News Column

COUSINS PROPERTIES INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

February 13, 2014

The following discussion and analysis should be read in conjunction with the selected financial data and the consolidated financial statements and notes. Overview of 2013 Performance and Company and Industry Trends The Company executed its strategy of creating value for its stockholders through the acquisition, development, ownership, and management of top-tier urban office assets and opportunistic mixed-use developments in Sunbelt markets, with a particular focus on Georgia, Texas, and North Carolina. During 2013, the Company made significant progress on its goals of simplifying its business platform, enhancing and growing a portfolio of trophy assets, and making opportunistic investments, while maintaining a strong balance sheet. Highlighting these efforts was the transformative acquisition of a portfolio of assets in Texas and the disposition of substantially all of its lifestyle and power center retail holdings. Investment Activity 21



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The Company's investment strategy is to purchase top-tier office assets or locate opportunistic development or redevelopment projects in its core markets to which it can add value through relationships, capital, or market expertise. During 2013, the Company purchased assets totaling 7.0 million square feet in the Texas markets of Dallas/Fort Worth, Houston, and Austin. The Company's first acquisition of 2013 was Post Oak Central, a 1.3 million square-foot, Class-A office complex in the Galleria submarket of Houston. This property was acquired from an affiliate of J.P. Morgan Asset Management for $230.9 million and represented the Company's first investment in the Houston market. This asset has three buildings and a two acre development parcel on which the Company is contemplating future development activities. This project is 94.5% leased at year end. In connection with the Post Oak Central acquisition, the Company acquired the interest of its joint venture partner in Terminus 200 then contributed Terminus 100 and Terminus 200 to a new joint venture with JP Morgan. The Company also purchased 816 Congress, a 435,000 square-foot, Class-A office tower in downtown Austin for $102.4 million. This building is 76.6% leased at year end and the Company expects to utilize its market expertise and strong local relationships to drive new leasing activity. The Company's largest acquisition in 2013 was the purchase of Greenway Plaza, a 4.3 million square-foot 10-building office portfolio in Houston, and 777 Main, a 980,000 square-foot office tower in Fort Worth, Texas. Total purchase price for these assets was $1.1 billion. This acquisition significantly expanded the Company's operating platform in Texas. The Company's development activities in 2013 consisted of the commencement of two projects, one in Austin and one in Atlanta. The Austin project, Colorado Tower, represents a 373,000 square foot, Class-A office tower in downtown Austin with a total projected cost of $126.1 million. The Atlanta project is the second phase of Emory Point which is expected to consist of 307 apartments and 43,000 square feet of retail space with a total projected cost of $73.3 million. The Company expects these two development projects to become operational in late 2014 and 2015. Disposition Activity The Company disposed of $138.2 million in non-core assets during 2013 in order to further simplify its business platform and be more focused on top-tier office assets and opportunistic mixed-use developments within its core markets. These dispositions included the sale of all of its lifestyle retail assets as well as interests in power centers within joint ventures. The Company sold its interests in Tiffany Springs MarketCenter, a 238,000 square foot power center in Kansas City; its 50% interest in The Avenue Murfreesboro, a 751,000 square foot lifestyle center in Murfreesboro, Tennessee; and its minority interests in eight retail properties in two joint ventures with Prudential. The Company also sold its Inhibitex building, a medical research office building in Atlanta. Prior to the sale of Inhibitex, the Company leased the building to a single user under an eleven-year lease. Throughout the year, the Company reduced its land holdings by selling 431 acres of land, including 140 acres at Blalock Lakes, nine acres in Round Rock, Texas, and 123 acres representing its remaining land holdings in its Jefferson Mill industrial development. These land sales reduced the Company's share of the net book value of its land holdings by $14.6 million. Financing Activity The Company entered 2013 with a strong balance sheet and one of its ongoing objectives is to maintain a conservative balance sheet that provides it with the flexibility to act on opportunities as they arise. The Company acquired the properties discussed above and reduced its overall leverage by funding the acquisitions with a combination of common equity issuances, asset sales, and new indebtedness. The Company partially funded its 816 Congress acquisition with the issuance of 16.5 million shares of its common stock at $10.45 per share resulting in net proceeds to the Company of $165.1 million. The Company also used a portion of the proceeds from this offering to redeem all outstanding shares of its 7 % Series A Cumulative Redeemable Preferred Stock for $74.8 million. The Company issued common shares in connection with the acquisition of Greenway Plaza and 777 Main. In this offering, the Company issued 69.0 million shares of common stock at $10.00 per share resulting in net proceeds to the Company of $661.3 million. The Company also placed mortgage debt on two of its existing assets to help fund the Greenway Plaza and 777 Main acquisition. The Post Oak Central loan generated $188.8 in proceeds at a fixed rate of 4.26% and the Promenade loan generated $114.0 million at a fixed rate of 4.27%. The remaining purchase price for the 816 Congress, Greenway Plaza, and 777 Main acquisitions was funded with the asset sales discussed above. Portfolio Activity 22



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In 2013, the Company leased or renewed 1,720,000 square feet of office and retail space. Net effective rent, representing base rent less operating expense reimbursements and leasing costs, was $13.46 per square foot in 2013. Net effective rent per square foot increased 13% on spaces that have been previously occupied in the past year. The same property leasing percentage remained stable throughout the year. Effect of 2013 Activities As a result of the significant changes in 2013 discussed above, the Company is larger, has more assets in Texas, is more focused on the office sector, is less leveraged, and is more efficiently managed. Below are certain metrics that demonstrate these changes: December 31, 2012 2013 Total market capitalization (in billions) $ 1.6 $



2.9

Texas square footage to total square footage 8.9 % 51.5 % Office square footage to total square footage 65.6 % 93.8 % Debt to total market capitalization 36.5 % 29.5 % Same property weighted average occupancy (fourth quarter) 89.0 % 90.4 % Land as percentage of undepreciated assets 3.5 %



1.6 % Annualized general and administrative expense as a percentage of undepreciated assets (fourth quarter)

1.3 %



0.7 %

Market Conditions The Company continues to target urban high-barrier to entry submarkets in Austin, Dallas-Fort Worth, Houston, Atlanta, Charlotte and Raleigh. Management believes these markets show positive demographic and economic trends compared to the national average. Houston has emerged into a leading global energy hub with oil and gas jobs peaking at an average annual growth of 16% in 2012. The city has one of the largest medical complexes in the world and stands to reap the economic benefits from the pending expansion of the Panama Canal. Since January 2010, Houston has added 377,000 new jobs, more than two jobs for every one job lost during the recession, and forecasts show Houston employment growing at a rate more than 50% the average market. Dallas/Fort Worth and Austin represent additional growth prospects in Texas with forecasted employment growth of 2.7% and 3.3% respectively. Dallas/Fort Worth added more than 80,000 jobs in 2013, one of the largest gains of any U.S. metro area. Austin's affordability, strong population growth and talented workforce continue to fuel future employment with the economy forecasted to grow at nearly double the national average. The Atlanta metro area, while slower to recover from the recent recession, is showing positive signs of economic growth. Atlanta has reclaimed all of the office jobs it lost during the downturn, and 2013 represents the fourth consecutive year of positive absorption for the office market. The metro area's diverse economic base coupled with its major research universities provide a platform for positive economic development with job growth forecasted at 2.4% compared to the national average of 1.5%. The Company's target markets combined twelve-month job growth was 2.7% compared to a national average of 0.8%. Management believes that it will benefit from these trends in the form of new leasing activity, higher future rents, and more investment opportunities for future value creation. Going forward, the Company expects to generate returns and create stockholder value through the lease up of its existing portfolio, through the execution of its development pipeline, and through opportunistic acquisition and development investments within its core markets. Critical Accounting Policies The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") as outlined in the Financial Accounting Standards Board's Accounting Standards Codification, and the notes to consolidated financial statements include a summary of the significant accounting policies for the Company. The preparation of financial statements in accordance with GAAP requires the use of certain estimates, a change in which could materially affect revenues, expenses, assets or liabilities. Some of the Company's accounting policies are considered to be critical accounting policies, which are ones that are both important to the portrayal of a company's financial condition and 23



