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Table of Contents


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 September 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 October 17, 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, including ground leases;
future acquisitions and dispositions of operating assets;
future development and redevelopment opportunities;
future fee development opportunities;
future issuances and repurchases of common or preferred stock;
future distributions;
future projected capital expenditures; 
future changes in interest rates;
market and industry trends; 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);
changes in senior management and the loss of key personnel;
the potential liability for uninsured losses, condemnation, or environmental issues;
the potential liability for a failure to meet regulatory requirements;
the financial condition and liquidity of, or disputes with, joint venture partners;
any failure to comply with debt covenants under credit agreements;
any failure to continue to qualify for taxation as a real estate investment trust and meet regulatory requirements;
potential changes to state, local, or federal regulations applicable to our business;
material changes in the 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)
 
September 30, 2018
 
December 31, 2017
 
(unaudited)
 
 
Assets:
 
 
 
Real estate assets:
 
 
 
Operating properties, net of accumulated depreciation of $384,097 and $275,977 in 2018 and 2017, respectively
$
3,499,741

 
$
3,332,619

Projects under development
128,580

 
280,982

Land
4,221

 
4,221

 
3,632,542

 
3,617,822

 
 
 
 
Cash and cash equivalents
82,706

 
148,929

Restricted cash
419

 
56,816

Notes and accounts receivable, net of allowance for doubtful accounts of $456 and $535 in 2018 and 2017, respectively
10,400

 
14,420

Deferred rents receivable
76,494

 
58,158

Investment in unconsolidated joint ventures
154,070

 
101,414

Intangible assets, net
155,025

 
186,206

Other assets
31,943

 
20,854

Total assets
$
4,143,599

 
$
4,204,619

Liabilities:


 
 
Notes payable
$
1,065,012

 
$
1,093,228

Accounts payable and accrued expenses
114,229

 
137,909

Deferred income
40,035

 
37,383

Intangible liabilities, net of accumulated amortization of $39,332 and $28,960 in 2018 and 2017, respectively
60,082

 
70,454

Other liabilities
39,786

 
40,534

Total liabilities
1,319,144

 
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, 430,724,520 and 430,349,620 shares issued in 2018 and 2017, respectively
430,725

 
430,350

Additional paid-in capital
3,605,617

 
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
(1,124,518
)
 
(1,121,647
)
Total stockholders' investment
2,770,218

 
2,771,973

Nonredeemable noncontrolling interests
54,237

 
53,138

Total equity
2,824,455

 
2,825,111

Total liabilities and equity
$
4,143,599

 
$
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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Rental property revenues
$
115,443

 
$
109,569

 
$
342,489

 
$
336,093

Fee income
2,519

 
2,597

 
7,211

 
6,387

Other
744

 
993

 
2,836

 
9,593

 
118,706

 
113,159

 
352,536

 
352,073

Expenses:
 

 
 

 
 

 
 

Rental property operating expenses
41,579

 
40,688

 
122,501

 
123,715

Reimbursed expenses
955

 
895

 
2,757

 
2,667

General and administrative expenses
3,913

 
7,193

 
18,793

 
21,993

Interest expense
9,551

 
7,587

 
29,043

 
25,851

Depreciation and amortization
45,068

 
47,622

 
135,836

 
152,546

Acquisition and transaction costs

 
(677
)
 
228

 
1,499

Other
93

 
423

 
457

 
1,063

 
101,159

 
103,731

 
309,615

 
329,334

Gain on extinguishment of debt
93

 
429

 
8

 
2,258

Income from continuing operations before unconsolidated joint ventures and gain (loss) on sale of investment properties
17,640

 
9,857

 
42,929

 
24,997

Income from unconsolidated joint ventures
2,252

 
2,461

 
10,173

 
43,362

Income from continuing operations before gain (loss) on sale of investment properties
19,892

 
12,318

 
53,102

 
68,359

Gain (loss) on sale of investment properties
(33
)
 
(33
)
 
4,912

 
119,729

Net income
19,859

 
12,285

 
58,014

 
188,088

Net income attributable to noncontrolling interests
(374
)
 
(218
)
 
(1,210
)
 
(3,181
)
Net income available to common stockholders
$
19,485

 
$
12,067

 
$
56,804

 
$
184,907

Net income per common share — basic and diluted
$
0.05

 
$
0.03

 
$
0.14

 
$
0.45

Weighted average shares — basic
420,385

 
419,998

 
420,279

 
414,123

Weighted average shares — diluted
427,520

 
427,300

 
427,472

 
421,954

Dividends declared per common share
$
0.065

 
$
0.060

 
$
0.195

 
$
0.240


See accompanying notes.

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COUSINS PROPERTIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
Nine months ended September 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
 

 

 

 

 
56,804

 
56,804

 
1,210

 
58,014

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
 

 
(22
)
 
1,705

 

 

 
1,683

 

 
1,683

Contributions from nonredeemable noncontrolling interest
 

 

 

 

 

 

 
1,960

 
1,960

Distributions to nonredeemable noncontrolling interest
 

 

 

 

 

 

 
(2,071
)
 
(2,071
)
Common dividends ($0.195 per share)
 

 

 

 

 
(82,004
)
 
(82,004
)
 

 
(82,004
)
Balance September 30, 2018
 
$
6,867

 
$
430,725

 
$
3,605,617

 
$
(148,473
)
 
$
(1,124,518
)
 
$
2,770,218

 
$
54,237

 
$
2,824,455

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 

 

 

 

 
184,907

 
184,907

 
3,181

 
188,088

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

 
25,000

 
186,774

 

 

 
211,774

 

 
211,774

Stock-based compensation
 

 
403

 
(279
)
 

 

 
124

 

 
124

Spin-off of Parkway, Inc.
 

 

 

 

 
545

 
545

 

 
545

Common stock redemption by unit holders
 

 
1,203

 
8,865

 

 

 
10,068

 
(10,068
)
 

Amortization of stock options and restricted stock, net of forfeitures
 

 
(3
)
 
1,479

 

 

 
1,476

 

 
1,476

Contributions from nonredeemable noncontrolling interests
 

 

 

 

 

 

 
1,588

 
1,588

Distributions to nonredeemable noncontrolling interest
 

 

 

 

 

 

 
(1,364
)
 
(1,364
)
Common dividends ($0.24 per share)
 

 

 

 

 
(99,151
)
 
(99,151
)
 

 
(99,151
)
Balance September 30, 2017
 
$
6,867

 
$
430,350

 
$
3,604,269

 
$
(148,373
)
 
$
(1,127,813
)
 
$
2,765,300

 
$
52,020

 
$
2,817,320

See accompanying notes.

