handy Road, an encumbered, undeveloped parcel of land in suburban Atlanta, Georgia that the Company was holding for future development or sale, because the Company determined that it would convey the land to the lending bank through foreclosure. In addition, in 2010, the Company recorded an impairment loss of $586,000 on 60 North Market, a multi-family residential project in Asheville, North Carolina, because it determined the estimated selling prices of the units had declined since its acquisition.

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Most of the Company's real estate assets are considered to be held for use pursuant to the accounting rules. If management's strategy changes on any of these assets, the Company may be required to record significant impairment charges in future periods. Changes that could cause these impairment losses include: (1) a decision by the Company to sell the asset rather than hold for long-term investment or development purposes, or (2) changes in management's estimates of future cash flows from the assets that cause the future undiscounted cash flows to be less than the asset's carrying amount. Given the uncertainties with the economic environment, management cannot predict whether or not the Company will incur impairment losses in the future, and if impairment losses are recorded, management cannot predict the magnitude of such losses.
Loss on Extinguishment of Debt and Interest Rate Swaps
In 2012, the Company amended and restated its Credit Facility and as a result, charged $94,000 of unamortized loan costs to expense. In 2011, the Company prepaid the Lakeshore Park Plaza mortgage note and as a result, charged $74,000 of unamortized loan costs to expense. In 2010, the Company incurred a fee of $9.2 million to terminate an interest rate swap on a term loan. In addition, in 2010, the Company restructured its Credit Facility and as a result, charged $592,000 in unamortized loan costs to expense.
Income (Loss) from Unconsolidated Joint Ventures
In 2012, 2011 and 2010, the Company had a considerable amount of activity that affected income (loss) from unconsolidated joint ventures. In 2012, the Company sold its interest in Palisades West LLC for $64.8 million and recognized a gain from unconsolidated entities of $23.3 million associated with this sale. In addition, Ten Peachtree Place Associates sold the Ten Peachtree Place building to a third party. The Company received proceeds from this sale of $5.1 million and recognized a gain from unconsolidated joint ventures of $7.3 million associated with this sale. CP Venture Two LLC sold Presbyterian Medical Plaza to a third party in 2012 and the Company received proceeds from the sale of $450,000 and recognized a gain of $167,000 associated with this sale. In addition, in 2012, the Emory Point development project became operational within EP I LLC and the Company recorded $330,000 in its share of the losses from the start-up operations.
In 2011, Temco Associates (“Temco”) and CL Realty, L.L.C. (“CL Realty”) recorded impairment losses in income from unconsolidated joint ventures on assets held by each entity. During 2011, Temco and CL Realty updated cash flow projections for its projects and determined the cash flows to be generated by certain projects were less than their carrying amounts. Consequently, Temco and CL Realty recorded impairment losses to record these assets at fair value, the Company's share of which was $14.6 million for Temco and $13.6 million for CL Realty. In the first quarter of 2012, Forestar Realty Inc., the Company's 50% partner in each venture, purchased the majority of the ventures' residential project and land acreage. The Company's share of the proceeds from this transaction was $23.5 million and neither venture recognized a significant gain or loss on the transaction since the purchase price approximated the carrying amounts of the assets sold. Also in 2011, the Company recognized income from the newly-formed Cousins Watkins LLC, which caused income from unconsolidated joint ventures to increase $2.4 million.
In 2010, CL Realty recognized an impairment loss as a result of a decision to sell rather than develop a parcel of land in Padre Island, Texas, which required CL Realty to reduce the carrying cost of the parcel to fair value. The Company's share of this impairment loss was $2.2 million. In 2010, CL Realty also recognized $5.2 million in gains on lot and tract sales.
The Company's share of income from CP Venture Five LLC, Charlotte Gateway Village, LLC and Crawford Long - CPI, LLC remained consistent over the three year period ended December 31, 2012. Going forward, the Company will not recognize any income from Palisades West LLC or Ten Peachtree Place Associates as a result of the sales noted above. Amounts recognized by the Company from CP Venture Two LLC will be slightly lower as a result of the sale of Presbyterian Medical Plaza discussed above.
Discontinued Operations
Accounting rules require that certain assets that were sold or plan to be sold be treated as discontinued operations and that the results of their operations and any gains on sales from these properties are shown as a separate component of income in the statements of comprehensive income for all periods presented. The following is a summary of the assets included in discontinued operations for each of the three years in the period ended December 31, 2012.
In 2012, the Company sold the following retail assets: The Avenue Collierville, a 511,000 square foot center in Memphis, Tennessee, for a sales price of $55.0 million; The Avenue Forsyth, a 524,000 square foot center in Atlanta, Georgia for a sales price of $119.0 million; and The Avenue Webb Gin, a 322,000 square foot center in Atlanta, Georgia for a sales price of $59.6 million. The weighted average capitalization rates for these three retail project was 7.8%. The Company also sold Galleria 75, a 111,000 square foot office building in Atlanta, Georgia, for a sales price of $9.2 million and a capitalization rate of 9.5%. In 2012, the Company also sold Cosmopolitan Center, a 51,000 square foot office building for a sales price of $7.0 million. The capitalization rate of Cosmopolitan Center was not a significant determinant of the sales price as it was being sold for its underlying land value

