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Section 1: 10-K (10-K)

10-K
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
 
[X]
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2015
 
OR
 
[  ]
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from________ to___________
 
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)
______________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $.01 par value, of Highwoods Properties, Inc.
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Highwoods Properties, Inc.  Yes  x    No ¨    Highwoods Realty Limited Partnership  Yes  x    No ¨
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act.
Highwoods Properties, Inc.  Yes  ¨    No x    Highwoods Realty Limited Partnership  Yes  ¨    No x
 




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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of such registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨
 
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 aggregate market value of shares of Common Stock of Highwoods Properties, Inc. held by non-affiliates (based upon the closing sale price on the New York Stock Exchange) on June 30, 2015 was approximately $3.7 billion. At January 29, 2016, there were 96,103,555 shares of Common Stock outstanding.
 
There is no public trading market for the Common Units of Highwoods Realty Limited Partnership. As a result, an aggregate market value of the Common Units of Highwoods Realty Limited Partnership cannot be determined.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Proxy Statement of Highwoods Properties, Inc. to be filed in connection with its Annual Meeting of Stockholders to be held May 11, 2016 are incorporated by reference in Part II, Item 5 and Part III, Items 10, 11, 12, 13 and 14.

 




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 January 29, 2016, the latest practicable date for financial information prior to the filing of this Annual Report.

This report combines the Annual Reports on Form 10-K for the period ended December 31, 2015 of the Company and the Operating Partnership. We believe combining the annual 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:

Item 6 - Selected Financial Data;

Item 9A - Controls and Procedures;

Item 15 - Certifications of CEO and CFO Pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act;

Consolidated Financial Statements; and

the following Notes to Consolidated Financial Statements:

Note 10 - Noncontrolling Interests;

Note 12 - Equity;

Note 17 - Earnings Per Share and Per Unit; and

Note 20 - Quarterly Financial Data.





HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP

TABLE OF CONTENTS

Item No.
 
Page
 
PART I
 
1.
1A.
1B.
2.
3.
X.
 
 
 
 
PART II
 
5.
6.
7.
7A.
8.
9.
9A.
9B.
 
 
 
 
PART III
 
10.
11.
12.
13.
14.
 
 
 
 
PART IV
 
15.


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PART I

ITEM 1. BUSINESS
 
General
 
Highwoods Properties, Inc., headquartered in Raleigh, is a publicly-traded real estate investment trust ("REIT"). The Company is a fully integrated office REIT that owns, develops, acquires, leases and manages properties primarily in the best business districts (BBDs) of Atlanta, Greensboro, Kansas City, Memphis, Nashville, Orlando, Pittsburgh, Raleigh, Richmond and Tampa. Our Common Stock is traded on the New York Stock Exchange ("NYSE") under the symbol "HIW."

At December 31, 2015, the Company owned all of the Preferred Units and 95.7 million, or 97.1%, of the Common Units. Limited partners owned the remaining 2.9 million Common Units. Generally, the Operating Partnership is obligated to redeem each Common Unit at the request of the holder thereof for cash equal to the value of one share of Common Stock based on the average of the market price for the 10 trading days immediately preceding the notice date of such redemption, provided that the Company, at its option, may elect to acquire any such Common Units presented for redemption for cash or one share of Common Stock. The Common Units owned by the Company are not redeemable.
 
The Company was incorporated in Maryland in 1994. The Operating Partnership was formed in North Carolina in 1994. Our executive offices are located at 3100 Smoketree Court, Suite 600, Raleigh, NC 27604, and our telephone number is (919) 872-4924.
 
Our business is the operation, acquisition and development of real estate properties. There are no material inter-segment transactions. See Note 19 to our Consolidated Financial Statements for a summary of the rental and other revenues, net operating income and assets for each reportable segment.

Our website is www.highwoods.com. In addition to this Annual Report, all quarterly and current reports, proxy statements, interactive data and other information are made available, without charge, on our website as soon as reasonably practicable after they are filed or furnished with the Securities and Exchange Commission ("SEC"). The information on our website does not constitute part of this Annual Report. Reports filed or furnished with the SEC may also be viewed at www.sec.gov or obtained at the SEC's public reference facilities. Please call the SEC at (800) 732-0330 for further information about the public reference facilities.
 