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


 
Nine Months Ended September 30,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
58,014

 
$
188,088

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Gain on sale of investment properties
(4,912
)
 
(119,821
)
Depreciation and amortization
135,836

 
152,546

Amortization of deferred financing costs and premium/discount on notes payable
1,808

 
(2,543
)
Stock-based compensation expense, net of forfeitures
2,825

 
2,486

Effect of non-cash adjustments to rental revenues
(24,028
)
 
(33,379
)
Income from unconsolidated joint ventures
(10,173
)
 
(43,362
)
Operating distributions from unconsolidated joint ventures
15,056

 
6,615

Gain on extinguishment of debt
(8
)
 
(2,258
)
Changes in other operating assets and liabilities:
 
 
 
Change in other receivables and other assets, net
(435
)
 
9,707

Change in operating liabilities, net
4,054

 
3,150

Net cash provided by operating activities
178,037

 
161,229

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from investment property sales

 
171,316

Property acquisition, development, and tenant asset expenditures
(132,468
)
 
(229,811
)
Purchase of tenant-in-common interest

 
(13,382
)
Collection of notes receivable

 
5,161

Investment in unconsolidated joint ventures
(43,276
)
 
(13,862
)
Distributions from unconsolidated joint ventures
2,032

 
74,531

Change in notes receivable and other assets
(4,429
)
 
(1,348
)
Other
(4,261
)
 

Net cash used in investing activities
(182,402
)
 
(7,395
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from credit facility

 
589,300

Repayment of credit facility

 
(723,300
)
Proceeds from issuance of notes payable

 
350,000

Repayment of notes payable
(28,719
)
 
(493,774
)
Payment of deferred financing costs
(6,166
)
 
(2,048
)
Common stock issued, net of expenses

 
211,598

Contributions from noncontrolling interests
252

 
1,588

Distributions to nonredeemable noncontrolling interests
(2,071
)
 
(1,364
)
Common dividends paid
(79,842
)
 
(73,950
)
Other
(1,709
)
 
(601
)
Net cash used in financing activities
(118,255
)
 
(142,551
)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
(122,620
)
 
11,283

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD
205,745

 
51,321

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD
$
83,125

 
$
62,604

 
 
 
 
See accompanying notes.

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COUSINS PROPERTIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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”) that 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 September 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 retail space and apartments.
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 September 30, 2018 and the results of operations for the three and nine months ended September 30, 2018 and 2017. The results of operations for the three and nine months ended September 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 herein are substantially the same as those shown in note 2 of Form 10-K for the year ended December 31, 2017.
For the three and nine months ended September 30, 2018 and 2017, there were no items of other comprehensive income. Therefore, the Company did not present comprehensive income.
Recently Issued Accounting Standards: In May 2014, the FASB issued ASU 2014-09 ("ASC 606"), "Revenue from Contracts with Customers." Under ASC 606, companies are required to recognize revenue when the seller satisfies a performance obligation, which is generally 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. 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 in 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 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 nine months ended September 30, 2018 the Company recognized rental property revenue of $115.4 million and $342.5 million, respectively. For the three and nine months ended September 30, 2017 the Company recognized rental property revenue of $109.6 million and $336.1 million, respectively. For the three and nine months ended September 30, 2018, the Company recognized fee and other revenue of $3.3 million and

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$10.0 million, respectively. For the three and nine months ended September 30, 2017, the Company recognized fee and other revenue of $3.6 million and $16.0 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 July 2018, the FASB amended the new leasing standard, providing lessors with a practical expedient to not separately classify and disclose non-lease components of revenue from the related lease components under certain conditions. The Company believes that the majority of its leases with non-lease components of revenue would qualify for the practical expedient and expects to elect this 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 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 operating activities of $33.6 million and a corresponding increase in net cash from investing activities of $33.6 million for the nine months ended September 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 a decrease in net cash from investing activities of $15.1 million and a decrease in net cash from operating activities of $92,000 for the nine months ended September 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 resulted in an increase in investments in unconsolidated joint ventures and a corresponding credit to distributions in excess of cumulative net income of $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 following information summarizes financial data and principal activities of the Company's unconsolidated joint ventures. The information included in the following table entitled summary of financial position is as of September 30, 2018 and December 31, 2017. The information included in the summary of operations table is for the nine months ended September 30, 2018 and 2017 (in thousands).

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Total Assets
 
Total Debt
 
Total Equity
 
Company’s Investment
 
SUMMARY OF FINANCIAL POSITION:
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
Terminus Office Holdings
$
260,668

 
$
261,999

 
$
199,851

 
$
203,131

 
$
49,458

 
$
48,033

 
$
48,019

 
$
24,898

 
DC Charlotte Plaza LLLP
129,916

 
53,791

 

 

 
84,385

 
42,853

 
43,656

 
22,293

 
Austin 300 Colorado Project, LP
39,467

 

 

 

 
37,187

 

 
19,180

 

 
Carolina Square Holdings LP
109,830

 
106,580

 
73,993

 
64,412

 
34,305

 
33,648

 
16,943

 
19,384

 
HICO Victory Center LP
14,857

 
14,403

 

 

 
14,683

 
14,401

 
9,925

 
9,752

 
Charlotte Gateway Village, LLC
115,071

 
124,691

 

 

 
110,172

 
121,386

 
8,478

 
14,568

 
AMCO 120 WT Holdings, LLC
28,791

 
18,066

 

 

 
24,878

 
16,354

 
4,004

 
1,664

 
CL Realty, L.L.C.
4,342

 
8,287

 

 

 
4,228

 
8,127

 
2,909

 
2,980

 
Temco Associates, LLC
4,506

 
4,441

 

 

 
4,402

 
4,337

 
907

 
875

 
EP II LLC
254

 
277

 

 

