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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 001-11312
COUSINS PROPERTIES INCORPORATED
(Exact name of registrant as specified in its charter)
GEORGIA
(State or other jurisdiction of
incorporation or organization)
58-0869052
(I.R.S. Employer
Identification No.)
3344 Peachtree Road NE, Suite 1800, Atlanta, Georgia
(Address of principal executive offices)
30326-4802
(Zip Code)
(404) 407-1000
(Registrant’s telephone number, including area code)
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 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes þ No o
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 definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨

Non-accelerated filer
o  (Do not check if a smaller reporting company)
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at July 18, 2018
Common Stock, $1 par value per share
 
420,384,785 shares


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FORWARD-LOOKING STATEMENTS
Certain matters contained in this report are “forward-looking statements” within the meaning of the federal securities laws and are subject to uncertainties and risks, as itemized in Item 1A included in the Annual Report on Form 10-K for the year ended December 31, 2017 and 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:
our 2018 guidance and underlying assumptions;
business and financial strategy;
future financings;
future acquisitions and dispositions of land;
future acquisitions and dispositions of operating assets;
future development and redevelopment opportunities;
future dispositions of non-core assets;
future issuances and repurchases of common or preferred stock;
projected operating results;
market and industry trends;
future distributions;
future projected capital expenditures; 
future 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 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;
risks and uncertainties related to national and local economic conditions, the real estate industry, and the commercial real estate markets in which we operate, particularly in Atlanta, Charlotte, Austin, Phoenix, and Tampa where we have high concentrations of our lease revenue;
changes to our strategy with regard to non-core holdings that require impairment losses 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, and the risk of declining leasing rates;
the adverse change in the financial condition of one or more of our major 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);
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 dividend rates or the ability to pay dividends on common shares or other securities;
potential changes to the tax laws and accounting standards impacting REITs and real estate in general; and
those additional risks and factors discussed in reports filed with the Securities and Exchange Commission 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.

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PART I — FINANCIAL INFORMATION
Item 1.    Financial Statements.
COUSINS PROPERTIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
June 30, 2018
 
December 31, 2017
 
(unaudited)
 
 
Assets:
 
 
 
Real estate assets:
 
 
 
Operating properties, net of accumulated depreciation of $347,681 and $275,977 in 2018 and 2017, respectively
$
3,513,203

 
$
3,332,619

Projects under development
115,158

 
280,982

Land
4,221

 
4,221

 
3,632,582

 
3,617,822

 
 
 
 
Cash and cash equivalents
110,232

 
148,929

Restricted cash
328

 
56,816

Notes and accounts receivable, net of allowance for doubtful accounts of $362 and $535 in 2018 and 2017, respectively
12,364

 
14,420

Deferred rents receivable
71,576

 
58,158

Investment in unconsolidated joint ventures
143,201

 
101,414

Intangible assets, net
164,753

 
186,206

Other assets
31,216

 
20,854

Total assets
$
4,166,252

 
$
4,204,619

Liabilities:


 
 
Notes payable
$
1,089,264

 
$
1,093,228

Accounts payable and accrued expenses
98,562

 
137,909

Deferred income
39,884

 
37,383

Intangible liabilities, net of accumulated amortization of $36,058 and $28,960 in 2018 and 2017, respectively
63,356

 
70,454

Other liabilities
42,842

 
40,534

Total liabilities
1,333,908

 
1,379,508

Commitments and contingencies


 


Equity:
 
 
 
Stockholders' investment:
 
 
 
Preferred stock, $1 par value, 20,000,000 shares authorized, 6,867,357 shares issued and outstanding in 2018 and 2017
6,867

 
6,867

Common stock, $1 par value, 700,000,000 shares authorized, 430,733,698 and 430,349,620 shares issued in 2018 and 2017, respectively
430,734

 
430,350

Additional paid-in capital
3,605,047

 
3,604,776

Treasury stock at cost, 10,339,735 and 10,329,082 shares in 2018 and 2017, respectively
(148,473
)
 
(148,373
)
Distributions in excess of cumulative net income
(1,116,640
)
 
(1,121,647
)
Total stockholders' investment
2,777,535

 
2,771,973

Nonredeemable noncontrolling interests
54,809

 
53,138

Total equity
2,832,344

 
2,825,111

Total liabilities and equity
$
4,166,252

 
$
4,204,619

 
 
 
 
See accompanying notes.
 
 
 

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COUSINS PROPERTIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; in thousands, except per share amounts)


 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Rental property revenues
$
113,698

 
$
114,007

 
$
227,046

 
$
226,524

Fee income
1,798

 
1,854

 
4,692

 
3,791

Other
1,132

 
3,174

 
2,092

 
8,600

 
116,628

 
119,035

 
233,830

 
238,915

Expenses:
 

 
 

 
 

 
 

Rental property operating expenses
40,731

 
41,501

 
80,922

 
83,026

Reimbursed expenses
860

 
907

 
1,802

 
1,772

General and administrative expenses
8,071

 
8,618

 
14,880

 
14,828

Interest expense
9,714

 
8,523

 
19,492

 
18,264

Depreciation and amortization
45,675

 
50,040

 
90,768

 
104,924

Acquisition and transaction costs
137

 
246

 
228

 
2,177

Other
44

 
236

 
364

 
612

 
105,232

 
110,071

 
208,456

 
225,603

Gain (loss) on extinguishment of debt

 
1,829

 
(85
)
 
1,829

Income from continuing operations before unconsolidated joint ventures and loss on sale of investment properties
11,396

 
10,793

 
25,289

 
15,141

Income from unconsolidated joint ventures
5,036

 
40,320

 
7,921

 
40,901

Income from continuing operations before gain on sale of investment properties
16,432

 
51,113

 
33,210

 
56,042

Gain on sale of investment properties
5,317

 
119,832

 
4,945

 
119,761

Net income
21,749

 
170,945

 
38,155

 
175,803

Net income attributable to noncontrolling interests
(473
)
 
(2,856
)
 
(836
)
 
(2,963
)
Net income available to common stockholders
$
21,276

 
$
168,089

 
$
37,319

 
$
172,840

Net income per common share — basic and diluted
$
0.05

 
$
0.40

 
$
0.09

 
$
0.42

Weighted average shares — basic
420,294

 
419,402

 
420,225

 
411,137

Weighted average shares — diluted
427,501

 
427,180

 
427,444

 
419,227

Dividends declared per common share
$
0.065

 
$
0.060

 
$
0.130

 
$
0.180


See accompanying notes.

