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Section 1: 10-Q (10-Q)

10-Q

 
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 September 30, 2015
 
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 or a smaller reporting company. See the definitions of 'large accelerated filer,' 'accelerated filer' and 'smaller reporting company' in Rule 12b-2 of the Securities Exchange Act.
Highwoods Properties, Inc.
Large accelerated filer x    Accelerated filer ¨      Non-accelerated filer ¨      Smaller reporting company ¨
Highwoods Realty Limited Partnership
Large accelerated filer ¨    Accelerated filer ¨      Non-accelerated filer x      Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).
Highwoods Properties, Inc.  Yes  ¨    No x    Highwoods Realty Limited Partnership  Yes  ¨    No x
 
The Company had 95,326,219 shares of Common Stock outstanding as of October 20, 2015.
 




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 October 20, 2015, 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 September 30, 2015 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;

the following Notes to Consolidated Financial Statements:

Note 8 - Noncontrolling Interests; and

Note 13 - 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 SEPTEMBER 30, 2015

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)
 
September 30,
2015
 
December 31,
2014
 
 
 
(as revised)
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
460,111

 
$
384,301

Buildings and tenant improvements
4,336,244

 
3,807,315

Development in process
157,100

 
205,971

Land held for development
71,997

 
79,355

 
5,025,452

 
4,476,942

Less-accumulated depreciation
(1,096,129
)
 
(1,024,936
)
Net real estate assets
3,929,323

 
3,452,006

Real estate and other assets, net, held for sale
2,629

 
1,038

Cash and cash equivalents
5,184

 
8,832

Restricted cash
19,310

 
14,595

Accounts receivable, net of allowance of $1,835 and $1,314, respectively
27,576

 
48,557

Mortgages and notes receivable, net of allowance of $362 and $275, respectively
2,132

 
13,116

Accrued straight-line rents receivable, net of allowance of $993 and $600, respectively
156,481

 
142,037

Investments in and advances to unconsolidated affiliates
20,674

 
50,685

Deferred financing and leasing costs, net of accumulated amortization of $123,463 and $112,804, respectively
255,849

 
228,768

Prepaid expenses and other assets, net of accumulated amortization of $15,697 and $14,259,
respectively
43,537

 
39,489

Total Assets
$
4,462,695

 
$
3,999,123

Liabilities, Noncontrolling Interests in the Operating Partnership and Equity:
 
 
 
Mortgages and notes payable
$
2,478,753

 
$
2,071,389

Accounts payable, accrued expenses and other liabilities
245,953

 
237,633

Financing obligation
7,402

 
8,962

Total Liabilities
2,732,108

 
2,317,984

Commitments and contingencies

 

Noncontrolling interests in the Operating Partnership
112,768

 
130,048

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), 29,050 and 29,060 shares issued and outstanding, respectively
29,050

 
29,060

Common Stock, $.01 par value, 200,000,000 authorized shares;
 
 
 
95,329,758 and 92,907,310 shares issued and outstanding, respectively
953

 
929

Additional paid-in capital
2,579,318

 
2,464,275

Distributions in excess of net income available for common stockholders
(1,002,879
)
 
(957,370
)
Accumulated other comprehensive loss
(6,610
)
 
(3,912
)
Total Stockholders’ Equity
1,599,832

 
1,532,982

Noncontrolling interests in consolidated affiliates
17,987

 
18,109

Total Equity
1,617,819

 
1,551,091

Total Liabilities, Noncontrolling Interests in the Operating Partnership and Equity
$
4,462,695

 
$
3,999,123

 
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
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Rental and other revenues
$
163,736

 
$
152,629

 
$
482,182

 
$
453,804

Operating expenses:
 
 
 
 
 
 
 
Rental property and other expenses
59,758

 
57,383

 
174,549

 
169,048

Depreciation and amortization
54,652

 
48,287

 
156,200

 
146,895

Impairments of real estate assets

 

 

 
588

General and administrative
9,182

 
7,526

 
29,511

 
26,973

Total operating expenses
123,592

 
113,196

 
360,260

 
343,504

Interest expense:
 
 
 
 
 
 
 
Contractual
20,484

 
20,962

 
61,783

 
62,352

Amortization of deferred financing costs
873

 
819

 
2,501

 
2,270

Financing obligation
155

 
567

 
653

 
301

 
21,512

 
22,348

 
64,937

 
64,923

Other income:
 
 
 