 
160

 
180

 
28

 
44

 
EP I LLC
501

 
521

 

 

 
320

 
319

 
21

 
25

 
HICO Avalon II, LLC

 
6,379

 

 

 

 
6,303

 

 
4,931

 
Wildwood Associates
11,219

 
16,337

 

 

 
11,140

 
16,297

 
(444
)
(1
)
(1,151
)
(1
)
Crawford Long - CPI, LLC
27,296

 
27,362

 
69,911

 
71,047

 
(44,561
)
 
(44,815
)
 
(21,258
)
(1
)
(21,323
)
(1
)
 
$
746,718

 
$
643,134

 
$
343,755

 
$
338,590

 
$
330,757

 
$
267,423

 
$
132,368

 
$
78,940

 

 
Total Revenues
 
Net Income (Loss)
 
Company's Share of Income (Loss)
 
SUMMARY OF OPERATIONS:
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
Charlotte Gateway Village, LLC
$
20,043

 
$
20,125

 
$
7,792

 
$
7,202

 
$
3,896

 
$
3,601

 
Wildwood Associates

 

 
(1,108
)
 
(86
)
 
2,739

 
(43
)
 
Terminus Office Holdings
33,545

 
33,503

 
4,424

 
4,907

 
2,276

 
2,453

 
Crawford Long - CPI, LLC
9,381

 
9,017

 
2,631

 
2,285

 
1,254

 
1,142

 
HICO Victory Center LP
282

 
320

 
282

 
320

 
160

 
171

 
Austin 300 Colorado Project, LP
385

 

 
173

 

 
86

 

 
Temco Associates, LLC
128

 
144

 
58

 
70

 
32

 
35

 
Courvoisier Centre JV, LLC

 
12,701

 

 
(1,000
)
 
5

 
(80
)
 
111 West Rio Building

 

 

 

 

 
(2,592
)
 
AMCO 120 WT Holdings, LLC

 

 
(28
)
 
(22
)
 

 

 
DC Charlotte Plaza LLLP

 
2

 

 
2

 
(1
)
 
1

 
EP I LLC
27

 
4,094

 
1

 
44,865

 
(5
)
 
28,479

 
HICO Avalon II, LLC

 

 
(14
)
 

 
(10
)
 

 
EP II LLC

 
2,644

 
(21
)
 
13,023

 
(15
)
 
9,768

 
CL Realty, L.L.C.

 
2,899

 
(116
)
 
2,657

 
(71
)
 
408

 
Carolina Square Holdings LP
7,403

 
640

 
5

 
(100
)
 
(173
)
 
19

 
 
$
71,194

 
$
86,089

 
$
14,079

 
$
74,123

 
$
10,173

 
$
43,362

 
(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 10000 Avalon, a 251,000 square foot office building in Atlanta, GA. 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.

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3. INTANGIBLE ASSETS
Intangible assets on the balance sheets as of September 30, 2018 and December 31, 2017 were as follows (in thousands):
 
 
September 30, 2018
 
December 31, 2017
In-place leases, net of accumulated amortization of $117,553 and $91,548 at September 30, 2018 and December 31, 2017, respectively
 
$
113,542

 
$
139,548

Above-market tenant leases, net of accumulated amortization of $18,007 and $13,038 at September 30, 2018 and December 31, 2017, respectively
 
21,948

 
26,917

Below-market ground lease, net of accumulated amortization of $552 and $345 at September 30, 2018 and December 31, 2017, respectively
 
17,861

 
18,067

Goodwill
 
1,674

 
1,674

 
 
$
155,025

 
$
186,206


Goodwill did not change for the nine months ended September 30, 2018 or the year ended December 31, 2017.
4. OTHER ASSETS
Other assets on the balance sheets as of September 30, 2018 and December 31, 2017 were as follows (in thousands):
 
 
September 30, 2018
 
December 31, 2017
Furniture, fixtures and equipment, leasehold improvements, and other deferred costs, net of accumulated depreciation of $24,350 and $21,925 at September 30, 2018 and December 31, 2017, respectively
 
$
13,181

 
$
12,241

Line of credit deferred financing costs, net of accumulated amortization of $1,086 and $3,119 at September 30, 2018 and December 31, 2017, respectively
 
6,209

 
1,213

Prepaid expenses and other assets
 
4,999

 
3,902

Predevelopment costs and earnest money
 
3,965

 
372

Lease inducements, net of accumulated amortization of $1,344 and $978 at September 30, 2018 and December 31, 2017, respectively
 
3,589

 
3,126

 
 
$
31,943

 
$
20,854

5. NOTES PAYABLE
The following table details the terms and amounts of the Company’s outstanding notes payable at September 30, 2018 and December 31, 2017 ($ in thousands):
Description
 
Interest Rate
 
Maturity(1)
 
September 30, 2018
 
December 31, 2017
Term Loan, Unsecured
 
3.46
%
 
2021
 
$
250,000

 
$
250,000

Senior Notes, Unsecured
 
3.91
%
 
2025
 
250,000

 
250,000

Fifth Third Center
 
3.37
%
 
2026
 
144,271

 
146,557

Colorado Tower
 
3.45
%
 
2026
 
120,000

 
120,000

Promenade
 
4.27
%
 
2022
 
100,030

 
102,355

Senior Notes, Unsecured
 
4.09
%
 
2027
 
100,000

 
100,000

816 Congress
 
3.75
%
 
2024
 
82,089

 
83,304

Meridian Mark Plaza
 
6.00
%
 
2020
 
23,655

 
24,038

The Pointe (2)
 
4.01
%
 
2019
 

 
22,510

Credit Facility, Unsecured
 
3.31
%
 
2023
 

 

 
 
 
 
 
 
1,070,045


1,098,764

Unamortized premium, net
 
 
 
 
 

 
219

Unamortized loan costs
 
 
 
 
 
(5,033
)
 
(5,755
)
Total Notes Payable
 
 
 
 
 
$
1,065,012

 
$
1,093,228


(1) Weighted average maturity of notes payable outstanding at September 30, 2018 was 6.0 years.
(2) In August 2018, the Company repaid in full, without penalty, the note payable secured by The Pointe.


