Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2017
 
2000244888_logotree033117.jpg
HIGHWOODS PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
 
Maryland
001-13100
56-1871668
 
 
(State or other jurisdiction
of incorporation or organization)
(Commission
File Number)
(I.R.S. Employer
Identification Number)
 
 
HIGHWOODS REALTY LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
 
North Carolina
000-21731
56-1869557
 
 
(State or other jurisdiction
of incorporation or organization)
(Commission
File Number)
(I.R.S. Employer
Identification Number)
 
 
3100 Smoketree Court, Suite 600
Raleigh, NC 27604
(Address of principal executive offices) (Zip Code)
919-872-4924
(Registrants’ 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 Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Highwoods Properties, Inc.  Yes  x    No ¨    Highwoods Realty Limited Partnership  Yes  x    No ¨
 
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).
Highwoods Properties, Inc.  Yes  x    No ¨    Highwoods Realty Limited Partnership  Yes  x    No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of 'large accelerated filer,' 'accelerated filer,' 'smaller reporting company,' and 'emerging growth company' in Rule 12b-2 of the Exchange Act.
Highwoods Properties, Inc.
Large accelerated filer x   Accelerated filer ¨   Non-accelerated filer ¨ (Do not check if a smaller reporting company)  
Smaller reporting company ¨   Emerging growth company ¨
Highwoods Realty Limited Partnership
Large accelerated filer ¨   Accelerated filer ¨   Non-accelerated filer x (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.
Highwoods Properties, Inc.  ¨        Highwoods Realty Limited Partnership   ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Highwoods Properties, Inc.  Yes  ¨    No x    Highwoods Realty Limited Partnership  Yes  ¨    No x
 
The Company had 102,019,691 shares of Common Stock outstanding as of April 18, 2017.
 




EXPLANATORY NOTE

We refer to Highwoods Properties, Inc. as the “Company,” Highwoods Realty Limited Partnership as the “Operating Partnership,” the Company’s common stock as “Common Stock” or “Common Shares,” the Company’s preferred stock as “Preferred Stock” or “Preferred Shares,” the Operating Partnership’s common partnership interests as “Common Units” and the Operating Partnership’s preferred partnership interests as “Preferred Units.” References to “we” and “our” mean the Company and the Operating Partnership, collectively, unless the context indicates otherwise.

The Company conducts its activities through the Operating Partnership and is its sole general partner. The partnership agreement provides that the Operating Partnership will assume and pay when due, or reimburse the Company for payment of, all costs and expenses relating to the ownership and operations of, or for the benefit of, the Operating Partnership. The partnership agreement further provides that all expenses of the Company are deemed to be incurred for the benefit of the Operating Partnership.

Certain information contained herein is presented as of April 18, 2017, the latest practicable date for financial information prior to the filing of this Quarterly Report.

This report combines the Quarterly Reports on Form 10-Q for the period ended March 31, 2017 of the Company and the Operating Partnership. We believe combining the quarterly reports into this single report results in the following benefits:

combined reports better reflect how management and investors view the business as a single operating unit;

combined reports enhance investors' understanding of the Company and the Operating Partnership by enabling them to view the business as a whole and in the same manner as management;

combined reports are more efficient for the Company and the Operating Partnership and result in savings in time, effort and expense; and

combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review.

To help investors understand the significant differences between the Company and the Operating Partnership, this report presents the following separate sections for each of the Company and the Operating Partnership:

Consolidated Financial Statements;

Note 12 to Consolidated Financial Statements - Earnings Per Share and Per Unit;

Item 4 - Controls and Procedures; and

Item 6 - Certifications of CEO and CFO Pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act.





HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP

QUARTERLY REPORT FOR THE PERIOD ENDED MARCH 31, 2017

TABLE OF CONTENTS

 
Page
 
 
PART I - FINANCIAL INFORMATION
 
 
 
 
 
PART II - OTHER INFORMATION
 
ITEM 6. EXHIBITS



2

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HIGHWOODS PROPERTIES, INC.
Consolidated Balance Sheets
(Unaudited and in thousands, except share and per share data)
 
March 31,
2017
 
December 31,
2016
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
474,661

 
$
474,375

Buildings and tenant improvements
4,326,570

 
4,313,373

Development in-process
327,446

 
279,602

Land held for development
84,056

 
77,355

 
5,212,733

 
5,144,705

Less-accumulated depreciation
(1,166,865
)
 
(1,134,103
)
Net real estate assets
4,045,868

 
4,010,602

Cash and cash equivalents
4,918

 
49,490

Restricted cash
29,241

 
29,141

Accounts receivable, net of allowance of $491 and $624, respectively
15,814

 
17,372

Mortgages and notes receivable, net of allowance of $96 and $105, respectively
7,787

 
8,833

Accrued straight-line rents receivable, net of allowance of $242 and $692, respectively
178,872

 
172,829

Investments in and advances to unconsolidated affiliates
14,822

 
18,846

Deferred leasing costs, net of accumulated amortization of $142,148 and $140,081, respectively
210,141

 
213,500

Prepaid expenses and other assets, net of accumulated amortization of $20,695 and $19,904,
respectively
41,353

 
40,437

Total Assets
$
4,548,816

 
$
4,561,050

Liabilities, Noncontrolling Interests in the Operating Partnership and Equity:
 
 
 
Mortgages and notes payable, net
$
2,042,486

 
$
1,948,047

Accounts payable, accrued expenses and other liabilities
207,144

 
313,885

Total Liabilities
2,249,630

 
2,261,932

Commitments and contingencies

 

Noncontrolling interests in the Operating Partnership
139,367

 
144,802

Equity:
 
 
 
Preferred Stock, $.01 par value, 50,000,000 authorized shares;
 
 
 
8.625% Series A Cumulative Redeemable Preferred Shares (liquidation preference $1,000 per share), 28,905 and 28,920 shares issued and outstanding, respectively
28,905

 
28,920

Common Stock, $.01 par value, 200,000,000 authorized shares;
 
 
 
102,018,119 and 101,665,554 shares issued and outstanding, respectively
1,020

 
1,017

Additional paid-in capital
2,868,869

 
2,850,881

Distributions in excess of net income available for common stockholders
(762,655
)
 
(749,412
)
Accumulated other comprehensive income
5,885

 
4,949

Total Stockholders’ Equity
2,142,024

 
2,136,355

Noncontrolling interests in consolidated affiliates
17,795

 
17,961

Total Equity
2,159,819

 
2,154,316

Total Liabilities, Noncontrolling Interests in the Operating Partnership and Equity
$
4,548,816

 
$
4,561,050

 
See accompanying notes to consolidated financial statements.