30


as opposed to its in-place income stream. In the fourth quarter of 2012, the Company determined that Inhibitex, a 51,000 square foot office building in Atlanta, Georgia met the requirements for discontinued operations.
Included in discontinued operations for 2012 were impairment losses recorded on The Avenue Collierville and Inhibitex in the amounts of $12.2 million and $1.6 million, respectively. The Company sold The Avenue Collierville for an amount lower than its carrying value and recorded the impairment loss as a result. When the Company determined that Inhibitex was held for sale in accordance with applicable accounting rules, it determined that the fair value of the asset less expected closing costs were lower than the carrying amount and recorded an impairment loss as a result. Included in discontinued operations for 2011 were impairment losses on Cosmopolitan Center and Galleria 75 in the amounts of $4.7 million and $2.9 million, respectively. The Company recorded this impairment loss in connection with the strategic review of its land and other holdings discussed in note 6 of notes to consolidated financial statements included in this Annual Report on Form 10-K. The Company reclassified this impairment loss to discontinued operations in 2012 when the related assets qualified for discontinued operations treatment.
In 2012, the Company also sold its third party management and leasing business to Cushman & Wakefield. Under the terms of the agreement, the Company has the potential to receive up to $15.4 million in gross sales proceeds, of which approximately 63.5% was received at closing. The final purchase price is subject to working capital adjustments, an earn out based on the performance of the contributed management and leasing contracts and the potential contribution of additional management and/or leasing contracts, all of which the Company expects to be substantially resolved by October 1, 2013. The Company recognized a gain on this transaction of $7.5 million and will recognize additional gains if and when additional consideration is earned. As a result of this sale, the operations of the Company's third party management and leasing business were reclassified to discontinued operations.
In 2011, the Company sold One Georgia Center, a 376,000 square foot office building in Atlanta, Georgia, for a sales price of $48.6 million, which corresponded to a capitalization rate of 8.0%. Also in 2011, the Company sold Jefferson Mill, a 459,000 square foot industrial property in suburban Atlanta, Georgia for a sales price of $22.0 million, and King Mill, a 796,000 square foot industrial property in suburban Atlanta, Georgia for a sales price of $28.3 million. The weighted average capitalization rate for these two industrial projects combined was 7.6%. The Company also sold Lakeside in 2011, a 749,000 square foot industrial property in Dallas, Texas for a sales price of $28.4 million. The capitalization rate of this property was not a significant determinant of the sales price, partly due to the fact that the transaction included related tracts of undeveloped land.
In 2010, the Company sold San Jose MarketCenter, a 213,000 square foot retail center in San Jose, California, for a sales price of $85.0 million and a capitalization rate of approximately 8%. The Company sold 8995 Westside Parkway, a 51,000 square foot office building in suburban Atlanta, Georgia for $3.2 million. The capitalization rate of 8995 Westside Parkway was not a significant determinant of the sales price because this building had no leases at the time of sale. Capitalization rates are generally calculated by dividing projected annualized cash flows by the sales price.
Net Income Attributable to Noncontrolling Interest
The Company consolidates certain entities and allocates the partner's share of those entities' results to net income attributable to noncontrolling interests on the statements of comprehensive income. The noncontrolling interests' share of the Company's net income decreased $2.8 million between 2012 and 2011, and increased $2.4 million between 2011 and 2010. In 2012, $2.1 million was allocated to the noncontrolling partner in the entity which owned the property in connection with the sale of The Avenue Collierville. Also in 2012, $1.8 million of the gain on the sale of The Avenue Forsyth was allocated to the noncontrolling partner in the entity which owned the property. In 2011, $1.6 million of the gain on sale of One Georgia Center was allocated to the noncontrolling partner in the entity which owned the property. Also in 2011, $1.4 million of the gain on sale of King Mill was allocated to the noncontrolling partner in the entity which owned the property.
Funds from Operations
The table below shows Funds from Operations Available to Common Stockholders (“FFO”) and the related reconciliation to net income (loss) available to common stockholders for the Company. The Company calculates FFO in accordance with the National Association of Real Estate Investment Trusts’ (“NAREIT”) definition, which is net income available to common stockholders (computed in accordance with GAAP), excluding extraordinary items, cumulative effect of change in accounting principle and gains on sale or impairment losses on depreciable property, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures to reflect FFO on the same basis.
FFO is used by industry analysts and investors as a supplemental measure of a REIT’s operating performance. 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. The use of FFO, combined with the required primary GAAP presentations,