 
 
 
 
Interest and other income
1,038

 
1,054

 
3,475

 
3,863

Losses on debt extinguishment

 
(326
)
 
(220
)
 
(308
)
 
1,038

 
728


3,255


3,555

Income from continuing operations before disposition of investment properties and activity in unconsolidated affiliates
19,670

 
17,813

 
60,240

 
48,932

Gains on disposition of property
7,012

 
36,238

 
10,581

 
42,185

Gain on disposition of investment in unconsolidated affiliate
4,155

 

 
4,155

 

Equity in earnings of unconsolidated affiliates
780

 
248

 
4,367

 
886

Income from continuing operations
31,617

 
54,299

 
79,343

 
92,003

Discontinued operations:
 
 
 
 
 
 
 
Net gains on disposition of discontinued operations

 

 

 
384

 

 

 

 
384

Net income
31,617

 
54,299

 
79,343

 
92,387

Net (income) attributable to noncontrolling interests in the Operating Partnership
(918
)
 
(1,673
)
 
(2,296
)
 
(2,813
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(324
)
 
(291
)
 
(948
)
 
(1,152
)
Dividends on Preferred Stock
(626
)
 
(627
)
 
(1,879
)
 
(1,881
)
Net income available for common stockholders
$
29,749

 
$
51,708


$
74,220


$
86,541

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

 
$
0.57

 
$
0.79

 
$
0.96

Income from discontinued operations available for common stockholders

 

 

 

Net income available for common stockholders
$
0.31

 
$
0.57

 
$
0.79

 
$
0.96

Weighted average Common Shares outstanding – basic
94,693

 
90,668

 
93,996

 
90,299

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

 
$
0.57

 
$
0.79

 
$
0.96

Income from discontinued operations available for common stockholders

 

 

 

Net income available for common stockholders
$
0.31

 
$
0.57

 
$
0.79

 
$
0.96

Weighted average Common Shares outstanding – diluted
97,661

 
93,723

 
97,003

 
93,358

Dividends declared per Common Share
$
0.425

 
$
0.425

 
$
1.275

 
$
1.275

Net income available for common stockholders:
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
29,749

 
$
51,708

 
$
74,220

 
$
86,169

Income from discontinued operations available for common stockholders

 

 

 
372

Net income available for common stockholders
$
29,749

 
$
51,708

 
$
74,220

 
$
86,541

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
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
31,617

 
$
54,299

 
$
79,343

 
$
92,387

Other comprehensive income/(loss):
 
 
 
 
 
 
 
Unrealized gains/(losses) on tax increment financing bond
(7
)
 
23

 
187

 
293

Unrealized gains/(losses) on cash flow hedges
(3,021
)
 
913

 
(5,666
)
 
(3,337
)
Amortization of cash flow hedges
932

 
952

 
2,781

 
2,824

Total other comprehensive income/(loss)
(2,096
)
 
1,888

 
(2,698
)
 
(220
)
Total comprehensive income
29,521

 
56,187

 
76,645

 
92,167

Less-comprehensive (income) attributable to noncontrolling interests
(1,242
)
 
(1,964
)
 
(3,244
)
 
(3,965
)
Comprehensive income attributable to common stockholders
$
28,279

 
$
54,223

 
$
73,401

 
$
88,202


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 Loss
 
Non-controlling Interests in Consolidated Affiliates
 
Distributions in Excess of Net Income Available for Common Stockholders
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(as revised)
 
(as revised)
Balance at December 31, 2014
92,907,310

 
$
929

 
$
29,060

 
$
2,464,275

 
$
(3,912
)
 
$
18,109

 
$
(957,370
)
 
$
1,551,091

Issuances of Common Stock, net of issuance costs and tax withholdings
2,268,380

 
23

 

 
93,193

 

 

 

 
93,216

Conversions of Common Units to Common Stock
26,820

 

 

 
1,206

 

 

 

 
1,206

Dividends on Common Stock


 

 

 

 

 

 
(119,729
)
 
(119,729
)
Dividends on Preferred Stock


 

 

 

 

 

 
(1,879
)
 
(1,879
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value


 

 

 
14,649

 

 

 

 
14,649

Distributions to noncontrolling interests in consolidated affiliates


 

 

 

 

 
(1,070
)
 

 
(1,070
)
Issuances of restricted stock
128,951

 

 

 

 

 

 

 

Redemptions/repurchases of Preferred Stock
 
 