3

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Income
(Unaudited and in thousands, except per share amounts)
 
Three Months Ended
March 31,
 
2017
 
2016
Rental and other revenues
$
169,408

 
$
164,859

Operating expenses:
 
 
 
Rental property and other expenses
57,396

 
57,580

Depreciation and amortization
56,145

 
53,494

General and administrative
11,490

 
11,137

Total operating expenses
125,031

 
122,211

Interest expense:
 
 
 
Contractual
17,023

 
19,715

Amortization of debt issuance costs
840

 
990

 
17,863

 
20,705

Other income:
 
 
 
Interest and other income
684

 
517

 
684


517

Income from continuing operations before disposition of investment properties and activity in unconsolidated affiliates
27,198

 
22,460

Gains on disposition of property
5,332

 
4,397

Equity in earnings of unconsolidated affiliates
955

 
1,285

Income from continuing operations
33,485

 
28,142

Discontinued operations:
 
 
 
Income from discontinued operations

 
4,097

Net gains on disposition of discontinued operations

 
414,496

 

 
418,593

Net income
33,485

 
446,735

Net (income) attributable to noncontrolling interests in the Operating Partnership
(888
)
 
(13,011
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(300
)
 
(308
)
Dividends on Preferred Stock
(623
)
 
(626
)
Net income available for common stockholders
$
31,674


$
432,790

Earnings per Common Share – basic:
 
 
 
Income from continuing operations available for common stockholders
$
0.31

 
$
0.27

Income from discontinued operations available for common stockholders

 
4.22

Net income available for common stockholders
$
0.31

 
$
4.49

Weighted average Common Shares outstanding – basic
101,738

 
96,373

Earnings per Common Share – diluted:
 
 
 
Income from continuing operations available for common stockholders
$
0.31

 
$
0.27

Income from discontinued operations available for common stockholders

 
4.22

Net income available for common stockholders
$
0.31

 
$
4.49

Weighted average Common Shares outstanding – diluted
104,661

 
99,357

Dividends declared per Common Share
$
0.440

 
$
0.425

Net income available for common stockholders:
 
 
 
Income from continuing operations available for common stockholders
$
31,674

 
$
26,462

Income from discontinued operations available for common stockholders

 
406,328

Net income available for common stockholders
$
31,674

 
$
432,790

See accompanying notes to consolidated financial statements.

4

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Comprehensive Income
(Unaudited and in thousands)
 
Three Months Ended
March 31,
 
2017
 
2016
Comprehensive income:
 
 
 
Net income
$
33,485

 
$
446,735

Other comprehensive income/(loss):
 
 
 
Unrealized gains/(losses) on cash flow hedges
452

 
(3,635
)
Amortization of cash flow hedges
484

 
795

Total other comprehensive income/(loss)
936

 
(2,840
)
Total comprehensive income
34,421

 
443,895

Less-comprehensive (income) attributable to noncontrolling interests
(1,188
)
 
(13,319
)
Comprehensive income attributable to common stockholders
$
33,233

 
$
430,576


See accompanying notes to consolidated financial statements.



5

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Equity
(Unaudited and in thousands, except share amounts)

 
Number of Common Shares
 
Common Stock
 
Series A Cumulative Redeemable Preferred Shares
 
Additional Paid-In Capital
 
Accumulated Other Compre-hensive Income
 
Non-controlling Interests in Consolidated Affiliates
 
Distributions in Excess of Net Income Available for Common Stockholders
 
Total
Balance at December 31, 2016
101,665,554

 
$
1,017

 
$
28,920

 
$
2,850,881

 
$
4,949

 
$
17,961

 
$
(749,412
)
 
$
2,154,316

Issuances of Common Stock, net of issuance costs and tax withholdings
239,817

 
2

 

 
9,132

 

 

 

 
9,134

Conversions of Common Units to Common Stock
2,000

 

 

 
102

 

 

 

 
102

Dividends on Common Stock


 

 

 

 

 

 
(44,917
)
 
(44,917
)
Dividends on Preferred Stock


 

 

 

 

 

 
(623
)
 
(623
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value


 

 

 
4,972

 

 

 

 
4,972

Distributions to noncontrolling interests in consolidated affiliates


 

 

 

 

 
(466
)
 

 
(466
)
Issuances of restricted stock
110,748

 

 

 

 

 

 

 

Redemptions/repurchases of Preferred Stock
 
 

 
(15
)
 

 

 

 

 
(15
)
Share-based compensation expense, net of forfeitures

 
1

 

 
3,782

 

 

 

 
3,783

Net (income) attributable to noncontrolling interests in the Operating Partnership


 

 

 

 

 

 
(888
)
 
(888
)
Net (income) attributable to noncontrolling interests in consolidated affiliates


 

 

 

 

 
300

 
(300
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income


 

 

 

 

 

 
33,485

 
33,485

Other comprehensive income


 

 

 

 
936

 

 

 
936

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
34,421

Balance at March 31, 2017
102,018,119

 
$
1,020

 
$
28,905

 
$
2,868,869

 
$
5,885

 
$
17,795

 
$
(762,655
)
 
$
2,159,819



 
Number of Common Shares
 
Common Stock
 
Series A Cumulative Redeemable Preferred Shares
 
Additional Paid-In Capital
 
Accumulated Other Compre-hensive Loss
 
Non-controlling Interests in Consolidated Affiliates
 
Distributions in Excess of Net Income Available for Common Stockholders
 
Total
Balance at December 31, 2015
96,091,932

 
$
961

 
$
29,050

 
$
2,598,242

 
$
(3,811
)
 
$
17,975

 
$
(1,023,135
)
 
$
1,619,282

Issuances of Common Stock, net of issuance costs and tax withholdings
1,177,885

 
12

 

 
50,886

 

 

 

 
50,898

Dividends on Common Stock

 

 

 

 

 

 
(40,881
)
 
(40,881
)
Dividends on Preferred Stock

 

 

 

 

 

 
(626
)
 
(626
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value

 

 

 
(429
)
 

 

 