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COUSINS PROPERTIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
Six Months Ended June 30, 2018 and 2017
(unaudited, in thousands)


 
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-In
Capital
 
Treasury
Stock
 
Distributions in
Excess of
Net Income
 
Stockholders’
Investment
 
Nonredeemable
Noncontrolling
Interests
 
Total
Equity
Balance December 31, 2017
 
$
6,867

 
$
430,350

 
$
3,604,776

 
$
(148,373
)
 
$
(1,121,647
)
 
$
2,771,973

 
$
53,138

 
$
2,825,111

Net income
 

 

 

 

 
37,319

 
37,319

 
836

 
38,155

Common stock issued pursuant to stock-based compensation
 

 
397

 
(864
)
 
(100
)
 

 
(567
)
 

 
(567
)
Cumulative effect of change in accounting principle
 

 

 

 

 
22,329

 
22,329

 

 
22,329

Amortization of stock options and restricted stock, net of forfeitures
 

 
(13
)
 
1,135

 

 

 
1,122

 

 
1,122

Contributions from nonredeemable noncontrolling interest
 

 

 

 

 

 

 
1,708

 
1,708

Distributions to nonredeemable noncontrolling interest
 

 

 

 

 

 

 
(873
)
 
(873
)
Common dividends ($0.13 per share)
 

 

 

 

 
(54,641
)
 
(54,641
)
 

 
(54,641
)
Balance June 30, 2018
 
$
6,867

 
$
430,734

 
$
3,605,047

 
$
(148,473
)
 
$
(1,116,640
)
 
$
2,777,535

 
$
54,809

 
$
2,832,344

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2016
 
$
6,867

 
$
403,747

 
$
3,407,430

 
$
(148,373
)
 
$
(1,214,114
)
 
$
2,455,557

 
$
58,683

 
$
2,514,240

Net income
 

 

 

 

 
172,840

 
172,840

 
2,963

 
175,803

Common stock issued pursuant to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock offering, net of issuance costs
 

 
25,000

 
186,820

 

 

 
211,820

 

 
211,820

Stock-based compensation
 

 
353

 
(54
)
 

 

 
299

 

 
299

Spin-off of Parkway, Inc.
 

 

 

 

 
562

 
562

 

 
562

Common stock redemption by unit holders
 

 
1,203

 
8,865

 

 

 
10,068

 
(10,068
)
 

Amortization of stock options and restricted stock, net of forfeitures
 

 
(6
)
 
975

 

 

 
969

 

 
969

Contributions from nonredeemable noncontrolling interests
 

 

 

 

 

 

 
900

 
900

Distributions to nonredeemable noncontrolling interest
 

 

 

 

 

 

 
(966
)
 
(966
)
Common dividends ($0.18 per share)
 

 

 

 

 
(73,950
)
 
(73,950
)
 

 
(73,950
)
Balance June 30, 2017
 
$
6,867

 
$
430,297

 
$
3,604,036

 
$
(148,373
)
 
$
(1,114,662
)
 
$
2,778,165

 
$
51,512

 
$
2,829,677

See accompanying notes.

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COUSINS PROPERTIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)


 
Six Months Ended June 30,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
38,155

 
$
175,803

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Gain on sale of investment properties
(4,945
)
 
(119,761
)
Depreciation and amortization
90,768

 
104,924

Amortization of deferred financing costs and premium/discount on notes payable
1,203

 
(2,948
)
Stock-based compensation expense, net of forfeitures
2,264

 
1,979

Effect of non-cash adjustments to rental revenues
(17,691
)
 
(24,057
)
Income from unconsolidated joint ventures
(7,921
)
 
(40,901
)
Operating distributions from unconsolidated joint ventures
10,896

 
6,389

(Gain) loss on extinguishment of debt
85

 
(1,829
)
Changes in other operating assets and liabilities:
 
 
 
Change in other receivables and other assets, net
(2,508
)
 
3,108

Change in operating liabilities, net
(5,590
)
 
(10,063
)
Net cash provided by operating activities
104,716

 
92,644

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from investment property sales

 
167,118

Property acquisition, development, and tenant asset expenditures
(99,767
)
 
(151,150
)
Purchase of tenant-in-common interest

 
(13,382
)
Collection of notes receivable

 
5,161

Investment in unconsolidated joint ventures
(30,423
)
 
(8,266
)
Distributions from unconsolidated joint ventures
2,032

 
74,532

Change in notes receivable and other assets
(1,954
)
 

Other
(4,264
)
 

Net cash provided by (used in) investing activities
(134,376
)
 
74,013

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from credit facility

 
457,000

Repayment of credit facility

 
(497,000
)
Proceeds from issuance of notes payable

 
100,000

Repayment of notes payable
(4,344
)
 
(413,726
)
Payment of deferred financing costs
(6,081
)
 
(2,030
)
Common stock issued, net of expenses

 
211,820

Contributions from noncontrolling interests

 
900

Distributions to nonredeemable noncontrolling interests
(873
)
 
(966
)
Common dividends paid
(52,518
)
 
(48,815
)
Other
(1,709
)
 
(602
)
Net cash used in financing activities
(65,525
)
 
(193,419
)
NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
(95,185
)
 
(26,762
)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD
205,745

 
51,321

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD
$
110,560

 
$
24,559

 
 
 
 
See accompanying notes.