 
(10
)
 

 

 

 

 
(10
)
Share-based compensation expense, net of forfeitures
(1,703
)
 
1

 

 
5,995

 

 

 

 
5,996

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


 

 

 

 

 

 
(2,296
)
 
(2,296
)
Net (income) attributable to noncontrolling interests in consolidated affiliates


 

 

 

 

 
948

 
(948
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income


 

 

 

 

 

 
79,343

 
79,343

Other comprehensive loss


 

 

 

 
(2,698
)
 

 

 
(2,698
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
76,645

Balance at September 30, 2015
95,329,758

 
$
953

 
$
29,050

 
$
2,579,318

 
$
(6,610
)
 
$
17,987

 
$
(1,002,879
)
 
$
1,617,819



 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
(as revised)
 
(as revised)
Balance at December 31, 2013
89,920,915

 
$
899

 
$
29,077

 
$
2,370,368

 
$
(2,611
)
 
$
21,396

 
$
(911,662
)
 
$
1,507,467

Issuances of Common Stock, net of issuance costs and tax withholdings
1,175,191

 
12

 

 
45,910

 

 

 

 
45,922

Conversions of Common Units to Common Stock
4,417

 

 

 
162

 

 

 

 
162

Dividends on Common Stock

 

 

 

 

 

 
(115,037
)
 
(115,037
)
Dividends on Preferred Stock

 

 

 

 

 

 
(1,881
)
 
(1,881
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value

 

 

 
(8,955
)
 

 

 

 
(8,955
)
Distributions to noncontrolling interests in consolidated affiliates

 

 

 

 

 
(940
)
 

 
(940
)
Issuances of restricted stock
169,501

 

 

 

 

 

 

 

Share-based compensation expense, net of forfeitures

 
2

 

 
6,177

 

 

 

 
6,179

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

 

 

 

 

 

 
(2,813
)
 
(2,813
)
Net (income) attributable to noncontrolling interests in consolidated affiliates

 

 

 

 

 
1,152

 
(1,152
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 

 
92,387

 
92,387

Other comprehensive loss

 

 

 

 
(220
)
 

 

 
(220
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
92,167

Balance at September 30, 2014
91,270,024

 
$
913

 
$
29,077

 
$
2,413,662

 
$
(2,831
)
 
$
21,608

 
$
(940,158
)
 
$
1,522,271


See accompanying notes to consolidated financial statements.

6

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
 
Nine Months Ended
September 30,
 
2015
 
2014
Operating activities:
 
 
 
Net income
$
79,343

 
$
92,387

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
156,200

 
146,895

Amortization of lease incentives and acquisition-related intangible assets and liabilities
214

 
249

Share-based compensation expense
5,996

 
6,179

Allowance for losses on accounts and accrued straight-line rents receivable
1,851

 
1,942

Accrued interest on mortgages and notes receivable
(313
)
 
(354
)
Amortization of deferred financing costs
2,501

 
2,270

Amortization of cash flow hedges
2,781

 
2,824

Amortization of mortgages and notes payable fair value adjustments
7

 
(845
)
Impairments of real estate assets

 
588

Losses on debt extinguishment
220

 
308

Net gains on disposition of property
(10,581
)
 
(42,569
)
Gain on disposition of investment in unconsolidated affiliate
(4,155
)
 

Equity in earnings of unconsolidated affiliates
(4,367
)
 
(886
)
Changes in financing obligation
162

 
(241
)
Distributions of earnings from unconsolidated affiliates
4,099

 
1,634

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
1,716

 
(1,762
)
Prepaid expenses and other assets
(3,475
)
 
(2,927
)
Accrued straight-line rents receivable
(16,955
)
 
(16,202
)
Accounts payable, accrued expenses and other liabilities
(5,834
)
 
(5,815
)
Net cash provided by operating activities
209,410

 
183,675

Investing activities:
 
 
 
Investments in acquired real estate and related intangible assets, net of cash acquired
(408,634
)
 
(83,751
)
Investments in development in process
(87,222
)
 
(122,106
)
Investments in tenant improvements and deferred leasing costs
(85,234
)
 
(80,132
)
Investments in building improvements
(38,295
)
 
(39,401
)
Net proceeds from disposition of real estate assets
22,781

 
151,987

Net proceeds from disposition of investment in unconsolidated affiliate
6,919

 