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results of operations, and ones that also require significant judgment or complex estimation processes. The Company's critical accounting policies are as follows: Real Estate Assets Cost Capitalization. The Company is involved in all stages of real estate ownership, including development. Prior to the point a project becomes probable of being developed (defined as more likely than not), the Company expenses predevelopment costs. After management determines the project is probable, all subsequently incurred predevelopment costs, as well as interest, real estate taxes, and certain internal personnel and associated costs directly related to the project under development, are capitalized in accordance with accounting rules. If the Company abandons development of a project that had earlier been deemed probable, the Company charges all previously capitalized costs to expense. If this occurs, the Company's predevelopment expenses could rise significantly. The determination of whether a project is probable requires judgment by management. If management determines that a project is probable, interest, general and administrative, and other expenses could be materially different than if management determines the project is not probable. During the predevelopment period of a probable project and the period in which a project is under construction, the Company capitalizes all direct and indirect costs associated with planning, developing, leasing, and constructing the project. Determination of what costs constitute direct and indirect project costs requires management, in some cases, to exercise judgment. If management determines certain costs to be direct or indirect project costs, amounts recorded in projects under development on the balance sheet and amounts recorded in general and administrative and other expenses on the statements of comprehensive income could be materially different than if management determines these costs are not directly or indirectly associated with the project. Once a project is constructed and deemed substantially complete and held for occupancy, carrying costs, such as real estate taxes, interest, internal personnel, and associated costs, are expensed as incurred. Determination of when construction of a project is substantially complete and held available for occupancy requires judgment. The Company considers projects and/or project phases to be both substantially complete and held for occupancy at the earlier of the date on which the project or phase reached economic occupancy of 90% or one year after it is substantially complete. The Company's judgment of the date the project is substantially complete has a direct impact on the Company's operating expenses and net income for the period. Operating Property Acquisitions. Upon acquisition of an operating property, the Company records the acquired tangible and intangible assets and assumed liabilities at fair value at the acquisition date. Fair value is based on estimated cash flow projections that utilize available market information and discount and/or capitalization rates as appropriate. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. The acquired assets and assumed liabilities for an acquired operating property generally include, but are not limited to: land, buildings, and identified tangible and intangible assets and liabilities associated with in-place leases, including tenant improvements, leasing costs, value of above-market and below-market leases, and value of acquired in-place lease. The fair value of land is derived from comparable sales of land within the same submarket and/or region. The fair value of buildings, tenant improvements, and leasing costs are based upon current market replacement costs and other relevant market rate information. The fair value of the above-market or below-market component of an acquired in-place lease is based upon the present value (calculated using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining term and (ii) management's estimate of the rents that would be paid using fair market rental rates and rent escalations at the date of acquisition over the remaining term of the lease. In-place leases at acquired properties are reviewed at the time of acquisition to determine if contractual rents are above or below current market rents for the acquired property, and an identifiable intangible asset or liability is recorded if there is an above-market or below-market lease. The fair value of acquired in-place leases is derived based on management's assessment of lost revenue and costs incurred for the period required to lease the "assumed vacant" property to the occupancy level when purchased. This fair value is based on a variety of considerations including, but not necessarily limited to: (1) the value associated with avoiding the cost of originating the acquired in-place leases; (2) the value associated with lost revenue related to tenant reimbursable operating costs estimated to be incurred during the assumed lease-up period; and (3) the value associated with lost rental revenue from existing leases during the assumed lease-up period. Factors considered in performing these analyses include an estimate of the carrying costs during the expected lease-up periods, such as real estate taxes, insurance, and other operating expenses, current market conditions, and costs to execute similar leases, such as leasing commissions, legal, and other related expenses. 24



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The amounts recorded for above-market and in-place leases are included in other assets on the balance sheets, and the amounts for below-market leases are included in other liabilities on the balance sheets. These amounts are amortized on a straight-line basis as an adjustment to rental income over the remaining term of the applicable leases. The determination of the fair value of the acquired tangible and intangible assets and assumed liabilities of operating property acquisitions requires significant judgments and assumptions about the numerous inputs discussed above. The use of different assumptions in these fair value calculations could significantly affect the reported amounts of the allocation of the acquisition related assets and liabilities and the related amortization and depreciation expense recorded for such assets and liabilities. In addition, since the value of above-market and below-market leases are amortized as either a reduction or increase to rental income, respectively, the judgments for these intangibles could have a significant impact on reported rental revenues and results of operations. Depreciation and Amortization. The Company depreciates or amortizes operating real estate assets over their estimated useful lives using the straight-line method of depreciation. Management uses judgment when estimating the life of real estate assets and when allocating certain indirect project costs to projects under development. Historical data, comparable properties, and replacement costs are some of the factors considered in determining useful lives and cost allocations. The use of different assumptions for the estimated useful life of assets or cost allocations could significantly affect depreciation and amortization expense and the carrying amount of the Company's real estate assets. Impairment. Management reviews its real estate assets on a property-by-property basis for impairment. This review includes the Company's operating properties and the Company's land holdings. The first step in this process is for management to use judgment to determine whether an asset is considered to be held and used or held for sale, in accordance with accounting guidance. In order to be considered a real estate asset held for sale, management must, among other things, have the authority to commit to a plan to sell the asset in its current condition, have commenced the plan to sell the asset and have determined that it is probable that the asset will sell within one year. If management determines that an asset is held for sale, it must record an impairment loss if the fair value less costs to sell is less than the carrying amount. All real estate assets not meeting the held for sale criteria are considered to be held and used. In the impairment analysis for assets held and used, management must use judgment to determine whether there are indicators of impairment. For operating properties, these indicators could include a decline in a property's leasing percentage, a current period operating loss or negative cash flows combined with a history of losses at the property, a decline on lease rates for that property or others in the property's market, or an adverse change in the financial condition of significant tenants. For land holdings, indicators could include an overall decline in the market value of land in the region, a decline in development activity for the intended use of the land or other adverse economic and market conditions. If management determines that an asset that is held and used has indicators of impairment, it must determine whether the undiscounted cash flows associated with the asset exceed the carrying amount of the asset. If the undiscounted cash flows are less than the carrying amount of the asset, the Company must reduce the carrying amount of the asset to fair value. In calculating the undiscounted net cash flows of an asset, management must estimate a number of inputs. For operating properties, management must estimate future rental rates, expenditures for future leases, future operating expenses, and market capitalization rates for residual values, among other things. For land holdings, management must estimate future sales prices as well as operating income, carrying costs, and residual capitalization rates for land held for future development. In addition, if there are alternative strategies for the future use of the asset, management must assess the probability of each alternative strategy and perform a probability-weighted undiscounted cash flow analysis to assess the recoverability of the asset. Management must use considerable judgment in determining the alternative strategies and in assessing the probability of each strategy selected. In determining the fair value of an asset, management exercises judgment on a number of factors. Management may determine fair value by using a discounted cash flow calculation or by utilizing comparable market information. Management must determine an appropriate discount rate to apply to the cash flows in the discounted cash flow calculation. Management must use judgment in analyzing comparable market information because no two real estate assets are identical in location and price. The estimates and judgments used in the impairment process are highly subjective and susceptible to frequent change. If management determines that an asset is held and used, the results of operations could be materially different than if it determines that an asset is held for sale. Different assumptions management uses in the calculation of undiscounted net cash flows of a project, including the assumptions associated with alternative strategies and the probabilities associated with alternative strategies, could cause a material impairment loss to be recognized when no impairment is otherwise warranted. Management's assumptions about the discount rate used in a discounted cash flow estimate of fair value and management's judgment with 25