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COUSINS PROPERTIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business: Cousins Properties Incorporated (“Cousins”), a Georgia corporation, is a self-administered and self-managed real estate investment trust (“REIT”). Cousins conducts substantially all of its business through Cousins Properties, LP ("CPLP"). Cousins owns approximately 98% of CPLP and consolidates CPLP. CPLP 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, CTRS, and their subsidiaries (collectively, the “Company”) develop, acquire, lease, manage, and own primarily Class A office and mixed-use properties in Sunbelt markets with a focus on Georgia, Texas, Arizona, Florida, and North Carolina. As of June 30, 2018, the Company’s portfolio of real estate assets consisted of interests in 14.7 million square feet of office space and 310,000 square feet of mixed-use space.
Basis of Presentation: The condensed consolidated financial statements are unaudited and were prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, these financial statements reflect all adjustments necessary (which adjustments are of a normal and recurring nature) for the fair presentation of the Company's financial position as of June 30, 2018 and the results of operations for the three and six months ended June 30, 2018 and 2017. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of results expected for the full year or any other interim period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017. The accounting policies employed are substantially the same as those shown in note 2 to the consolidated financial statements included therein.
For the three and six months ended June 30, 2018 and 2017, there were no items of other comprehensive income. Therefore, no presentation of comprehensive income is required.
Recently Issued Accounting Standards: In May 2014, the FASB issued ASU 2014-09 ("ASC 606"), "Revenue from Contracts with Customers." Under the new guidance, companies are required to recognize revenue when the seller satisfies a performance obligation, which would be when the buyer takes control of the good or service. The Company adopted this guidance using the “modified retrospective” method effective January 1, 2018; as such, the Company applied the guidance only to the most recent period presented in the financial statements. The classification of certain non-lease components of revenue from leases may be impacted by the new revenue standard upon the adoption of the new leasing standard beginning January 1, 2019 (see below). Prior to adoption of ASC 606, gains or losses from real estate sales were adjusted at the time of the sale by the maximum exposure to loss related to continuing involvement with the real estate asset. After adoption, any continuing involvement is considered a separate performance obligation and the sales price is required to be allocated between the elements with continuing involvement and those without continuing involvement. As the continuing performance obligations are satisfied, additional gains or losses will be recognized. The Company had no sales of real estate with continuing involvement during 2018 or in any prior periods that affected results of operations 2018 or could affect results of operations in future periods.
The Company categorizes its primary sources of revenue into revenue from contracts with customers and other revenue accounted for as leases under Accounting Standards Codification Topic 840 - Leases ("ASC 840") as follows:
Rental property revenue consists of (1) contractual revenues from leases recognized on a straight-line basis over the term of the respective lease; (2) percentage rents recognized once a specified sales target is achieved; (3) parking revenue; and (4) the reimbursement of the tenants' share of real estate taxes, insurance, and other operating expenses. Rental property revenue is accounted for in accordance with the guidance set forth in ASC 840.
Fee revenue consists of development fees, management fees, and leasing fees earned from unconsolidated joint ventures and from third parties. Fee revenue is revenue from contracts with customers and is accounted for in accordance with the guidance set forth in ASC 606.
Other revenue consists primarily of termination fees, which are accounted for in accordance with the guidance set forth in ASC 840.
Fee revenue and other revenue, as a whole, are immaterial to total revenues. There was no change to previously reported amounts from the cumulative effect of the adoption of ASC 606. For the three and six months ended June 30, 2018 the Company

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recognized rental property revenue of $113.7 million and $227.0 million, respectively. For the three and six months ended June 30, 2017 the Company recognized rental property revenue of $114.0 million and $226.5 million, respectively. For the three and six months ended June 30, 2018, the Company recognized fee and other revenue of $2.9 million and $6.8 million, respectively. For the three and six months ended June 30, 2017, the Company recognized fee and other revenue of $5.0 million and $12.4 million, respectively.
In February 2016, the FASB issued ASU 2016-02, "Leases," which amends the existing standards for lease accounting by requiring lessees to record most leases on their balance sheets and making targeted changes to lessor accounting and reporting. The new standard will require lessees to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months and classify such leases as either finance or operating leases based on the principle of whether the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method (finance leases) or on a straight-line basis over the term of the lease (operating leases). Leases with a term of 12 months or less will be accounted for similarly to existing guidance for operating leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. ASU 2016-02 supersedes previous leasing standards. The guidance is effective for the fiscal years beginning after December 15, 2018, with early adoption permitted. The Company expects to adopt this guidance using the "modified retrospective" method effective January 1, 2019. Under the new standard, the accounting by a lessor is largely unchanged from that of the previous standard. However, the presentation and disclosure in the financial statements of certain non-lease components, such as charges to tenants for a building's operating expenses, has been updated. In March 2018, the FASB approved an exposure draft which would provide lessors with a practical expedient to not separate non-lease components from the related lease components under certain conditions. The Company believes that the majority of its leases would qualify for the practical expedient. The new standard also revises the treatment of indirect leasing costs and permits the capitalization and amortization only of direct leasing costs. Also, for leases where the Company is a ground lessee, the new standard will require the Company to record a right of use asset and a lease liability on its consolidated balance sheet with a minimal impact on the recognition of ground lease expense. The Company is currently assessing the potential impact of adopting the new guidance.
In the fourth quarter of 2017, the Company adopted ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15") which updated ASC Topic 230, "Statement of Cash Flows." ASU 2016-15 clarified guidance on the classification of certain cash receipts and payments in the statement of cash flows to reduce diversity in practice. The Company adopted this standard with retrospective application and, and as a result, changed the classification of distributions from equity method investments such that it now classifies distributions received on the basis of the nature of the activity that generated the distribution. The adoption of this new approach resulted in a decrease in net cash from by operating activities of $33.6 million and a corresponding increase in net cash from investing activities of $33.6 million for the six months ended June 30, 2017.
In the fourth quarter of 2017, the Company adopted ASU 2016-18, "Restricted Cash" ("ASU 2016-18"), which updated ASC Topic 230, "Statement of Cash Flows." ASU 2016-18 required companies to include restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The adoption of this standard resulted in an decrease in net cash from investing activities of $7.5 million for the six months ended June 30, 2017.
On January 1, 2018, the Company adopted ASU No. 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”).” ASU 2017-05 updated the definition of an “in substance nonfinancial asset” and clarified the derecognition guidance for nonfinancial assets to conform with the new revenue recognition standard. Among other things, ASU 2017-05 requires companies to recognize 100% of the gain on the transfer of a nonfinancial asset to an entity in which it has a noncontrolling interest. The Company adopted this guidance using the "modified retrospective" method. As a result of the adoption of ASU 2017-05, the Company recorded a cumulative effect from change in accounting principle, which credited distributions in excess of cumulative net income by $22.3 million. This cumulative effect adjustment resulted from the 2013 transfer of a wholly-owned property to an entity in which it had a noncontrolling interest.
On January 1, 2018, the Company adopted ASU 2017-09, "Scope of Modification Accounting," which amended the scope of modification accounting for share-based payment arrangements and provided guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718, "Compensation—Stock Compensation." Adoption of the standard did not have a material impact on the Company's financial statements.
2. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
The Company describes its investments in unconsolidated joint ventures in note 6 of notes to consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2017. The following information summarizes financial data and principal activities of the Company's unconsolidated joint ventures. The information included in the following table entitled

8

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summary of financial position is as of June 30, 2018 and December 31, 2017. The information included in the summary of operations table is for the six months ended June 30, 2018 and 2017 (in thousands).
 