During 2015, the Company filed unqualified Section 303A certifications with the NYSE. The Company and the Operating Partnership have also filed the CEO and CFO certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 as exhibits to this Annual Report.
 
Business and Operating Strategy
 
Our Strategic Plan focuses on:
 
owning high-quality, differentiated office buildings in the BBDs of our core markets;

improving the operating results of our existing properties through concentrated leasing, asset management, cost control and customer service efforts;

developing and acquiring office buildings in BBDs that improve the overall quality of our portfolio and generate attractive returns over the long term for our stockholders;

disposing of properties no longer considered to be core assets primarily due to location, age, quality and overall strategic fit; and

maintaining a conservative and flexible balance sheet with ample liquidity to meet our funding needs and growth prospects. 

Local Market Leadership. We focus our real estate activities in markets where we have extensive local knowledge and own a significant amount of assets. In each of our core markets, we maintain offices that are led by division officers with significant real estate experience. Our real estate professionals are seasoned and cycle-tested. Our senior leadership team has significant experience and maintains important relationships with market participants in each of our core markets.
 

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Customer Service-Oriented Organization. We provide a complete line of real estate services to our customers. We believe that our in-house leasing and asset management, development, acquisition and construction management services generally allow us to respond to the many demands of our existing and potential customer base. We provide our customers with cost-effective services such as build-to-suit construction and space modification, including tenant improvements and expansions. In addition, the breadth of our capabilities and resources provides us with market information not generally available. We believe that operating efficiencies achieved through our fully integrated organization and the strength of our balance sheet also provide a competitive advantage in retaining existing customers and attracting new customers as well as setting our lease rates and pricing other services. In addition, our relationships with our customers may lead to development projects when these customers seek new space.
 
Geographic Diversification. Our core portfolio consists primarily of office properties in Raleigh, Atlanta, Tampa, Nashville, Memphis, Pittsburgh, Richmond and Orlando, office and industrial properties in Greensboro and retail and office properties in Kansas City. We do not believe that our operations are significantly dependent upon any particular geographic market.
 
Conservative and Flexible Balance Sheet. We are committed to maintaining a conservative and flexible balance sheet that allows us to capitalize on favorable development and acquisition opportunities as they arise. Our balance sheet also allows us to proactively assure our existing and prospective customers that we are able to fund tenant improvements and maintain our properties in good condition.
 
Competition
 
Our properties compete for customers with similar properties located in our markets primarily on the basis of location, rent, services provided and the design, quality and condition of the facilities. We also compete with other domestic and foreign REITs, financial institutions, pension funds, partnerships, individual investors and others when attempting to acquire, develop and operate properties.
 
Employees
 
At December 31, 2015, we had 447 full-time employees.

ITEM 1A. RISK FACTORS
 
An investment in our securities involves various risks. Investors should carefully consider the following risk factors in conjunction with the other information contained in this Annual Report before trading in our securities. If any of these risks actually occur, our business, results of operations, prospects and financial condition could be adversely affected.

Adverse economic conditions in our markets that negatively impact the demand for office space, such as high unemployment, may result in lower occupancy and rental rates for our portfolio, which would adversely affect our results of operations. Our operating results depend heavily on successfully leasing and operating the office space in our portfolio. Economic growth and employment levels in our core markets are and will continue to be important factors in predicting our future operating results.

Key components affecting our rental and other revenues include average occupancy, rental rates, cost recovery income, new developments placed in service, acquisitions and dispositions. Average occupancy generally increases during times of improving economic growth, as our ability to lease space outpaces vacancies that occur upon the expirations of existing leases. Average occupancy generally declines during times of slower economic growth and decreasing office employment because new vacancies tend to outpace our ability to lease space. In addition, the timing of changes in occupancy levels tends to lag the timing of changes in overall economic activity and employment levels. For additional information regarding our average occupancy and rental rate trends over the past five years, see “Item 2. Properties.” Lower rental revenues that result from lower average occupancy or lower rental rates with respect to our same property portfolio will adversely affect our results of operations unless offset by the impact of any newly acquired or developed properties or lower variable operating expenses, general and administrative expenses and/or interest expense.