 
(429
)
Distributions to noncontrolling interests in consolidated affiliates

 

 

 

 

 
(320
)
 

 
(320
)
Issuances of restricted stock
122,832

 

 

 

 

 

 

 

Redemptions/repurchases of Preferred Stock

 

 
(20
)
 

 

 

 

 
(20
)
Share-based compensation expense, net of forfeitures
(348
)
 
1

 

 
3,555

 

 

 

 
3,556

Net (income) attributable to noncontrolling interests in the Operating Partnership

 

 

 

 

 

 
(13,011
)
 
(13,011
)
Net (income) attributable to noncontrolling interests in consolidated affiliates

 

 

 

 

 
308

 
(308
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 

 
446,735

 
446,735

Other comprehensive loss

 

 

 

 
(2,840
)
 

 

 
(2,840
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
443,895

Balance at March 31, 2016
97,392,301

 
$
974

 
$
29,030

 
$
2,652,254

 
$
(6,651
)
 
$
17,963

 
$
(631,226
)
 
$
2,062,344


See accompanying notes to consolidated financial statements.

6

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
 
Three Months Ended
March 31,
 
2017
 
2016
Operating activities:
 
 
 
Net income
$
33,485

 
$
446,735

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
56,145

 
53,494

Amortization of lease incentives and acquisition-related intangible assets and liabilities
(10
)
 
108

Share-based compensation expense
3,783

 
3,556

Allowance for losses on accounts and accrued straight-line rents receivable
61

 
1,077

Accrued interest on mortgages and notes receivable
(132
)
 
(42
)
Amortization of debt issuance costs
840

 
990

Amortization of cash flow hedges
484

 
795

Amortization of mortgages and notes payable fair value adjustments
(30
)
 
(59
)
Net gains on disposition of property
(5,332
)
 
(418,893
)
Equity in earnings of unconsolidated affiliates
(955
)
 
(1,285
)
Distributions of earnings from unconsolidated affiliates
2,431

 
717

Settlement of cash flow hedges
7,322

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
3,922

 
601

Prepaid expenses and other assets
(5,959
)
 
(6,577
)
Accrued straight-line rents receivable
(6,185
)
 
(6,624
)
Accounts payable, accrued expenses and other liabilities
(20,951
)
 
(26,358
)
Net cash provided by operating activities
68,919

 
48,235

Investing activities:
 
 
 
Investments in development in-process
(59,408
)
 
(33,188
)
Investments in tenant improvements and deferred leasing costs
(24,649
)
 
(23,513
)
Investments in building improvements
(17,194
)
 
(16,479
)
Net proceeds from disposition of real estate assets
11,532

 
661,390

Distributions of capital from unconsolidated affiliates
6,512

 
2,118

Investments in mortgages and notes receivable

 
(7,602
)
Repayments of mortgages and notes receivable
1,178

 
79

Investments in and advances to unconsolidated affiliates

 
(105
)
Changes in restricted cash and other investing activities
(1,696
)
 
(248,865
)
Net cash provided by/(used in) investing activities
(83,725
)
 
333,835

Financing activities:
 
 
 
Dividends on Common Stock
(44,917
)
 
(40,881
)
Special dividend on Common Stock
(81,205
)
 

Redemptions/repurchases of Preferred Stock
(15
)
 
(20
)
Dividends on Preferred Stock
(623
)
 
(626
)
Distributions to noncontrolling interests in the Operating Partnership
(1,249
)
 
(1,232
)
Special distribution to noncontrolling interests in the Operating Partnership
(2,271
)
 

Distributions to noncontrolling interests in consolidated affiliates
(466
)
 
(320
)
Proceeds from the issuance of Common Stock
13,191

 
54,915

Costs paid for the issuance of Common Stock
(250
)
 
(788
)
Repurchase of shares related to tax withholdings
(3,807
)
 
(3,229
)
Borrowings on revolving credit facility
200,300

 
66,400

Repayments of revolving credit facility
(69,300
)
 
(107,400
)
Borrowings on mortgages and notes payable
346,001

 

Repayments of mortgages and notes payable
(380,261
)
 
(350,535
)
Changes in debt issuance costs and other financing activities
(4,894
)
 
(45
)
Net cash used in financing activities
(29,766
)
 
(383,761
)
Net decrease in cash and cash equivalents
$
(44,572
)
 
$
(1,691
)
See accompanying notes to consolidated financial statements.

7

Table of Contents


HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Cash Flows – Continued
(Unaudited and in thousands)

 
Three Months Ended
March 31,
 
2017
 
2016
Net decrease in cash and cash equivalents
$
(44,572
)
 
$
(1,691
)
Cash and cash equivalents at beginning of the period
49,490

 
5,036

Cash and cash equivalents at end of the period
$
4,918

 
$
3,345


Supplemental disclosure of cash flow information:
 
 
Three Months Ended
March 31,
 
2017
 
2016
Cash paid for interest, net of amounts capitalized
$
18,909

 
$
20,951


Supplemental disclosure of non-cash investing and financing activities:
 
 
Three Months Ended
March 31,
 
2017
 
2016
Unrealized gains/(losses) on cash flow hedges
$
452

 
$
(3,635
)
Conversions of Common Units to Common Stock
102

 

Changes in accrued capital expenditures
(6,741
)
 
(5,978
)
Write-off of fully depreciated real estate assets
10,649

 
12,579

Write-off of fully amortized debt issuance and leasing costs
13,252

 
5,282

Adjustment of noncontrolling interests in the Operating Partnership to fair value
(4,972
)
 
429


See accompanying notes to consolidated financial statements.

