UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________
FORM 10-K
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the fiscal year ended December 31 , 2020
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
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(Exact name of registrant as specified in its charter)
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Securities registered pursuant to Section 12(b) of the Act:
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Securities registered pursuant to Section 12(g) of the Act: None
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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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ý | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
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 30, 2020, the aggregate market value of the common stock of Cousins Properties Incorporated held by non-affiliates was $4,460,913,956 based on the closing sales price as reported on the New York Stock Exchange. As of January 31, 2021, 148,566,470 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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. | ||||||||
| 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 herein. These forward-looking statements include information about possible or assumed future results of the business and our 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:
•guidance and underlying assumptions;
•business and financial strategy;
•future debt financings;
•future acquisitions and dispositions of operating assets or joint venture interests;
•future acquisitions and dispositions of land, including ground leases;
•future development and redevelopment opportunities, including fee development opportunities;
•future issuances and repurchases of common stock, limited partnership units, or preferred stock;
•future distributions;
•projected capital expenditures;
•market and industry trends;
•entry into new markets or changes in existing market concentrations;
•future changes in interest rates; and
•all statements that address operating performance, events, or developments that we expect or anticipate will occur in the future — including statements relating to creating value for stockholders.
Any forward-looking statements are based upon management's beliefs, assumptions, and expectations of our future performance, taking into account information that is 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, our 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;
•the ability to refinance or repay indebtedness as it matures;
•the failure of purchase, sale, or other contracts to ultimately close;
•the failure to achieve anticipated benefits from acquisitions, investments, or dispositions;
•the potential dilutive effect of common stock or operating partnership unit issuances;
•the availability of buyers and pricing with respect to the disposition of assets;
•changes in national and local economic conditions, the real estate industry, and the commercial real estate markets in which we operate (including supply and demand changes), particularly in Atlanta, Austin, Charlotte, Phoenix, Tampa, and Dallas where we have high concentrations of our lease revenues, including the impact of high unemployment, volatility in the public equity and debt markets, and international economic and other conditions;
•the impact of a public health crisis, including the COVID-19 pandemic, and the governmental and third-party response to
such a crisis, which may affect our key personnel, our tenants, and the costs of operating our assets;
•the impact of social distancing, shelter-in-place, border closings, travel restrictions, remote work requirements, and similar
governmental and private measures taken to combat the spread of a public health crisis on our operations and our
tenants
•sociopolitical unrest such as political instability, civil unrest, armed hostilities, or political activism which may result in a disruption of day-to-day building operations;
•changes to our strategy in regard to our real estate assets may require impairment to be recognized;
•leasing risks, including the ability to obtain new tenants or renew expiring tenants, the ability to lease newly developed and/or recently acquired space, the failure of a tenant to commence or complete tenant improvements on schedule or to occupy leased space, and the risk of declining leasing rates;
•changes in the needs of our tenants brought about by the desire for co-working arrangements, trends toward utilizing less office space per employee, and the effect of employees working remotely;
•any adverse change in the financial condition of one or more of our tenants;
•volatility in interest rates and insurance rates;
•competition from other developers or investors;
•the risks associated with real estate developments (such as zoning approval, receipt of required permits, construction delays, cost overruns, and leasing risk);
•cyber security breaches;
•changes in senior management, changes in the Board of Directors, and 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;
•any failure to continue to qualify for taxation as a real estate investment trust and meet regulatory requirements;
•potential changes to state, local, or federal regulations applicable to our business;
•material changes in the rates, or the ability to pay, dividends on common shares or other securities;
•potential changes to the tax laws impacting REITs and real estate in general; and
•those additional risks and factors discussed in reports filed with the Securities and Exchange Commission ("SEC") by the Company.
The words “believes,” “expects,” “anticipates,” “estimates,” “plans,” “may,” “intend,” “will,” or similar expressions are intended to identify forward-looking statements. Although we believe that our plans, intentions, and expectations reflected in any forward-looking statements are reasonable, we can give no assurance that such plans, intentions, or expectations will be achieved. We undertake 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.
PART I
Item 1.Business
Corporate Profile
Cousins Properties Incorporated (the “Registrant” or “Cousins”) is a Georgia corporation, which has elected to be taxed as a real estate investment trust (“REIT”). Cousins conducts substantially all of its business through Cousins Properties LP ("CPLP"), a Delaware limited partnership. Cousins owns in excess of 99% of CPLP, and CPLP is consolidated with Cousins for financial reporting purposes. CPLP also owns Cousins TRS Services LLC ("CTRS"), a taxable entity which owns and manages its own real estate portfolio and performs certain real estate related services for other parties. Cousins, CPLP, their subsidiaries, and CTRS combined are hereafter referred to as “we,” “us,” “our,” and the “Company.” Our common stock trades on the New York Stock Exchange under the symbol “CUZ.”
Our operations are conducted through a number of segments based on our method of internal reporting, which classifies operations by property type and geographical area.
Company Strategy
Our strategy is to create value for our stockholders through ownership of the premier office portfolio in the Sun Belt markets of the United States, with a particular focus on Atlanta, Austin, Charlotte, Phoenix, Tampa, and Dallas. This strategy is based on a disciplined approach to capital allocation that includes value-add acquisitions, selective development projects, and timely dispositions of non-core assets. This strategy is also based on a simple, flexible, and low-leveraged balance sheet that allows us to pursue compelling growth opportunities at the most advantageous points in the cycle. To implement this strategy, we leverage our strong local operating platforms within each of our major markets.
Recent Notable Business Developments
In recent years, we have experienced several significant business developments resulting from transactions that represent a direct outgrowth of our company strategy to create value for our stockholders. These transactions have driven significant portfolio growth and repositioning of our portfolio through entries into new core markets, exits of prior core markets, and rebalancing among all core markets.
During 2019, through a strategic merger with TIER REIT, Inc. ("TIER") ("Merger"), we added nine operating office properties containing 5.8 million square feet of space, two office properties under development, and seven strategically located land parcels on which up to 2.5 million square feet of additional space could be developed. We believe that this Merger created a company with an attractive portfolio of trophy office assets balanced across the premier Sun Belt markets and enhanced our position in our existing markets of Austin and Charlotte, provided a strategic entry into Dallas, and balanced our exposure in Atlanta. The Merger also enhanced growth and provided value-add opportunities as a result of TIER's active and attractive development portfolio and land bank. Additional details of the Merger are discussed in "Item 1. Business" of our 2019 Annual Report on Form 10-K.
During 2016, we completed a merger with Parkway Properties, Inc. ("Parkway") and simultaneous spin-off of the combined companies' Houston business into a separate public company, Parkway, Inc. ("New Parkway"). As a result of the merger and spin-off, we added 16 properties and 1.6 million square feet of space to our pre-merger portfolio on a net basis. We added properties in our existing markets of Atlanta, Charlotte, and Austin and in new markets including Phoenix, Tampa, and Orlando. Additional details of the merger with Parkway and spin-off are discussed in "Item 1. Business" of our 2016 Annual Report on Form 10-K.
2020 Activities
During 2020, we completed acquisitions and dispositions of multiple operating properties and land parcels, completed one development project, and commenced development on one project. At year-end, we had five development projects in process and our share of the total expected costs of these projects totaled $449.4 million. The following is a summary of our significant 2020 activities:
Investment Activity
•Acquired a 329,000 square foot creative office asset in the South End submarket of Charlotte known as The RailYard for a gross purchase price of $201.3 million, including acquisition costs.
•Acquired a 1,550 space parking garage adjacent to multiple of our Charlotte properties for $85.3 million, including acquisition costs.
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•Acquired 3.4 acres of land in the South End submarket of Charlotte for a gross purchase price of $28.1 million. The Company anticipates developing a 600,000 to 700,000 square foot mixed-use development on the site to be called South End Station.
•Acquired 2.4 acres of land in the South End submarket of Charlotte for a purchase price of $18.8 million to be used for a future development and to be called 303 Tremont.
•Acquired 1.7 acres of land adjacent to existing Domain properties in Austin through a 90% owned joint venture for a purchase price of $11.0 million.
•Completed development and commenced operations of Domain 12, a 320,000 square foot office building in Austin that was acquired in the Merger.
•Continued development of Domain 10, a 300,000 square foot office building in Austin that was acquired in the Merger, which is in the final stages of development.
•Continued development of 120 West Trinity, a 352,000 square foot mixed-use property in Atlanta, which is in the final stages of development.
•Continued development of 10000 Avalon, a 251,000 square foot building in Atlanta, which is in the final stages of development. This project is adjacent to our existing 8000 Avalon building and is being developed in a joint venture in which we hold a 90% interest.
•Continued development of 300 Colorado, a 358,000 square foot office building in downtown Austin. This project is being developed in a joint venture in which we hold a 50% interest, and is expected to begin operations in early 2021.
•Commenced development of 100 Mill, a 287,000 square foot office building in Tempe. This project is being developed in a joint venture in which we hold a 90% interest and is expected to begin operations in early 2022.
Disposition Activity
•Sold Hearst Tower, a 966,000 square foot office tower in Charlotte, for gross proceeds of $455.5 million.
•Sold the Company's 50% interest in Gateway Village, a 1 million square foot office property in Charlotte, for gross proceeds of $52.2 million which represented a 17% internal rate of return on our invested capital, as stipulated in the partnership agreement.