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respect to market information could materially affect the decision to record impairment losses or, if required, the amount of the impairment losses. Revenue Recognition - Valuation of Receivables Notes and accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The Company reviews its receivables regularly for potential collection problems in computing the allowance to record against its receivables. This review requires management to make certain judgments regarding collectibility, notwithstanding the fact that ultimate collections are inherently difficult to predict. Economic conditions fluctuate over time, and the Company has tenants in many different industries which experience changes in economic health, making collectibility prediction difficult. Therefore, certain receivables currently deemed collectible could become uncollectible, and those reserved could ultimately be collected. A change in judgments made could result in an adjustment to the allowance for doubtful accounts with a corresponding effect on net income. Investment in Joint Ventures The Company holds ownership interests in a number of joint ventures with varying structures. Management evaluates all of its joint ventures and other variable interests to determine if the entity is a variable interest entity ("VIE"), as defined in accounting rules. If the venture is a VIE, and if management determines that the Company is the primary beneficiary, the Company consolidates the assets, liabilities and results of operations of the VIE. The Company quarterly reassesses its conclusions as to whether the entity is a VIE and whether consolidation is appropriate as required under the rules. For entities that are not determined to be VIEs, management evaluates whether or not the Company has control or significant influence over the joint venture to determine the appropriate consolidation and presentation. Generally, entities under the Company's control are consolidated, and entities over which the Company can exert significant influence, but does not control, are accounted for under the equity method of accounting. Management uses judgment to determine whether an entity is a VIE, whether the Company is the primary beneficiary of the VIE, and whether the Company exercises control over the entity. If management determines that an entity is a VIE with the Company as primary beneficiary or if management concludes that the Company exercises control over the entity, the balance sheets and statements of comprehensive income would be significantly different than if management concludes otherwise. In addition, VIEs require different disclosures in the notes to the financial statements than entities that are not VIEs. Management may also change its conclusions and, thereby, change its balance sheets, statements of comprehensive income, and notes to the financial statements, based on facts and circumstances that arise after the original consolidation determination is made. These changes could include additional equity contributed to entities, changes in the allocation of cash flow to entity partners, and changes in the expected results within the entity. Management performs an impairment analysis of the recoverability of its investments in joint ventures on a quarterly basis. As part of this analysis, management first determines whether there are any indicators of impairment in any joint venture investment. If indicators of impairment are present for any of the Company's investments in joint ventures, management calculates the fair value of the investment. If the fair value of the investment is less than the carrying value of the investment, management must determine whether the impairment is temporary or other than temporary, as defined by GAAP. If management assesses the impairment to be temporary, the Company does not record an impairment charge. If management concludes that the impairment is other than temporary, the Company records an impairment charge. Management uses considerable judgment in the determination of whether there are indicators of impairment present and in the assumptions, estimations and inputs used in calculating the fair value of the investment. These judgments are similar to those outlined above in the impairment of real estate assets. Management also uses judgment in making the determination as to whether the impairment is temporary or other than temporary. The Company utilizes guidance provided by the SEC in making the determination of whether the impairment is temporary. The guidance indicates that companies consider the length of time that the impairment has existed, the financial condition of the joint venture, and the ability and intent of the holder to retain the investment long enough for a recovery in market value. Management's judgment as to the fair value of the investment or on the conclusion of the nature of the impairment could have a material impact on the results of operations and financial condition of the Company. Income Taxes - Valuation Allowance The Company establishes a valuation allowance against deferred tax assets if, based on the available evidence, it is more likely than not that such assets will not be realized. The realization of a deferred tax asset ultimately depends on the existence of sufficient taxable income in either the carryback or carryforward periods under tax law. The Company periodically assesses the need for valuation allowances for deferred tax assets based on the "more likely than not" realization threshold criterion. In the assessment, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred 26



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tax assets. This assessment requires considerable judgment by management and includes, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, its experience with operating loss and tax credit carryforwards, and tax planning alternatives. If management determines that the Company requires a valuation allowance on its deferred tax assets, income tax expense or benefit could be materially different than if management determines no such valuation allowance is necessary. Recoveries from Tenants Recoveries from tenants for operating expenses are determined on a calendar year and on a lease by lease basis. The most common types of cost reimbursements in our leases are utility expenses, building operating expenses, real estate taxes, and insurance, for which the tenant pays its pro rata share in excess of a base year amount, if applicable. The computation of these amounts is complex and involves numerous judgments, including the interpretation of terms and other customer lease provisions. Leases are not uniform in dealing with such cost reimbursements and there are many variations in the computation. We accrue income related to these payments each month. We make monthly accrual adjustments, positive or negative, to recorded amounts to our best estimate of the annual amounts to be billed and collected with respect to the cost reimbursements. After the end of the calendar year, we compute each customer's final cost reimbursements and, after considering amounts paid by the tenant during the year, issue a bill or credit for the appropriate amount to the tenant. The differences between the amounts billed less previously received payments and the accrual adjustments are recorded as increases or decreases to revenues when the final bills are prepared, which occurs during the first half of the subsequent year. Stock-based Compensation The Company has several types of stock-based compensation plans. These are described in note 13, as are the accounting policies by type of award. Compensation cost for all stock-based awards requires measurement at estimated fair value on the grant date and compensation cost is recognized over the service vesting period, which represents the requisite service period. The grant date fair value for compensation plans that contain market measures are performed using complex pricing valuation models that require the input of assumptions, including judgments to estimate expected life, expected stock price volatility, and assumed dividend yield. Specifically, the grant date fair value of performance-based restricted stock units are calculated using a Monte Carlo simulation pricing model and the grant date fair value of stock option grants are calculated using the Black-Scholes valuation model. Discussion of New Accounting Pronouncements There are currently no recently issued accounting pronouncements that are expected to have a material effect on our financial condition or results of operations in future periods. Results of Operations For The Three Years Ended December 31, 2013 General The Company's financial results have historically been significantly affected by purchase and sale transactions. Accordingly, the Company's historical financial statements may not be indicative of future operating results. Rental Property Revenues Rental property revenues increased $80.2 million (70%) between 2013 and 2012 as a result of the following: Increase of $47.9 million as a result of the acquisition of Greenway



Plaza and 777 Main ("the Texas Acquisition");

Increase of $31.2 million as a result of the Post Oak Central acquisition;

Increase of $8.6 million as a result of the 816 Congress acquisition;

Increase of $6.5 million as a result of the 2012 acquisition of 2100 Ross;

Increase of $1.9 million at 191 Peachtree due to higher economic occupancy;

Increase of $1.7 million at Mahan Village as a result of the commencement of operations in late 2012; Increase of $1.3 million at Promenade due to higher economic occupancy; and Decrease of $19.7 million due to the sale of 50% of the Company's



interest in Terminus 100.