Distributions of capital from unconsolidated affiliates
10,227

 
725

Investments in mortgages and notes receivable
(1,772
)
 
(419
)
Repayments of mortgages and notes receivable
9,301

 
16,974

Investments in and advances/repayments to/from unconsolidated affiliates
20,416

 
(6,425
)
Redemption of investment in unconsolidated affiliate

 
4,660

Changes in restricted cash and other investing activities
(12,582
)
 
(1,296
)
Net cash used in investing activities
(564,095
)
 
(159,184
)
Financing activities:
 
 
 
Dividends on Common Stock
(119,729
)
 
(115,037
)
Redemptions/repurchases of Preferred Stock
(10
)
 

Redemptions of Common Units

 
(93
)
Dividends on Preferred Stock
(1,879
)
 
(1,881
)
Distributions to noncontrolling interests in the Operating Partnership
(3,721
)
 
(3,745
)
Distributions to noncontrolling interests in consolidated affiliates
(1,070
)
 
(940
)
Proceeds from the issuance of Common Stock
98,485

 
49,216

Costs paid for the issuance of Common Stock
(1,518
)
 
(600
)
Repurchase of shares related to tax withholdings
(3,751
)
 
(2,694
)
Borrowings on revolving credit facility
393,900

 
377,700

Repayments of revolving credit facility
(337,900
)
 
(443,400
)
Borrowings on mortgages and notes payable
375,000

 
296,949

Repayments of mortgages and notes payable
(43,076
)
 
(172,810
)
Payments on financing obligation
(1,722
)
 
(2,904
)
Payments of debt extinguishment costs

 
(369
)
Additions to deferred financing costs and other financing activities
(1,972
)
 
(2,467
)
Net cash provided by/(used in) financing activities
351,037

 
(23,075
)
Net increase/(decrease) in cash and cash equivalents
$
(3,648
)
 
$
1,416

See accompanying notes to consolidated financial statements.

7

Table of Contents


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

 
Nine Months Ended
September 30,
 
2015
 
2014
Net increase/(decrease) in cash and cash equivalents
$
(3,648
)
 
$
1,416

Cash and cash equivalents at beginning of the period
8,832

 
10,184

Cash and cash equivalents at end of the period
$
5,184

 
$
11,600


Supplemental disclosure of cash flow information:
 
 
Nine Months Ended
September 30,
 
2015
 
2014
Cash paid for interest, net of amounts capitalized
$
62,661

 
$
63,340


Supplemental disclosure of non-cash investing and financing activities:
 
 
Nine Months Ended
September 30,
 
2015
 
2014
Unrealized losses on cash flow hedges
$
(5,666
)
 
$
(3,337
)
Conversions of Common Units to Common Stock
1,206

 
162

Changes in accrued capital expenditures
1,759

 
17,255

Write-off of fully depreciated real estate assets
44,742

 
29,953

Write-off of fully amortized deferred financing and leasing costs
27,658

 
17,138

Adjustment of noncontrolling interests in the Operating Partnership to fair value
(14,649
)
 
8,955

Unrealized gains on tax increment financing bond
187

 
293

Assumption of mortgages and notes payable related to acquisition activities
19,277

 

Reduction in the carrying amount of real estate purchased from unconsolidated affiliate by our share of the unconsolidated affiliate's gain
3,124

 

Contingent consideration in connection with the acquisition of land
900

 


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)
 
September 30,
2015
 
December 31,
2014
 
 
 
(as revised)
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
460,111

 
$
384,301

Buildings and tenant improvements
4,336,244

 
3,807,315

Development in process
157,100

 
205,971

Land held for development
71,997

 
79,355

 
5,025,452

 
4,476,942

Less-accumulated depreciation
(1,096,129
)
 
(1,024,936
)
Net real estate assets
3,929,323

 
3,452,006

Real estate and other assets, net, held for sale
2,629

 
1,038

Cash and cash equivalents
5,184

 
8,938

Restricted cash
19,310

 
14,595

Accounts receivable, net of allowance of $1,835 and $1,314, respectively
27,576

 
48,557

Mortgages and notes receivable, net of allowance of $362 and $275, respectively
2,132

 
13,116

Accrued straight-line rents receivable, net of allowance of $993 and $600, respectively
156,481

 
142,037

Investments in and advances to unconsolidated affiliates
20,674

 
50,685

Deferred financing and leasing costs, net of accumulated amortization of $123,463 and $112,804, respectively
255,849