Total Assets
 
Total Debt
 
Total Equity
 
Company’s Investment
 
SUMMARY OF FINANCIAL POSITION:
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
Terminus Office Holdings
$
259,619

 
$
261,999

 
$
200,957

 
$
203,131

 
$
48,103

 
$
48,033

 
$
47,349

 
$
24,898

 
DC Charlotte Plaza LLLP
98,068

 
53,791

 

 

 
72,225

 
42,853

 
35,647

 
22,293

 
Carolina Square Holdings LP
108,915

 
106,580

 
73,140

 
64,412

 
34,093

 
33,648

 
19,450

 
19,384

 
Charlotte Gateway Village, LLC
115,244

 
124,691

 

 

 
110,570

 
121,386

 
8,677

 
14,568

 
Austin 300 Colorado Project, LP
33,630

 

 

 

 
33,569

 

 
15,483

 

 
HICO Victory Center LP
14,734

 
14,403

 

 

 
14,603

 
14,401

 
9,865

 
9,752

 
CL Realty, L.L.C.
8,098

 
8,287

 

 

 
8,029

 
8,127

 
2,932

 
2,980

 
AMCO 120 WT Holdings, LLC
24,384

 
18,066

 

 

 
24,407

 
16,354

 
2,853

 
1,664

 
Temco Associates, LLC
4,485

 
4,441

 

 

 
4,380

 
4,337

 
896

 
875

 
EP II LLC
260

 
277

 

 

 
160

 
180

 
28

 
44

 
EP I LLC
501

 
521

 

 

 
315

 
319

 
21

 
25

 
HICO Avalon II, LLC

 
6,379

 

 

 

 
6,303

 

 
4,931

 
Wildwood Associates
11,228

 
16,337

 

 

 
11,162

 
16,297

 
(433
)
(1
)
(1,151
)
(1
)
Crawford Long - CPI, LLC
27,867

 
27,362

 
70,293

 
71,047

 
(44,777
)
 
(44,815
)
 
(21,345
)
(1
)
(21,323
)
(1
)
 
$
707,033

 
$
643,134

 
$
344,390

 
$
338,590

 
$
316,839

 
$
267,423

 
$
121,423

 
$
78,940

 

 
Total Revenues
 
Net Income (Loss)
 
Company's Share of Income (Loss)
 
SUMMARY OF OPERATIONS:
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
Wildwood Associates
$

 
$

 
$
(1,086
)
 
$
(51
)
 
$
2,750

 
$
(26
)
 
Charlotte Gateway Village, LLC
13,477

 
13,380

 
5,189

 
4,734

 
2,594

 
2,367

 
Terminus Office Holdings
22,318

 
21,908

 
3,070

 
3,178

 
1,597

 
1,769

 
Crawford Long - CPI, LLC
6,259

 
6,033

 
1,730

 
1,516

 
824

 
758

 
HICO Victory Center LP
202

 
171

 
202

 
171

 
106

 
114

 
Austin 300 Colorado Project, LP
285

 

 
172

 

 
86

 

 
Temco Associates, LLC
80

 
80

 
36

 
41

 
21

 
25

 
Carolina Square Holdings LP
5,361

 
40

 
445

 
(94
)
 
17

 

 
Courvoisier Centre JV, LLC

 
6,554

 

 
(1,083
)
 
5

 
(195
)
 
EP I LLC
19

 
4,103

 
(4
)
 
44,929

 
(5
)
 
28,525

 
HICO Avalon II, LLC

 

 
(14
)
 

 
(10
)
 

 
EP II LLC

 
2,643

 
(21
)
 
12,967

 
(15
)
 
9,725

 
CL Realty, L.L.C.

 
2,599

 
(71
)
 
2,415

 
(49
)
 
430

 
DC Charlotte Plaza LLLP

 
2

 

 
2

 

 
2

 
111 West Rio Building

 

 

 

 

 
(2,593
)
 
AMCO 120 WT Holdings, LLC

 

 
(24
)
 
(12
)
 

 

 
 
$
48,001

 
$
57,513

 
$
9,624

 
$
68,713

 
$
7,921

 
$
40,901

 
(1) Negative balances are included in deferred income on the balance sheets.

Hico Avalon II LLC, a joint venture between the Company and Hines Avalon II Investor, LLC ("Hines"), commenced development of a 251,000 square foot office building. Pursuant to the joint venture agreement, all predevelopment expenditures were funded 75% by the Company and 25% by Hines until June 2018 when a notice to proceed was issued to the general contractor. At this time, the capital accounts and economics of the joint venture were adjusted such that the Company owns 90% of the venture and Hines owns 10%. Additionally, the Company now has control over the operational aspects of the venture and, therefore, has consolidated the joint venture.
In the second quarter of 2018, the Carolina Square Holdings LP joint venture executed the first of two one-year extensions for its associated construction loan, extending the maturity date to May 2019.

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3. INTANGIBLE ASSETS
Intangible assets on the balance sheets as of June 30, 2018 and December 31, 2017 were as follows (in thousands):
 
 
June 30, 2018
 
December 31, 2017
In-place leases, net of accumulated amortization of $109,477 and $91,548 at June 30, 2018 and December 31, 2017, respectively
 
$
121,619

 
$
139,548

Above-market tenant leases, net of accumulated amortization of $16,424 and $13,038 at June 30, 2018 and December 31, 2017, respectively
 
23,531

 
26,917

Below-market ground lease, net of accumulated amortization of $483 and $345 at June 30, 2018 and December 31, 2017, respectively
 
17,929

 
18,067

Goodwill
 
1,674

 
1,674

 
 
$
164,753

 
$
186,206


Goodwill did not change for the six months ended June 30, 2018 and 2017.
4. OTHER ASSETS
Other assets on the balance sheets as of June 30, 2018 and December 31, 2017 included the following (in thousands):
 