8

Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Balance Sheets
(Unaudited and in thousands, except unit and per unit data)
 
March 31,
2017
 
December 31,
2016
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
474,661

 
$
474,375

Buildings and tenant improvements
4,326,570

 
4,313,373

Development in-process
327,446

 
279,602

Land held for development
84,056

 
77,355

 
5,212,733

 
5,144,705

Less-accumulated depreciation
(1,166,865
)
 
(1,134,103
)
Net real estate assets
4,045,868

 
4,010,602

Cash and cash equivalents
4,918

 
49,490

Restricted cash
29,241

 
29,141

Accounts receivable, net of allowance of $491 and $624, respectively
15,814

 
17,372

Mortgages and notes receivable, net of allowance of $96 and $105, respectively
7,787

 
8,833

Accrued straight-line rents receivable, net of allowance of $242 and $692, respectively
178,872

 
172,829

Investments in and advances to unconsolidated affiliates
14,822

 
18,846

Deferred leasing costs, net of accumulated amortization of $142,148 and $140,081, respectively
210,141

 
213,500

Prepaid expenses and other assets, net of accumulated amortization of $20,695 and $19,904,
respectively
41,353

 
40,437

Total Assets
$
4,548,816

 
$
4,561,050

Liabilities, Redeemable Operating Partnership Units and Capital:
 
 
 
Mortgages and notes payable, net
$
2,042,486

 
$
1,948,047

Accounts payable, accrued expenses and other liabilities
207,144

 
313,885

Total Liabilities
2,249,630

 
2,261,932

Commitments and contingencies

 

Redeemable Operating Partnership Units:
 
 
 
Common Units, 2,836,704 and 2,838,704 outstanding, respectively
139,367

 
144,802

Series A Preferred Units (liquidation preference $1,000 per unit), 28,905 and 28,920 units issued and
outstanding, respectively
28,905

 
28,920

Total Redeemable Operating Partnership Units
168,272

 
173,722

Capital:
 
 
 
Common Units:
 
 
 
General partner Common Units, 1,044,460 and 1,040,954 outstanding, respectively
21,070

 
21,023

Limited partner Common Units, 100,564,850 and 100,215,791 outstanding, respectively
2,086,164

 
2,081,463

Accumulated other comprehensive income
5,885

 
4,949

Noncontrolling interests in consolidated affiliates
17,795

 
17,961

Total Capital
2,130,914

 
2,125,396

Total Liabilities, Redeemable Operating Partnership Units and Capital
$
4,548,816

 
$
4,561,050


See accompanying notes to consolidated financial statements.

9

Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Income
(Unaudited and in thousands, except per unit amounts)
 
Three Months Ended
March 31,
 
2017
 
2016
Rental and other revenues
$
169,408

 
$
164,859

Operating expenses:
 
 
 
Rental property and other expenses
57,396

 
57,580

Depreciation and amortization
56,145

 
53,494

General and administrative
11,490

 
11,137

Total operating expenses
125,031

 
122,211

Interest expense:
 
 
 
Contractual
17,023

 
19,715

Amortization of debt issuance costs
840

 
990

 
17,863

 
20,705

Other income:
 
 
 
Interest and other income
684

 
517

 
684

 
517

Income from continuing operations before disposition of investment properties and activity in unconsolidated affiliates
27,198

 
22,460

Gains on disposition of property
5,332

 
4,397

Equity in earnings of unconsolidated affiliates
955

 
1,285

Income from continuing operations
33,485

 
28,142

Discontinued operations:
 
 
 
Income from discontinued operations

 
4,097

Net gains on disposition of discontinued operations

 
414,496

 

 
418,593

Net income
33,485

 
446,735

Net (income) attributable to noncontrolling interests in consolidated affiliates
(300
)
 
(308
)
Distributions on Preferred Units
(623
)
 
(626
)
Net income available for common unitholders
$
32,562

 
$
445,801

Earnings per Common Unit – basic:
 
 
 
Income from continuing operations available for common unitholders
$
0.31

 
$
0.28

Income from discontinued operations available for common unitholders

 
4.23

Net income available for common unitholders
$
0.31

 
$
4.51

Weighted average Common Units outstanding – basic
104,167

 
98,864

Earnings per Common Unit – diluted:
 
 
 
Income from continuing operations available for common unitholders
$
0.31

 
$
0.28

Income from discontinued operations available for common unitholders

 
4.23

Net income available for common unitholders
$
0.31

 
$
4.51

Weighted average Common Units outstanding – diluted
104,252

 
98,948

Distributions declared per Common Unit
$
0.440

 
$
0.425

Net income available for common unitholders:
 
 
 
Income from continuing operations available for common unitholders
$
32,562

 
$
27,208

Income from discontinued operations available for common unitholders

 
418,593

Net income available for common unitholders
$
32,562

 
$
445,801

See accompanying notes to consolidated financial statements.

10

Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Comprehensive Income
(Unaudited and in thousands)
 
Three Months Ended
March 31,
 
2017
 
2016
Comprehensive income:
 
 
 
Net income
$
33,485

 
$
446,735

Other comprehensive income/(loss):
 
 
 
Unrealized gains/(losses) on cash flow hedges
452

 
(3,635
)
Amortization of cash flow hedges
484

 
795

Total other comprehensive income/(loss)
936

 
(2,840
)
Total comprehensive income
34,421

 
443,895

Less-comprehensive (income) attributable to noncontrolling interests
(300
)
 
(308
)
Comprehensive income attributable to common unitholders
$
34,121

 
$
443,587


See accompanying notes to consolidated financial statements.


11

Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Capital
(Unaudited and in thousands)

 
Common Units
 
Accumulated
Other
Comprehensive Income
 
Noncontrolling
Interests in
Consolidated
Affiliates
 
Total
 
General
Partners’
Capital
 
Limited
Partners’
Capital
 
Balance at December 31, 2016
$
21,023

 
$
2,081,463

 
$
4,949

 
$
17,961

 
$
2,125,396

Issuances of Common Units, net of issuance costs and tax withholdings
91

 
9,043

 

 

 
9,134

Distributions on Common Units
(460
)
 
(45,526
)
 

 

 
(45,986
)
Distributions on Preferred Units
(6
)
 
(617
)
 

 

 
(623
)
Share-based compensation expense, net of forfeitures
38

 
3,745

 

 

 
3,783

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(466
)
 
(466
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
52

 
5,203

 

 

 
5,255

Net (income) attributable to noncontrolling interests in consolidated affiliates
(3
)
 
(297
)
 

 
300

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
335

 
33,150

 

 

 
33,485

Other comprehensive income

 

 
936

 

 
936

Total comprehensive income
 
 
 
 
 
 
 
 
34,421

Balance at March 31, 2017
$
21,070

 
$
2,086,164

 
$
5,885

 
$
17,795

 
$
2,130,914



 
Common Units
 
Accumulated
Other
Comprehensive Loss
 
Noncontrolling
Interests in
Consolidated
Affiliates
 
Total
 
General
Partners’
Capital
 
Limited
Partners’
Capital
 
Balance at December 31, 2015
$
15,759

 
$
1,560,309

 
$
(3,811
)
 