•Sold Woodcrest, a 386,000 square foot non-core office property in Cherry Hill, New Jersey that was acquired in the Merger, for gross proceeds of $25.3 million.
•Disposed of various non-core land holdings.
Portfolio Activity
•Leased or renewed 1.4 million square feet of office space.
•Increased second generation net rent per square foot by 27.2% on a straight-line basis and 13.1% on a cash basis.
•Increased same property net operating income by 0.7% on a cash basis.
Sustainability
We have been an advocate and practitioner of energy conservation measures and sustainability initiatives for many years, and we operate our business in a manner that seeks to advance energy efficiency and sustainability practices in every area of our company. We review characteristics of existing buildings, including acquisition opportunities, to evaluate feasible improvements for operating efficiencies, including improvements in the existing performance of the building in consumption of energy and water resources and the mitigation of resource consumption through recycling and other efforts. In addition, we evaluate the proximity to transit options, with a strong preference for nearby bus and rail transit. When planning development projects, we take all of the foregoing into account, and we strive to design highly-sustainable buildings, generally taking advantage of the LEED and/or BOMA 360 certification process and designation. For us, sustainability means developing and maintaining durable buildings that are operated in an environmentally and socially responsible manner, thereby encouraging office users to select us for their corporate operations, while enhancing the communities in which our buildings are located. Over the long-term, we believe properties that reflect these priorities will remain attractive to office users and investors, and as a result, we anticipate that this philosophy will continue to create value for our stockholders.
In the development and operation of our office buildings, we look to relevant industry standards for guidelines on energy performance and other measures. In particular, we are influenced by EnergyStar, LEED, and BOMA 360. As part of our pragmatic approach to sustainability, we carefully consider the guidelines and ratings when designing our new developments and improvements to existing office buildings, and we seek to include the guidelines or ratings where we
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believe adoption of the guidelines or receipt of ratings will have a positive effect on our operational excellence and resource consumption.
We publish reports reflecting our corporate social responsibility practices (including sustainability), which is available on the Sustainability page of our website at www.cousins.com. Since 2016, we have participated in the Global Real Estate Sustainability Benchmark ("GRESB") Annual Survey, which measures the environmental performance of property portfolios around the world and is endorsed by many large institutional investors. In each of these GRESB Surveys, we received a rating of "Green Star," the highest rating within the Survey, with a total score each year above the GRESB overall participant average. Since 2017, we scored above our peer group average in the GRESB Public Disclosure assessment, which GRESB has indicated is intended to represent an overall measure of disclosure by listed real estate companies on matters related to the environment, social, and governance practices, based on a selection of indicators aligned with the GRESB Annual Sustainability Benchmark assessment. Our 2020 scores along with additional information on our sustainability and other corporate social responsibility initiatives will be included under the caption "Sustainability and Corporate Responsibility" in the Proxy Statement relating to our 2021 Annual Meeting of Stockholders. Except for the documents specifically incorporated by reference into this Annual report on Form 10-K, information contained on our website or that can be accessed through our website is not incorporated by reference into this Annual Report on Form 10-K.
Environmental Matters
Our 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.
We typically manage this potential liability through performance of Phase I Environmental Site Assessments and, as necessary, Phase II Environmental Site Assessments which include environmental sampling on properties we acquire or develop. Even with these assessments and testings, no assurance can be given that environmental liabilities do not exist, that the reports revealed all environmental liabilities, or that no prior owner created or permitted any material environmental condition not known to us. In certain situations, we have also sought to avail ourselves 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 operational or development activity of the relevant property. We are not aware of any environmental liability that we believe would have a material adverse effect on our 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 we are not aware of any such situation, we may have such liabilities on properties previously sold. We believe that we and our properties are in compliance in all material respects with applicable federal, state, and local laws, ordinances, and regulations governing the environment. For additional information, see Item 1A. Risk Factors - "Environmental issues."
Competition
We compete with other real estate owners with similar properties located in our markets and distinguish ourselves to tenants/buyers primarily on the basis of location, rental rates/sales prices, services provided, proximity to public transit, reputation, design and condition of our facilities, operational efficiencies, and availability of amenities. We also compete with other real estate companies, financial institutions, pension funds, partnerships, individual investors, and others when attempting to acquire and develop properties.
Human Capital
Our executive offices are located at 3344 Peachtree Road NE, Suite 1800, Atlanta, Georgia 30326-4802, and we maintain regional offices in each of our additional key markets of Charlotte, Austin, Phoenix and Dallas.
We recognize that our achievements and progress on our corporate strategy are made possible by the attraction, development and retention of our dedicated employees. We regularly evaluate, modify, and enhance our internal processes and technologies to increase employee engagement, productivity and efficiency, which benefits our operations and performance. We also invest in training and development opportunities to enhance our employees’ engagement, effectiveness and well-being.
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All of our employees are responsible for upholding our Code of Business Conduct and Ethics (the “Code”) and our Core Values, which includes the embrace of diversity in the backgrounds, cultures, interests and experiences within our Company, and we strive to have a workforce that reflects the diversity of qualified talent that is available in the markets we serve. Our Code and Core Values are available on our website at www.cousins.com. As of December 31, 2020, we had 316 full time employees, which include the seven executive officers listed on page 22, with women representing 39% of our workforce and with 39% of the workforce self-identifying as a minority. In addition, as of December 31, 2020, 45% of our supervisors were women and 25% of our Board of Directors, including the Chair of our Audit Committee. We also recognize the importance of experienced leadership, and as of December 31, 2020, the average tenure for the executive team was ten years.
We are committed to maintaining a healthy environment for our employees that enables them to be productive members of our team. Our priorities include professional development, health and wellness and community engagement by our employees. Among our engagement efforts, we conduct regular “townhall” events for all employees, where we update everyone on recent accomplishments and key initiatives, we regularly participate in employee engagement surveys and we sponsor community engagement opportunities and various health challenges.
We also strive to provide pay, benefits and services that help meet the varying needs of our employees. Our general total rewards packages include market-competitive pay, performance-conditioned annual incentive compensation, stock- and performance-based long-term incentive compensation for key employees, healthcare and retirement benefits, paid time off, and family leave. Through a combination of Company giving and direct voluntary participation by our employees, we donate funds to support meaningful organizations in communities across our geographical footprint.
Available Information
We make available free of charge on the “Investor Relations” page of our website, www.cousins.com, our 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”).
Our Corporate Governance Guidelines, Director Independence Standards, Code of Business Conduct and Ethics, and the Charters of the Audit Committee and the Compensation, Succession, Nominating, and Governance Committee of the Board of Directors are also available on the “Investor Relations” page of our website. The information contained on our website is not incorporated herein by reference. Copies of these documents (without exhibits, when applicable) are also available free of charge upon request to us at 3344 Peachtree Road NE, Suite 1800, Atlanta, Georgia 30326-4802, Attention: Investor Relations or by telephone at (404) 407-1104 or by facsimile at (404) 407-1105. In addition, the SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC at www.sec.gov.
Item 1A. Risk Factors
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 a general economic decline or recessionary climate, our commercial real estate assets may not generate sufficient cash to pay expenses, service debt, or cover operational, improvement, or maintenance costs, and, as a result, our results of operations and cash flows may be adversely affected. Factors that may adversely affect the economic performance and value of our properties include, among other things:
•changes in the national, regional, and local economic climate;
•local real estate conditions such as an oversupply of rentable space caused by increased development of new properties, a reduction in demand for rentable space caused by a change in the wants and needs of our tenants, or economic conditions making our locations undesirable;
•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 including, but not limited to, free rent and tenant improvement allowances;
•uninsured losses as a result of casualty events;
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•sociopolitical unrest such as political instability, civil unrest, armed hostilities, or political activism resulting in a disruption of day-to-day building operations;
•the need to periodically repair, renovate, and re-lease properties; and
•changes in federal and state income tax laws as they affect real estate companies and real estate investors.
Uncertain economic conditions may adversely impact current tenants in our various markets and, accordingly, could affect their ability to pay rent owed to us pursuant to their leases. In periods of economic uncertainty, tenants are more likely to downsize 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 rates, financing availability, law changes, 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 impairments 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. If we decide to sell a real estate asset rather than holding it for long-term investment or if we reduce our estimates of future cash flows on a real estate asset, the risk of impairment increases. The magnitude and frequency with which these charges occur could materially and adversely affect our business, financial condition, and results of operations.
Leasing risk. Our properties were 90.8% leased at December 31, 2020. Our operating revenues are dependent upon entering into leases with, and collecting rents from, our tenants. Tenants whose leases are expiring may want 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, 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 market concentration risk. As of December 31, 2020, our top 20 tenants represented 32.7% of our annualized base rental revenues with no single tenant accounting for more than 5.1% of our annualized base rental revenues. The inability of any of our significant tenants to pay rent or a decision by a significant tenant to vacate their premises prior to, or at the conclusion of, their lease term 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 manner.
For the three months ended December 31, 2020, 35.0% of our net operating income for properties owned was derived from the metropolitan Atlanta area, 27.1% was derived from the Austin area, and 11.2% was derived from the Charlotte area. Any adverse economic conditions impacting Atlanta, Austin, or Charlotte could adversely affect our overall results of operations and financial condition.