 
June 30, 2018
 
December 31, 2017
Furniture, fixtures and equipment, leasehold improvements, and other deferred costs, net of accumulated depreciation of $23,542 and $21,925 at June 30, 2018 and December 31, 2017, respectively
 
$
12,952

 
$
12,241

Prepaid expenses and other assets
 
6,854

 
3,902

Line of credit deferred financing costs, net of accumulated amortization of $721 and $3,119 at June 30, 2018 and December 31, 2017, respectively
 
6,574

 
1,213

Lease inducements, net of accumulated amortization of $1,218 and $978 at June 30, 2018 and December 31, 2017, respectively
 
3,273

 
3,126

Predevelopment costs and earnest money
 
1,563

 
372

 
 
$
31,216

 
$
20,854

5. NOTES PAYABLE
The following table details the terms and amounts of the Company’s outstanding notes payable at June 30, 2018 and December 31, 2017 ($ in thousands):
Description
 
Interest Rate
 
Maturity*
 
June 30, 2018
 
December 31, 2017
Term Loan, Unsecured
 
3.29
%
 
2021
 
$
250,000

 
$
250,000

Senior Notes, Unsecured
 
3.91
%
 
2025
 
250,000

 
250,000

Fifth Third Center
 
3.37
%
 
2026
 
145,039

 
146,557

Colorado Tower
 
3.45
%
 
2026
 
120,000

 
120,000

Promenade
 
4.27
%
 
2022
 
100,813

 
102,355

Senior Notes, Unsecured
 
4.09
%
 
2027
 
100,000

 
100,000

816 Congress
 
3.75
%
 
2024
 
82,498

 
83,304

Meridian Mark Plaza
 
6.00
%
 
2020
 
23,785

 
24,038

The Pointe
 
4.01
%
 
2019
 
22,285

 
22,510

Credit Facility, Unsecured
 
3.14
%
 
2023
 

 

 
 
 
 
 
 
1,094,420


1,098,764

Unamortized premium, net
 
 
 
 
 
118

 
219

Unamortized loan costs
 
 
 
 
 
(5,274
)
 
(5,755
)
Total Notes Payable
 
 
 
 
 
$
1,089,264

 
$
1,093,228


*Weighted average maturity of notes payable outstanding at June 30, 2018 was 6.2 years.



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Credit Facility
The Company had a $500 million senior unsecured line of credit (the "Credit Facility") that was scheduled to mature on May 28, 2019. The Credit Facility contained financial covenants that required, among other things, the maintenance of an unencumbered interest coverage ratio of at least 2.00; a fixed charge coverage ratio of at least 1.50; an overall leverage ratio of no more than 60%; and a minimum stockholders' equity balance in an amount equal to $1.0 billion, plus a portion of the net cash proceeds from certain equity issuances. The Credit Facility also contained customary representations and warranties and affirmative and negative covenants, as well as customary events of default.
The interest rate applicable to the Credit Facility varied according to the Company’s leverage ratio and was, at the election of the Company, determined based on either (1) the current London Interbank Offered Rate ("LIBOR") plus a spread of between 1.10% and 1.45%, based on leverage, or (2) the greater of Bank of America's prime rate, the federal funds rate plus 0.50%, or the one-month LIBOR plus 1.0% (the “Base Rate”), plus a spread of between 0.10% and 0.45%, based on leverage. The Company also paid an annual facility fee on the total commitments under the Credit Facility of between 0.15% and 0.30%, based on leverage.
On January 3, 2018, the Company entered into a Fourth Amended and Restated Credit Agreement (the "New Credit Facility") under which the Company may borrow up to $1 billion if certain conditions are satisfied.
The New Credit Facility recasts the Credit Facility by, among other things, increasing the size from $500 million to $1 billion; extending the maturity date from May 28, 2019 to January 3, 2023; providing for the expansion of the New Credit Facility by an additional $500 million, subject to receipt of additional commitments from lenders and other customary conditions; and decreasing the Consolidated Unencumbered Interest Coverage ratio from 2.00 to 1.75.
The interest rate applicable to the New Credit Facility varies according to the Company's leverage ratio, and may, at the election of the Company, be determined based on either (1) the current LIBOR plus a spread of between 1.05% and 1.45%, based on leverage, or (2) the greater of Bank of America's prime rate, the federal funds rate plus 0.50%, or the one-month LIBOR plus 1.00% (the "Base Rate"), plus a spread of between 0.10% and 0.45%, based on leverage.
At June 30, 2018, the New Credit Facility's spread over LIBOR was 1.05%. The amount that the Company had available to be drawn under the New Credit Facility was a defined calculation based on the Company's unencumbered assets and other factors. As of June 30, 2018, the Company had no amounts drawn under the New Credit Facility and had the ability to borrow $998 million of the $1 billion available with $2 million utilized by outstanding letters of credit.
Unsecured Term Loan
The Company has a $250 million unsecured term loan (the "Term Loan") that matures on December 2, 2021. Through January 21, 2018, the Term Loan contained financial covenants substantially consistent with those of the Credit Facility. On January 22, 2018, the Term Loan was amended to make the financial covenants consistent with those of the New Credit Facility. The interest rate applicable to the Term Loan varies according to the Company’s leverage ratio, and may, at the election of the Company, be determined based on either (1) LIBOR plus a spread of between 1.20% and 1.70%, based on leverage, or (2) the greater of Bank of America's prime rate, the federal funds rate plus 0.50%, or the one-month LIBOR plus 1.00%, plus a spread of between 0.00% and 0.75%, based on leverage. At June 30, 2018, the Term Loan's spread over LIBOR was 1.20%.
Unsecured Senior Notes
In 2017, the Company closed a $350 million private placement of senior unsecured notes, which was funded in two tranches. The first tranche of $100 million has a 10-year maturity and a fixed annual interest rate of 4.09%. The second tranche of $250 million has an 8-year maturity and a fixed annual interest rate of 3.91%.
The senior unsecured notes contain financial covenants that require, among other things, the maintenance of an unencumbered interest coverage ratio of at least 1.75; a fixed charge coverage ratio of at least 1.50; an overall leverage ratio of no more than 60%; and secured leverage ratio of 40% or less. The senior notes also contain customary representations and warranties and affirmative and negative covenants, as well as customary events of default.
Fair Value
At June 30, 2018 and December 31, 2017, the aggregate estimated fair values of the Company's notes payable were $1.1 billion for each of the periods, calculated by discounting the debt's remaining contractual cash flows at estimated rates at which similar loans could have been obtained at those respective dates. The estimate of the current market rate, which is the most significant input in the discounted cash flow calculation, is intended to replicate debt of similar maturity and loan-to-value relationship. These fair value calculations are considered to be Level 2 under the guidelines as set forth in ASC 820, "Fair Value Measurement," as the Company utilizes market rates for similar type loans from third-party brokers.