$
17,975

 
$
1,590,232

Issuances of Common Units, net of issuance costs and tax withholdings
509

 
50,389

 

 

 
50,898

Distributions on Common Units
(419
)
 
(41,520
)
 

 

 
(41,939
)
Distributions on Preferred Units
(6
)
 
(620
)
 

 

 
(626
)
Share-based compensation expense, net of forfeitures
36

 
3,520

 

 

 
3,556

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(320
)
 
(320
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
(124
)
 
(12,258
)
 

 

 
(12,382
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(3
)
 
(305
)
 

 
308

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
4,467

 
442,268

 

 

 
446,735

Other comprehensive loss

 

 
(2,840
)
 

 
(2,840
)
Total comprehensive income
 
 
 
 
 
 
 
 
443,895

Balance at March 31, 2016
$
20,219

 
$
2,001,783

 
$
(6,651
)
 
$
17,963

 
$
2,033,314


See accompanying notes to consolidated financial statements.

12

Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
 
Three Months Ended
March 31,
 
2017
 
2016
Operating activities:
 
 
 
Net income
$
33,485

 
$
446,735

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
56,145

 
53,494

Amortization of lease incentives and acquisition-related intangible assets and liabilities
(10
)
 
108

Share-based compensation expense
3,783

 
3,556

Allowance for losses on accounts and accrued straight-line rents receivable
61

 
1,077

Accrued interest on mortgages and notes receivable
(132
)
 
(42
)
Amortization of debt issuance costs
840

 
990

Amortization of cash flow hedges
484

 
795

Amortization of mortgages and notes payable fair value adjustments
(30
)
 
(59
)
Net gains on disposition of property
(5,332
)
 
(418,893
)
Equity in earnings of unconsolidated affiliates
(955
)
 
(1,285
)
Distributions of earnings from unconsolidated affiliates
2,431

 
717

Settlement of cash flow hedges
7,322

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
3,922

 
601

Prepaid expenses and other assets
(5,959
)
 
(6,577
)
Accrued straight-line rents receivable
(6,185
)
 
(6,624
)
Accounts payable, accrued expenses and other liabilities
(20,951
)
 
(26,358
)
Net cash provided by operating activities
68,919

 
48,235

Investing activities:
 
 
 
Investments in development in-process
(59,408
)
 
(33,188
)
Investments in tenant improvements and deferred leasing costs
(24,649
)
 
(23,513
)
Investments in building improvements
(17,194
)
 
(16,479
)
Net proceeds from disposition of real estate assets
11,532

 
661,390

Distributions of capital from unconsolidated affiliates
6,512

 
2,118

Investments in mortgages and notes receivable

 
(7,602
)
Repayments of mortgages and notes receivable
1,178

 
79

Investments in and advances to unconsolidated affiliates

 
(105
)
Changes in restricted cash and other investing activities
(1,696
)
 
(248,865
)
Net cash provided by/(used in) investing activities
(83,725
)
 
333,835

Financing activities:
 
 
 
Distributions on Common Units
(45,986
)
 
(41,939
)
Special distribution on Common Units
(83,149
)
 

Redemptions/repurchases of Preferred Units
(15
)
 
(20
)
Distributions on Preferred Units
(623
)
 
(626
)
Distributions to noncontrolling interests in consolidated affiliates
(466
)
 
(320
)
Proceeds from the issuance of Common Units
13,191

 
54,915

Costs paid for the issuance of Common Units
(250
)
 
(788
)
Repurchase of units related to tax withholdings
(3,807
)
 
(3,229
)
Borrowings on revolving credit facility
200,300

 
66,400

Repayments of revolving credit facility
(69,300
)
 
(107,400
)
Borrowings on mortgages and notes payable
346,001

 

Repayments of mortgages and notes payable
(380,261
)
 
(350,535
)
Changes in debt issuance costs and other financing activities
(5,401
)
 
(219
)
Net cash used in financing activities
(29,766
)
 
(383,761
)
Net decrease in cash and cash equivalents
$
(44,572
)
 
$
(1,691
)
See accompanying notes to consolidated financial statements.

13

Table of Contents


HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows - Continued
(Unaudited and in thousands)

 
Three Months Ended
March 31,
 
2017
 
2016
Net decrease in cash and cash equivalents
$
(44,572
)
 
$
(1,691
)
Cash and cash equivalents at beginning of the period
49,490

 
5,036

Cash and cash equivalents at end of the period
$
4,918

 
$
3,345


Supplemental disclosure of cash flow information:
 
 
Three Months Ended
March 31,
 
2017
 
2016
Cash paid for interest, net of amounts capitalized
$
18,909

 
$
20,951


Supplemental disclosure of non-cash investing and financing activities:
 
 
Three Months Ended
March 31,
 
2017
 
2016
Unrealized gains/(losses) on cash flow hedges
$
452

 
$
(3,635
)
Changes in accrued capital expenditures
(6,741
)
 
(5,978
)
Write-off of fully depreciated real estate assets
10,649

 
12,579

Write-off of fully amortized debt issuance and leasing costs
13,252

 
5,282

Adjustment of Redeemable Common Units to fair value
(5,435
)
 
12,208


See accompanying notes to consolidated financial statements.

14

Table of Contents

HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(tabular dollar amounts in thousands, except per share and per unit data)
(Unaudited)

1.    Description of Business and Significant Accounting Policies

Description of Business

Highwoods Properties, Inc. (the “Company”) is a fully integrated real estate investment trust (“REIT”) that provides leasing, management, development, construction and other customer-related services for its properties and for third parties. The Company conducts its activities through Highwoods Realty Limited Partnership (the “Operating Partnership”). At March 31, 2017, we owned or had an interest in 31.3 million rentable square feet of in-service properties, 1.2 million rentable square feet of properties under development and approximately 400 acres of development land.
 
The Company is the sole general partner of the Operating Partnership. At March 31, 2017, the Company owned all of the Preferred Units and 101.6 million, or 97.3%, of the Common Units in the Operating Partnership. Limited partners owned the remaining 2.8 million Common Units. During the three months ended March 31, 2017, the Company redeemed 2,000 Common Units for a like number of shares of Common Stock.