We face considerable competition in the leasing market and may be unable to renew existing leases or re-let space on terms similar to the existing leases, or we may spend significant capital in our efforts to renew and re-let space, which may adversely affect our results of operations. In addition to seeking to increase our average occupancy by leasing current vacant space, we also concentrate our leasing efforts on renewing existing leases. Because we compete with a number of other developers, owners and operators of office and office-oriented, mixed-use properties, we may be unable to renew leases with our existing customers and, if our current customers do not renew their leases, we may be unable to re-let the space to new customers. To the

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extent that we are able to renew existing leases or re-let such space to new customers, heightened competition resulting from adverse market conditions may require us to utilize rent concessions and tenant improvements to a greater extent than we anticipate or have historically. Further, changes in space utilization by our customers due to technology, economic conditions and business culture also affect the occupancy of our properties. As a result, customers may seek to downsize by leasing less space from us upon any renewal.

If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our customers, we may lose existing and potential customers, and we may be pressured to reduce our rental rates below those we currently charge in order to retain customers upon expiration of their existing leases. Even if our customers renew their leases or we are able to re-let the space, the terms and other costs of renewal or re-letting, including the cost of required renovations, increased tenant improvement allowances, leasing commissions, reduced rental rates and other potential concessions, may be less favorable than the terms of our current leases and could require significant capital expenditures. From time to time, we may also agree to modify the terms of existing leases to incentivize customers to renew their leases. If we are unable to renew leases or re-let space in a reasonable time, or if our rental rates decline or our tenant improvement costs, leasing commissions or other costs increase, our financial condition and results of operations could be materially adversely affected.

Difficulties or delays in renewing leases with large customers or re-leasing space vacated by large customers would materially impact our results of operations. Our 20 largest customers account for a significant portion of our revenues. See “Item 2. Properties - Customers” and “Item 2. Properties - Lease Expirations.” There are no assurances that these customers, or any of our other large customers, will renew all or any of their space upon expiration of their current leases.

Some of our leases provide customers with the right to terminate their leases early, which could have an adverse effect on our financial condition and results of operations. Certain of our leases permit our customers to terminate their leases as to all or a portion of the leased premises prior to their stated lease expiration dates under certain circumstances, such as providing notice by a certain date and, in many cases, paying a termination fee. To the extent that our customers exercise early termination rights, our results of operations will be adversely affected, and we can provide no assurances that we will be able to generate an equivalent amount of net effective rent by leasing the vacated space to new third party customers.

An oversupply of space in our markets would typically cause rental rates and occupancies to decline, making it more difficult for us to lease space at attractive rental rates, if at all. Undeveloped land in many of the markets in which we operate is generally more readily available and less expensive than in higher barrier-to-entry markets such as New York, Boston and San Francisco. As a result, even during times of positive economic growth, we and/or our competitors could construct new buildings that would compete with our existing properties. Any such oversupply could result in lower occupancy and rental rates in our portfolio, which would have a negative impact on our results of operations.

In order to maintain and/or increase the quality of our properties and successfully compete against other properties, we regularly must spend money to maintain, repair, renovate and improve our properties, which could negatively impact our financial condition and results of operations. If our properties are not as attractive to customers due to physical condition as properties owned by our competitors, we could lose customers or suffer lower rental rates. As a result, we may from time to time be required to make significant capital expenditures to maintain or enhance the competitiveness of our properties. There can be no assurances that any such expenditures would result in higher occupancy or higher rental rates or deter existing customers from relocating to properties owned by our competitors.