Uninsured losses and condemnation costs. Accidents, earthquakes, hurricanes, floods, terrorism incidents, and other losses at our properties could adversely affect our operating results. Casualties may occur that significantly damage an operating property or property under development, and insurance proceeds may be less than the total loss incurred by us. Although we, or our joint venture partners where applicable, 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, and insurers may not pay a claim as required under a policy. 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. 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 released 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
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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 manage this risk through Phase I Environmental Site Assessments and, as necessary, Phase II Environmental Site Assessments which include environmental sampling on properties we acquire or develop.
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.
Inquiries about indoor air quality may necessitate special investigation and, depending on the results, remediation beyond our regular indoor air quality testing and maintenance programs. Indoor air quality issues can stem from inadequate ventilation, chemical contaminants from indoor or outdoor sources, and biological contaminants such as molds, pollen, viruses, and bacteria. Indoor exposure to chemical or biological contaminants above certain levels can be alleged to be connected to allergic reactions or other health effects and symptoms in susceptible individuals. If these conditions were to occur at one of our properties, we may be subject to third-party claims for personal injury or may need to undertake a targeted remediation program, including without limitation, steps to increase indoor ventilation rates and eliminate sources of contaminants. Such remediation programs could be costly, necessitate the temporary relocation of some or all of the property’s tenants, or require rehabilitation of the affected property.
Sustainability strategies. Our sustainability strategy is to develop and maintain durable buildings that are operated in an environmentally and socially responsible manner, encouraging office users to select us for their corporate operations while enhancing the communities in which our buildings are located. Failure to develop and maintain sustainable buildings relative to our peers could adversely impact our ability to lease space at competitive rates and negatively impact our results of operations and portfolio attractiveness.
Climate change risks. The physical effects of climate change could have a material adverse effect on our properties, operations, and business. To the extent climate change causes changes in weather patterns, our markets could experience increases in storm intensity, rising sea-levels, and changes in precipitation, temperature, and air quality. Over time, these conditions could result in physical damage to, or declining demand for, our properties or our inability to operate the buildings at all. Climate change may also indirectly affect our business by increasing the cost of (or making unavailable) property insurance on terms we find acceptable, increasing the cost of energy and increasing the risk of flood at our properties. Should the impact of climate change be severe or occur for lengthy periods of time, our financial condition or results of operations could be adversely impacted.
Joint venture structure risks. We hold ownership interests in a number of joint ventures with varying structures and may in the future invest in additional 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 may 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, including loans secured by property owned by the joint venture, which could have an adverse impact on the financial condition and operations of the joint venture. Such defaults may result in our fulfilling the defaulting's partner's 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, financing, or disposition of the underlying properties.
Risks associated with the development of mixed-use properties. We operate, are currently developing, and may in the future develop properties, either alone or through joint ventures, that are known as "mixed-use" developments. This means that, in addition to the development of office space, the project may also include space for retail, residential, or other commercial purposes. We do not have as much experience in developing and managing non-office real estate as we do office real estate and, as a result, we may seek to develop the non-office component ourselves, sell the right to that component to a third-party developer, or we may partner with a third party who has more non-office real estate experience. If we do choose to develop other components ourselves, we would be exposed not only to those risks typically associated with the development of commercial real estate generally, but also to specific risks associated with the development and ownership of
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non-office real estate. In addition, even if we sell the rights to develop the other components or elect to participate in the development through a joint venture, we may be exposed to the risks associated with the failure of the other party to complete the development as expected. These include the risk that the other party would default on its obligations necessitating that we complete the other component ourselves, including potential financing of the project. If we decide not to sell or participate in a joint venture and instead hire a third party manager, we would be dependent on them and their key personnel to provide services to us and we may not find a suitable replacement if the management agreement is terminated, or if key personnel leave or otherwise become unavailable to us.
Title insurance risk. We did not acquire new title insurance policies in connection with the mergers with Parkway in 2016 and with TIER in 2019, instead relying on existing policies benefiting those entities' subsidiaries. We generally do acquire title insurance policies for all developed and acquired properties; however, these policies may be for amounts less than the current or future values of the covered properties. If there were a title defect related to any of these properties, or to any of the properties acquired in connection with the mergers with Parkway and TIER where title insurance policies are ruled unenforceable, we could lose both our capital invested in and our anticipated profits from such property.
Liquidity risk. Real estate investments are relatively illiquid and can be difficult to sell and convert to cash quickly. 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/or we may be required to record an impairment on the property as a result.
Ground lease risks. As of December 31, 2020, we had interests in eleven land parcels in various markets which we lease individually on a long-term basis. As of December 31, 2020, we had 2.3 million aggregate rentable square feet of rental space located on these leased parcels, from which we recognized 11.1% of total Net Operating Income ("NOI") in the fourth quarter of 2020. In the future, we may invest in additional properties on some of these parcels or additional parcels subject to ground leases. Many of these ground leases and other restrictive agreements impose significant limitations on our uses of the subject property and restrict our ability to sell or otherwise transfer our interests in the property. These restrictions may limit our ability to timely sell or exchange the property, impair the property's value, or negatively impact our ability to find suitable tenants for the property. In addition, if we default under the terms of any particular lease, we may lose the ownership rights to the property subject to the lease. Upon expiration of a lease, we may not be able to renegotiate a new lease on favorable terms, if at all. The loss of the ownership rights to these properties or an increase of rental expense could have an adverse effect on our financial condition and results.
Compliance or failure to comply with the Americans with Disabilities Act or other federal, state, and local regulatory requirements could result in substantial costs.
The Americans with Disabilities Act generally requires that certain buildings, including office buildings, be made accessible to disabled persons. Noncompliance could result in the imposition of fines by the federal government or the award of damages to private litigants. If, under the Americans with Disabilities Act, we are required to make substantial alterations and capital expenditures in one or more of our properties, including the removal of access barriers, it could adversely impact our earnings and cash flows, thereby impacting our ability to service debt and make distributions to our stockholders.
Our properties are subject to various federal, state, and local regulatory requirements, such as state and local fire, health, and life safety requirements. 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 future requirements will require significant unanticipated expenditures that will affect our cash flow and results of operations.
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 generally finance our acquisition and development projects through one or more of the following: our $1 billion senior unsecured line of credit (the "Credit Facility"), unsecured debt, non-recourse mortgages, construction loans, the sale of assets, joint venture equity, the issuance of common stock, the issuance of preferred stock, and the issuance of units of CPLP. 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:
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•Credit Facility. Terms and conditions available in the marketplace for unsecured 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 unsecured debt outstanding, restrictions on secured recourse debt outstanding, and requirements to maintain a minimum fixed charge coverage ratio. Our continued ability to borrow under our Credit Facility is subject to compliance with these covenants.
•Unsecured Debt. Terms and conditions available in the marketplace for unsecured debt vary over time. The availability of unsecured debt may vary based on the capital markets and capital market activity. Unsecured debt generally contains restrictive covenants that may place limitations on our ability to conduct our business similar to those placed upon us by our Credit Facility.
•Non-recourse mortgages. The availability of non-recourse mortgages 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. If a property is mortgaged to secure payment of indebtedness and we are unable to make the mortgage payments, the lender may foreclose. Further, at the time a mortgage matures, the property may be worth less than the mortgage amount and, as a result, we may determine not to refinance the mortgage and permit foreclosure, potentially generating defaults on other debt.
•Asset 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 can limit our ability to sell properties, which may affect our ability to liquidate an investment. As a result, our ability to raise capital through asset sales could be limited. In addition, mortgage financing on an asset may prohibit prepayment and/or impose a prepayment penalty upon the sale of that property, which may decrease the proceeds from a sale or make the sale impractical.
•Construction loans. Construction loans generally relate to specific assets under construction and fund costs above an initial equity amount deemed acceptable by the lender. Terms and conditions of construction loans 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 funding. Construction loans can require a portion of the loan to be recourse to us. In addition, construction loans generally require a completion guarantee by the borrower and may require a limited payment guarantee from the Company which may be disproportionate to any guaranty required from a joint venture partner. There may be times when construction loans 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 and at favorable terms.
•Common stock. Common stock issuances may have a dilutive effect on our earnings per share and funds from operations per share. The actual amount of dilution, if any, from any future offering of common stock will be based on numerous factors, particularly the use of proceeds and any return generated from these proceeds. The per share trading price of our common stock could decline as a result of the sale of shares of our common stock in the market in connection with an offering or as a result of the perception or expectation that such sales could occur. We can also provide no assurance that conditions will be favorable for future issuances of common stock when we need capital.
•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. Issuance of preferred stock could be dilutive to earnings per share and have an adverse effect on the trading price of common stock. We can provide no assurance that conditions will be favorable for future issuances of preferred
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stock when we need the capital, which could have an adverse effect on our ability to fund acquisition and development activities.
•Operating partnership units. The issuance of units of CPLP in connection with property, portfolio, or business acquisitions could be dilutive to our earnings per share and could have an adverse effect on the per share trading price of our common stock.
Any additional indebtedness incurred may have a material adverse effect on our financial condition and results of operations.
As of December 31, 2020, we had $2.2 billion of outstanding indebtedness. The incurrence of additional indebtedness could have adverse consequences on our business, such as:
•requiring us to use a substantial portion of our cash flow from operations to service our indebtedness, which would reduce the available cash flow to fund working capital, capital expenditures, development projects, distributions, and other general corporate purposes;
•limiting our ability to obtain additional financing to fund our working capital needs, acquisitions, capital expenditures, or other debt service requirements or for other purposes;
•increasing our exposure to floating interest rates;
•limiting our ability to compete with other companies who have less leverage, as we may be less capable of responding to adverse economic and industry conditions;
•restricting us from making strategic acquisitions, developing properties, or capitalizing on business opportunities;
•restricting the way in which we conduct our business due to financial and operating covenants in the agreements governing our existing and future indebtedness;
•exposing us to potential events of default (if not cured or waived) under covenants contained in our debt instruments;
•increasing our vulnerability to a downturn in general economic conditions; and
•limiting our ability to react to changing market conditions in our industry.