Rental property revenues increased $19.5 million (21%) between 2012 and 2011 as a result of the following:

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Increase of $15.1 million as a result of the Promenade acquisition in 2011;

Increase of $4.8 million as a result of the 2100 Ross acquisition;

Increase of $1.4 million at 191 Peachtree Tower due to higher economic occupancy; and Decrease of $2.5 million at 555 North Point as a result of the termination of a lease in 2011. The vacated space was re-leased to a tenant whose lease commenced in the fourth quarter of 2012. Fee Income Fee income decreased approximately $6.9 million (39%) between 2013 and 2012. This decrease is primarily due to the receipt of a $4.5 million participation interest in 2012 related to a contract that the Company assumed in the acquisition of an entity several years ago. Under this contract, the Company is entitled to receive a portion of the proceeds from the sale of a project that the entity developed and from payments received from a related seller-financed note. The Company may receive additional proceeds under this contract in future periods. Fee income also decreased as a result of a decrease in reimbursed expenses primarily due to the third quarter 2013 sale of the Company's interest in two unconsolidated joint ventures, CP Venture Two LLC and CP Venture Five LLC, and the sale of The Avenue Murfreesboro retail center, which was held through the CF Murfreesboro Associates unconsolidated joint venture. The Company was earning management and leasing fees associated with these ventures that ended upon the sale of the Company's interest in these ventures. Fee income increased $4.0 million (29%) between 2012 and 2011. This increase is primarily due to the receipt of a $4.5 million participation interest discussed above. Partially offsetting this amount were lower leasing fees earned in 2012 from MSREF/Terminus200 LLC ("MSREF/T200") and Ten Peachtree Place Associates, which was sold in 2012. Other Revenues Other revenues remained relatively stable between 2013 and 2012 and decreased $4.8 million between 2012 and 2011. This decrease is primarily due to multi-family residential unit sales decreasing between 2012 and 2011. The Company liquidated its holdings of for-sale multi-family units over the past three years. Rental Property Operating Expenses Rental property operating expenses increased $40.2 million (80%) between 2013 and 2012 as a result of the following: Increase of $20.2 million as a result of the Texas Acquisition;



Increase of $15.6 million as a result of the Post Oak Central acquisition;

Increase of $4.6 million as a result of the 816 Congress acquisition;

Increase of $3.4 million as a result of the 2012 acquisition of 2100 Ross; Increase of $1.1 million at 191 Peachtree due to higher economic



occupancy; and

Decrease of $5.5 million due to the sale of 50% of the Company's

interest in Terminus 100.

Rental property operating expenses increased $9.5 million (23%) between 2012 and 2011 as a result of the following: Increase of $7.0 million as a result of the 2011 acquisition of Promenade;



Increase of $3.3 million as a result of the 2100 Ross acquisition; and

Decrease of $670,000 at Terminus 100 as a result of lower bad debt expense and lower utilities. Reimbursed Expenses Reimbursed expenses decreased $1.8 million (26%) between 2013 and 2012 and increased $855,000 (14%) between 2012 and 2011. Reimbursed expenses are primarily incurred on projects for which the Company pays management and development expenses and is later reimbursed by our client. The offsetting income related to these expenses is recorded in fee income. General and Administrative Expenses General and administrative (G&A) expenses decreased $1.3 million (5%) between 2013 and 2012 as a result of the following: Decrease in employee salaries and benefits, other than stock-based compensation and bonus, of $2.0 million due to a decrease in the number of corporate employees between 2013 and 2012; 28



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Increase in capitalized salaries of $2.3 million as a result of increased development activity;



Increase in stock-based compensation expense of $1.7 million primarily

due to an increase in the Company's stock price between years; and Increase in bonus expense of $1.2 million as a result of the Company exceeding its bonus goals for 2013. G&A expense decreased $958,000 (4%) between 2012 and 2011 as a result of the following: Decrease in employee salaries and benefits, other than stock-based compensation, of approximately $3.2 million due to a decrease in the number of corporate employees between 2012 and 2011;



Increase in stock-based compensation expense of $3.1 million primarily

due to an increase in employee grants between years; and

Increase in capitalized salaries of $734,000 as a result of increased

development activity.

Interest Expense Interest expense decreased $2.2 million (9%) between 2013 and 2012 as a result of the following: Lower interest expense of $6.5 million as a result of the sale of 50% of Terminus 100 in 2013; Lower interest expense of $1.5 million related to lower average borrowings under the Credit Facility during the year; Higher interest expense of $2.6 million related to the new Post Oak Central loan in 2013;



Higher interest expense of $1.6 million related to the new Promenade

loan in 2013;

Higher interest expense of $1.1 million due to lower capitalized

interest in 2013 as a result of a reduction in development expenditures

in 2013; and

Higher interest expense of $784,000 related to a new mortgage loan on

191 Peachtree Tower that closed in the first quarter of 2012.

Interest expense decreased $2.7 million (10%) between 2012 and 2011 as a result of the following: Lower interest expense related to lower average borrowings under the Credit Facility during the year; Lower interest expense as a result of the prepayment of the 100/200 North Point mortgage loan in 2012; Lower interest expense as a result of the repayment of the 333/555 North Point mortgage loan in 2011;



Lower interest expense due to higher capitalized interest in 2012; and

Higher interest expense related to a new mortgage loan on 191 Peachtree

Tower that closed in the first quarter of 2012.

Depreciation and Amortization Depreciation and amortization increased $36.9 million (93%) between 2013 and 2012 as a result of the following: Increase of $21.6 million as a result of the Texas Acquisition;



Increase of $11.7 million as a result of the Post Oak Central acquisition;

Increase of $4.3 million as a result of the 816 Congress acquisition;

Increase of $4.4 million as a result of the 2011 acquisition of 2100 Ross;

Increase of $1.2 million at 191 Peachtree due to higher economic occupancy;

Increase of $662,000 at Mahan Village as a result of the commencement

of operations in late 2012;

Increase of $572,000 at Promenade due to higher economic occupancy; and

Decrease of $8.0 million due to the sale of 50% of the Company's

interest in Terminus 100.

Depreciation and amortization increased $8.8 million (29%) between 2012 and 2011 as a result of the following: Increase of $6.8 million as a result of the Promenade acquisition in 2011;



Increase of $2.3 million as a result of the 2100 Ross acquisition; and

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Decrease of $1.0 million at 555 North Point Center East due to

accelerated amortization recognized in 2011 of tenant assets for a

tenant that terminated its lease prior to the originally scheduled end

date. Impairment Losses During 2013, the Company did not incur any impairment losses. During 2012, the Company incurred an impairment loss of $488,000 on its investment in Verde Realty ("Verde"), a cost method investment in a non-public real estate investment trust, as a result of a merger of Verde into another company at a price per share less than the Company's carrying amount. During 2011, management began a strategic review and analysis of its residential and land businesses, as well as certain of its operating properties, in an attempt to determine the most effective way to maximize the value of its holdings. In February 2012, the Company determined that it would liquidate its holdings of certain non-core assets in bulk on a more accelerated timeline and at lower prices than initially planned and re-deploy this capital, primarily into office properties within its core markets. As part of this process, in the fourth quarter of 2011, the Company revised the cash flow projections for its residential holdings as well as two operating properties that were being held for long term investment opportunities. The cash flow revisions reflected a higher probability that the Company would sell the assets in the short term than holding them for long term investment and development opportunities. These cash flow revisions indicated that the undiscounted cash flows of 12 residential and land projects, as well as two operating properties, were less than their carrying amounts, and the Company recorded impairment losses of $104.3 million to adjust these carrying amounts to fair value. The Company reclassified $7.6 million of these amounts to discontinued operations in 2012. Earlier in 2011, the Company recorded an other-than-temporary impairment loss of $3.5 million on its investment in Verde to adjust the carrying amount of the Company's investment to fair value, as a result of an analysis performed in connection with Verde's withdrawal of its proposed public offering. Most of the Company's real estate assets are considered to be held for use pursuant to the accounting rules. If management's strategy changes on any of these assets, the Company may be required to record impairment charges in future periods. Changes that could cause these impairment losses include: (1) a decision by the Company to sell the asset rather than hold for long-term investment or development purposes, or (2) changes in management's estimates of future cash flows from the assets that cause the future undiscounted cash flows to be less than the asset's carrying amount. Given the uncertainties with the economic environment, management cannot predict whether or not the Company will incur impairment losses in the future, and if impairment losses are recorded, management cannot predict the magnitude of such losses. Separation Expenses Separation expenses decreased $1.5 million between 2013 and 2012 and increased $1.8 million between 2012 and 2011. The Company had reductions in force in each of the years presented, which varied by number of employees and positions between years. Acquisition and Related Costs Acquisition and related costs increased $6.7 million between 2013 and 2012 primarily as a result of the Texas Acquisition. Included in acquisition and related costs in 2013 is $2.6 million in costs associated with a term loan that was obtained in connection with the Texas Acquisition but was terminated unused upon closing of the acquisition. Acquisition and related costs in 2012 and 2011 related primarily to the acquisitions of 2100 Ross and Promenade, respectively. Other Costs and Expenses Other costs and expenses decreased $1.5 million between 2013 and 2012 and decreased $4.1 million between 2012 and 2011. These decreases are primarily due to costs associated with land and multi-family residential unit sales. The Company has been liquidating its holdings of unsold land and has liquidated its holdings of multi-family units over the past three years. In each of the three years, there was a decrease in sales and, therefore, a decrease in costs of sales. Loss on Extinguishment of Debt In 2012, the Company amended and restated its Credit Facility and as a result, charged $94,000 of unamortized loan costs to expense. Income (Loss) from Unconsolidated Joint Ventures In 2013, 2012, and 2011, the Company had a considerable amount of activity that affected income (loss) from unconsolidated joint ventures. In 2013, the Company sold its interests in CP Venture Two LLC and CP Venture Five LLC for $23.3 million and $30.0 million, respectively. The Company recorded gains from unconsolidated joint ventures on these transactions totaling $37.0 30