31


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. Company management evaluates operating performance in part based on FFO. Additionally, the Company uses FFO, along with other measures, to assess performance in connection with evaluating and granting incentive compensation to its officers and other key employees. The reconciliation of net income (loss) available to common stockholders to FFO is as follows for the years ended December 31, 2012, 2011 and 2010 (in thousands, except per share information):

Years Ended December 31,

2012
 
2011
 
2010
Net Income (Loss) Available to Common Stockholders
$
32,821

 
$
(141,332
)
 
$
(27,480
)
Depreciation and amortization:
 
 
 
 
 
Consolidated properties
43,559

 
34,580

 
36,710

Discontinued properties
9,344

 
19,481

 
23,268

Share of unconsolidated joint ventures
10,230

 
10,357

 
9,661

Depreciation of furniture, fixtures and equipment:
 
 
 
 
 
Consolidated properties
(1,075
)
 
(1,688
)
 
(1,884
)
Discontinued properties

 

 
(5
)
Share of unconsolidated joint ventures
(15
)
 
(20
)
 
(22
)
Impairment losses on depreciable investment properties, net of amounts attributable to noncontrolling interests
11,748

 
7,632

 

Gain on sale of investment properties:
 
 
 
 
 
Consolidated properties
(4,318
)
 
(3,494
)
 
(1,938
)
Discontinued properties, net of gain attributable to noncontrolling interests
(16,292
)
 
(5,649
)
 
(7,226
)
Share of unconsolidated joint ventures
(30,662
)
 

 

Gain on sale of undepreciated investment properties
3,693

 
3,258

 
1,697

Gain on sale of third party management and leasing business
7,459

 

 

Funds From Operations Available to Common Stockholders
$
66,492

 
$
(76,875
)
 
$
32,781

Per Common Share—Basic:
 
 
 
 
 
Net Income (Loss) Available
$
0.32

 
$
(1.36
)
 
$
(0.27
)
Funds From Operations
$
0.64

 
$
(0.74
)
 
$
0.32

Weighted Average Shares—Basic
104,117

 
103,651

 
101,440

Per Common Share—Diluted:
 
 
 
 
 
Net Income (Loss) Available
$
0.32

 
$
(1.36
)
 
$
(0.27
)
Funds From Operations
$
0.64

 
$
(0.74
)
 
$
0.32

Weighted Average Shares—Diluted
104,125

 
103,655

 
101,440

Liquidity and Capital Resources
The Company’s primary liquidity sources are:
Net cash from operations;
Sales of assets;
Borrowings under its Credit Facility;
Proceeds from mortgage notes payable;
Proceeds from equity offerings; and
Joint venture formations.
The Company’s primary liquidity uses are:
Corporate expenses;
Payments of tenant improvements and other leasing costs;
Principal and interest payments on debt obligations;
Dividends to common and preferred stockholders;
Property acquisitions; and
Expenditures on predevelopment and development projects.
Financial Condition