Common Stock Offerings
 
During the first quarter of 2017, we entered into separate equity distribution agreements in which the Company may offer and sell up to $300.0 million in aggregate gross sales price of shares of Common Stock. During the three months ended March 31, 2017, the Company issued 186,185 shares of Common Stock under its equity distribution agreements at an average gross sales price of $49.73 per share and received net proceeds, after sales commissions, of $9.1 million.

Basis of Presentation
 
Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

The Company's Consolidated Financial Statements include the Operating Partnership, wholly owned subsidiaries and those entities in which the Company has the controlling interest. The Operating Partnership's Consolidated Financial Statements include wholly owned subsidiaries and those entities in which the Operating Partnership has the controlling interest. All intercompany transactions and accounts have been eliminated.

The unaudited interim consolidated financial statements and accompanying unaudited consolidated financial information, in the opinion of management, contain all adjustments (including normal recurring accruals) necessary for a fair presentation of our financial position, results of operations and cash flows. We have condensed or omitted certain notes and other information from the interim Consolidated Financial Statements presented in this Quarterly Report as permitted by SEC rules and regulations. These Consolidated Financial Statements should be read in conjunction with our 2016 Annual Report on Form 10-K.

Use of Estimates

The preparation of consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in our Consolidated Financial Statements and accompanying notes. Actual results could differ from those estimates.

15

Table of Contents
HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share and per unit data)


1.    Description of Business and Significant Accounting Policies – Continued

Recently Issued Accounting Standards

The Financial Accounting Standards Board ("FASB") issued an accounting standards update ("ASU") that requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that we identify the contract with the customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when we satisfy the performance obligations. We will also be required to disclose information regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The ASU is required to be adopted in 2018. Retrospective application is required either to all periods presented or with the cumulative effect of initial adoption recognized in the period of adoption. Our initial analysis of our non-lease related revenue contracts indicates that the adoption of this ASU will not have a material effect on our Consolidated Financial Statements; however, we are still in the process of evaluating this ASU.
 
The FASB issued an ASU that adds to and clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The ASU is required to be adopted in 2018 with retrospective application required. We do not expect such adoption to have a material effect on our Consolidated Statements of Cash Flows.

The FASB issued an ASU that clarifies and narrows the definition of a business used in determining whether to account for a transaction as an asset acquisition or business combination. The guidance requires evaluation of the fair value of the assets acquired to determine if it is concentrated in a single identifiable asset or a group of similar identifiable assets. If so, the transferred assets would not be a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs. The ASU is required to be adopted in 2018 and applied prospectively. We are in the process of evaluating this ASU.

The FASB issued an ASU which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The ASU requires lessors to account for leases using an approach that is substantially equivalent to the existing guidance and is effective for reporting periods beginning in 2019 with early adoption permitted. We are in the process of evaluating this ASU.

The FASB issued an ASU that requires, among other things, the use of a new current expected credit loss ("CECL") model in determining our allowances for doubtful accounts with respect to accounts receivable, accrued straight-line rents receivable and mortgages and notes receivable. The CECL model requires that we estimate our lifetime expected credit loss with respect to these receivables and record allowances that, when deducted from the balance of the receivables, represent the net amounts expected to be collected. We will also be required to disclose information about how we developed the allowances, including changes in the factors (e.g., portfolio mix, credit trends, unemployment, gross domestic product, etc.) that influenced our estimate of expected credit losses and the reasons for those changes. We will apply the ASU’s provisions as a cumulative-effect adjustment to retained earnings upon adoption in 2020. We are in the process of evaluating this ASU.

2.    Real Estate Assets
 
During the first quarter of 2017, we sold a building for a sale price of $13.0 million (before closing credits to buyer of $1.2 million) and recorded a gain on disposition of property of $5.3 million.



16

Table of Contents
HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share and per unit data)

 
3.    Mortgages and Notes Receivable
 
Mortgages and notes receivable were $7.8 million and $8.8 million at March 31, 2017 and December 31, 2016, respectively. We evaluate the ability to collect our mortgages and notes receivable by monitoring the leasing statistics and/or market fundamentals of these assets. As of March 31, 2017, our mortgages and notes receivable were not in default and there were no other indicators of impairment.

4.    Intangible Assets and Below Market Lease Liabilities
 
The following table sets forth total intangible assets and acquisition-related below market lease liabilities, net of accumulated amortization:
 
 
March 31,
2017
 
December 31,
2016
Assets:
 
 
 
Deferred leasing costs (including lease incentives and above market lease and in-place lease acquisition-related intangible assets)
$
352,289

 
$
353,581

Less accumulated amortization
(142,148
)
 
(140,081
)
 
$
210,141

 
$
213,500

 
 
 
 
Liabilities (in accounts payable, accrued expenses and other liabilities):
 
 
 
Acquisition-related below market lease liabilities
$
61,049

 
$
61,221

Less accumulated amortization
(24,482
)
 
(23,074
)
 
$
36,567

 
$
38,147

 
The following table sets forth amortization of intangible assets and below market lease liabilities:
 
 
Three Months Ended
March 31,
 
2017
 
2016
Amortization of deferred leasing costs and acquisition-related intangible assets (in depreciation and amortization)
$
10,619

 
$
11,335

Amortization of lease incentives (in rental and other revenues)
$
397

 
$
711

Amortization of acquisition-related intangible assets (in rental and other revenues)
$
1,036

 
$
1,031

Amortization of acquisition-related intangible assets (in rental property and other expenses)
$
137

 
$
138

Amortization of acquisition-related below market lease liabilities (in rental and other revenues)
$
(1,580
)
 
$
(1,772
)
 

17

Table of Contents
HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share and per unit data)

 
4.    Intangible Assets and Below Market Lease Liabilities - Continued

The following table sets forth scheduled future amortization of intangible assets and below market lease liabilities:
 
 
 
Amortization of Deferred Leasing Costs and Acquisition-Related Intangible Assets (in Depreciation and Amortization)
 
Amortization of Lease Incentives (in Rental and Other Revenues)
 
Amortization of Acquisition-Related Intangible Assets (in Rental and Other Revenues)
 
Amortization of Acquisition-Related Intangible Assets (in Rental Property and Other Expenses)
 
Amortization of Acquisition-Related Below Market Lease Liabilities (in Rental and Other Revenues)
April 1 through December 31, 2017
 