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Credit Facility
Through January 2, 2018, 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 September 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 September 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 September 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 September 30, 2018 and December 31, 2017, the aggregate estimated fair values of the Company's notes payable were $1.1 billion for both 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 nine months ended September 30, 2018 and 2017, interest expense was as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Total interest incurred
$
11,087

 
$
10,288

 
$
33,064

 
$
32,360

Interest capitalized
(1,536
)
 
(2,701
)
 
(4,021
)
 
(6,509
)
Total interest expense
$
9,551

 
$
7,587

 
$
29,043

 
$
25,851

6. COMMITMENTS AND CONTINGENCIES

Commitments
The Company had outstanding letters of credit and performance bonds totaling $2.7 million at September 30, 2018. As a lessor, the Company had $93.8 million in future obligations under leases to fund tenant improvements and other future construction obligations at September 30, 2018. As a lessee, the Company had future obligations under ground and other operating leases of $206.3 million at September 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 grants restricted stock and restricted stock units ("RSUs") to officers, directors, and key employees. In the past, the Company also awarded stock options to officers, directors, and key employees. 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 and in part as a result of the Company's financial performance relative to goals. The Company recorded stock-based compensation expense, net of forfeitures, of $403,000 and $3.3 million for the three months ended September 30, 2018 and 2017, respectively, and $6.4 million and $7.9 million for the nine months ended September 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 nine months ended September 30, 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 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

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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 nine months ended September 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 nine months ended September 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 nine months ended September 30, 2018 and 2017 (in thousands except per share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Earnings per common share - basic:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
19,859

 
$
12,285

 
$
58,014

 
$
188,088

Net income attributable to noncontrolling interests in CPLP
    from continuing operations
(326
)
 
(213
)
 
(1,023
)
 
(3,170
)
Net income attributable to other noncontrolling interests
(48
)
 
(5
)
 
(187
)
 
(11
)
Net income available to common stockholders
$
19,485

 
$
12,067

 
$
56,804

 
$
184,907

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average common shares - basic
420,385

 
419,998

 
420,279

 
414,123

 
 
 
 
 
 
 
 
Earnings per common share - basic
$
0.05

 
$
0.03

 
$
0.14

 
$
0.45

 
 
 
 
 
 
 
 
Earnings per common share - diluted:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
19,859

 
$
12,285

 
$
58,014


$
188,088

Net income attributable to other noncontrolling interests from continuing operations
(48
)
 
(5
)
 
(187
)
 
(11
)
Net income available to common stockholders before net income attributable to noncontrolling interests in CPLP
$
19,811

 
$
12,280

 
$
57,827

 
$
188,077

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average common shares - basic
420,385

 
419,998

 
420,279

 
414,123

     Add:
 
 
 
 
 
 
 
Potential dilutive common shares - stock options
161

 
328

 
219

 
320

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

 
6,974

 
6,974

 
7,511

Weighted average common shares - diluted
427,520

 
427,300

 
427,472

 
421,954

 
 
 
 
 
 
 
 
Earnings per common share - diluted
$
0.05

 
$
0.03

 
$
0.14


$
0.45

 
 
 
 
 
 
 
 
Weighted average anti-dilutive stock options outstanding

 
731

 
8

 
740










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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 nine months ended September 30, 2018 and 2017 is as follows (in thousands):
 
 
September 30,
 
 
2018
 
2017
Interest paid, net of amounts capitalized
$
31,601

 
$
26,927

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

 
58,928

 
Common stock dividends declared and accrued
27,364

 
25,201

 
Change in accrued property acquisition, development, and tenant expenditures
21,920

 
(18,081
)
 
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):
 
September 30,
 
December 31,
 
2018
 
2017
 
2017
 
2016
Cash and cash equivalents
$
82,706

 
$
62,167

 
$
148,929

 
$
35,687

Restricted cash
419

 
437

 
56,816

 
15,634

Total cash, cash equivalents, and restricted cash
$
83,125

 
$
62,604

 
$
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.

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Segment net income, 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 nine months ended September 30, 2018 and 2017 are as follows (in thousands):
Three Months Ended September 30, 2018
 
Office
 
Mixed-Use
 
Total
Net Operating Income:
 
 
 
 
 
 
Atlanta
 
$
32,296

 
$

 
$
32,296

Charlotte
 
15,924

 

 
15,924

Austin
 
15,180

 

 
15,180

Phoenix
 
9,265

 

 
9,265

Tampa
 
7,446

 

 
7,446

Other
 
310

 
437

 
747

Total Net Operating Income
 
$
80,421

 
$
437

 
$
80,858

Three Months Ended September 30, 2017
 
Office
 
Mixed-Use
 
Total
Net Operating Income:
 
 
 
 
 
 
Atlanta
 
$
25,247

 
$

 
$
25,247

Charlotte
 
15,074

 

 
15,074

Austin
 
15,489

 

 
15,489

Phoenix
 
8,667

 

 
8,667

Tampa
 
7,412

 

 
7,412

Orlando
 
3,356

 

 
3,356

Other
 
525

 
45

 
570

Total Net Operating Income
 
$
75,770

 
$
45

 
$
75,815

Nine Months Ended September 30, 2018
 
Office
 
Mixed-Use
 
Total
Net Operating Income:
 
 
 
 
 
 
Atlanta
 
$
96,639

 
$

 
$
96,639

Charlotte
 
47,197

 

 
47,197

Austin
 
45,209

 

 
45,209

Phoenix
 
27,119

 

 
27,119

Tampa
 
22,816

 

 
22,816

Other
 
1,183

 
1,468

 
2,651

Total Net Operating Income
 
$
240,163

 
$
1,468

 
$
241,631

Nine Months Ended September 30, 2017
 
Office
 
Mixed-Use
 
Total
Net Operating Income:
 
 
 
 
 
 
Atlanta
 
$
84,437

 
$
3,125

 
$
87,562

Charlotte
 
46,117

 

 
46,117

Austin
 
44,113

 

 
44,113

Phoenix
 
24,722

 

 
24,722

Tampa
 
21,700

 

 
21,700

Orlando
 
10,464

 

 
10,464

Other
 
1,374

 
45

 
1,419

Total Net Operating Income
 
$
232,927

 
$
3,170

 
$
236,097




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Table of Contents


The following reconciles Net Operating Income to Net Income for each of the periods presented (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net Operating Income
$
80,858