Our results of operations and financial condition could be adversely affected by financial difficulties experienced by a major customer, or by a number of smaller customers, including bankruptcies, insolvencies or general downturns in business. The success of our investments and stability of our operations depend on the financial stability of our customers. A default or termination by a significant customer on its lease payments to us would cause us to lose the revenue associated with such lease. In the event of a customer default or bankruptcy, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-leasing the property. We cannot evict a customer solely because of its bankruptcy. On the other hand, a court might authorize the customer to reject and terminate its lease. In such case, our claim against the bankrupt customer for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease. As a result, our claim for unpaid rent would likely not be paid in full. If a customer defaults on or terminates a significant lease, we may not be able to recover the full amount of unpaid rent or be able to lease the property for the rent previously received, if at all. In any of these instances, we may also be required to write off deferred leasing costs and accrued straight-line rents receivable. These events would adversely impact our financial condition and results of operations.

Costs of complying with governmental laws and regulations may adversely affect our results of operations. All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to

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environmental protection and human health and safety. Some of these laws and regulations may impose joint and several liability on customers, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may hinder our ability to sell, rent or pledge such property as collateral for future borrowings.

Compliance with new laws or regulations or stricter interpretation of existing laws may require us to incur significant expenditures. Future laws or regulations may impose significant environmental liability. Additionally, our customers' operations, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties may affect our properties. In addition, there are various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply and that may subject us to liability in the form of fines or damages for noncompliance. Any expenditures, fines or damages we must pay would adversely affect our results of operations. Proposed legislation to address climate change could increase utility and other costs of operating our properties.

Discovery of previously undetected environmentally hazardous conditions may adversely affect our financial condition and results of operations. Under various federal, state and local environmental laws and regulations, a current or previous property owner or operator may be liable for the cost to remove or remediate hazardous or toxic substances on such property. These costs could be significant. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require significant expenditures or prevent us from entering into leases with prospective customers that may be impacted by such laws. Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing materials. Third parties may seek recovery from real property owners or operators for personal injury or property damage associated with exposure to released hazardous substances. The cost of defending against claims of liability, of complying with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could adversely affect our financial condition and results of operations.

Our same property results of operations would suffer if costs of operating our properties, such as real estate taxes, utilities, insurance, maintenance and other costs, rise faster than our ability to increase rental revenues and/or cost recovery income. While we receive additional rent from our customers that is based on recovering a portion of operating expenses, increased operating expenses will negatively impact our results of operations. Our revenues, including cost recovery income, are subject to longer-term leases and may not be quickly increased sufficient to recover an increase in operating costs and expenses. Furthermore, the costs associated with owning and operating a property are not necessarily reduced when circumstances such as market factors and competition cause a reduction in rental revenues from the property. Increases in same property operating expenses would adversely affect our results of operations unless offset by higher rental rates, higher cost recovery income, the impact of any newly acquired or developed properties, or lower general and administrative expenses and/or interest expense.

Recent and future acquisitions and development properties may fail to perform in accordance with our expectations and may require renovation and development costs exceeding our estimates. In the normal course of business, we typically evaluate potential acquisitions, enter into non-binding letters of intent, and may, at any time, enter into contracts to acquire additional properties. Acquired properties may fail to perform in accordance with our expectations due to lease-up risk, renovation cost risks and other factors. In addition, the renovation and improvement costs we incur in bringing an acquired property up to our standards may exceed our original estimates. We may not have the financial resources to make suitable acquisitions or renovations on favorable terms or at all.

Further, we face significant competition for attractive investment opportunities from an indeterminate number of other real estate investors, including investors with significantly greater capital resources and access to capital than we have, such as domestic and foreign corporations and financial institutions, publicly-traded and privately-held REITs, private institutional investment funds, investment banking firms, life insurance companies and pension funds. Moreover, owners of office properties may be reluctant to sell, resulting in fewer acquisition opportunities. As a result of such increased competition and limited opportunities, we may be unable to acquire additional properties or the purchase price of such properties may be significantly elevated and reduce our expected return from making any such acquisitions.

In addition to acquisitions, we periodically consider developing or re-developing properties. Risks associated with development and re-development activities include:

the unavailability of favorable construction and/or permanent financing;

construction costs exceeding original estimates;

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construction and lease-up delays resulting in increased debt service expense and construction costs; and

lower than anticipated occupancy rates and rents causing a property to be unprofitable or less profitable than originally estimated.

Development and re-development activities are also subject to risks relating to our ability to obtain, or delays in obtaining, all necessary zoning, land-use, building, occupancy and other required governmental and utility company authorizations.