 
228,768

Prepaid expenses and other assets, net of accumulated amortization of $15,697 and $14,259,
respectively
43,537

 
39,489

Total Assets
$
4,462,695

 
$
3,999,229

Liabilities, Redeemable Operating Partnership Units and Capital:
 
 
 
Mortgages and notes payable
$
2,478,753

 
$
2,071,389

Accounts payable, accrued expenses and other liabilities
245,953

 
237,547

Financing obligation
7,402

 
8,962

Total Liabilities
2,732,108

 
2,317,898

Commitments and contingencies

 

Redeemable Operating Partnership Units:
 
 
 
Common Units, 2,910,135 and 2,936,955 outstanding, respectively
112,768

 
130,048

Series A Preferred Units (liquidation preference $1,000 per unit), 29,050 and 29,060 units issued and
outstanding, respectively
29,050

 
29,060

Total Redeemable Operating Partnership Units
141,818

 
159,108

Capital:
 
 
 
Common Units:
 
 
 
General partner Common Units, 978,311 and 954,355 outstanding, respectively
15,771

 
15,078

Limited partner Common Units, 93,942,638 and 91,544,146 outstanding, respectively
1,561,621

 
1,492,948

Accumulated other comprehensive loss
(6,610
)
 
(3,912
)
Noncontrolling interests in consolidated affiliates
17,987

 
18,109

Total Capital
1,588,769

 
1,522,223

Total Liabilities, Redeemable Operating Partnership Units and Capital
$
4,462,695

 
$
3,999,229


See accompanying notes to consolidated financial statements.

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Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Income
(Unaudited and in thousands, except per unit amounts)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Rental and other revenues
$
163,736

 
$
152,629

 
$
482,182

 
$
453,804

Operating expenses:
 
 
 
 
 
 
 
Rental property and other expenses
59,758

 
57,383

 
174,549

 
169,015

Depreciation and amortization
54,652

 
48,287

 
156,200

 
146,895

Impairments of real estate assets

 

 

 
588

General and administrative
9,182

 
7,526

 
29,511

 
27,006

Total operating expenses
123,592

 
113,196

 
360,260

 
343,504

Interest expense:
 
 
 
 
 
 
 
Contractual
20,484

 
20,962

 
61,783

 
62,352

Amortization of deferred financing costs
873

 
819

 
2,501

 
2,270

Financing obligation
155

 
567

 
653

 
301

 
21,512

 
22,348

 
64,937

 
64,923

Other income:
 
 
 
 
 
 
 
Interest and other income
1,038

 
1,054

 
3,475

 
3,863

Losses on debt extinguishment

 
(326
)
 
(220
)
 
(308
)
 
1,038

 
728

 
3,255

 
3,555

Income from continuing operations before disposition of investment properties and activity in unconsolidated affiliates
19,670

 
17,813

 
60,240

 
48,932

Gains on disposition of property
7,012

 
36,238

 
10,581

 
42,185

Gain on disposition of investment in unconsolidated affiliate
4,155

 

 
4,155

 

Equity in earnings of unconsolidated affiliates
780

 
248

 
4,367

 
886

Income from continuing operations
31,617

 
54,299

 
79,343

 
92,003

Discontinued operations:
 
 
 
 
 
 
 
Net gains on disposition of discontinued operations

 

 

 
384

 

 

 

 
384

Net income
31,617

 
54,299

 
79,343

 
92,387

Net (income) attributable to noncontrolling interests in consolidated affiliates
(324
)
 
(291
)
 
(948
)
 
(1,152
)
Distributions on Preferred Units
(626
)
 
(627
)
 
(1,879
)
 
(1,881
)
Net income available for common unitholders
$
30,667

 
$
53,381

 
$
76,516

 
$
89,354

Earnings per Common Unit – basic:
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
0.32

 
$
0.57

 
$
0.79

 
$
0.96

Income from discontinued operations available for common unitholders

 

 

 

Net income available for common unitholders
$
0.32

 
$
0.57

 
$
0.79

 
$
0.96

Weighted average Common Units outstanding – basic
97,194

 
93,196

 
96,505

 
92,828

Earnings per Common Unit – diluted:
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
0.32

 
$
0.57

 
$
0.79

 
$
0.96

Income from discontinued operations available for common unitholders

 

 

 

Net income available for common unitholders
$
0.32

 
$
0.57

 
$
0.79

 
$
0.96

Weighted average Common Units outstanding – diluted
97,252

 
93,314

 
96,594

 
92,949

Distributions declared per Common Unit
$
0.425

 
$
0.425

 
$
1.275

 
$
1.275

Net income available for common unitholders:
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
30,667

 
$
53,381

 
$
76,516

 
$
88,970

Income from discontinued operations available for common unitholders

 

 

 
384

Net income available for common unitholders
$
30,667

 
$
53,381

 
$
76,516

 
$
89,354

See accompanying notes to consolidated financial statements.