 
$
75,815

 
$
241,631

 
$
236,097

Net operating income from unconsolidated joint
   ventures
(6,994
)
 
(6,934
)
 
(21,643
)
 
(23,719
)
Fee income
2,519

 
2,597

 
7,211

 
6,387

Other income
744

 
993

 
2,836

 
9,593

Reimbursed expenses
(955
)
 
(895
)
 
(2,757
)
 
(2,667
)
General and administrative expenses
(3,913
)
 
(7,193
)
 
(18,793
)
 
(21,993
)
Interest expense
(9,551
)
 
(7,587
)
 
(29,043
)
 
(25,851
)
Depreciation and amortization
(45,068
)
 
(47,622
)
 
(135,836
)
 
(152,546
)
Acquisition and transaction costs

 
677

 
(228
)
 
(1,499
)
Gain on extinguishment of debt
93

 
429

 
8

 
2,258

Other expenses
(93
)
 
(423
)
 
(457
)
 
(1,063
)
Income from unconsolidated joint ventures
2,252

 
2,461

 
10,173

 
43,362

Gain (loss) on sale of investment properties
(33
)
 
(33
)
 
4,912

 
119,729

Net Income
$
19,859


$
12,285

 
$
58,014

 
$
188,088

Revenues by reportable segment, including a reconciliation to total rental property revenues on the condensed consolidated statements of operations, for three and nine months ended September 30, 2018 and 2017 are as follows (in thousands):
Three Months Ended September 30, 2018
 
Office
 
Mixed-Use
 
Total
Revenues:
 
 
 
 
 
 
Atlanta
 
$
51,088

 
$

 
$
51,088

Austin
 
26,415

 

 
26,415

Charlotte
 
23,263

 

 
23,263

Phoenix
 
12,830

 

 
12,830

Tampa
 
12,228

 

 
12,228

Other
 
1,104

 
429

 
1,533

Total segment revenues
 
126,928

 
429

 
127,357

Less: Company's share of rental property revenues from unconsolidated joint ventures
 
(11,485
)
 
(429
)
 
(11,914
)
Total rental property revenues
 
$
115,443

 
$

 
$
115,443

Three Months Ended September 30, 2017
 
Office
 
Mixed-Use
 
Total
Revenues:
 
 
 
 
 
 
Atlanta
 
$
41,507

 
$

 
$
41,507

Austin
 
25,385

 

 
25,385

Charlotte
 
23,153

 

 
23,153

Tampa
 
11,815

 

 
11,815

Phoenix
 
11,692

 

 
11,692

Orlando
 
6,408

 

 
6,408

Other
 
915

 
143

 
1,058

Total segment revenues
 
120,875

 
143

 
121,018

Less: Company's share of rental property revenues from unconsolidated joint ventures
 
(11,306
)
 
(143
)
 
(11,449
)
Total rental property revenues
 
$
109,569

 
$

 
$
109,569


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Table of Contents


Nine Months Ended September 30, 2018
 
Office
 
Mixed-Use
 
Total
Revenues:
 
 
 
 
 
 
Atlanta
 
$
150,917

 
$

 
$
150,917

Austin
 
79,329

 

 
79,329

Charlotte
 
69,342

 

 
69,342

Tampa
 
37,014

 

 
37,014

Phoenix
 
37,137

 

 
37,137

Other
 
3,238

 
997

 
4,235

Total segment revenues
 
376,977

 
997

 
377,974

Less: Company's share of rental property revenues from unconsolidated joint ventures
 
(34,488
)
 
(997
)
 
(35,485
)
Total rental property revenues
 
$
342,489

 
$

 
$
342,489

Nine Months Ended September 30, 2017
 
Office
 
Mixed-Use
 
Total
Revenues:
 
 
 
 
 
 
Atlanta
 
$
135,319

 
$
5,049

 
$
140,368

Austin
 
75,348

 

 
75,348

Charlotte
 
68,495

 

 
68,495

Tampa
 
34,913

 

 
34,913

Phoenix
 
33,689

 

 
33,689

Orlando
 
19,380

 

 
19,380

Other
 
2,492

 
143

 
2,635

Total segment revenues
 
369,636

 
5,192

 
374,828

Less: Company's share of rental property revenues from unconsolidated joint ventures
 
(33,543
)
 
(5,192
)
 
(38,735
)
Total rental property revenues
 
$
336,093

 
$

 
$
336,093





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 strategic 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 September 30, 2018, our portfolio of real estate assets consisted of interests in 27 operating properties (26 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 485,598 square feet of office space during the third quarter of 2018. The weighted average net effective rent of these leases, representing base rent less operating expense reimbursements and leasing costs, was $20.83 per square foot. For those leases that were previously occupied within the past year, net effective rent increased 25.8%. Same property net operating income (defined below) for consolidated properties and our share of unconsolidated properties increased by 2.7% between the three months ended September 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. This information is presented for consolidated properties only and does not include net operating income from our unconsolidated joint ventures.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
$ Change
 
% Change
 
2018
 
2017
 
$ Change
 
% Change
Rental Property Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Same Property
$
105,755

 
$
101,196

 
$
4,559

 
4.5
 %
 
$
313,611

 
$
301,438

 
$
12,173

 
4.0
 %
Non-Same Property
9,688

 
8,373

 
1,315

 
15.7
 %
 
28,878

 
34,655

 
(5,777
)
 
(16.7
)%
Total Rental Property Revenues
$
115,443

 
$
109,569

 
$
5,874

 
5.4
 %
 
$
342,489

 
$
336,093

 
$
6,396

 
1.9
 %
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
Rental Property Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Same Property
$
39,111

 
$
36,585

 
$
2,526

 
6.9
 %
 
$
115,619

 
$
108,406

 
$
7,213

 
6.7
 %
Non-Same Property
2,468

 
4,103

 
(1,635
)
 
(39.8
)%
 
6,882

 
15,309

 
(8,427
)
 
(55.0
)%
Total Rental Property Operating Expenses
$
41,579

 
$
40,688

 
$
891

 
2.2
 %
 
$
122,501

 
$
123,715

 
$
(1,214
)
 