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million. In addition, CF Murfreesboro Associates sold The Avenue Murfreesboro, the venture's only asset. The Company received a distribution from this sale of $33.8 million and recognized a gain from unconsolidated joint ventures of $23.5 million associated with this sale. In 2012, the Company sold its interest in Palisades West LLC for $64.8 million and recognized a gain from unconsolidated joint ventures of $23.3 million associated with this sale. In addition, Ten Peachtree Place Associates sold Ten Peachtree Place to a third party. The Company received proceeds from this sale of $5.1 million and recognized a gain from unconsolidated joint ventures of $7.3 million associated with this sale. CP Venture Two LLC sold Presbyterian Medical Plaza to a third party and the Company received proceeds from the sale of $450,000 and recognized a gain of $167,000 associated with this sale. In addition, the Emory Point Phase I development project became operational within EP I LLC and the Company recorded $330,000 in its share of the losses from the start-up operations. In 2011, Temco Associates ("Temco") and CL Realty, L.L.C. ("CL Realty") recorded impairment losses in income from unconsolidated joint ventures on assets held by each entity. During 2011, Temco and CL Realty updated cash flow projections for its projects and determined the cash flows to be generated by certain projects were less than their carrying amounts. Consequently, Temco and CL Realty recorded impairment losses to record these assets at fair value, the Company's share of which was $14.6 million for Temco and $13.6 million for CL Realty. In the first quarter of 2012, Forestar Realty Inc., the Company's 50% partner in each venture, purchased the majority of the ventures' residential project and land acreage. The Company's share of the proceeds from this transaction was $23.5 million and neither venture recognized a significant gain or loss on the transaction since the purchase price approximated the carrying amounts of the assets sold. Also in 2011, the Company recognized income from the newly-formed Cousins Watkins LLC, which caused income from unconsolidated joint ventures to increase $2.4 million. Gain on Sale of Investment Properties Gain on sale of investment properties increased $57.2 million between 2013 and 2012 and increased $559,000 between 2012 and 2011. The 2013 amount includes a gain on the sale of Terminus 100 of $37.1 million, a gain on the acquisition of Terminus 200, which was acquired in stages, of $19.7 million, and the recognition of a deferred gain associated with CP Venture Two LLC of $3.6 million that was recognized when the Company sold its interest in CP Venture Two LLC. The 2012 and 2011 amounts include gains recognized on the sale of various land tracts during those years. Discontinued Operations In 2013, the Company sold Tiffany Springs MarketCenter, a 238,000 square foot center in Kansas City, Missouri, for a sales price of $53.5 million, which represented a 7.9% capitalization rate. In the fourth quarter of 2013, the Company sold the Inhibitex building, a 51,000 square foot medical office building in Atlanta, for $8.3 million, prior to the allocation of free rent credits, which represented a 9.1% capitalization rate. In the fourth quarter of 2013, the Company determined that Lakeshore Park Plaza, a 197,000 square foot office building in Birmingham, Alabama, and 600 University Park Place, a 123,000 square foot office building in Birmingham, Alabama, were held for sale. Included in discontinued operations for 2013 were the operations of the properties sold or held for sale as of December 31, 2013, the gains recognized on the sale of the assets sold in 2013 and an additional gain of $4.6 million recognized on the 2012 sale of the Company's third party management and leasing business. The Company recognized this additional gain based on the performance of the business for the year subsequent to the sale. In 2012, the Company sold the following retail assets: The Avenue Collierville, a 511,000 square foot center in Memphis, Tennessee, for a sales price of $55.0 million; The Avenue Forsyth, a 524,000 square foot center in Atlanta, Georgia for a sales price of $119.0 million; and The Avenue Webb Gin, a 322,000 square foot center in Atlanta, Georgia for a sales price of $59.6 million. The weighted average capitalization rates for these three retail projects was 7.8%. The Company also sold Galleria 75, a 111,000 square foot office building in Atlanta, Georgia, for a sales price of $9.2 million and a capitalization rate of 9.5%. In 2012, the Company also sold Cosmopolitan Center, a 51,000 square foot office building for a sales price of $7.0 million. The capitalization rate of Cosmopolitan Center was not a significant determinant of the sales price as it was being sold for its underlying land value as opposed to its in-place income stream. In the fourth quarter of 2012, the Company determined that Inhibitex, a 51,000 square foot office building in Atlanta, Georgia, met the requirements for discontinued operations. Included in discontinued operations for 2012 were impairment losses recorded on The Avenue Collierville and Inhibitex in the amounts of $12.2 million and $1.6 million, respectively. The Company sold The Avenue Collierville for an amount lower than its carrying value and recorded the impairment loss as a result. When the Company determined that Inhibitex was held for sale in accordance with applicable accounting rules, it determined that the fair value of the asset less expected closing costs were lower than the carrying amount and recorded an impairment loss as a result. 31



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Included in discontinued operations for 2011 were impairment losses on Cosmopolitan Center and Galleria 75 in the amounts of $4.7 million and $2.9 million, respectively. The Company recorded this impairment loss in connection with the strategic review of its land and other holdings discussed in note 15 of notes to consolidated financial statements included in this Annual Report on Form 10-K. The Company reclassified this impairment loss to discontinued operations in 2012 when the related assets qualified for discontinued operations treatment. In 2012, the Company also sold its third party management and leasing business to Cushman & Wakefield and recognized an initial gain of $7.5 million. As a result of this sale, the operations of the Company's third party management and leasing business were reclassified to discontinued operations. In 2011, the Company sold One Georgia Center, a 376,000 square foot office building in Atlanta, Georgia, for a sales price of $48.6 million, which corresponded to a capitalization rate of 8.0%. Also in 2011, the Company sold Jefferson Mill, a 459,000 square foot industrial property in suburban Atlanta, Georgia for a sales price of $22.0 million, and King Mill, a 796,000 square foot industrial property in suburban Atlanta, Georgia for a sales price of $28.3 million. The weighted average capitalization rate for these two industrial projects combined was 7.6%. The Company also sold Lakeside in 2011, a 749,000 square foot industrial property in Dallas, Texas for a sales price of $28.4 million. The capitalization rate of this property was not a significant determinant of the sales price, partly due to the fact that the transaction included related tracts of undeveloped land. Capitalization rates are generally calculated by dividing projected annualized net operating income by the sales price. Net Income Attributable to Noncontrolling Interest The Company consolidates certain entities and allocates the partner's share of those entities' results to net income attributable to noncontrolling interests on the statements of comprehensive income. The noncontrolling interests' share of the Company's net income increased $2.9 million between 2013 and 2012, and decreased $2.8 million between 2012 and 2011. In 2013, $3.4 million was allocated to the noncontrolling partner in CP Venture Six LLC in connection with the Company's purchase of the partner's interest. In 2012, $2.1 million was allocated to the noncontrolling partner in the entity which owned the property in connection with the sale of The Avenue Collierville. Also in 2012, $1.8 million of the gain on the sale of The Avenue Forsyth was allocated to the noncontrolling partner in the entity which owned the property. In 2011, $1.6 million of the gain on sale of One Georgia Center was allocated to the noncontrolling partner in the entity which owned the property. Also in 2011, $1.4 million of the gain on sale of King Mill was allocated to the noncontrolling partner in the entity which owned the property. Funds from Operations The table below shows Funds from Operations Available to Common Stockholders ("FFO") and the related reconciliation to net income (loss) available to common stockholders for the Company. The Company calculates FFO in accordance with the National Association of Real Estate Investment Trusts' ("NAREIT") definition, which is net income available to common stockholders (computed in accordance with GAAP), excluding extraordinary items, cumulative effect of change in accounting principle and gains on sale or impairment losses on depreciable property, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures to reflect FFO on the same basis. FFO is used by industry analysts and investors as a supplemental measure of a REIT's operating performance. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors and analysts have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Thus, NAREIT created FFO as a supplemental measure of REIT operating performance that excludes historical cost depreciation, among other items, from GAAP net income. The use of FFO, combined with the required primary GAAP presentations, has been fundamentally beneficial, improving the understanding of operating results of REITs among the investing public and making comparisons of REIT operating results more meaningful. Company management evaluates operating performance in part based on FFO. Additionally, the Company uses FFO, along with other measures, to assess performance in connection with evaluating and granting incentive compensation to its officers and other key employees. The reconciliation of net income (loss) available to common stockholders to FFO is as follows for the years ended December 31, 2013, 2012, and 2011 (in thousands, except per share information): 32