$
31,933

 
$
1,155

 
$
1,815

 
$
412

 
$
(4,665
)
2018
 
35,918

 
1,432

 
1,680

 
553

 
(5,962
)
2019
 
30,251

 
1,214

 
1,286

 
553

 
(5,492
)
2020
 
25,543

 
936

 
967

 
525

 
(5,180
)
2021
 
21,315

 
729

 
647

 

 
(4,409
)
Thereafter
 
46,614

 
2,778

 
1,885

 

 
(10,859
)
 
 
$
191,574

 
$
8,244

 
$
8,280

 
$
2,043

 
$
(36,567
)
Weighted average remaining amortization periods as of March 31, 2017 (in years)
 
6.7

 
8.2

 
6.4

 
3.7

 
7.1


5.    Mortgages and Notes Payable
 
The following table sets forth our mortgages and notes payable:
 
 
March 31,
2017
 
December 31,
2016
Secured indebtedness
$
127,358

 
$
128,204

Unsecured indebtedness
1,923,692

 
1,826,145

Less-unamortized debt issuance costs
(8,564
)
 
(6,302
)
Total mortgages and notes payable, net
$
2,042,486

 
$
1,948,047

 
At March 31, 2017, our secured mortgage loans were collateralized by real estate assets with an aggregate undepreciated book value of $254.2 million.

Our $475.0 million unsecured revolving credit facility is scheduled to mature in January 2018 and includes an accordion feature that allows for an additional $75.0 million of borrowing capacity subject to additional lender commitments. Assuming no defaults have occurred, we have an option to extend the maturity for two additional six-month periods. The interest rate at our current credit ratings is LIBOR plus 110 basis points and the annual facility fee is 20 basis points. There was $131.0 million and $130.0 million outstanding under our revolving credit facility at March 31, 2017 and April 18, 2017, respectively. At both March 31, 2017 and April 18, 2017, we had $0.2 million of outstanding letters of credit, which reduces the availability on our revolving credit facility. As a result, the unused capacity of our revolving credit facility at March 31, 2017 and April 18, 2017 was $343.8 million and $344.8 million, respectively.
 
During the first quarter of 2017, the Operating Partnership issued $300.0 million aggregate principal amount of 3.875% notes due 2027, less original issue discount of $4.0 million. These notes were priced to yield 4.038%. Underwriting fees and other expenses were incurred that aggregated $2.5 million; these costs were deferred and will be amortized over the term of the notes.

18

Table of Contents
HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share and per unit data)


5.    Mortgages and Notes Payable - Continued

During the first quarter of 2017, we paid off at maturity $379.7 million principal amount of 5.85% unsecured notes.

During the first quarter of 2017, we amended our $150.0 million unsecured bank term loan that is scheduled to mature in January 2022 by increasing the borrowed amount to $200.0 million. The interest rate on this term loan at our current credit ratings is LIBOR plus 110 basis points. We incurred $0.3 million of debt issuance costs in connection with this amendment, which will be amortized along with existing unamortized debt issuance costs over the remaining term.
 
We are currently in compliance with financial covenants and other requirements with respect to our consolidated debt.

We have considered our short-term liquidity needs within one year from April 25, 2017 (the date of issuance of the quarterly financial statements) and the adequacy of our estimated cash flows from operating activities and other expected financing sources to meet these needs. In particular, we have considered our scheduled debt maturities during such one year period, including the $108.3 million secured loan due November 1, 2017 and the $200.0 million principal amount of unsecured notes due April 15, 2018. We have concluded it is probable we will meet these short-term liquidity requirements through a combination of the following:
 
available cash and cash equivalents;
 
cash flows from operating activities;
 
issuance of debt securities by the Operating Partnership;
 
issuance of secured debt (including the $100.0 million fixed-rate loan described in Note 14);

bank term loans;
 
borrowings under our revolving credit facility;
 
issuance of other secured debt;
 
issuance of equity securities by the Company or the Operating Partnership; and
 
the disposition of non-core assets.
 

19

Table of Contents
HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share and per unit data)

 
6.
Derivative Financial Instruments
 
During 2016, we obtained $150.0 million notional amount of forward-starting swaps that effectively locked the underlying 10-year treasury rate at 1.90% with respect to a planned issuance of debt securities by the Operating Partnership. The counterparties under the swaps were major financial institutions. Upon issuance of the $300.0 million aggregate principal amount of 3.875% notes due 2027 during the first quarter of 2017, we terminated the forward-starting swaps resulting in an unrealized gain of $7.3 million in accumulated other comprehensive income.

Our interest rate swaps have been designated as and are being accounted for as cash flow hedges with changes in fair value recorded in other comprehensive income/(loss) each reporting period. No gain or loss was recognized related to hedge ineffectiveness or to amounts excluded from effectiveness testing on our cash flow hedges during the three months ended March 31, 2017 and 2016. We have no collateral requirements related to our interest rate swaps.
 
Amounts reported in accumulated other comprehensive income/(loss) related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the period from April 1, 2017 through March 31, 2018, we estimate that $0.5 million will be reclassified to interest expense.
 
The following table sets forth the gross fair value of our derivatives:
 
 
March 31,
2017
 
December 31,
2016
Derivatives:
 
 
 
Derivatives designated as cash flow hedges in prepaid expenses and other assets:
 
 
 
Interest rate swaps
$

 
$
7,619

Derivatives designated as cash flow hedges in accounts payable, accrued expenses and other liabilities:
 
 
 
Interest rate swaps
$
1,001

 
$
1,870

 
The following table sets forth the effect of our cash flow hedges on accumulated other comprehensive income/(loss) and interest expense:
 
 
Three Months Ended
March 31,
 
2017
 
2016
Derivatives Designated as Cash Flow Hedges:
 
 
 
Amount of unrealized gains/(losses) recognized in accumulated other comprehensive income/(loss) on derivatives (effective portion):
 
 
 
Interest rate swaps
$
452

 
$
(3,635
)
Amount of net losses reclassified out of accumulated other comprehensive income/(loss) into contractual interest expense (effective portion):
 
 
 
Interest rate swaps
$
484

 
$
795


20

Table of Contents
HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share and per unit data)

 
7.
Noncontrolling Interests

Noncontrolling Interests in Consolidated Affiliates
 
At March 31, 2017, our noncontrolling interests in consolidated affiliates relate to our joint venture partner's 50.0% interest in office properties in Richmond. Our joint venture partner is an unrelated third party.