(1.0
)%
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
Net Operating Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Same Property NOI
$
66,644

 
$
64,611

 
$
2,033

 
3.1
 %
 
$
197,992

 
$
193,032

 
$
4,960

 
2.6
 %
Non-Same Property NOI
7,220


4,270

 
2,950

 
69.1
 %
 
21,996

 
19,346

 
2,650

 
13.7
 %
Total NOI
$
73,864

 
$
68,881

 
$
4,983

 
7.2
 %
 
$
219,988

 
$
212,378

 
$
7,610

 
3.6
 %
The increases in Same Property NOI in the three and nine month periods are primarily due to increased occupancy at Northpark and Corporate Center.
Non-Same Property NOI increased in the three month period as a result of the lease-up of 8000 Avalon, which began operations in June 2017, and the commencement of operations of 864 Spring Street in January 2018. These increases were offset by decreases resulting from the December 2017 sale of our Orlando properties. Non-Same Property revenues increased during this period while Non-Same Property Expenses decreased because we receive a higher percentage of operating expenses in revenue from tenants at 864 Spring Street than we did at our Orlando properties.

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Table of Contents


Non-Same Property NOI increased in the nine month period on a percentage basis less than that of the three month period because American Cancer Society Center ("ACSC") was sold in June 2017 in addition to the activity noted in the three month period.
Other Income
Other income decreased $6.8 million (70.4%) between the 2018 and 2017 nine month periods. Primarily as a result of 2017 lease termination fees at Hayden Ferry and Northpark.
General and Administrative Expenses
General and administrative expenses decreased $3.3 million (45.6%) between the 2018 and 2017 three month periods and decreased $3.2 million (14.6%) between the 2018 and 2017 nine month periods primarily driven by a reduction in long-term compensation expense as a result of fluctuations in our common stock price relative to our office peers included in the SNL US Office REIT Index.
Interest Expense
Interest expense increased $2.0 million (25.9%) between the 2018 and 2017 three month periods primarily as a result of an increase in interest incurred on the Term Loan due to an increase in the LIBOR rate and a decrease in capitalized interest as a result of the completion of the 864 Spring Street and Carolina Square properties. Interest expense increased $3.2 million (12.3%) between the 2018 and 2017 nine month periods primarily due to a decrease in capitalized interest and an increase in the LIBOR rate.
Depreciation and Amortization
Depreciation and amortization decreased $2.6 million (5.4%) between the 2018 and 2017 three month periods and decreased $16.7 million (11.0%) between the 2018 and 2017 nine month periods primarily due to the sale of ACSC in June 2017 and the sales of Bank of America Center, One Orlando Centre, and Citrus Center in December 2017, partially offset by the commencement of operations at 8000 Avalon in June 2017 and 864 Spring Street in January 2018.
Acquisition and Transaction Costs
Acquisition and transaction costs decreased $1.3 million (84.8%) between the 2018 and 2017 nine month periods. These costs represent the trailing costs of combining the operations of Parkway Properties, Inc. with the Company in 2016.
Income from Unconsolidated Joint Ventures
Income from unconsolidated joint ventures consisted of the Company's share of the following (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
$ Change
 
2018
 
2017
 
$ Change
Net operating income
$
6,994

 
$
6,934

 
$
60

 
$
21,643

 
$
23,719

 
$
(2,076
)
Other income, net
36

 
165

 
(129
)
 
83

 
1,869

 
(1,786
)
Depreciation and amortization
(3,119
)
 
(2,862
)
 
(257
)
 
(9,554
)
 
(10,535
)
 
981

Interest expense
(1,657
)
 
(1,776
)
 
119

 
(4,763
)
 
(6,023
)
 
1,260

Net gain (loss) on sale of investment property
(2
)
 

 
(2
)
 
(15
)
 
34,332

 
(34,347
)
Gain on sale of undepreciated property

 

 

 
2,779

 

 
2,779

Income from unconsolidated joint ventures
$
2,252

 
$
2,461

 
$
(209
)
 
$
10,173

 
$
43,362

 
$
(33,189
)
Net operating income and depreciation and amortization from unconsolidated joint ventures decreased $2.1 million and $1.0 million, respectively, between the 2018 and 2017 nine month periods primarily due to the sale of properties owned by EPI, LLC and EPII, LLC ("Emory Point I and II") in the second quarter of 2017 and the sale of our interest in Courvoisier Centre JV, LLC in the fourth quarter of 2017. Other income decreased $1.8 million between the nine month periods primarily as a result of 2017 lease termination fees recognized at 111 West Rio. Interest expense decreased $1.3 million between the nine month periods primarily due to the sale of Emory Point I and II and repayment of the related mortgage loans in the second quarter of 2017. The change in net gain (loss) on sale of investment property is primarily due to the 2017 sale of Emory Point I and II, offset by the 2017 purchase of the remaining 25.4% interest in the 111 West Rio building and the related consolidation of the building immediately following the purchase that generated a $3.5 million loss. The gain on sale of undepreciated property in the 2018 periods is related to the sale of two land parcels by Wildwood Associates.


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Table of Contents



Gain (loss) on Sale of Investment Properties
Gain on sale of investment properties in the nine month 2018 period is primarily related to the post-closing settlement of a liability that arose as a result of the 2016 sale of the Lincoln Place property. Gain on sale of investment properties in the nine month 2017 period related primarily to the second quarter 2017 sale of ACSC.

Funds From Operations
The table below shows Funds from Operations (“FFO”) and the related reconciliation to net income available to common stockholders. We calculate 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, we use 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 to FFO is as follows for the three and nine months ended September 30, 2018 and 2017 (in thousands, except per share information):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net Income Available to Common Stockholders
$
19,485

 
$
12,067

 
$
56,804

 
$
184,907

Depreciation and amortization of real estate assets:
 
 
 
 
 
 
 
Consolidated properties
44,599

 
47,161

 
134,426

 
151,169

Share of unconsolidated joint ventures
3,119

 
2,862

 
9,554

 
10,535

Partners' share of real estate depreciation
(72
)
 
(4
)
 
(211
)
 
(4
)
(Gain) loss on sale of depreciated properties:
 
 
 
 
 
 
 
Consolidated properties
33

 
36

 
(4,912
)
 
(119,713
)
Share of unconsolidated joint ventures

 

 
15

 
(34,332
)
     Non-controlling interest related to unit holders
326

 
212

 
1,023

 
3,169

Funds From Operations
$
67,490

 
$
62,334

 
$
196,699

 
$
195,731

Per Common Share — Diluted:
 
 
 
 
 
 
 
Net Income Available to Common
Stockholders
$
0.05

 
$
0.03

 
$
0.14

 
$
0.45

Funds from Operations
$
0.16

 
$
0.15

 
$
0.46

 
$
0.46

Weighted Average Shares — Diluted
427,520

 
427,300

 
427,472

 
421,954


Net Operating Income

Company management evaluates the performance of its property portfolio in part based on 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.