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Table of Contents Year Ended December 31, 2013 2012 2011 Net Income (Loss) Available to Common Stockholders $ 109,097$ 32,821$ (141,332 ) Depreciation and amortization: Consolidated properties 75,524 38,349



28,978

Discontinued properties 3,083 13,479



23,395

Share of unconsolidated joint ventures 13,434 10,215



10,337

Impairment losses on depreciable investment properties, net of amounts attributable to noncontrolling interests - 11,748



7,632

Gain on sale of investment properties: Consolidated properties (60,587 ) (334 ) (624 ) Discontinued properties (6,469 ) (10,948 ) (8,519 ) Share of unconsolidated joint ventures (60,345 ) (30,662 ) - Other 3,397 1,824



3,258

Funds From Operations Available to Common Stockholders $ 77,134$ 66,492$ (76,875 ) Per Common Share-Basic and Diluted: Net Income (Loss) Available $ 0.76$ 0.32$ (1.36 ) Funds From Operations $ 0.53$ 0.64$ (0.74 ) Weighted Average Shares-Basic 144,255 104,117 103,651 Weighted Average Shares-Diluted 144,420 104,125



103,651

Same Property Net Operating Income Net Operating Income is used by industry analysts, investors and Company management to measure operating performance of the Company's properties. Net Operating Income, which is rental property revenues less rental property operating expenses, excludes certain components from net income in order to provide results that are more closely related to a property's results of operations. Certain items, such as interest expense, while included in FFO and net income, do not affect the operating performance of a real estate asset and are often incurred at the corporate level as opposed to the property level. As a result, management uses only those income and expense items that are incurred at the property level to evaluate a property's performance. Depreciation and amortization are also excluded from Net Operating Income. Same Property Net Operating Income includes those 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 for each of the two periods presented or has been substantially complete and owned by the Company for each of the two periods presented and the preceding year. Same Property Net Operating Income allows analysts, investors and management to analyze continuing operations and evaluate the growth trend of the Company's portfolio. 33



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Table of Contents Year Ended December 31, 2013 2012 Net Operating Income - Consolidated Properties Rental property revenues $ 194,420 $



114,208

Rental property expenses (90,498 ) (50,329 ) Net Operating Income - Consolidated Properties 103,922



63,879

Net Operating Income - Discontinued Operations Rental property revenues 10,552



33,918

Rental property expenses (4,157 ) (10,936 ) Net Operating Income - Discontinued Operations 6,395



22,982

Net Operating Income - Unconsolidated Joint Ventures 27,763 23,596 Total Net Operating Income $ 138,080$ 110,457 Net Operating Income: Same Property $ 60,621$ 57,942 Non-Same Property 77,459 52,515 Net Operating Income $ 138,080$ 110,457 Change year over year in Net Operating Income - Same Property 4.6 % Same Property Net Operating Income increased 4.6% between 2013 and 2012. This increase is primarily attributable to an increase in occupancy at North Point Center East and 191 Peachtree Tower as well as lower expenses and increased parking income at American Cancer Society Center. Net rental rates for the office portfolio increased 12.9% on new leases and renewals between 2013 and 2012. Net rental rates for the retail portfolio increased 9% on new leases and renewals between 2013 and 2012. Net rental rates represent average rent per square foot after operating expense reimbursement over the lease term for leased space that has not been vacant for more than one year. Liquidity and Capital Resources The Company's primary liquidity sources are: Net cash from operations; Sales of assets;



Borrowings under its Credit Facility;

Proceeds from mortgage notes payable;

Proceeds from equity offerings; and

Joint venture formations.

The Company's primary liquidity uses are: Property acquisitions;



Expenditures on development projects;

Building improvements, tenant improvements, and leasing costs;

Principal and interest payments on indebtedness; and

Common and preferred stock dividends.

Financial Condition The Company's goal is to maintain a conservative balance sheet with leverage ratios that will enable it to be positioned for future growth. During 2013, the Company experienced significant growth as its total assets increased from $1.1 billion at the beginning of the year to $2.3 billion at year end. In light of this growth, the Company took steps to maintain its relatively conservative balance sheet and to improve its leverage ratios. 34



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To partially fund its acquisition of 816 Congress, the Company issued 16.5 million shares of its common stock at $10.45 per share resulting in net proceeds of $165.1 million. The Company also used a portion of the proceeds from this offering to redeem all outstanding shares of its 7 % Series A Cumulative Redeemable Preferred Stock for $74.8 million. To partially fund its acquisition of Greenway Plaza and 777 Main, the Company issued 69.0 million shares of common stock at $10.00 per share resulting in net proceeds of $661.3 million. The Company also placed mortgage debt on two of its existing assets to help fund this acquisition. A loan on Post Oak Central loan generated $188.8 million in proceeds at a fixed rate of 4.26% and a loan on Promenade generated $114.0 million at a fixed rate of 4.27%. In addition to equity financing and mortgage debt, the Company funded its growth with the sale of $138.2 million in non-core assets, including substantially all of its remaining lifestyle and power center retail assets. As a result of these activities, the Company reduced its debt to total market capitalization ratio from 36% at the beginning of the year to 30% at year end. The Company also increased its fixed charges coverage ratio from 2.03 at the beginning of the year to 2.64 at the end of the year. In addition, over 80% of the Company's debt (including the Company's share of unconsolidated debt) matures after 2016. Consistent with its strategy, the Company believes it will make additional investments in 2014 and beyond and expects to fund these activities with one or more of the following: sale of additional non-core assets, additional borrowings under its Credit Facility, mortgage loans on existing or newly acquired properties, issuance of common or preferred equity, and joint venture formation with third parties. Contractual Obligations and Commitments At December 31, 2013, the Company was subject to the following contractual obligations and commitments (in thousands): Less than More than Total 1 Year 1-3 Years 3-5 Years 5 years Contractual Obligations: Company debt: Unsecured Credit Facility and construction loan $ 54,545$ 14,470$ 40,075 $ - $ - Mortgage notes payable 575,549 8,406 32,754 240,771 293,618 Interest commitments (1) 150,455 27,988 53,079 38,795 30,593 Ground leases 149,895 1,382 3,377 3,486 141,650 Other operating leases 551 186 279 86 - Total contractual obligations $ 930,995$ 52,432$ 129,564$ 283,138$ 465,861 Commitments: Unfunded tenant improvements 101,547 101,547 - - - Letters of credit 1,000 1,000 - - - Performance bonds 1,386 117 100 1,169 - Total commitments $ 103,933$ 102,664$ 100$ 1,169 $ - (1) Interest on variable rate obligations is based on rates effective as of December 31, 2013. In addition, the Company has several standing or renewable service contracts mainly related to the operation of its buildings. These contracts were entered into in the ordinary course of business and are generally one year or less. These contracts are not included in the above table and are usually reimbursed in whole or in part by tenants. In 2013, the Company entered into a $188.8 million non-recourse mortgage note payable, secured by the Post Oak Central office buildings. The loan has a fixed interest rate of 4.26% and matures in 2020. In 2013, the Company also entered into a $114.0 million non-recourse mortgage note payable, secured by the Promenade office building. The loan has a fixed interest rate of 4.27% and matures in 2022. Proceeds from these loans were used to fund the Texas Acquisition. The Company repaid the 100/200 North Point Center East mortgage loan during 2012 totaling $24.5 million. This loan had an interest rate of 5.39%, which is higher than the rate paid on the Company's Credit Facility and the weighted average rate on the Company's other debt. The Company repaid this note to provide flexibility to sell these assets or refinance them at a later date, depending upon its strategic direction. 35