The impact of any of these potential adverse consequences could have a material adverse effect on our results of operations, financial condition, and liquidity.
Covenants contained in our Credit Facility, senior unsecured notes, term loans, and mortgages could restrict our operational flexibility, which could adversely affect our results of operations.
Our Credit Facility, senior unsecured notes, and our unsecured term loan impose financial and operating restrictions on us. These restrictions may be modified from time to time, but restrictions of this type include limitations on our ability to incur debt, as well as limitations on the amount of our secured debt, unsecured debt, and on the amount of joint venture activity in which we may engage. These covenants may limit our flexibility in making business decisions. 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 provisions on the Credit Facility, senior unsecured notes, and term loan may affect business decisions on other debt.
Some of our mortgages contain customary negative covenants, including limitations on our ability, without the lender’s prior consent, to further mortgage that specific property, to enter into new leases, to modify existing leases, or to redevelop or sell the 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.
Net debt as a percentage of either total asset value or total market capitalization and net debt as a multiple of annualized EBITDAre are often used by analysts to gauge the financial health of equity REITs like 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
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general, our degree of leverage could also make us more vulnerable to a downturn in business or the economy. In addition, increases in our net 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 common stock.
Changes in, or the planned discontinuation of, LIBOR could have an adverse impact on operations.
LIBOR has been the subject of regulatory guidance and proposals for reform and in July 2017, the United Kingdom's Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. Changes in, or the planned discontinuation of, LIBOR would cause changes in how interest is calculated on our variable rate debt including our Credit Facility and term loan. Recent proposals for LIBOR reforms may result in the establishment of new methods of calculating LIBOR or the establishment of one or more alternative benchmark rates. Our variable-interest debt instruments, including our Credit Facility and term loan facilities, provide for alternate interest rate calculations if LIBOR is no longer widely available or should the alternative interest rate prove more favorable. There can be no assurances as to what alternative interest rates may be and whether such interest rates will be more or less favorable than LIBOR and any other unforeseen impacts of the potential discontinuation of LIBOR. The Company intends to continue monitoring the developments with respect to the planned phasing out of LIBOR after 2021 and work with its lenders to ensure any transition away from LIBOR will have minimal impact on its financial condition.
Real Estate Acquisition and Development Risks
We face risks associated with operating property acquisitions.
Operating property acquisitions contain inherent risks. These risks may include:
•difficulty in leasing vacant space or renewing existing tenants at the acquired property;
•the costs and timing of repositioning or redeveloping acquisitions;
•disproportionate concentrations of earnings in one or more markets;
•the acquisitions may fail to meet internal projections or otherwise fail to perform as expected;
•the acquisitions may be in markets that are unfamiliar to us and could present unforeseen business challenges;
•the timing of acquisitions may not match the timing of dispositions, leading to periods of time where proceeds are not invested as profitably as we desire or where we increase short-term borrowings until sales proceeds become available;
•the inability to obtain financing for acquisitions on favorable terms, or at all;
•the inability to successfully integrate the operations, maintain consistent standards, controls, policies, and procedures, or realize the anticipated benefits of acquisitions within the anticipated time frames, or at all;
•the inability to effectively monitor and manage our expanded portfolio of properties, retain key employees, or attract highly qualified new employees;
•the possible decline in value of the acquired asset;
•the diversion of our management’s attention away from other business concerns; and
•the exposure to any undisclosed or unknown issues, expenses, or potential liabilities relating to acquisitions.
In addition, we may acquire properties subject to liabilities 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 might not be fully covered by owner's title insurance policies or other insurance policies.
Any of these risks could cause a failure to realize the intended benefits of our acquisitions and could have a material adverse effect on our financial condition, results of operations, and the market price of our common stock.
We face risks associated with the development of real estate.
Development activities contain certain inherent risks. Although we seek to minimize risks from development through various management controls and procedures, development risks cannot be eliminated. Some of the key factors affecting development of property are as follows:
•Abandoned predevelopment costs. The development process inherently requires that a large number of opportunities be pursued with only a few actually being developed. We may incur significant costs for predevelopment activity for projects that are abandoned, which would directly affect our results of operations. For projects that are abandoned, we must expense certain costs, such as salaries, that would have otherwise been
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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 abandoned projects on an ongoing basis.
•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 cost of labor and 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.
•Construction delays. Real estate development carries the risk that a project could be delayed due to a number of issues that may arise including, but not limited to, weather and other forces of nature, availability of materials, availability of skilled labor, and the financial health of general contractors or sub-contractors. Construction delays could cause adverse financial impacts to us which could include higher interest and other carrying costs than originally budgeted, monetary penalties from tenants pursuant to their leases, and higher construction costs. Delays could also result in a violation of terms of construction loans that could increase fees, interest, or trigger additional recourse of a construction loan to us.
•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 generally to achieve certain pre-leasing goals (which vary by market, product type, and circumstances) before committing to a project, it is expected that sometimes 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 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 a significant portion of 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 developed under-performing 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. Damage to our reputation could make it more difficult to successfully develop 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.
•Competition. We compete for tenants in our Sun Belt markets by highlighting our locations, rental rates, services, amenities, reputation, and the design and condition of our facilities including operational efficiencies and sustainability improvements. As the competition for tenants is intense, we may be required to provide rent abatements, incur charges for tenant improvements and other concessions, or we may not be able to lease vacant space in a timely manner.
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 continue 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
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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 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, in 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 income, and to avoid the nondeductible excise tax.
Certain property transfers may be characterized as prohibited transactions.
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 a 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 ("IRS") may contend that certain transfers or disposals of properties by us are prohibited transactions. While we believe that the IRS would not prevail in any such dispute, if the IRS 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.
Recent changes to the U.S. tax laws could have an adverse impact on our business operations, financial condition, and earnings.
In recent years, numerous legislative, judicial, and administrative changes have been made in the provisions of federal and state income tax laws applicable to investments similar to an investment in our shares. In particular, the comprehensive tax reform legislation enacted in December 2017 and commonly known as the Tax Cuts and Jobs Act ("TCJA") made many significant changes to the U.S. federal income tax laws that will profoundly impact the taxation of individuals and corporations (including both regular C corporations and corporations that have elected to be taxed as REITs). A number of changes that affect noncorporate taxpayers will expire at the end of 2025 unless Congress acts to extend them. Among other changes, the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, signed into law on March 27, 2020, makes certain changes to the TCJA. These changes will impact us and our stockholders in various ways, some of which are adverse or potentially adverse compared to prior law. To date, the IRS has issued only limited guidance with respect to certain of the new provisions, and there are numerous interpretive issues that will require further guidance. It is highly likely that technical corrections of legislation will be needed to clarify certain aspects of the new law and give proper effect to Congressional intent. There can be no assurance, however, that technical clarifications or changes needed to prevent unintended or unforeseen tax consequences will be enacted by Congress in the near future. Additional changes to tax laws are likely to continue to occur in the future, and we cannot assure investors that any such changes will not adversely affect the taxation of our stockholders. Any such changes could have an adverse effect on an investment in shares or on the market value or the
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resale potential of our properties. Investors are urged to consult with their own tax advisor with respect to the impact of recent legislation on ownership of shares and the status of legislative, regulatory, or administrative developments and proposals, and their potential effect on ownership of shares.
We may face risks in connection with Section 1031 Exchanges.
When possible, we dispose of and acquire properties in transactions that are intended to qualify as Section 1031 Exchanges. If a transaction's gain that is intended to qualify as a Section 1031 deferral is later determined to be taxable, we may face adverse consequences, and if the laws applicable to such transactions are amended or repealed, we may not be able to dispose of properties on a tax-deferred basis. In such case, our taxable income and earnings and profits would increase. This could increase the dividend income to our stockholders by reducing any return of capital they received. In some circumstances, we may be required to pay additional dividends or, in lieu of that, corporate income tax, possibly including interest and penalties. In addition, if a Section 1031 Exchange were later to be determined to be taxable, we may be required to amend our tax returns for the applicable year in question.
Further, as a result of changes made by the TCJA, Section 1031 Exchanges are only permitted with respect to real property. The changes generally apply to exchanges completed after December 31, 2017, unless the property was disposed of or received in the exchange on or before such date. If a material amount of personal property is associated with the real property that we have disposed of in a Section 1031 Exchange, these provisions will be less beneficial than under prior law.
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.
General Risks
A pandemic, epidemic or outbreak of a contagious disease, such as the ongoing global pandemic of COVID-19, could adversely affect us.