20

Table of Contents



The following table reconciles NOI for consolidated properties to Net Income each of the periods presented (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net Income
$
19,859

 
$
12,285

 
$
58,014

 
$
188,088

Fee income
(2,519
)
 
(2,597
)
 
(7,211
)
 
(6,387
)
Other income
(744
)
 
(993
)
 
(2,836
)
 
(9,593
)
Reimbursed expenses
955

 
895

 
2,757

 
2,667

General and administrative expenses
3,913

 
7,193

 
18,793

 
21,993

Interest expense
9,551

 
7,587

 
29,043

 
25,851

Depreciation and amortization
45,068

 
47,622

 
135,836

 
152,546

Acquisition and transaction costs

 
(677
)
 
228

 
1,499

Other expenses
93

 
423

 
457

 
1,063

Gain on extinguishment of debt
(93
)
 
(429
)
 
(8
)
 
(2,258
)
Income from unconsolidated joint ventures
(2,252
)
 
(2,461
)
 
(10,173
)
 
(43,362
)
(Gain) loss on sale of investment properties
33

 
33

 
(4,912
)
 
(119,729
)
Net Operating Income
$
73,864

 
$
68,881

 
$
219,988

 
$
212,378


Liquidity and Capital Resources
Our primary short-term and long-term liquidity needs include the following:
property and land acquisitions;
expenditures on development projects;
building improvements, tenant improvements, and leasing costs;
principal and interest payments on indebtedness; and
common stock dividends and distributions to outside unitholders of CPLP.
We may satisfy these needs with one or more of the following:
cash and cash equivalents on hand;
net cash from operations;
proceeds from the sale of assets;
borrowings under our credit facility;
proceeds from mortgage notes payable;
proceeds from construction loans;
proceeds from unsecured loans;
proceeds from offerings of debt or equity securities; and
joint venture formations.
As of September 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.
In August 2018, the Company repaid in full, without penalty, the $22.3 million mortgage note secured by The Pointe.

Contractual Obligations and Commitments
The following table sets forth information as of September 30, 2018 with respect to our outstanding contractual obligations and commitments (in thousands):

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Table of Contents


 
 
Total
 
Less than 1 Year
 
1-3 Years
 
3-5 Years
 
More than 5 years
Contractual Obligations:
 
 
 
 
 
 
 
 
 
 
Company debt:
 
 
 
 
 
 
 
 
 
 
Unsecured Credit Facility
 
$

 
$

 
$

 
$

 
$

Unsecured Senior Notes
 
350,000

 

 

 

 
350,000

Unsecured Term Loan
 
250,000

 

 

 
250,000

 

Mortgage notes payable
 
470,045

 
2,684

 
44,820

 
108,300

 
314,241

Interest commitments (1)
 
241,223

 
7,136

 
82,591

 
67,061

 
84,435

Ground leases
 
205,709

 
2,321

 
4,660

 
4,748

 
193,980

Other operating leases
 
580

 
277

 
255

 
48

 

Total contractual obligations
 
$
1,517,557

 
$
12,418

 
$
132,326

 
$
430,157

 
$
942,656

Commitments:
 
 
 
 
 
 
 
 
 
 
Unfunded tenant improvements and construction obligations
 
$
93,773

 
$
57,678

 
$
36,095

 
$

 
$

Letters of credit
 
2,000

 
2,000

 

 

 

Performance bonds
 
665

 
665

 

 

 

Total commitments
 
$
96,438

 
$
60,343

 
$
36,095

 
$

 
$

(1)
Interest on variable rate obligations is based on rates effective as of September 30, 2018.
In addition, we have several standing or renewable service contracts mainly related to the operation of buildings. These contracts are 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.
Other Debt Information
Our existing mortgage debt is primarily non-recourse, fixed-rate mortgage notes secured by various real estate assets. Many of our non-recourse mortgages contain covenants which, if not satisfied, could result in acceleration of the maturity of the debt. We expect to either refinance the non-recourse mortgages at maturity or repay the mortgages with proceeds from asset sales, debt, or other capital sources.
Future Capital Requirements
To meet capital requirements for future investment activities over the long term, we intend to actively manage our portfolio of properties, generating internal cash flows, and to strategically sell assets. We expect to continue to utilize indebtedness to fund future commitments, if available and under appropriate terms. We may also seek equity capital and capital from joint venture partners to implement our strategy.
Our business model is dependent upon raising or recycling capital to meet obligations and to fund development and acquisition activity. If one or more sources of capital are not available when required, we may be forced to reduce the number of projects we acquire or develop and/or raise capital on potentially unfavorable terms, or we may be unable to raise capital, which could have an adverse effect on our financial position or results of operations.
Cash Flows Summary
We report and analyze our cash flows based on operating activities, investing activities, and financing activities. The following table summarizes the changes in cash flows (in thousands):
 
Nine Months Ended September 30,
 
2018
 
2017
 
Change
Net cash provided by operating activities
$
178,037

 
$
161,229

 
$
16,808

Net cash used in investing activities
(182,402
)
 
(7,395
)
 
(175,007
)
Net cash used in financing activities
(118,255
)
 
(142,551
)
 
24,296

The reasons for significant increases and decreases in cash flows between the periods are as follows:
Cash Flows from Operating Activities. Cash flows from operating activities increased $16.8 million between the 2018 and 2017 nine month periods primarily due to an increase in cash generated from property operations as a result of the commencement of operations of 864 Spring Street in the first quarter of 2018, 8000 Avalon in the second quarter of 2017, and