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Other Information
For the three and six months ended June 30, 2018 and 2017, interest expense was as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Total interest incurred
$
11,103

 
$
10,741

 
$
21,977

 
$
22,072

Interest capitalized
(1,389
)
 
(2,218
)
 
(2,485
)
 
(3,808
)
Total interest expense
$
9,714

 
$
8,523

 
$
19,492

 
$
18,264

In July 2018, the Company notified the lender that it intends to repay The Pointe note payable in full without penalty during the third quarter of 2018.
6. COMMITMENTS AND CONTINGENCIES

Commitments
The Company had outstanding letters of credit and performance bonds totaling $2.7 million, at June 30, 2018. As a lessor, the Company had $102.9 million in future obligations under leases to fund tenant improvements and other future construction obligations at June 30, 2018. As a lessee, the Company had future obligations under ground and other operating leases of $207.0 million at June 30, 2018.
Litigation
The Company is subject to various legal proceedings, claims, and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters using the latest information available. The Company records a liability for litigation if an unfavorable outcome is probable and the amount of loss or range of loss can be reasonably estimated. If an unfavorable outcome is probable and a reasonable estimate of the loss is a range, the Company accrues the best estimate within the range. If no amount within the range is a better estimate than any other amount, the Company accrues the minimum amount within the range. If an unfavorable outcome is probable but the amount of the loss cannot be reasonably estimated, the Company discloses the nature of the litigation and indicates that an estimate of the loss or range of loss cannot be made. If an unfavorable outcome is reasonably possible and the estimated loss is material, the Company discloses the nature and estimate of the possible loss of the litigation. The Company does not disclose information with respect to litigation where an unfavorable outcome is considered to be remote or where the estimated loss would not be material. Based on current expectations, such matters, both individually and in the aggregate, are not expected to have a material adverse effect on the liquidity, results of operations, business, or financial condition of the Company.
7. STOCK-BASED COMPENSATION
The Company has several types of stock-based compensation - stock options, restricted stock, and restricted stock units (“RSUs”) - which are described in note 13 of notes to consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2017. The expense related to stock options and time vested restricted stock is generally fixed. The expense related to RSUs generally fluctuates from period to period dependent, in part, on the Company's absolute stock price and stock price performance relative to its peers. The Company recorded stock-based compensation expense, net of forfeitures, of $3.4 million and $2.9 million for the three months ended June 30, 2018 and 2017, respectively, and $6.0 million and $4.6 million for the six months ended June 30, 2018 and 2017, respectively.
The Company maintains the 2009 Incentive Stock Plan (the "2009 Plan") and the 2005 Restricted Stock Unit Plan (the “RSU Plan”). Under the 2009 Plan, during the quarter ended March 31, 2018, the Company made restricted stock grants of 315,199 shares to key employees, which vest ratably over a three-year period. Under the RSU Plan, during the quarter ended March 31, 2018, the Company awarded two types of performance-based RSUs to key employees based on the following metrics: (1) Total Stockholder Return of the Company, as defined in the RSU Plan, as compared to the companies in the SNL US REIT Office index (“TSR RSUs”) and (2) the ratio of cumulative funds from operations per share to targeted cumulative funds from operations per share (“FFO RSUs”) as defined in the RSU Plan. The performance period for both awards is January 1, 2018 to December 31, 2020, and the targeted units awarded of TSR RSUs and FFO RSUs was 315,124 and 135,054, respectively. The ultimate payout of these awards can range from 0% to 200% of the targeted number of units depending on the achievement of the market and performance metrics described above. These RSU awards cliff vest on December 31, 2020 and are to be settled in cash with payment dependent upon attainment of required service, market, and performance criteria. The number of RSUs vesting will be determined by the Compensation Committee, and the payout per unit will be equal to the average closing price on each trading

12

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day during the 30-day period ending on December 31, 2020. The Company expenses an estimate of the fair value of the TSR RSUs over the performance period using a quarterly Monte Carlo valuation. The FFO RSUs are expensed over the vesting period using the fair market value of the Company's stock at the reporting date multiplied by the anticipated number of units to be paid based on the current estimate of what the ratio is expected to be upon vesting. Dividend equivalents on the TSR RSUs and the FFO RSUs will also be paid based upon the percentage vested.
During the quarter ended June 30, 2018, the Company issued 118,555 shares of common stock at fair value to members of its board of directors in lieu of fees, and recorded $1.1 million in general and administrative expense related to these issuances.
During the quarter ended June 30, 2018, 457,206 stock options were exercised. As a result, the Company issued 47,309 shares and paid $945,000 to optionees.
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2018 and 2017 (in thousands except per share amounts):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
Earnings per common share - basic:
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
      Income from continuing operations
$
21,749

 
$
170,945

 
$
38,155

 
$
175,803

 
Net income attributable to noncontrolling interests in CPLP
from continuing operations
(410
)
 
(2,856
)
 
(697
)
 
(2,957
)
 
Net income attributable to other noncontrolling interests
(63
)
 

 
(139
)
 
(6
)
 
     Net income available for common stockholders
$
21,276

 
$
168,089

 
$
37,319

 
$
172,840

 
 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares - basic
420,294

 
419,402

 
420,225

 
411,137

 
 
 
 
 
 
 
 
 
 
Earnings per common share - basic
$
0.05

 
$
0.40

 
$
0.09

 
$
0.42

 
 
 
 
 
 
 
 
 
 
Earnings per common share - diluted:
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
     Income from continuing operations
$
21,749

 
$
170,945

 
$
38,155


$
175,803

 
Net income attributable to other noncontrolling interests
    from continuing operations
(63
)
 

 
(139
)
 
(6
)
 
Net income available for common stockholders before
     net income attributable to noncontrolling interests in
     CPLP
$
21,686

 
$
170,945

 
$
38,016

 
$
175,797

 
 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares - basic
420,294

 
419,402

 
420,225

 
411,137

 
     Add:
 