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Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Comprehensive Income
(Unaudited and in thousands)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
31,617

 
$
54,299

 
$
79,343

 
$
92,387

Other comprehensive income/(loss):
 
 
 
 
 
 
 
Unrealized gains/(losses) on tax increment financing bond
(7
)
 
23

 
187

 
293

Unrealized gains/(losses) on cash flow hedges
(3,021
)
 
913

 
(5,666
)
 
(3,337
)
Amortization of cash flow hedges
932

 
952

 
2,781

 
2,824

Total other comprehensive income/(loss)
(2,096
)
 
1,888

 
(2,698
)
 
(220
)
Total comprehensive income
29,521

 
56,187

 
76,645

 
92,167

Less-comprehensive (income) attributable to noncontrolling interests
(324
)
 
(291
)
 
(948
)
 
(1,152
)
Comprehensive income attributable to common unitholders
$
29,197


$
55,896

 
$
75,697

 
$
91,015


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 Loss
 
Noncontrolling
Interests in
Consolidated
Affiliates
 
Total
 
General
Partners’
Capital
 
Limited
Partners’
Capital
 
 
(as revised)
 
(as revised)
 
 
 
 
 
(as revised)
Balance at December 31, 2014
$
15,078

 
$
1,492,948

 
$
(3,912
)
 
$
18,109

 
$
1,522,223

Issuances of Common Units, net of issuance costs and tax withholdings
932

 
92,284

 

 

 
93,216

Distributions paid on Common Units
(1,230
)
 
(121,699
)
 

 

 
(122,929
)
Distributions paid on Preferred Units
(19
)
 
(1,860
)
 

 

 
(1,879
)
Share-based compensation expense, net of forfeitures
60

 
5,936

 

 

 
5,996

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(1,070
)
 
(1,070
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
166

 
16,401

 

 

 
16,567

Net (income) attributable to noncontrolling interests in consolidated affiliates
(9
)
 
(939
)
 

 
948

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
793

 
78,550

 

 

 
79,343

Other comprehensive loss

 

 
(2,698
)
 

 
(2,698
)
Total comprehensive income
 
 
 
 
 
 
 
 
76,645

Balance at September 30, 2015
$
15,771

 
$
1,561,621

 
$
(6,610
)
 
$
17,987

 
$
1,588,769



 
Common Units
 
Accumulated
Other
Comprehensive Loss
 
Noncontrolling
Interests in
Consolidated
Affiliates
 
Total
 
General
Partners’
Capital
 
Limited
Partners’
Capital
 
 
(as revised)
 
(as revised)
 
 
 
 
 
(as revised)
Balance at December 31, 2013
$
14,596

 
$
1,445,181

 
$
(2,611
)
 
$
21,396

 
$
1,478,562

Issuances of Common Units, net of issuance costs and tax withholdings
459

 
45,463

 

 

 
45,922

Redemptions of Common Units
(1
)
 
(92
)
 

 

 
(93
)
Distributions paid on Common Units
(1,183
)
 
(117,078
)
 

 

 
(118,261
)
Distributions paid on Preferred Units
(19
)
 
(1,862
)
 

 

 
(1,881
)
Share-based compensation expense, net of forfeitures
62

 
6,117

 

 

 
6,179

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(940
)
 
(940
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
(83
)
 
(8,250
)
 

 

 
(8,333
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(12
)
 
(1,140
)
 

 
1,152

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
924

 
91,463

 

 

 
92,387

Other comprehensive loss

 

 
(220
)
 

 
(220
)
Total comprehensive income
 
 
 
 
 
 
 
 
92,167

Balance at September 30, 2014
$
14,743

 
$
1,459,802

 
$
(2,831
)
 
$
21,608

 
$
1,493,322


See accompanying notes to consolidated financial statements.