32


During 2012 and 2011, the Company improved its financial position by reducing leverage, extending maturities, replacing higher cost mortgage notes with lower cost financing and modifying its Credit Facility, all of which increased overall financial flexibility. The Company expects to fund its current commitments over the next 12 months with cash flows from operations, borrowings under its Credit Facility, borrowings under new or renewed mortgage loans, proceeds from the sale of assets and proceeds from equity offerings. The Company amended its $350 million Credit Facility in the first quarter of 2012, extending the maturity from August 2012 to February 2016, with a one-year extension under certain situations, and adding an accordion feature that allows it to increase capacity under the Credit Facility to $500 million. Also in the first quarter of 2012, the Company entered into a $100 million mortgage note payable secured by 191 Peachtree Tower that matures in 2018. Proceeds from this loan were used to reduce amounts outstanding under the Credit Facility. The Company had a $24.5 million fixed-rate mortgage loan maturing in June 2012, which was prepaid in April 2012. There are no significant maturities over the next 12 months.
In 2012, the Company sold operating properties, its third party management and leasing business, land, its interest in real estate joint ventures and other non-core assets, generating proceeds of $401.2 million. With these proceeds, the Company acquired an operating property for $63.4 million, repaid all amounts outstanding under its Credit Facility and held excess cash on its balance sheet as of December 31, 2012.
In February 2013, the Company purchased the remaining 80% interest in MSREF/T200, repaid the mortgage loan on Terminus 200, sold 50% of its interest in Terminus 100 and Terminus 200 to JP Morgan and purchased Post Oak Central as discussed in note 9 of notes to consolidated financial statements. The Company funded this series of transactions with cash on hand and borrowings under its Credit Facility. Subsequent to these transactions, the Company had $85.0 million outstanding under its Credit Facility.
The Company may seek additional acquisitions and opportunistic investments in 2013 and beyond and expects to fund these activities with one or more of the following: sale of additional non-core assets, additional borrowings under its Credit Facility, mortgage loans on existing and newly acquired properties, the issuance of common or preferred equity and joint venture formation with third parties.
Contractual Obligations and Commitments
At December 31, 2012, the Company was subject to the following 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:
 
 
 
 
 
 
 
 
 
Construction loan
$
13,027

 
$

 
$
13,027

 
$

 
$

Mortgage notes payable
412,383

 
4,775

 
10,045

 
152,787

 
244,776

Interest commitments (1)
143,811

 
21,929

 
42,828

 
38,763

 
40,291

Ground leases
15,400

 
117

 
241

 
255

 
14,787

Other operating leases
619

 
196

 
283

 
100

 
40

Total contractual obligations
$
585,240

 
$
27,017

 
$
66,424

 
$
191,905

 
$
299,894

Commitments:
 
 
 
 
 
 
 
 
 
Unfunded tenant improvements and other
13,337

 
13,033

 
304

 

 

Letters of credit
2,105

 
2,105

 

 

 

Performance bonds
537

 
377

 
60

 
100

 

Total commitments
$
15,979

 
$
15,515

 
$
364

 
$
100

 
$

 
(1)
Interest on variable rate obligations is based on rates effective as of December 31, 2012.
In addition, the Company has several standing or renewable service contracts mainly related to the operation of its buildings. These contracts were entered into in the ordinary course of business and are generally one year or less. These contracts are not included in the above table and are usually reimbursed in whole or in part by tenants.
The Company repaid one mortgage loan during 2012 totaling $24.5 million. This loan had an interest rate of 5.39%, which is higher than the rate paid on the Company’s Credit Facility and the weighted average rate on the Company’s other debt. The Company repaid this note to provide flexibility to sell these assets or refinance them at a later date, depending upon its strategic direction.