 
 
 
 
 
 
 
Potential dilutive common shares - stock options
233

 
320

 
245

 
306

 
Weighted average units of CPLP convertible into
    common shares
6,974

 
7,458

 
6,974

 
7,784

 
Weighted average common shares - diluted
427,501

 
427,180

 
427,444

 
419,227

 
 
 
 
 
 
 
 
 
 
Earnings per common share - diluted
$
0.05

 
$
0.40

 
$
0.09


$
0.42

 
 
 
 
 
 
 
 
 
 
Weighted average anti-dilutive stock options outstanding

 
731

 
12

 
744

 









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Table of Contents


9.    CONSOLIDATED STATEMENTS OF CASH FLOWS - SUPPLEMENTAL INFORMATION
Supplemental information related to cash flows, including significant non-cash activity affecting the consolidated statements of cash flows, for the six months ended June 30, 2018 and 2017 is as follows (in thousands):
 
 
June 30, 2018
 
June 30, 2017
Interest paid, net of amounts capitalized
$
19,283

 
$
22,721

Non-Cash Transactions:
 
 
 
 
Transfer from projects under development to operating properties
212,628

 
58,928

 
Common stock dividends declared and accrued
27,326

 
25,212

 
Change in accrued property acquisition, development, and tenant expenditures
24,121

 
(1,110
)
 
Cumulative effect of change in accounting principle
22,329

 

 
Transfer from investment in unconsolidated joint ventures to projects under development
7,025

 

 
Transfer from investment in unconsolidated joint ventures to operating properties

 
68,390


The following table provides a reconciliation of cash, cash equivalents, and restricted cash recorded on the balance sheet to cash, cash equivalents, and restricted cash in the statements of cash flows (in thousands):
 
June 30,
 
December 31,
 
2018
 
2017
 
2017
 
2016
Cash and cash equivalents
$
110,232

 
$
16,420

 
$
148,929

 
$
35,687

Restricted cash
328

 
8,139

 
56,816

 
15,634

Total cash, cash equivalents, and restricted cash
$
110,560

 
$
24,559

 
$
205,745

 
$
51,321

10. REPORTABLE SEGMENTS
The Company's segments are based on the Company's method of internal reporting which classifies operations by property type and geographical area. The segments by property type are: Office and Mixed-Use. The segments by geographical region are: Atlanta, Austin, Charlotte, Phoenix, Tampa, Orlando, and Other. In the fourth quarter of 2017, the Company sold its properties in the Orlando market as part of its ongoing investment strategy of exiting non-core markets and recycling investment capital to fund investment activity. These reportable segments represent an aggregation of operating segments reported to the Chief Operating Decision Maker based on similar economic characteristics that include the type of property and the geographical location. Each segment includes both consolidated operations and the Company's share of unconsolidated joint venture operations.
Company management evaluates the performance of its reportable segments in part based on net operating income (“NOI”). NOI represents rental property revenues less rental property operating expenses. NOI is not a measure of cash flows or operating results as measured by GAAP, is not indicative of cash available to fund cash needs, and should not be considered an alternative to cash flows as a measure of liquidity. All companies may not calculate NOI in the same manner. The Company considers NOI to be an appropriate supplemental measure to net income as it helps both management and investors understand the core operations of the Company's operating assets. NOI excludes corporate general and administrative expenses, interest expense, depreciation and amortization, impairments, gains/loss on sales of real estate, and other non-operating items.








14

Table of Contents


Segment net income, amount of capital expenditures, and total assets are not presented in the following tables because management does not utilize these measures when analyzing its segments or when making resource allocation decisions. Information on the Company's segments along with a reconciliation of NOI to net income for the three and six months ended June 30, 2018 and 2017 are as follows (in thousands):
Three Months Ended June 30, 2018
 
Office
 
Mixed-Use
 
Total
Net Operating Income:
 
 
 
 
 
 
Atlanta
 
$
32,178

 
$

 
$
32,178

Charlotte
 
15,431

 

 
15,431

Austin
 
15,088

 

 
15,088

Phoenix
 
8,880

 

 
8,880

Tampa
 
7,642

 

 
7,642

Other
 
433

 
543

 
976

Total Net Operating Income
 
$
79,652

 
$
543

 
$
80,195

Three Months Ended June 30, 2017
 
Office
 
Mixed-Use
 
Total
Net Operating Income:
 
 
 
 
 
 
Atlanta
 
$
29,218

 
$
853

 
$
30,071

Charlotte
 
15,202

 

 
15,202

Austin
 
14,852

 

 
14,852

Phoenix
 
8,838

 

 
8,838

Tampa
 
7,451

 

 
7,451

Orlando
 
3,318

 

 
3,318

Other
 
383

 

 
383

Total Net Operating Income
 
$
79,262

 
$
853

 
$
80,115

Six Months Ended June 30, 2018
 
Office
 
Mixed-Use
 
Total
Net Operating Income:
 
 
 
 
 
 
Atlanta
 
$
64,343

 
$

 
$
64,343

Charlotte
 
31,273

 

 
31,273

Austin
 
30,029

 

 
30,029

Phoenix
 
17,854

 

 
17,854

Tampa
 
15,370

 

 
15,370

Other
 
873

 
1,031

 
1,904

Total Net Operating Income
 
$
159,742

 
$
1,031

 
$
160,773

Six Months Ended June 30, 2017
 
Office
 
Mixed-Use
 
Total
Net Operating Income:
 
 
 
 
 
 
Atlanta
 
$
59,190

 
$
3,126

 
$
62,316

Charlotte
 
30,627

 

 
30,627

Austin
 
29,039

 

 
29,039

Phoenix
 
16,056

 

 
16,056

Tampa
 
14,287

 

 
14,287

Orlando
 
7,108

 

 
7,108

Other
 
848

 

 
848

Total Net Operating Income
 
$
157,155

 
$
3,126

 
$
160,281




15

Table of Contents


The following reconciles Net Operating Income to Net Income for each of the periods presented (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net Operating Income
$
80,195

 
$
80,115

 
$
160,773

 
$
160,281

Net operating income from unconsolidated joint
   ventures
(7,228
)
 
(7,609
)
 
(14,649
)
 
(16,783
)
Fee income
1,798

 
1,854

 
4,692

 
3,791

Other income
1,132

 
3,174

 
2,092

 
8,600

Reimbursed expenses
(860
)
 