Public health crises, pandemics, and epidemics, such as the ongoing COVID-19 pandemic, have had, and could continue to have, a material adverse effect on global, national, and local economies, as well as on our business and our tenants’ businesses. The potential impact of a pandemic, epidemic, or outbreak of a contagious disease on our tenants and our properties is difficult to predict or assess. The extent to which the ongoing COVID-19 pandemic, including the outbreaks in Atlanta, Austin, Charlotte, Phoenix, Tampa, and Dallas and actions taken to contain or slow them, continues to impact our operations and those of our tenants, will depend on future developments. These may include the scope, severity, and duration of the pandemic, and the actions taken to mitigate its impact including the availability and effectiveness of vaccines or other treatments; all of which are highly uncertain and unpredictable, but could be material. The long-term impact of COVID-19 on the U.S. and global economies is uncertain and could result in prolonged world-wide economic downturns and recessions that may lead to corporate bankruptcies among our tenants. Any of these developments, and other effects of the ongoing global pandemic of COVID-19 or any other pandemic, epidemic, or outbreak of contagious disease, could adversely affect us.
In addition to the general economic impact of a pandemic, epidemic, or outbreak of a contagious disease, if an outbreak of COVID-19 occurs within the workforce of our tenants or otherwise disrupts their management and other personnel, the business and operating results of our tenants could be negatively impacted. Large-scale “shelter in place”, “stay safe”, or "social distancing" executive orders and health guidance in Atlanta, Austin, Charlotte, Phoenix, Tampa, or Dallas, where we have high concentrations of our lease revenues, have caused many of our tenants, including retailers and restaurants, to stay closed or operate at reduced capacity for an extended period of time. Although many (but not all) of these restrictions have been gradually lifted, national "social distancing" guidance has remained, and it remains unclear whether an initial surge in the level of business activity is likely to be sustained, especially if the areas in which our properties are located experience a resurgence in COVID-19 cases and/or are subject to the reimposition of previously lifted business restrictions, the imposition of new business restrictions, or the issuance of new or revised local or national health guidance. The negative impact upon our tenants may include an immediate reduction in cash flow available to pay rent under our leases, and although various
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governmental financial programs may mitigate this, governmental assistance may not be available to all affected tenants or may be significantly delayed or discontinued. In turn, our tenants' inability to pay rent under our leases could adversely affect our own liquidity, and there can be no guarantee that additional liquidity will be readily available or available on favorable terms in the future. Large-scale executive orders and other measures taken to curb the spread of COVID-19 may also negatively impact the ability of our properties to continue to obtain necessary goods and services or provide adequate staffing, which may also adversely affect our operating results and reputation. Any increased costs or lost revenue as a result of tenant financial difficulty, or their need to comply with executive orders and other guidance from the Centers for Disease Control and Prevention, or other health agencies or departments may not be fully recoverable under our leases or adequately covered by insurance, which could impact our profitability. In addition to the potential consequences listed above, these same factors may cause prospective tenants to delay their leasing decisions or to lease less space. Even after the pandemic has ceased to be active, the prevalence of work-from-home policies during the pandemic may alter tenant preferences in the long-term with respect to the demand for leasing office space.
We are dependent upon the services of certain key personnel, including members of the Board of Directors, the loss of any of whom could adversely impact 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, members of the Board of Directors, and other employees. None of our Board members, key executives, or other employees are 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 these key persons could have an adverse effect upon our results of operations, financial condition, and our ability to execute our business strategy.
Employee misconduct or misconduct by members of the Board of Directors could adversely impact our ability to execute our business.
Our reputation is critical to maintaining and developing relationships with tenants, vendors, and investors and there is a risk that our employees or members of the Board of Directors could engage, deliberately or recklessly, in misconduct that creates legal exposure for us and adversely impacts our business. Employees or members of the Board becoming subject to allegations of illegal activity, sexual harassment, or racial and gender discrimination, regardless of the outcome, could result in adverse publicity that could harm our reputation and brand. The loss of reputation could impact our ability to develop and manage relationships with tenants, vendors, and investors and have an adverse impact on the price of our common stock.
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 interest 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 or organizations 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. We provide waivers to this limitation on a case by case basis, which could result in increased voting control by a stockholder. 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.
The market price of our common stock may fluctuate.
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;
•material changes in any significant tenant industry concentration;
•material changes in market concentrations,
•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;
•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;
15
•any foreclosure or deed in lieu of foreclosure of our properties;
•additions or departures of directors, 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; in particular, market and economic conditions of Atlanta, Austin, Charlotte, Phoenix, Tampa, and Dallas.
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.
If our future operating performance does not meet the projections of our analysts or investors, our stock price could decline.
Securities analysts publish quarterly and annual projections of our financial performance. These projections are developed independently 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, net income, and funds from operations 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.
We face risks associated with security breaches through cyber attacks, cyber intrusions, or otherwise, as well as other significant disruptions of our information technology (IT) networks and related systems.
We face risks associated with security breaches or disruptions, whether through cyber attacks or cyber intrusions over the internet, malware, computer viruses, attachments to emails, persons inside our organization, persons with access to systems inside our organization, and other significant disruptions of our IT networks and related systems. The risk of a security breach or disruption, particularly through cyber attacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity, and sophistication of attempted attacks and intrusions from around the world have increased. Our IT networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations (including managing our building systems) and, in some cases, may be critical to the operations of certain of our tenants. While, to date, we have not had a significant cyber breach or attack that had a material impact on our business or results of operations, there can be no assurance that our efforts to maintain the security and integrity of these types of IT networks and related systems will be effective or that attempted security breaches or disruptions would not be successful or damaging. A security breach or other significant disruption involving our IT networks and related systems could adversely impact our financial condition, results of operations, cash flows, liquidity, and the market price of our common stock. Further, one or more of our tenants could experience a cyber incident which could impact their operations and ability to perform under the terms of their lease with us. While we maintain insurance coverage that may, subject to policy terms and conditions including deductibles, cover specific aspects of cyber risks, such insurance coverage may be insufficient to cover all losses. As cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures and to investigate and remediate any information security vulnerabilities.
Item 1B.Unresolved Staff Comments
Not applicable.
16
Item 2.Properties
The following table sets forth certain information related to operating properties in which we have an ownership interest. Except as noted, all information presented is as of December 31, 2020 ($ in thousands):
Operating Properties