Noncontrolling Interests in the Operating Partnership

The following table sets forth the Company's noncontrolling interests in the Operating Partnership:
 
 
Three Months Ended
March 31,
 
2017
 
2016
Beginning noncontrolling interests in the Operating Partnership
$
144,802

 
$
126,429

Adjustment of noncontrolling interests in the Operating Partnership to fair value
(4,972
)
 
429

Conversions of Common Units to Common Stock
(102
)
 

Net income attributable to noncontrolling interests in the Operating Partnership
888

 
13,011

Distributions to noncontrolling interests in the Operating Partnership
(1,249
)
 
(1,232
)
Total noncontrolling interests in the Operating Partnership
$
139,367

 
$
138,637


The following table sets forth net income available for common stockholders and transfers from the Company's noncontrolling interests in the Operating Partnership:
 
 
Three Months Ended
March 31,
 
2017
 
2016
Net income available for common stockholders
$
31,674

 
$
432,790

Increase in additional paid in capital from conversions of Common Units
to Common Stock
102

 

Change from net income available for common stockholders and transfers from noncontrolling interests
$
31,776

 
$
432,790


21

Table of Contents
HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share and per unit data)

 
8.
Disclosure About Fair Value of Financial Instruments

The following summarizes the three levels of inputs that we use to measure fair value.

Level 1.  Quoted prices in active markets for identical assets or liabilities.

Our Level 1 asset is our investment in marketable securities that we use to pay benefits under our non-qualified deferred compensation plan. Our Level 1 liability is our non-qualified deferred compensation obligation. The Company's Level 1 noncontrolling interests in the Operating Partnership relate to the ownership of Common Units by various individuals and entities other than the Company.

Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.

Our Level 2 assets include the fair value of our mortgages and notes receivable and certain of our interest rate swaps. Our Level 2 liabilities include the fair value of our mortgages and notes payable and the remainder of our interest rate swaps.

The fair value of mortgages and notes receivable and mortgages and notes payable is estimated by the income approach utilizing contractual cash flows and market-based interest rates to approximate the price that would be paid in an orderly transaction between market participants. The fair value of interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments of interest rate swaps are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves. In addition, credit valuation adjustments are considered in the fair values to account for potential nonperformance risk, but were concluded to not be significant inputs to the calculation for the periods presented.
 
Level 3. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
Our Level 3 asset consisted of our tax increment financing bond, which was not routinely traded but whose fair value was determined by the income approach utilizing contractual cash flows and market-based interest rates to estimate the projected redemption value based on quoted bid/ask prices for similar unrated municipal bonds. Our tax increment financing bond was assigned in conjunction with a sale during the first quarter of 2016. The estimated fair value at the date of sale of $11.2 million was equal to the outstanding principal amount due on the bond.
 

22

Table of Contents
HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share and per unit data)


8.
Disclosure About Fair Value of Financial Instruments - Continued

The following table sets forth our assets and liabilities and the Company's noncontrolling interests in the Operating Partnership that are measured or disclosed at fair value within the fair value hierarchy.
 
 
 
 
 
Level 1
 
Level 2
 
 
Total
 
Quoted Prices
in Active
Markets for Identical Assets or Liabilities
 
Significant Observable Inputs
Fair Value at March 31, 2017:
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
Mortgages and notes receivable, at fair value (1)
 
$
7,787

 
$

 
$
7,787

Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)
 
2,370

 
2,370

 

Total Assets
 
$
10,157

 
$
2,370

 
$
7,787

Noncontrolling Interests in the Operating Partnership
 
$
139,367

 
$
139,367

 
$

Liabilities:
 
 
 
 
 
 
Mortgages and notes payable, net, at fair value (1)
 
$
2,050,264

 
$

 
$
2,050,264

Interest rate swaps (in accounts payable, accrued expenses and other liabilities)
 
1,001

 

 
1,001

Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)
 
2,370

 
2,370

 

Total Liabilities
 
$
2,053,635

 
$
2,370

 
$
2,051,265

Fair Value at December 31, 2016:
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
Mortgages and notes receivable, at fair value (1)
 
$
8,833

 
$

 
$
8,833

Interest rate swaps (in prepaid expenses and other assets)
 
7,619

 

 
7,619

Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)
 
2,451

 
2,451

 

Total Assets
 
$
18,903

 
$
2,451

 
$
16,452

Noncontrolling Interests in the Operating Partnership
 
$
144,802

 
$
144,802

 
$

Liabilities:
 
 
 
 
 
 
Mortgages and notes payable, net, at fair value (1)
 
$
1,965,611

 
$

 
$
1,965,611

Interest rate swaps (in accounts payable, accrued expenses and other liabilities)
 
1,870

 

 
1,870

Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)
 
2,451

 
2,451

 

Total Liabilities
 
$
1,969,932

 
$
2,451

 
$
1,967,481

__________
(1)    Amounts recorded at historical cost on our Consolidated Balance Sheets at March 31, 2017 and December 31, 2016.


23

Table of Contents
HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share and per unit data)

 
9.
Share-Based Payments
 
During the three months ended March 31, 2017, the Company granted 168,748 stock options with an exercise price equal to the last reported stock price of our Common Stock on the New York Stock Exchange on the last trading day prior to the date of grant. The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model, which resulted in a weighted average grant date fair value per share of $6.72. During the three months ended March 31, 2017, the Company also granted 61,404 shares of time-based restricted stock and 49,344 shares of total return-based restricted stock with weighted average grant date fair values per share of $52.49 and $49.59, respectively. We recorded share-based compensation expense of $3.8 million and $3.6 million during the three months ended March 31, 2017 and 2016, respectively. At March 31, 2017, there was $8.1 million of total unrecognized share-based compensation costs, which will be recognized over a weighted average remaining contractual term of 2.6 years.

10.
Accumulated Other Comprehensive Income/(Loss)
 
The following table sets forth the components of accumulated other comprehensive income/(loss):
 
 
Three Months Ended
March 31,
 
2017
 
2016
Cash flow hedges:
 
 
 
Beginning balance
$
4,949

 
$
(3,811
)
Unrealized gains/(losses) on cash flow hedges
452

 
(3,635
)
Amortization of cash flow hedges (1)
484

 
795

Total accumulated other comprehensive income/(loss)