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Table of Contents


Carolina Square in the third quarter of 2017. These increases are partially offset by a decrease in cash generated from property operations as a result of the sale of ACSC in June 2017 and the sales of Bank of America Center, One Orlando Centre, and Citrus Center in December 2017 and a decrease in lease termination fees between periods.
Cash Flows from Investing Activities. Cash used in investing activities increased $175.0 million between the 2018 and 2017 nine month periods primarily due to proceeds from the 2017 ACSC sale, proceeds from the 2017 sale of Emory Point I and II, offset by a reduction in acquisition and development expenditures.
Cash Flows from Financing Activities. Cash used in financing activities decreased $24.3 million between the 2018 and 2017 nine month periods primarily due to net repayment of notes payable in 2017, partially offset by a 2017 common stock issuance.
Capital Expenditures. We incur costs related to our 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 assets we develop or acquire and then hold and operate are included in the property acquisition, development, and tenant asset expenditures line item within investing activities on the condensed consolidated statements of cash flows. The changes in 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 nine months ended September 30, 2018 and 2017 are as follows (in thousands):
 
Nine Months Ended September 30,
 
2018
 
2017
Development
$
47,842

 
$
144,116

Operating — leasing costs
29,359

 
53,809

Operating — building improvements
22,711

 
38,097

Capitalized interest
4,021

 
6,509

Capitalized personnel costs
6,615

 
5,361

Change in accrued capital expenditures
21,920

 
(18,081
)
Total property acquisition, development, and tenant asset expenditures
$
132,468

 
$
229,811

Capital expenditures decreased due to a number of development projects being completed and a decrease in building improvement projects. Tenant improvements and leasing costs, as well as related capitalized personnel costs, are a function of the number and size of newly executed leases or renewals of existing leases. Changes in accrued capital expenditures decreased primarily due to payments related to the construction of 864 Spring Street that were due and made at the time the property commenced operations. The amounts of tenant improvement and leasing costs for our office portfolio on a per square foot basis were as follows:
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
New leases
 
$8.18
 
$7.52
Renewal leases
 
$5.03
 
$5.10
Expansion leases
 
$7.02
 
$7.12
The amounts of tenant improvement and leasing costs on a per square foot basis vary by lease and by market. Given the level of expected leasing and renewal activity, management expects tenant improvements and leasing costs per square foot in future periods to remain consistent with those experienced in the first nine months of 2018.
Dividends. We paid common dividends of $79.8 million and $74.0 million in the 2018 and 2017 nine month periods, respectively. We funded the common dividends with cash on hand and cash provided by operating activities. We expect to fund our future quarterly common dividends with cash provided by operating activities, proceeds from investment property sales, distributions from unconsolidated joint ventures, and indebtedness, if necessary.
On a quarterly basis, we review the amount of the common dividend in light of current and projected future cash flows from the sources noted above and also consider the requirements needed to maintain our REIT status. In addition, we have certain covenants under credit agreements which could limit the amount of common dividends paid. In general, common dividends of any amount can be paid as long as leverage, as defined in our credit agreements, is less than 60% and we are not in default. Certain conditions also apply in which we can still pay common dividends if leverage is above that amount. We routinely monitor the status of our common dividend payments in light of the covenants of our credit agreements.

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Off Balance Sheet Arrangements
General. We have a number of off balance sheet joint ventures with varying structures, as described in note 6 of our 2017 Annual Report on Form 10-K and note 2 of this Form 10-Q. The joint ventures in which we have an interest are involved in the ownership, acquisition, 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 we will evaluate such request.
Debt. At September 30, 2018, our unconsolidated joint ventures had aggregate outstanding indebtedness to third parties of $343.8 million. These loans are generally mortgage or construction loans, most of which are non-recourse to us except as described in the paragraph below. In addition, in certain instances, we provide “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 from interest rate changes.
We guarantee 12.5% of the loan amount related to the Carolina Square construction loan, which has a lending capacity of $79.8 million, and an outstanding balance of $74.0 million as of September 30, 2018. At September 30, 2018, we guaranteed $9.2 million of the amount outstanding.
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.
Critical Accounting Policies
There have been no material changes in the critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in the market risk associated with our notes payable at September 30, 2018 compared to that as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.


Item 4.    Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer along with the Chief Financial Officer, of the effectiveness, design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon the foregoing, the Chief Executive Officer along with the Chief Financial Officer concluded that our disclosure controls and procedures were effective. In addition, based on such evaluation we have identified no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION
Item 1.    Legal Proceedings.
Information regarding legal proceedings is described under the subheading "Litigation" in note 6 to the unaudited condensed consolidated financial statements set forth in this Form 10-Q.
Item 1A. Risk Factors

Risk factors that affect our business and financial results are discussed in Part I, "Item 1A. Risk Factors," of our Annual Report on Form 10-K for the year ended December 31, 2017. There have been no material changes in our risk factors from those previously disclosed in our Annual Report. You should carefully consider the risks described in our Annual Report, which could materially affect our business, financial condition or future results. The risks described in our Annual Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.
For information on our equity compensation plans, see note 13 of our Annual Report on Form 10-K and note 7 to the unaudited condensed consolidated financial statements set forth in this Form 10-Q. We did not make any sales of unregistered securities during the third quarter of 2018. We did not purchase any common shares during the third quarter of 2018.


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Item 6. Exhibits.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
11
 *
Computation of Per Share Earnings.
 
 
 
 †
 
 
 
 †
 
 
 
 †
 
 
 
 †
 
 
 
101
 †
The following financial information for the Registrant, formatted in XBRL (Extensible Business Reporting Language): (i) the condensed consolidated balance sheets, (ii) the condensed consolidated statements of operations, (iii) the condensed consolidated statements of equity, (iv) the condensed consolidated statements of cash flows, and (v) the notes to condensed consolidated financial statements.


 *
 
Data required by ASC 260, “Earnings per Share,” is provided in note 8 to the condensed consolidated financial statements included in this report.
 †
 
Filed herewith.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
COUSINS PROPERTIES INCORPORATED
 
 
 /s/ Gregg D. Adzema
 
Gregg D. Adzema 
 
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer) 
Date: October 24, 2018


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