| Company's Share | |||||||||||||||||||||||||||||||||||||||||||||||
| Office Properties | Rentable Square Feet | Financial Statement Presentation | Company's Ownership Interest | End of Period Leased | Weighted Average Occupancy (1) | % of Total Net Operating Income (2) | Property Level Debt (3) | Annualized Rent (4) | |||||||||||||||||||||||||||||||||||||||
| Spring & 8th (5) | 765,000 | Consolidated | 100% | 100.0% | 100.0% | 6.2% | $ | — | |||||||||||||||||||||||||||||||||||||||
| Terminus (5) (6) | 1,226,000 | Consolidated | 100% | 85.1% | 80.9% | 5.7% | 195,489 | ||||||||||||||||||||||||||||||||||||||||
| Northpark (5) | 1,539,000 | Consolidated | 100% | 90.9% | 91.0% | 5.7% | — | ||||||||||||||||||||||||||||||||||||||||
| Promenade | 777,000 | Consolidated | 100% | 89.6% | 90.2% | 3.5% | 92,492 | ||||||||||||||||||||||||||||||||||||||||
| 3344 Peachtree | 484,000 | Consolidated | 100% | 95.3% | 88.3% | 3.0% | — | ||||||||||||||||||||||||||||||||||||||||
| Buckhead Plaza (5) | 666,000 | Consolidated | 100% | 73.2% | 72.6% | 2.5% | — | ||||||||||||||||||||||||||||||||||||||||
| 1200 Peachtree (6) | 370,000 | Consolidated | 100% | 100.0% | 100.0% | 2.0% | — | ||||||||||||||||||||||||||||||||||||||||
| 3350 Peachtree | 413,000 | Consolidated | 100% | 95.2% | 95.2% | 1.9% | — | ||||||||||||||||||||||||||||||||||||||||
| 8000 Avalon | 229,000 | Consolidated | 90% | 97.8% | 98.7% | 1.5% | — | ||||||||||||||||||||||||||||||||||||||||
| 3348 Peachtree | 258,000 | Consolidated | 100% | 91.0% | 91.1% | 1.1% | — | ||||||||||||||||||||||||||||||||||||||||
| Meridian Mark Plaza | 160,000 | Consolidated | 100% | 100.0% | 100.0% | 1.0% | — | ||||||||||||||||||||||||||||||||||||||||
| Emory University Hospital Midtown | 358,000 | Unconsolidated | 50% | 98.6% | 97.8% | 0.9% | 33,098 | ||||||||||||||||||||||||||||||||||||||||
| ATLANTA | 7,245,000 | 90.7% | 89.5% | 35.0% | 321,079 | ||||||||||||||||||||||||||||||||||||||||||
| The Domain (5) (6) | 1,603,000 | Consolidated | 100% | 100.0% | 93.7% | 10.0% | — | ||||||||||||||||||||||||||||||||||||||||
| One Eleven Congress | 519,000 | Consolidated | 100% | 87.6% | 89.6% | 3.9% | — | ||||||||||||||||||||||||||||||||||||||||
| The Terrace (5) (6) | 619,000 | Consolidated | 100% | 90.6% | 86.6% | 3.6% | — | ||||||||||||||||||||||||||||||||||||||||
| San Jacinto Center | 399,000 | Consolidated | 100% | 93.9% | 92.5% | 2.8% | — | ||||||||||||||||||||||||||||||||||||||||
| Colorado Tower | 373,000 | Consolidated | 100% | 99.1% | 93.2% | 2.3% | 114,114 | ||||||||||||||||||||||||||||||||||||||||
| 816 Congress | 435,000 | Consolidated | 100% | 83.9% | 86.1% | 2.2% | 77,917 | ||||||||||||||||||||||||||||||||||||||||
| Domain Point (5) (6) | 243,000 | Consolidated | 97% | 90.6% | 86.6% | 1.4% | — | ||||||||||||||||||||||||||||||||||||||||
| Research Park V | 173,000 | Consolidated | 100% | 97.1% | 97.1% | 0.9% | — | ||||||||||||||||||||||||||||||||||||||||
| AUSTIN | 4,364,000 | 94.3% | 90.9% | 27.1% | 192,031 | ||||||||||||||||||||||||||||||||||||||||||
| Fifth Third Center | 692,000 | Consolidated | 100% | 99.5% | 98.8% | 3.7% | 136,676 | ||||||||||||||||||||||||||||||||||||||||
| One South at the Plaza (fka Bank of America Plaza) (6) | 891,000 | Consolidated | 100% | 58.0% | 82.9% | 3.8% | — | ||||||||||||||||||||||||||||||||||||||||
| NASCAR Plaza | 394,000 | Consolidated | 100% | 99.4% | 99.2% | 2.1% | — | ||||||||||||||||||||||||||||||||||||||||
| Dimensional Place (6) | 281,000 | Unconsolidated | 50% | 95.6% | 95.1% | 1.6% | — | ||||||||||||||||||||||||||||||||||||||||
| The RailYard (6) | 329,000 | Consolidated | 100% | 96.8% | 96.8% | —% | — | ||||||||||||||||||||||||||||||||||||||||
| CHARLOTTE | 2,587,000 | 83.8% | 92.1% | 11.2% | 136,676 | ||||||||||||||||||||||||||||||||||||||||||
| Hayden Ferry (5) | 792,000 | Consolidated | 100% | 97.9% | 93.9% | 5.3% | — | ||||||||||||||||||||||||||||||||||||||||
| Tempe Gateway | 264,000 | Consolidated | 100% | 78.1% | 91.4% | 1.4% | — | ||||||||||||||||||||||||||||||||||||||||
| 111 West Rio | 225,000 | Consolidated | 100% | 100.0% | 100.0% | 1.2% | — | ||||||||||||||||||||||||||||||||||||||||
| PHOENIX | 1,281,000 | 94.2% | 94.5% | 7.9% | — | ||||||||||||||||||||||||||||||||||||||||||
| Corporate Center (5) | 1,227,000 | Consolidated | 100% | 97.0% | 91.7% | 6.2% | — | ||||||||||||||||||||||||||||||||||||||||
| The Pointe | 253,000 | Consolidated | 100% | 89.6% | 92.1% | 0.9% | — | ||||||||||||||||||||||||||||||||||||||||
| Harborview Plaza | 205,000 | Consolidated | 100% | 76.3% | 77.3% | 0.7% | — | ||||||||||||||||||||||||||||||||||||||||
| TAMPA | 1,685,000 | 93.4% | 90.0% | 7.8% | — | ||||||||||||||||||||||||||||||||||||||||||
| Legacy Union One (6) | 319,000 | Consolidated | 100% | 100.0% | 100.0% | 2.1% | 67,437 | ||||||||||||||||||||||||||||||||||||||||
| 5950 Sherry Lane (6) | 197,000 | Consolidated | 100% | 85.6% | 89.6% | 1.0% | — | ||||||||||||||||||||||||||||||||||||||||
| DALLAS | 516,000 | 94.5% | 96.0% | 3.1% | 67,437 | ||||||||||||||||||||||||||||||||||||||||||
| BriarLake Plaza - Houston (5) (6) | 835,000 | Consolidated | 100% | 84.9% | 85.7% | 4.0% | — | ||||||||||||||||||||||||||||||||||||||||
| Burnett Plaza - Fort Worth (6) | 1,023,000 | Consolidated | 100% | 86.1% | 85.1% | 2.7% | — | ||||||||||||||||||||||||||||||||||||||||
| Carolina Square - Chapel Hill | 158,000 | Unconsolidated | 50% | 94.5% | 86.9% | 0.4% | 13,004 | ||||||||||||||||||||||||||||||||||||||||
| OTHER OFFICE | 2,016,000 | 85.9% | 85.5% | 7.1% | 13,004 | ||||||||||||||||||||||||||||||||||||||||||
| TOTAL OFFICE | 19,694,000 | 90.7% | 90.3% | 99.2% | $ | 730,227 | $ | 703,872 | |||||||||||||||||||||||||||||||||||||||
Table continued on next page
17
| Company's Share | ||||||||||||||||||||||||||
| Office Properties | Rentable Square Feet | Financial Statement Presentation | Company's Ownership Interest | End of Period Leased | Weighted Average Occupancy (1) | % of Total Net Operating Income (2) | Property Level Debt (3) | Annualized Rent (4) | ||||||||||||||||||
| Other Properties | ||||||||||||||||||||||||||
| Carolina Square Apartment - Chapel Hill (246 units) (6) | 266,000 | Unconsolidated | 50% | 100.0% | 99.5% | 0.7% | $ | 21,892 | ||||||||||||||||||
| Carolina Square Retail - Chapel Hill | 44,000 | Unconsolidated | 50% | 89.8% | 89.8% | 0.1% | 3,621 | |||||||||||||||||||
| TOTAL OTHER | 310,000 | 98.6% | 98.1% | 0.8% | $ | 25,513 | $ | 4,426 | ||||||||||||||||||
| TOTAL | 20,004,000 | 90.8% | 90.3% | 100.0% | $ | 755,740 | $ | 708,298 | ||||||||||||||||||
(1)The weighted average economic occupancy of the property over the period for which the property was available for occupancy.
(2)The Company's share of net operating income for the three months ended December 31, 2020.
(3)The Company's share of property specific mortgage debt, including premiums and net of unamortized loan costs, as of December 31, 2020.
(4)The Company's share of annualized rent represents the sum of the annualized rent including tenant's share of estimated operating expenses, if applicable, 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 rent is calculated based on the annualized contractual rent the tenant will pay in the first period it is required to pay rent. Included in this amount is $15.9 million of annualized base rent for tenants in a free rent period.
(5)Contains two or more buildings that are grouped together for reporting purposes.
(6)Not included in Same Property as of December 31, 2020.
Office Lease Expirations
As of December 31, 2020, our leases expire as follows:
| Year of Expiration | Square Feet Expiring (1) | % of Leased Space (1) | Annual Contractual Rent ($000) (1) (2) | % of Annual Contractual Rent (1) | Annual Contractual Rent/Sq. Ft. | |||||||||||||||||||||||||||
| 2021 | 1,988,585 | 11.0 | % | $ | 69,480 | 8.5 | % | $ | 34.94 | |||||||||||||||||||||||
| 2022 | 1,359,054 | 7.5 | % | 57,939 | 7.1 | % | 42.63 | |||||||||||||||||||||||||
| 2023 | 1,552,657 | 8.6 | % | 65,266 | 8.0 | % | 42.04 | |||||||||||||||||||||||||
| 2024 | 1,163,934 | 6.4 | % | 48,649 | 5.9 | % | 41.80 | |||||||||||||||||||||||||
| 2025 | 2,023,617 | 11.2 | % | 90,328 | 11.0 | % | 44.64 | |||||||||||||||||||||||||
| 2026 | 1,622,577 | 9.0 | % | 75,691 | 9.2 | % | 46.65 | |||||||||||||||||||||||||
| 2027 | 1,506,613 | 8.3 | % | 63,785 | 7.8 | % | 42.34 | |||||||||||||||||||||||||
| 2028 | 1,301,956 | 7.2 | % | 59,948 | 7.3 | % | 46.04 | |||||||||||||||||||||||||
| 2029 | 1,067,126 | 5.9 | % | 49,907 | 6.1 | % | 46.77 | |||||||||||||||||||||||||
| 2030 & Thereafter | 4,490,339 | 24.9 | % | 237,849 | 29.1 | % | 52.97 | |||||||||||||||||||||||||
| Total | 18,076,458 | 100.0 | % | $ | 818,842 | 100.0 | % | $ | 45.30 | |||||||||||||||||||||||
| (1) Company's share. | |||||||||||
| (2) Annual Contractual Rent is the estimated rent in the year of expiration. It includes the minimum base rent and an estimate of tenant's share of operating expenses, if applicable, as defined in the respective leases. | |||||||||||
18
Top 20 Office Tenants
As of December 31, 2020, our top 20 office tenants were as follows:
| Tenant (1) | Number of Properties Occupied | Number of Markets Occupied | Company's Share of Square Footage | Company's Share of Annualized Rent (2) | Percentage of Company's Share of Annualized Rent | Weighted Average Remaining Lease Term (Years) | |||||||||||||||||||||||||||||||||||
| 1 | NCR Corporation | 1 | 1 | 762,090 | $ | 35,754,771 | 5.1% | 13 | |||||||||||||||||||||||||||||||||