Illiquidity of real estate investments and the tax effect of dispositions could significantly impede our ability to sell assets or respond to favorable or adverse changes in the performance of our properties. Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties in our portfolio in response to changing economic, financial and investment conditions is limited. In addition, we have mortgage debt under which we would incur significant prepayment penalties if such loans were paid off in connection with the sale of the underlying real estate assets.

We intend to continue to sell some of our properties in the future as part of our investment strategy and activities. However, we cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether the price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and close the sale of a property.

Certain of our properties have low tax bases relative to their estimated current fair values, and accordingly, the sale of such assets would generate significant taxable gains unless we sold such properties in a tax-deferred exchange under Section 1031 of the Internal Revenue Code or another tax-free or tax-deferred transaction. For an exchange to qualify for tax-deferred treatment under Section 1031, the net proceeds from the sale of a property must be held by an escrow agent until applied toward the purchase of real estate qualifying for gain deferral. Given the competition for properties meeting our investment criteria, there could be a delay in reinvesting such proceeds or we may be unable to reinvest such proceeds at all. Any delay or limitation in using the reinvestment proceeds to acquire additional income producing assets would adversely affect our results of operations. Additionally, in connection with tax-deferred 1031 transactions, our restricted cash balances may be commingled with other funds being held by any such escrow agent, which subjects our balance to the credit risk of the institution. If we sell properties outright in taxable transactions, we may be required to distribute a significant amount of the taxable gain to our stockholders under the requirements of the Internal Revenue Code for REITs, which in turn could negatively affect our future results of operations and may increase our leverage.

Because holders of Common Units, including one of our directors, may suffer adverse tax consequences upon the sale of some of our properties, they may seek to influence us not to sell certain properties even if such a sale would otherwise be in our best interest. Holders of Common Units may suffer adverse tax consequences upon the sale of certain properties. Therefore, holders of Common Units, including one of our directors, may have different objectives than our stockholders regarding the appropriate pricing and timing of a property's sale. Although the Company is the sole general partner of the Operating Partnership and has the exclusive authority to sell any of our properties, those who hold Common Units may seek to influence us not to sell certain properties even if such sale might be financially advantageous to us or influence us to enter into tax deferred exchanges with the proceeds of such sales when such a reinvestment might not otherwise be in our best interest.

Our use of joint ventures may limit our flexibility with jointly owned investments. In appropriate circumstances, we own, develop and acquire properties in joint ventures with other persons or entities when circumstances warrant the use of these structures. Our participation in joint ventures is subject to the risks that:

we could become engaged in a dispute with any of our joint venture partners that might affect our ability to develop or operate a property;

our joint ventures are subject to debt and the refinancing of such debt may require equity capital calls;

our joint venture partners may default on their obligations necessitating that we fulfill their obligation ourselves;

our joint venture partners may have different objectives than we have regarding the appropriate timing and terms of any renovation, sale or refinancing of properties;

our joint venture partners may be structured differently than us for tax purposes and this could create conflicts of interest; and


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our joint venture partners may have competing interests in our markets that could create conflicts of interest.

Our insurance coverage on our properties may be inadequate. We carry insurance on all of our properties, including insurance for liability, fire, windstorms, floods, earthquakes and business interruption. Insurance companies, however, limit or exclude coverage against certain types of losses, such as losses due to terrorist acts, named windstorms, earthquakes and toxic mold. Thus, we may not have insurance coverage, or sufficient insurance coverage, against certain types of losses and/or there may be decreases in the insurance coverage available. Should an uninsured loss or a loss in excess of our insured limits occur, we could lose all or a portion of the capital we have invested in a property or properties, as well as the anticipated future operating income from the property or properties. If any of our properties were to experience a catastrophic loss, it could disrupt our operations, delay revenue and result in large expenses to repair or rebuild the property. Further, if any of our insurance carriers were to become insolvent, we would be forced to replace the existing insurance coverage with another suitable carrier, and any outstanding claims would be at risk for collection. In such an event, we cannot be certain that we would be able to replace the coverage at similar or otherwise favorable terms. Such events could adversely affect our results of operations and financial condition.