12

Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
 
Nine Months Ended
September 30,
 
2015
 
2014
Operating activities:
 
 
 
Net income
$
79,343

 
$
92,387

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
156,200

 
146,895

Amortization of lease incentives and acquisition-related intangible assets and liabilities
214

 
249

Share-based compensation expense
5,996

 
6,179

Allowance for losses on accounts and accrued straight-line rents receivable
1,851

 
1,942

Accrued interest on mortgages and notes receivable
(313
)
 
(354
)
Amortization of deferred financing costs
2,501

 
2,270

Amortization of cash flow hedges
2,781

 
2,824

Amortization of mortgages and notes payable fair value adjustments
7

 
(845
)
Impairments of real estate assets

 
588

Losses on debt extinguishment
220

 
308

Net gains on disposition of property
(10,581
)
 
(42,569
)
Gain on disposition of investment in unconsolidated affiliate
(4,155
)
 

Equity in earnings of unconsolidated affiliates
(4,367
)
 
(886
)
Changes in financing obligation
162

 
(241
)
Distributions of earnings from unconsolidated affiliates
4,099

 
1,634

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
1,716

 
(1,762
)
Prepaid expenses and other assets
(3,475
)
 
(2,885
)
Accrued straight-line rents receivable
(16,955
)
 
(16,202
)
Accounts payable, accrued expenses and other liabilities
(5,748
)
 
(5,804
)
Net cash provided by operating activities
209,496

 
183,728

Investing activities:
 
 
 
Investments in acquired real estate and related intangible assets, net of cash acquired
(408,634
)
 
(83,751
)
Investments in development in process
(87,222
)
 
(122,106
)
Investments in tenant improvements and deferred leasing costs
(85,234
)
 
(80,132
)
Investments in building improvements
(38,295
)
 
(39,401
)
Net proceeds from disposition of real estate assets
22,781

 
151,987

Net proceeds from disposition of investment in unconsolidated affiliate
6,919

 

Distributions of capital from unconsolidated affiliates
10,227

 
725

Investments in mortgages and notes receivable
(1,772
)
 
(419
)
Repayments of mortgages and notes receivable
9,301

 
16,974

Investments in and advances/repayments to/from unconsolidated affiliates
20,416

 
(6,425
)
Redemption of investment in unconsolidated affiliate

 
4,660

Changes in restricted cash and other investing activities
(12,582
)
 
(1,296
)
Net cash used in investing activities
(564,095
)
 
(159,184
)
Financing activities:
 
 
 
Distributions on Common Units
(122,929
)
 
(118,261
)
Redemptions/repurchases of Preferred Units
(10
)
 

Redemptions of Common Units

 
(93
)
Distributions on Preferred Units
(1,879
)
 
(1,881
)
Distributions to noncontrolling interests in consolidated affiliates
(1,070
)
 
(940
)
Proceeds from the issuance of Common Units
98,485

 
49,216

Costs paid for the issuance of Common Units
(1,518
)
 
(600
)
Repurchase of units related to tax withholdings
(3,751
)
 
(2,694
)
Borrowings on revolving credit facility
393,900

 
377,700

Repayments of revolving credit facility
(337,900
)
 
(443,400
)
Borrowings on mortgages and notes payable
375,000

 
296,949

Repayments of mortgages and notes payable
(43,076
)
 
(172,810
)
Payments on financing obligation
(1,722
)
 
(2,904
)
Payments of debt extinguishment costs

 
(369
)
Additions to deferred financing costs and other financing activities
(2,685
)
 
(3,032
)
Net cash provided by/(used in) financing activities
350,845

 
(23,119
)
Net increase/(decrease) in cash and cash equivalents
$
(3,754
)
 
$
1,425

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)

 
Nine Months Ended
September 30,
 
2015
 
2014
Net increase/(decrease) in cash and cash equivalents
$
(3,754
)
 
$
1,425

Cash and cash equivalents at beginning of the period
8,938

 
10,281

Cash and cash equivalents at end of the period
$
5,184

 
$
11,706


Supplemental disclosure of cash flow information:
 
 
Nine Months Ended
September 30,
 
2015
 
2014
Cash paid for interest, net of amounts capitalized
$
62,661

 
$
63,340


Supplemental disclosure of non-cash investing and financing activities:
 
 
Nine Months Ended
September 30,
 
2015
 
2014
Unrealized losses on cash flow hedges
$
(5,666
)
 
$
(3,337
)
Changes in accrued capital expenditures
1,759

 
17,255

Write-off of fully depreciated real estate assets
44,742

 
29,953

Write-off of fully amortized deferred financing and leasing costs
27,658

 
17,138

Adjustment of Redeemable Common Units to fair value
(17,280
)
 
7,768

Unrealized gains on tax increment financing bond
187

 
293

Assumption of mortgages and notes payable related to acquisition activities
19,277

 

Reduction in the carrying amount of real estate purchased from unconsolidated affiliate by our share of the unconsolidated affiliate's gain
3,124

 

Contingent consideration in connection with the acquisition of land
900

 


See accompanying notes to consolidated financial statements.