| 2 | Amazon | 4 | 3 | 602,945 | 28,185,712 | 4.0% | 6 | ||||||||||||||||||||||||||||||||||
| 3 | Expedia, Inc. | 1 | 1 | 363,751 | 17,379,131 | 2.5% | 9 | ||||||||||||||||||||||||||||||||||
| 4 | Facebook,Inc. | 1 | 1 | 323,328 | 16,944,648 | 2.4% | 9 | ||||||||||||||||||||||||||||||||||
| 5 | Bank of America | 2 | 1 | 513,724 | 15,943,460 | 2.3% | 3 | ||||||||||||||||||||||||||||||||||
| 6 | Norfolk Southern Corporation | 2 | 1 | 394,621 | 9,716,585 | 1.4% | 1 | ||||||||||||||||||||||||||||||||||
| 7 | Apache Corporation | 1 | 1 | 210,012 | 9,150,550 | 1.3% | 4 | ||||||||||||||||||||||||||||||||||
| 8 | Americredit Financial Services (dba GM Financial) | 2 | 2 | 333,782 | 9,136,376 | 1.3% | 9 | ||||||||||||||||||||||||||||||||||
| 9 | Pioneer Natural Resources Company (fka Parsley Energy, L.P.) | 2 | 1 | 135,612 | 8,570,098 | 1.2% | 6 | ||||||||||||||||||||||||||||||||||
| 10 | Wells Fargo Bank, NA | 4 | 3 | 198,376 | 8,518,272 | 1.2% | 5 | ||||||||||||||||||||||||||||||||||
| 11 | Ovintiv USA Inc (fka Encana Oil & Gas (USA) Inc.) (3) | 1 | 1 | 318,582 | 7,949,937 | 1.1% | 6 | ||||||||||||||||||||||||||||||||||
| 12 | Allstate | 2 | 2 | 214,380 | 7,561,934 | 1.1% | 7 | ||||||||||||||||||||||||||||||||||
| 13 | ADP, LLC | 1 | 1 | 225,000 | 7,479,972 | 1.1% | 7 | ||||||||||||||||||||||||||||||||||
| 14 | SVB Financial Group | 1 | 1 | 188,940 | 7,397,135 | 1.0% | 5 | ||||||||||||||||||||||||||||||||||
| 15 | Regus Equity Business Centers, LLC | 6 | 4 | 158,740 | 7,067,647 | 1.0% | 5 | ||||||||||||||||||||||||||||||||||
| 16 | Westrock Shared Services, LLC | 1 | 1 | 205,185 | 6,955,383 | 1.0% | 9 | ||||||||||||||||||||||||||||||||||
| 17 | Dimensional Fund Advisors LP | 1 | 1 | 132,434 | 6,871,718 | 1.0% | 13 | ||||||||||||||||||||||||||||||||||
| 18 | McGuirewoods LLP | 3 | 3 | 197,282 | 6,864,549 | 1.0% | 6 | ||||||||||||||||||||||||||||||||||
| 19 | RigUp, Inc. | 1 | 1 | 93,210 | 6,386,794 | 0.9% | 8 | ||||||||||||||||||||||||||||||||||
| 20 | Samsung Engineering America | 1 | 1 | 133,860 | 6,153,090 | 0.8% | 6 | ||||||||||||||||||||||||||||||||||
| Total | 5,705,854 | $ | 229,987,762 | 32.7% | 7 | ||||||||||||||||||||||||||||||||||||
| (1) | In some cases, the actual tenant may be an affiliate of the entity shown. | ||||||||||||||||||||||||||||||||||||||||
| (2) | Annualized Rent represents the annualized rent including tenant's share of estimated operating expenses, if applicable, paid by the tenant as of the date of this report. If the tenant is in a free rent period as of the date of this report, Annualized Rent represents the annualized contractual rent the tenant will pay in the first month it is required to pay rent. | ||||||||||||||||||||||||||||||||||||||||
| (3) | Ovintiv USA Inc. has multiple subleases for substantially all of its space. In the event of termination of the Ovintiv lease, such subleases would become direct leases with Cousins. | ||||||||||||||||||||||||||||||||||||||||
| Note: | This schedule includes leases that have commenced. Leases that have been signed but have not commenced are excluded. | ||||||||||||||||||||||||||||||||||||||||
19
Tenant Industry Diversification
As of December 31, 2020, our tenant industry diversification was as follows:
| Industry (1) | Percentage of Company's Share of Annualized Rent (2) | |||||||
| Technology | 21.1 | % | ||||||
| Financial | 16.9 | % | ||||||
| Professional Services | 14.5 | % | ||||||
| Legal | 10.4 | % | ||||||
| Consumer Goods & Services | 6.7 | % | ||||||
| Energy & Utilities | 5.4 | % | ||||||
| Health Care | 4.9 | % | ||||||
| Insurance | 4.7 | % | ||||||
| Real Estate | 4.0 | % | ||||||
| Other | 3.8 | % | ||||||
| Construction/Design | 2.5 | % | ||||||
| Marketing/Media/Creative | 2.4 | % | ||||||
| Transportation | 1.6 | % | ||||||
| Government | 1.1 | % | ||||||
| Total | 100 | % | ||||||
| (1) | Management uses SIC codes when available, along with judgment, to determine tenant industry classification. | ||||
| (2) | Annualized Rent represents the annualized rent including tenant's share of estimated operating expenses, if applicable, paid by the tenant as of the date of this report. If the tenant is in a free rent period as of the date of this report, Annualized Rent represents the annualized contractual rent the tenant will pay in the first month it is required to pay full rent. | ||||
Development Pipeline (1)
As of December 31, 2020, information on our projects under development was as follows ($ in thousands):
| Project | Type | Market | Company's Ownership Interest | Construction Start Date | Number of Square Feet / Apartment Units | Estimated Project Cost(1)(2) ($ in thousands) | Company's Share of Estimated Project Cost(2) ($ in thousands) | Project Cost Incurred to Date(2) ($ in thousands) | Company's Share of Project Cost Incurred to Date(2) ($ in thousands) | Percent Leased | Initial Revenue Recognition(3) | ||||||||||||||||||||||||
| 120 West Trinity | Mixed | Atlanta | 20 | % | 1Q17 | $ | 89,000 | $ | 17,800 | $ | 87,872 | $ | 17,574 | ||||||||||||||||||||||
| Office (4) | 52,000 | 68 | % | 2Q20 | |||||||||||||||||||||||||||||||
| Apartments | 330 | 66 | % | 4Q19 | |||||||||||||||||||||||||||||||
| 10000 Avalon | Office | Atlanta | 90 | % | 3Q18 | 251,000 | 96,000 | 86,400 | 94,771 | 85,294 | 75 | % | 1Q20 | ||||||||||||||||||||||
| 300 Colorado (5) | Office | Austin | 50 | % | 4Q18 | 358,000 | 193,000 | 96,500 | 154,476 | 77,238 | 87 | % | 1Q21 | ||||||||||||||||||||||
| Domain 10 | Office | Austin | 100 | % | 4Q18 | 300,000 | 111,000 | 111,000 | 93,987 | 93,987 | 98 | % | 3Q20 | ||||||||||||||||||||||
| 100 Mill | Office | Phoenix | 90 | % | 1Q20 | 287,000 | 153,000 | 137,700 | 54,848 | 49,364 | 44 | % | 1Q22 | ||||||||||||||||||||||
| Total | $ | 642,000 | $ | 449,400 | $ | 485,954 | $ | 323,457 | |||||||||||||||||||||||||||
| (1) | This schedule shows projects currently under active development through the substantial completion of construction as well as properties in an initial lease up period prior to stabilization. Amounts included in the estimated project cost column are 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. | ||||
| (2) | Estimated and incurred project costs include financing costs only on project-specific debt, and exclude certain allocated capitalized costs required by GAAP that are not incurred by the joint venture and fair value adjustments for legacy TIER projects that were recorded as a result of the Merger. | ||||
| (3) | Initial revenue recognition represents the quarter within which the Company estimates it will begin recognizing revenue under GAAP. | ||||
| (4) | The 120 West Trinity office component has 33,000 square feet of office space and 19,000 square feet of retail space. | ||||
| (5) | 300 Colorado estimated project cost will be funded with a combination of $67 million of equity contributed by the joint venture partners, followed by a $126 million construction loan. | ||||
20
Land Holdings
As of December 31, 2020, we owned the following land holdings, either directly or indirectly through joint ventures:
| Market | Company's Ownership Interest | Financial Statement Presentation | Total Developable Land (Acres) | Cost Basis of Land ($ in thousands) | ||||||||||||||||||||||||||||
| 3354 Peachtree | Atlanta | 95% | Consolidated | 3.0 | ||||||||||||||||||||||||||||
| 901 West Peachtree (1) | Atlanta | 100% | Consolidated | 1.0 | ||||||||||||||||||||||||||||
| The Avenue Forsyth-Adjacent Land | Atlanta | 100% | Consolidated | 10.4 | ||||||||||||||||||||||||||||
| Domain Point 3 | Austin | 90% | Consolidated | 1.7 | ||||||||||||||||||||||||||||
| Domain 9 | Austin | 100% | Consolidated | 2.5 | ||||||||||||||||||||||||||||
| Domain Central (Domain 14 & 15) | Austin | 100% | Consolidated | 5.6 | ||||||||||||||||||||||||||||
| South End Station | Charlotte | 100% | Consolidated | 3.4 | ||||||||||||||||||||||||||||
| 303 Tremont | Charlotte | 100% | Consolidated | 2.4 | ||||||||||||||||||||||||||||
| Legacy Union 2 & 3 | Dallas | 95% | Consolidated | 4.0 | ||||||||||||||||||||||||||||
| Victory Center | Dallas | 75% | Unconsolidated | 3.0 | ||||||||||||||||||||||||||||
| 100 Mill-Adjacent Land | Phoenix | 90% | Consolidated | 0.7 | ||||||||||||||||||||||||||||
| Corporate Center 5 & 6 (2) | Tampa | 100% | Consolidated | 14.1 | ||||||||||||||||||||||||||||
| Total | 51.8 | $ | 172,185 | |||||||||||||||||||||||||||||
| Company's Share | 50.5 | $ | 167,383 | |||||||||||||||||||||||||||||
| (1) | Includes a long-term ground lease with future obligation to purchase. | ||||
| (2) | Corporate Center 5 is controlled through a long-term ground lease. | ||||
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Item 3.Legal Proceedings
We are 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. We record 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, we accrue the best estimate within the range. If no amount within the range is a better estimate than any other amount, we accrue the minimum amount within the range. If an unfavorable outcome is probable but the amount of the loss cannot be reasonably estimated, we disclose the nature of the litigation and indicate 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, we disclose the nature and estimate of the possible loss of the litigation. We do 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 our liquidity, results of operations, business, or financial condition.