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In 2012, the Company entered into a $100.0 million non-recourse mortgage note payable, secured by the 191 Peachtree Tower office building. The loan has a fixed interest rate of 3.35% and matures in 2018. The Company's existing mortgage debt is primarily non-recourse, fixed-rate mortgage notes secured by various real estate assets. Many of the Company's non-recourse mortgages contain covenants which, if not satisfied, could result in acceleration of the maturity of the debt. The Company expects that it will either refinance the non-recourse mortgages at maturity or repay the mortgages with proceeds from other financings. As of December 31, 2013, the weighted average interest rate on the Company's consolidated debt was 4.46%. Credit Facility Information The Company amended its $350 million Credit Facility in the first quarter of 2012, extending the maturity from August 2012 to February 2016, with a one-year extension under certain situations, and adding an accordion feature that allows it to increase capacity under the Credit Facility to $500 million. The Company's Credit Facility bears interest at the London Interbank Offered Rate ("LIBOR") plus a spread, based on the Company's leverage ratio, as defined in the Credit Facility. At December 31, 2013, the Company had $40.1 million drawn on the facility and a total available borrowing capacity of $308.9 million on the facility. The amount that the Company may draw under the Credit Facility is a defined calculation based on the Company's unencumbered assets and other factors and is reduced by both letters of credit and borrowings outstanding. The Credit Facility includes customary events of default, including, but not limited to, the failure to pay any interest or principal when due, the failure to perform under covenants of the credit agreement, incorrect or misleading representations or warranties, insolvency or bankruptcy, change of control, the occurrence of certain ERISA events and certain judgment defaults. The amounts outstanding under the Credit Facility may be accelerated upon an event of default. The Credit Facility contains restrictive covenants pertaining to the operations of the Company, including limitations on the amount of debt that may be incurred, the sale of assets, transactions with affiliates, dividends and distributions. The Credit Facility also includes certain financial covenants (as defined in the agreement) that require, among other things, the maintenance of an unencumbered interest coverage ratio of at least 2.00; a fixed charge coverage ratio of at least 1.40, increasing to 1.50 during the extension period; and a leverage ratio of no more than 60%. The Company is currently in compliance with its financial covenants. Future Capital Requirements Over the long term, management intends to actively manage its portfolio of properties and strategically sell assets to exit its non-core holdings, reposition its portfolio of income-producing assets geographically and by product type, and generate capital for future investment activities. The Company expects to continue to utilize indebtedness to fund future commitments and expects to place long-term mortgages on selected assets as well as to utilize construction facilities for some development assets, if available and under appropriate terms. The Company may also generate capital through the issuance of securities that include common or preferred stock, warrants, debt securities or depositary shares. In March 2013, the Company filed a shelf registration statement to allow for the issuance from time to time of such securities. Management will continue to evaluate all public equity sources and select the most appropriate options as capital is required. The Company's business model is dependent upon raising or recycling capital to meet obligations. If one or more sources of capital are not available when required, the Company may be forced to reduce the number of projects it acquires or develops and/or raise capital on potentially unfavorable terms, or may be unable to raise capital, which could have an adverse effect on the Company's financial position or results of operations. Cash Flows The reasons for significant increases and decreases in cash flows between the years are as follows: Cash Flows from Operating Activities Cash flows provided by operating activities increased $42.0 million between 2013 and 2012 due to the following: Increase of $29.7 million in operating distributions from joint



ventures due to the sale of the Company's interests in CP Venture Two

LLC and CP Venture Five LLC and the sale of The Avenue Murfreesboro

through CF Murfreesboro Associates; Increase of $1.9 million as a result of lower interest paid due to lower average debt outstanding and a lower weighted average interest rate;



Decrease of $22.8 million as a result of discontinued operations;

36



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Decrease of $14.2 million related to the deconsolidation of Terminus 100; Decrease of $6.7 million as a result of higher acquisition and related costs associated with increased acquisition activity; Decrease of $3.5 million in fee income as a result of the sale of the Company's interest in CP Venture Two LLC and CP Venture Five LLC and



the sale of The Avenue Murfreesboro through CF Murfreesboro Associates;

Decrease of $3.5 million due to the receipt of a lease termination fee

in 2012; Decrease of $3.4 million related to a participation interest in a former development project in 2012; and



The remaining increase is primarily a result of acquisition activities

in 2013 and 2012 and increased occupancy at 191 Peachtree Tower and Promenade in 2013. Cash flows provided by operating activities increased $39.7 million between 2012 and 2011 due to the following: Increase of $28.5 million in operating distributions from joint ventures due to the sale of the Company's interest in Palisades West LLC and distribution the Company received from Ten Peachtree Place



Associates as a result of the sale of the Ten Peachtree Place building;

Increase of $3.5 million due to the receipt of a lease termination fee;

Increase of $3.4 million related to a participation interest in a former development project; and Increase of $2.8 million as a result of lower interest paid due to lower average debt outstanding. Cash Flows from Investing Activities Net cash used in investing activities increased $1.5 billion between 2013 and 2012 due to the following: Increase of $1.4 billion in acquisition, development, and tenant asset expenditures. This increase is primarily attributable to the acquisition of Post Oak Central, 816 Congress, Greenway Plaza, and 777 Main in 2013 and 2100 Ross in 2012; Increase of $94.4 million due to a decrease in investment property sales. In 2013, the Company sold two operating properties and three



tracts of land. In 2012, the Company sold six operating properties and

four tracts of land; Increase of $3.7 million due to a decrease in proceeds from the sale of the third party management and leasing business; and Decrease of $15.9 million from joint ventures. In 2013, the Company sold its investments in CP Venture Two LLC and CP Venture Five LLC,



sold The Avenue Murfreesboro retail center through CF Murfreesboro

Associates, and received distributions from Crawford Long - CPI LLC as a result of a new mortgage note financing. In 2012, the Company sold its investment in Palisades West, received distributions from Ten Peachtree Place Associates from the sale of its only asset, and



received distributions from CL Realty, L.L.C. and Temco Associates in

connection with the sale of most of the assets owned in these two

ventures. In addition, the Company invested more in its joint ventures

as a result of capital contributions in EP II, which was formed and initially capitalized in 2013. Net cash from investing activities increased $286.8 million between 2012 and 2011 due to the following: Increase of $129.8 million from investment property sales. In 2012, the Company sold six operating properties and four tracts of land. In 2011, the Company sold four operating properties and three tracts of land.