33


In 2012, the Company entered into a $100 million mortgage note payable, secured by an office building. The loan has an interest rate of 3.35% and matures in 2018. Proceeds from this loan were used to reduce amounts outstanding under the Credit Facility.
In 2011, the Company entered into a construction loan to fund a development project. The Company expects to fund the majority of its future joint venture development projects with construction loans, as long as the terms remain attractive to other capital sources.
The Company’s existing mortgage debt is primarily non-recourse, fixed-rate mortgage notes secured by various real estate assets. Many of the Company’s non-recourse mortgages contain covenants which, if not satisfied, could result in acceleration of the maturity of the debt. The Company expects that it will either refinance the non-recourse mortgages at maturity or repay the mortgages with proceeds from other financings. As of December 31, 2012, the weighted average interest rate on the Company’s consolidated debt was 5.14%, and the Company’s consolidated debt to undepreciated assets ratio was 35.3%.
Credit Facility Information
The Company amended its $350 million Credit Facility in the first quarter of 2012, extending the maturity from August 2012 to February 2016, with a one-year extension under certain situations and adding an accordion feature that allows it to increase capacity under the Credit Facility to $500 million. The Company’s Credit Facility bears interest at the London Interbank Offered Rate (“LIBOR”) plus a spread, based on the Company’s leverage ratio, as defined in the Credit Facility. At December 31, 2012, the Company had no funds drawn on the facility. The amount that the Company may draw under the Credit Facility is a defined calculation based on the Company’s unencumbered assets and other factors and is reduced by both letters of credit and borrowings outstanding.
The Credit Facility includes customary events of default, including, but not limited to, the failure to pay any interest or principal when due, the failure to perform under covenants of the credit agreement, incorrect or misleading representations or warranties, insolvency or bankruptcy, change of control, the occurrence of certain ERISA events and certain judgment defaults. The amounts outstanding under the Credit Facility may be accelerated upon an event of default. The Credit Facility contains restrictive covenants pertaining to the operations of the Company, including limitations on the amount of debt that may be incurred, the sale of assets, transactions with affiliates, dividends and distributions. The Credit Facility also includes certain financial covenants (as defined in the agreement) that require, among other things, the maintenance of an unencumbered interest coverage ratio of at least 2.00; a fixed charge coverage ratio of at least 1.40, increasing to 1.50 during the extension period; and a leverage ratio of no more than 60%. The Company is currently in compliance with its financial covenants.
Future Capital Requirements
Over the long term, management intends to actively manage its portfolio of properties and strategically sell assets to exit its non-core holdings, reposition its portfolio of income-producing assets geographically and by product type, and generate capital for future investment activities. The Company expects to continue to utilize indebtedness to fund future commitments and expects to place long-term mortgages on selected assets as well as to utilize construction facilities for development assets, if available and under appropriate terms.
The Company may also generate capital through the issuance of securities that include common or preferred stock, warrants, debt securities or depositary shares. In March 2010, the Company filed a shelf registration statement to allow for the issuance of up to $500 million of such securities, of which $482 million remains to be drawn as of December 31, 2012. Management will continue to evaluate all public equity sources and select the most appropriate options as capital is required.
The Company’s business model is dependent upon raising or recycling capital to meet obligations. If one or more sources of capital are not available when required, the Company may be forced to reduce the number of projects it acquires or develops and/or raise capital on potentially unfavorable terms, or may be unable to raise capital, which could have an adverse effect on the Company’s financial position or results of operations.
Cash Flows
The reasons for significant increases and decreases in cash flows between the years are as follows:
Cash Flows from Operating Activities
Cash flows from operating activities increased $39.7 million between 2012 and 2011 due to the following:
Increase of $28.5 million in operating distributions from joint ventures due to the sale of the Company's interest in Palisades West LLC and distribution the Company received from Ten Peachtree Place Associates as a result of the sale of the Ten Peachtree Place building;

34


Increase of $3.5 million due to the receipt of a lease termination fee;
Increase of $3.4 million related to a participation interest in a former development project; and
Increase of $2.8 million as a result of lower interest paid due to lower average debt outstanding.
Cash flows from operating activities decreased approximately $24.1 million between 2011 and 2010 due to the following:
Decrease of $27.8 million from multi-family residential unit sales due to a lower number of units sold in 2011 compared to 2010 at both the Company's 10 Terminus and 60 North Market condominium projects;
Increase of $9.2 million as a result of the 2010 payment of a fee for an interest rate swap termination;
Increase of $9.7 million as a result of lower interest paid due to lower average debt outstanding and lower average interest rates in 2011;
Increase of $2.2 million from residential lot, outparcel and multi-family acquisition and development expenditures due to a decrease in development activities for those property types between 2011 and 2010;
Decrease of $14.3 million from lower proceeds from outparcel sales. There were no outparcel sales in 2011, compared to eight outparcel sales in 2010; and
Decrease of $2.8 million from a decrease in income taxes refunded between 2011 and 2010.
Cash Flows from Investing Activities
Net cash from investing activities increased $286.8 million between 2012 and 2011 due to the following:
Increase of $129.8 million from investment property sales. In 2012, the Company sold six operating properties and four tracts of land. In 2011, the Company sold four operating properties and three tracts of land.
Increase of $76.8 million from a decrease in acquisition, development