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Item 4.Mine Safety Disclosures
Not applicable.
Item X.Information about our Executive Officers
The Executive Officers of the Registrant, as of the date hereof, are as follow:
| Name | Age | Office Held | ||||||||||||
| M. Colin Connolly | 44 | President, Chief Executive Officer and Director | ||||||||||||
| Gregg D. Adzema | 56 | Executive Vice President and Chief Financial Officer | ||||||||||||
| J. Kennedy Hicks | 37 | Executive Vice President, Investments & Managing Director | ||||||||||||
| Richard G. Hickson IV | 46 | Executive Vice President, Operations | ||||||||||||
| John S. McColl | 58 | Executive Vice President | ||||||||||||
| Pamela F. Roper | 47 | Executive Vice President, General Counsel, and Corporate Secretary | ||||||||||||
| Jeffrey D. Symes | 55 | Senior Vice President and Chief Accounting Officer | ||||||||||||
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
Mr. Connolly was appointed Chief Executive Officer and President by the Company's Board of Directors effective January 2019. From July 2017 to December 2018, Mr. Connolly served as President and Chief Operating Officer. From July 2016 to July 2017, Mr. Connolly served as Executive Vice President and Chief Operating Officer. From December 2015 to July 2016, Mr. Connolly served as Executive Vice President and Chief Investment Officer. From May 2013 to December 2015, Mr. Connolly served as Senior Vice President and Chief Investment Officer.
Mr. Adzema was appointed Executive Vice President and Chief Financial Officer in November 2010.
Ms. Hicks was appointed Executive Vice President of Investments in October 2020. Ms. Hicks joined Cousins in November 2018 as Senior Vice President of Investments. Prior to Cousins, Ms. Hicks worked at Eastdil Secured, a real estate investment banking firm, where she served in a variety of roles from 2010 – 2018, including Managing Director.
Mr. Hickson was appointed Executive Vice President of Operations in October 2018. Mr. Hickson joined Cousins in September 2016 as Senior Vice President responsible for Asset Management. Prior to joining the Company, from May 2012 to September 2016, Mr. Hickson was self-employed in private investment.
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.
Ms. Roper was appointed Executive Vice President, General Counsel and Corporate Secretary in February 2017. From October 2012 to February 2017, Ms. Roper served as Senior Vice President, General Counsel and Corporate Secretary. From February 2008 to October 2012, Ms. Roper served as Senior Vice President, Associate General Counsel and Assistant Secretary.
Mr. Symes joined the Company in February 2020 and was appointed Senior Vice President and Chief Accounting Officer effective March 2020. From April 2018 to January 2020, Mr. Symes served as Senior Vice President and Chief Accounting Officer of a private company. From April 2012 to August 2017, Mr. Symes served as Senior Vice President and Chief Accounting Officer at FelCor Lodging Trust Incorporated (“FelCor”), and he was employed by RLJ Lodging Trust (FelCor’s acquirer) in a transition capacity from September 2017 to March 2018.
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PART II
Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters
Market Information and Holders
Our common stock trades on the New York Stock Exchange (ticker symbol CUZ). On January 31, 2021, there were 10,196 stockholders of record of our common stock.
Purchases of Equity Securities
There were no purchases of common stock by the Company during the fourth quarter of 2020.
Performance Graph
The following graph compares the five-year cumulative total return of our 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, 2015 and the reinvestment of all dividends.
COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE COMPANIES, PEER
GROUPS, INDUSTRY INDICES, AND/OR BROAD MARKETS
| Fiscal Year Ended | |||||||||||||||||||||||||||||||||||
| Index | 12/31/2015 | 12/31/2016 | 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | |||||||||||||||||||||||||||||
| Cousins Properties Incorporated | 100.00 | 128.39 | 144.42 | 126.07 | 169.63 | 144.53 | |||||||||||||||||||||||||||||
| NYSE Composite Index | 100.00 | 111.94 | 132.90 | 121.01 | 151.87 | 162.49 | |||||||||||||||||||||||||||||
| FTSE NAREIT Equity Index | 100.00 | 108.52 | 114.19 | 108.91 | 137.23 | 126.25 | |||||||||||||||||||||||||||||
| SNL US REIT Office Index | 100.00 | 111.59 | 114.60 | 94.53 | 120.51 | 95.69 | |||||||||||||||||||||||||||||
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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 our consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto. Prior year disclosures have been restated for the reclassification of termination fees from other revenues to rental property revenues as well as for the effect of the one-for-four reverse stock split described in note 1 of the consolidated financial statements.
| Year Ended December 31, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||
| (in thousands, except per share amounts) | |||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||
| Rental property revenues | $ | 721,883 | $ | 628,751 | $ | 463,401 | $ | 455,305 | $ | 249,936 | |||||||||||||||||||
| Fee income | 18,226 | 28,518 | 10,089 | 8,632 | 8,347 | ||||||||||||||||||||||||
| Other | 231 | 246 | 1,722 | 2,248 | 928 | ||||||||||||||||||||||||
| 740,340 | 657,515 | 475,212 | 466,185 | 259,211 | |||||||||||||||||||||||||
| Expenses: | |||||||||||||||||||||||||||||
| Rental property operating expenses | 250,850 | 222,146 | 164,678 | 163,882 | 96,908 | ||||||||||||||||||||||||
| Reimbursed expenses | 1,580 | 4,004 | 3,782 | 3,527 | 3,259 | ||||||||||||||||||||||||
| General and administrative expenses | 27,034 | 37,007 | 22,040 | 27,523 | 25,592 | ||||||||||||||||||||||||
| Interest expense | 60,605 | 53,963 | 39,430 | 33,524 | 26,650 | ||||||||||||||||||||||||
| Impairment | 14,829 | — | — | — | — | ||||||||||||||||||||||||
| Depreciation and amortization | 288,648 | 257,149 | 181,382 | 196,745 | 97,948 | ||||||||||||||||||||||||
| Transaction costs | 428 | 52,881 | 248 | 1,661 | 24,521 | ||||||||||||||||||||||||
| Other | 2,091 | 1,109 | 556 | 1,796 | 5,888 | ||||||||||||||||||||||||
| 646,065 | 628,259 | 412,116 | 428,658 | 280,766 | |||||||||||||||||||||||||
| Income from unconsolidated joint ventures | 7,947 | 12,666 | 12,224 | 47,115 | 10,562 | ||||||||||||||||||||||||
| Gain on sales of investments in unconsolidated joint ventures | 45,767 | — | — | — | — | ||||||||||||||||||||||||
| Gain on investment property transactions | 90,125 | 110,761 | 5,437 | 133,059 | 77,114 | ||||||||||||||||||||||||
| Gain (loss) on extinguishment of debt | — | — | 8 | 2,258 | (5,180) | ||||||||||||||||||||||||
| Income from continuing operations | 238,114 | 152,683 | 80,765 | 219,959 | 60,941 | ||||||||||||||||||||||||
| Income from discontinued operations | — | — | — | — | 19,163 | ||||||||||||||||||||||||
| Net income | 238,114 | 152,683 | 80,765 | 219,959 | 80,104 | ||||||||||||||||||||||||
| Net income attributable to noncontrolling interests | (836) | (2,265) | (1,601) | (3,684) | (995) | ||||||||||||||||||||||||
| Net income available to common stockholders | $ | 237,278 | $ | 150,418 | $ | 79,164 | $ | 216,275 | $ | 79,109 | |||||||||||||||||||
| Net income from continuing operations attributable to controlling interest per common share - basic and diluted | $ | 1.60 | $ | 1.17 | $ | 0.75 | $ | 2.08 | $ | 0.94 | |||||||||||||||||||
| Net income per common share - basic and diluted | $ | 1.60 | $ | 1.17 | $ | 0.75 | $ | 2.08 | $ | 1.25 | |||||||||||||||||||
| Dividends declared per common share | $ | 1.20 | $ | 1.16 | $ | 1.04 | $ | 1.20 | $ | 0.96 | |||||||||||||||||||
| Total assets (at year-end) | $ | 7,107,398 | $ | 7,151,447 | $ | 4,146,296 | $ | 4,204,619 | $ | 4,171,607 | |||||||||||||||||||
| Notes payable (at year-end) | $ | 2,162,719 | $ | 2,222,975 | $ | 1,062,570 | $ | 1,093,228 | $ | ||||||||||||||||||||