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Table of Contents

HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(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 September 30, 2015, we owned or had an interest in 32.5 million rentable square feet of in-service properties, 1.4 million rentable square feet of properties under development and approximately 500 acres of development land.
 
The Company is the sole general partner of the Operating Partnership. At September 30, 2015, the Company owned all of the Preferred Units and 94.9 million, or 97.0%, of the Common Units in the Operating Partnership. Limited partners own the remaining 2.9 million Common Units. During the nine months ended September 30, 2015, the Company redeemed 26,820 Common Units for a like number of shares of Common Stock.

Common Stock Offerings
 
During the three and nine months ended September 30, 2015, the Company issued 1,206,200 and 2,178,859 shares, respectively, of Common Stock under its equity sales agreements at an average gross sales price of $41.89 and $43.33 per share, respectively, and received net proceeds, after sales commissions, of $49.8 million and $93.0 million, respectively. As a result of this activity and the redemptions discussed above, the percentage of Common Units owned by the Company increased from 96.9% at December 31, 2014 to 97.0% at September 30, 2015.

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. At December 31, 2014, we had involvement with, but were not the primary beneficiary in, an entity that we concluded to be a variable interest entity (see Note 3).
 
During the second quarter of 2015, as a result of our partner’s irrevocable exercise of a buy-sell provision in our SF-HIW Harborview Plaza, LP ("Harborview") joint venture agreement, our partner’s right to put its 80.0% equity interest back to us became no longer exercisable. As a result, we recorded the original contribution transaction as a partial sale and recognized $2.2 million of gain. Our investment in this joint venture then qualified for the equity method of accounting, which resulted in the retrospective revision of the Consolidated Balance Sheets and Consolidated Statements of Equity and Capital for all prior periods presented. The effects of the retrospective application of the equity method of accounting to the Consolidated Statements of Income, Comprehensive Income and Cash Flows were not material. The effects of the retrospective application of the equity method of accounting to the Company's December 31, 2014 Balance Sheet were as follows:
 
 
December 31,
2014
 
Previously Reported
 
As Revised
Net real estate assets
$
3,481,406

 
$
3,452,006

Investments in and advances to unconsolidated affiliates
$
27,071

 
$
50,685

Total Assets
$
4,004,909

 
$
3,999,123

Financing obligations
$
23,519

 
$
8,962

Distributions in excess of net income available for common stockholders
$
(966,141
)
 
$
(957,370
)
Total Liabilities, Noncontrolling Interests in the Operating Partnership and Equity
$
4,004,909

 
$
3,999,123


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
 
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 2014 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 the Consolidated Financial Statements and accompanying notes. Actual results could differ from those estimates.

Recently Issued Accounting Standards

The Financial Accounting Standards Board ("FASB") recently issued an accounting standards update 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 accounting standards update 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. We are in the process of evaluating this accounting standards update.

The FASB recently issued an accounting standards update that amends consolidation requirements. The amendments significantly change the consolidation analysis required under GAAP and will require companies to reevaluate all previous consolidation conclusions. The accounting standards update is required to be adopted in 2016. We are in the process of evaluating this accounting standards update.

The FASB recently issued an accounting standards update that requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The accounting standards update is required to be adopted in 2016. Retrospective application is required. We are in the process of evaluating this accounting standards update.

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)



2.    Real Estate Assets

Acquisitions

During the third quarter of 2015, we acquired:

a building in Tampa, FL encompassing 528,000 rentable square feet for a net purchase price of $113.5 million and an adjacent land parcel for a purchase price of $2.2 million; and

two buildings in Atlanta, GA encompassing 896,000 rentable square feet for a net purchase price of $290.3 million.

During the second quarter of 2015, we acquired:

land in Atlanta, GA for a purchase price and related transaction costs of $5.2 million (including contingent consideration of $0.9 million); and