(907
)
 
(1,802
)
 
(1,772
)
General and administrative expenses
(8,071
)
 
(8,618
)
 
(14,880
)
 
(14,828
)
Interest expense
(9,714
)
 
(8,523
)
 
(19,492
)
 
(18,264
)
Depreciation and amortization
(45,675
)
 
(50,040
)
 
(90,768
)
 
(104,924
)
Acquisition and transaction costs
(137
)
 
(246
)
 
(228
)
 
(2,177
)
Gain (loss) on extinguishment of debt

 
1,829

 
(85
)
 
1,829

Other expenses
(44
)
 
(236
)
 
(364
)
 
(612
)
Income from unconsolidated joint ventures
5,036

 
40,320

 
7,921

 
40,901

Gain on sale of investment properties
5,317

 
119,832

 
4,945

 
119,761

Net Income
$
21,749


$
170,945

 
$
38,155

 
$
175,803

Revenues by reportable segment, including a reconciliation to total rental property revenues on the condensed consolidated statements of operations, for three and six months ended June 30, 2018 and 2017 are as follows (in thousands):
Three Months Ended June 30, 2018
 
Office
 
Mixed-Use
 
Total
Revenues:
 
 
 
 
 
 
Atlanta
 
$
50,362

 
$

 
$
50,362

Austin
 
26,339

 

 
26,339

Charlotte
 
23,037

 

 
23,037

Tampa
 
12,251

 

 
12,251

Phoenix
 
12,247

 

 
12,247

Other
 
549

 
834

 
1,383

Total segment revenues
 
124,785

 
834

 
125,619

Less: Company's share of rental property revenues from unconsolidated joint ventures
 
(11,087
)
 
(834
)
 
(11,921
)
Total rental property revenues
 
$
113,698

 
$

 
$
113,698

Three Months Ended June 30, 2017
 
Office
 
Mixed-Use
 
Total
Revenues:
 
 
 
 
 
 
Atlanta
 
$
46,293

 
$
1,358

 
$
47,651

Austin
 
25,429

 

 
25,429

Charlotte
 
22,599

 

 
22,599

Phoenix
 
11,879

 

 
11,879

Tampa
 
11,795

 

 
11,795

Orlando
 
6,331

 

 
6,331

Other
 
758

 

 
758

Total segment revenues
 
125,084

 
1,358

 
126,442

Less: Company's share of rental property revenues from unconsolidated joint ventures
 
(11,077
)
 
(1,358
)
 
(12,435
)
Total rental property revenues
 
$
114,007

 
$

 
$
114,007


16

Table of Contents


Six Months Ended June 30, 2018
 
Office
 
Mixed-Use
 
Total
Revenues:
 
 
 
 
 
 
Atlanta
 
$
99,828

 
$

 
$
99,828

Austin
 
52,915

 

 
52,915

Charlotte
 
46,078

 

 
46,078

Tampa
 
24,787

 

 
24,787

Phoenix
 
24,307

 

 
24,307

Other
 
1,078

 
1,624

 
2,702

Total segment revenues
 
248,993

 
1,624

 
250,617

Less: Company's share of rental property revenues from unconsolidated joint ventures
 
(21,947
)
 
(1,624
)
 
(23,571
)
Total rental property revenues
 
$
227,046

 
$

 
$
227,046

Six Months Ended June 30, 2017
 
Office
 
Mixed-Use
 
Total
Revenues:
 
 
 
 
 
 
Atlanta
 
$
93,814

 
$
5,049

 
$
98,863

Austin
 
49,963

 

 
49,963

Charlotte
 
45,342

 

 
45,342

Tampa
 
23,098

 

 
23,098

Phoenix
 
21,997

 

 
21,997

Orlando
 
12,972

 

 
12,972

Other
 
1,575

 

 
1,575

Total segment revenues
 
248,761

 
5,049

 
253,810

Less: Company's share of rental property revenues from unconsolidated joint ventures
 
(22,237
)
 
(5,049
)
 
(27,286
)
Total rental property revenues
 
$
226,524

 
$

 
$
226,524





17

Table of Contents


Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview:
Cousins Properties Incorporated ("Cousins") (and collectively, with its subsidiaries, the "Company," "we," "our," or "us") is a self-administered and self-managed real estate investment trust, or REIT. Cousins conducts substantially all of its business through Cousins Properties, LP ("CPLP"). Cousins owns approximately 98% of CPLP and consolidates CPLP. CPLP owns Cousins TRS Services LLC, a taxable entity which owns and manages its own real estate portfolio and performs certain real estate related services for other parties. Our strategy is to create value for our stockholders through ownership of the premier urban office portfolio in the Sunbelt markets, with a particular focus on Georgia, Texas, North Carolina, Florida, and Arizona. 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 investment 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. As of June 30, 2018, our portfolio of real estate assets consisted of interests in 29 operating properties (28 office and one mixed-use) containing 15.1 million square feet of space and five projects (four office and one mixed-use) under active development.
We leased or renewed 327,680 square feet of office space during the second quarter of 2018. The weighted average net effective rent of these leases, representing base rent less operating expense reimbursements and leasing costs, was $24.41 per square foot. For those leases that were previously occupied within the past year, net effective rent increased 34.2%. Same property net operating income (defined below) for consolidated properties and our share of unconsolidated properties increased by 1.3% between the three months ended June 30, 2018 and 2017.
Results of Operations
Net Operating Income
The following table summarizes rental property revenues, rental property operating expenses, and net operating income ("NOI") for each of the periods presented, including our same property portfolio. NOI represents rental property revenue less rental property operating expenses. Our same property portfolio is comprised of office properties that have been fully operational in each of the comparable reporting periods. A fully operational property is one that has achieved 90% economic occupancy or has been substantially complete and owned by us for each of the periods presented. Same property amounts for the 2018 versus 2017 comparison are from properties that have been owned since January 1, 2017 through the end of the current reporting period, excluding dispositions. This information is presented for consolidated properties only and does not include net operating income from our unconsolidated joint ventures.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
$ Change
 
% Change
 
2018
 
2017
 
$ Change
 
% Change
Rental Property Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Same Property
$
103,866

 
$
100,589

 
$
3,277

 
3.3
 %
 
$
207,856

 
$
200,242

 
$
7,614

 
3.8
 %
Non-Same Property