Increase of $76.8 million from a decrease in acquisition, development

and tenant asset expenditures. This decrease is primarily attributable

to the differences in the purchase prices for the 2012 purchase of 2100 Ross and the 2011 purchase of Promenade; Increase of $75.7 million from joint ventures. In 2012, the Company sold its investment in Palisades West, received distributions from Ten Peachtree Place Associates from the sale of its only asset, and



received distributions from CL Realty, L.L.C. and Temco Associates in

connection with the sale of most of the assets owned in these two ventures. In addition, the Company invested less in its joint ventures as a result of lower capital contributions in EP I, which was formed and initially capitalized in 2011; Increase of $8.2 million from the sale of the Company's third party management and leasing business; and Decrease of $8.5 million from the use of restricted cash for tenant improvements. 37



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Cash Flows from Financing Activities Net cash provided by financing activities increased $1.1 billion between 2013 and 2012 due to the following: Increase of $826.2 million from the issuance of common stock;



Increase of $380.5 million from new debt, net of repayments;

Decrease of $74.8 million from the redemption of preferred shares;

Decrease of $9.9 million due to an increase of distributions to noncontrolling interests as a result of the sale of the Company's interest in CP Venture Five LLC; and Decrease of $8.4 million due to an increase in common dividends paid related to the increase in common shares outstanding. Net cash used in financing activities increased $151.8 million between 2012 and 2011 due primarily to a reduction in debt outstanding of $114.0 million in 2012 compared to an increase in net borrowings in 2011 of $33.3 million. In 2012, the Company repaid outstanding debt with proceeds from investment property sales. Capital Expenditures The Company incurs costs related to its real estate assets that include acquisition of properties, development of new properties, redevelopment of existing or newly purchased properties, leasing costs for new or replacement tenants and ongoing property repairs and maintenance. Capital expenditures for certain types of consolidated real estate are categorized as operating activities in the statements of cash flows, such as those for the development of residential lots, retail outparcels and for-sale multi-family residential projects. During the years ended December 31, 2013, 2012, and 2011, the Company incurred $0, $47,000, and $999,000, respectively, in land and for-sale multi-family project expenditures. Capital expenditures for assets the Company develops or acquires and then holds and operates are included in the property acquisition, development, and tenant asset expenditures line item within investing activities on the statements of cash flows. Amounts accrued are removed from the table below (accrued capital adjustment) to show the components of these costs on a cash basis. Components of costs included in this line item for the years ended December 31, 2013, 2012 and 2011 are as follows (in thousands): 2013 2012 2011 Acquisition of property $ 1,470,147$ 63,562$ 134,733 Projects under development 16,829 13,387 10,741 Redevelopment property-leasing costs - -



3,420

Redevelopment property-building improvements - -



6,036

Operating properties-leasing costs 14,594 20,179



25,476

Operating properties-building improvements 20,726 4,499 1,420 Land held for investment - 480 57 Capitalized interest 518 407 117 Capitalized salaries 5,230 1,515 1,532 Accrued capital adjustment (1,781 ) 1,040 (1,623 ) Total property acquisition, development and tenant asset expenditures $ 1,526,263$ 105,069



$ 181,909

Capital expenditures increased $1.4 billion between 2013 and 2012 mainly due to increased acquisition activity. In 2013, the Company acquired Post Oak Central, 816 Congress Avenue, Greenway Plaza, and 777 Main. In addition, the Company commenced construction on Colorado Tower and Emory Point Phase II in 2013, causing an increase in projects under development. Leasing costs, as well as some of the tenant improvements and capitalized personnel costs, are a function of the number and size of executed new and renewed leases, which increased in 2013 due to acquisition activity. The amount of tenant improvements and leasing costs on a per square foot basis was $5.25 for 2013, but varies by lease and by market. Given the level of expected leasing and renewal activity in future periods and the 2013 acquisitions, management anticipates future tenant improvement and leasing costs to be greater than those experienced in 2013. 38



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Capital expenditures decreased $76.8 million between 2012 and 2011 mainly due to decreased acquisition activity. In addition, the Company incurred lower overall leasing and building improvement costs in 2012 due to the sale of several operating properties. Tenant improvements and leasing costs, as well as some of the capitalized personnel costs, are a function of the number and size of executed new and renewed leases. The amount of tenant improvements and leasing costs on a per square foot basis varies by lease and by market, and such costs per square foot have increased in certain markets during recent years. However, these amounts have stabilized overall and are decreasing in some of the Company's markets. The accrued capital adjustment is affected by the amount and timing of the Company's payments for accounts payable and accrued expenses. The Company paid $1.1 million more in accounts payable and accrued expenses than it incurred. Dividends. The Company paid common and preferred dividends of $37.2 million, $31.7 million, and $31.6 million in 2013, 2012 and 2011, respectively, which it funded with cash provided by operating activities. The Company expects to fund its quarterly distributions to common and preferred stockholders with cash provided by operating activities, proceeds from investment property sales, distributions from unconsolidated joint ventures and indebtedness, if necessary. On a quarterly basis, the Company reviews the amount of the common dividend in light of current and projected future cash flows from the sources noted above and also considers the requirements needed to maintain its REIT status. In addition, the Company has certain covenants under its Credit Facility which could limit the amount of dividends paid. In general, dividends of any amount can be paid as long as leverage, as defined in the facility, is less than 60% and the Company is not in default under its facility. Certain conditions also apply in which the Company can still pay dividends if leverage is above that amount. The Company routinely monitors the status of its dividend payments in light of the Credit Facility covenants. In the first quarter of 2014, the Company increased the quarterly dividend on its common stock from $0.045 per share to $0.075 per share. Effects of Inflation The Company attempts to minimize the effects of inflation on income from operating properties by providing periodic fixed-rent increases or increases based on the Consumer Price Index and/or pass-through of certain operating expenses of properties to tenants or, in certain circumstances, rents tied to tenants' sales. Off Balance Sheet Arrangements General. The Company has a number of off balance sheet joint ventures with varying structures, as described in note 5 of notes to consolidated financial statements. Most of the joint ventures in which the Company has an interest are involved in the ownership and/or development of real estate. A venture will fund capital requirements or operational needs with cash from operations or financing proceeds, if possible. If additional capital is deemed necessary, a venture may request a contribution from the partners, and the Company will evaluate such request. Except as previously discussed, based on the nature of the activities conducted in these ventures, management cannot estimate with any degree of accuracy amounts that the Company may be required to fund in the short or long-term. However, management does not believe that additional funding of these ventures will have a material adverse effect on its financial condition or results of operations. Debt. At December 31, 2013, the Company's unconsolidated joint ventures had aggregate outstanding indebtedness to third parties of $428.2 million. These loans are generally mortgage or construction loans, most of which are non-recourse to the Company, except as described below. In addition, in certain instances, the Company provides "non-recourse carve-out guarantees" on these non-recourse loans. Certain of these loans have variable interest rates, which creates exposure to the ventures in the form of market risk to interest rate changes. At December 31, 2013, $7.2 million of the $17.3 million in recourse loans at unconsolidated joint ventures were recourse to the Company. The Company guarantees 25% of two of the four outstanding loans at the Cousins Watkins LLC joint venture, which owns four retail shopping centers. The two recourse loans have a total capacity of $16.3 million, of which the Company guarantees 25% of the outstanding balance. At December 31, 2013, the Company guaranteed $2.9 million, based on amounts outstanding under these loans as of that date. These guarantees may be reduced or eliminated based on achievement of certain criteria. The Company guarantees repayment of up to $4.6 million of the EP I construction loan, which has a maximum amount available of $61.1 million. At December 31, 2013, the Company guaranteed $4.3 million, based on amounts outstanding as of that date under this loan. This guarantee may be reduced and/or eliminated based on achievement of certain criteria. The Company guarantees repayment of up to $8.6 million of the EP II construction loan, which has a maximum amount available of $46.0 million. At December 31, 2013, the Company guaranteed $1,000, based on amounts outstanding as of that date under this loan. This guarantee may be reduced and/or eliminated based on achievement of certain criteria.


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Source: Edgar Glimpses


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