We have obtained title insurance policies for each of our properties, typically in an amount equal to its original purchase price.  However, these policies may be for amounts less than the current or future values of our properties, particularly for land parcels on which we subsequently construct a building. In such event, if there is a title defect relating to any of our properties, we could lose some of the capital invested in and anticipated profits from such property.

Our use of debt to finance a significant portion of our operations could have a material adverse effect on our financial condition and results of operations. We are subject to risks associated with debt financing, such as the sufficiency of cash flow to meet required payment obligations, ability to comply with financial ratios and other covenants and the availability of capital to refinance existing indebtedness or fund important business initiatives. If we breach covenants in our debt agreements, the lenders can declare a default and, if the debt is secured, can take possession of the property securing the defaulted loan. In addition, our unsecured debt agreements contain cross-default provisions with respect to certain other indebtedness, giving the unsecured lenders the right to declare a default if we are in default under other loans in some circumstances. Unwaived defaults under our debt agreements could materially and adversely affect our financial condition and results of operations.

Further, we obtain credit ratings from Moody's Investors Service and Standard and Poor's Rating Services based on their evaluation of our creditworthiness. These agencies' ratings are based on a number of factors, some of which are not within our control. In addition to factors specific to our financial strength and performance, the rating agencies also consider conditions affecting REITs generally. We cannot assure you that our credit ratings will not be downgraded. If our credit ratings are downgraded or other negative action is taken, we could be required, among other things, to pay additional interest and fees on outstanding borrowings under our revolving credit facility, bridge facility and term loans.

We generally do not intend to reserve funds to retire existing secured or unsecured debt upon maturity. We may not be able to repay, refinance or extend any or all of our debt at maturity or upon any acceleration. If any refinancing is done at higher interest rates, the increased interest expense could adversely affect our financial condition and results of operations. Any such refinancing could also impose tighter financial ratios and other covenants that restrict our ability to take actions that could otherwise be in our best interest, such as funding new development activity, making opportunistic acquisitions, repurchasing our securities or paying distributions. If we do not meet our mortgage financing obligations, any properties securing such indebtedness could be foreclosed on.

We depend on our revolving credit facility for working capital purposes and for the short-term funding of our development and acquisition activity and, in certain instances, the repayment of other debt upon maturity. Our ability to borrow under the revolving credit facility also allows us to quickly capitalize on opportunities at short-term interest rates. If our lenders default under their obligations under the revolving credit facility or we become unable to borrow additional funds under the facility for any reason, we would be required to seek alternative equity or debt capital, which could be more costly and adversely impact our financial condition. If such alternative capital were unavailable, we may not be able to make new investments and could have difficulty repaying other debt.

Increases in interest rates would increase our interest expense. At December 31, 2015, we had $974.0 million of variable rate debt outstanding not protected by interest rate hedge contracts. We may incur additional variable rate debt in the future. If interest rates increase, then so would the interest expense on our unhedged variable rate debt, which would adversely affect our financial condition and results of operations. From time to time, we manage our exposure to interest rate risk with interest rate hedge contracts that effectively fix or cap a portion of our variable rate debt. In addition, we utilize fixed rate debt at market rates. If interest rates decrease, the fair market value of any existing interest rate hedge contracts or outstanding fixed-rate debt would decline.


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Our efforts to manage these exposures may not be successful. Our use of interest rate hedge contracts to manage risk associated with interest rate volatility may expose us to additional risks, including a risk that a counterparty to a hedge contract may fail to honor its obligations. Developing an effective interest rate risk strategy is complex and no strategy can completely insulate us from risks associated with interest rate fluctuations. There can be no assurance that our hedging activities will have the desired beneficial impact on our results of operations or financial condition. Termination of interest rate hedge contracts typically involves costs, such as transaction fees or breakage costs.

Failure to comply with Federal government contractor requirements could result in substantial costs and loss of substantial revenue. We are subject to compliance with a wide variety of complex legal requirements because we are a Federal government contractor. These laws regulate how we conduct business, require us to administer various compliance programs and require us to impose compliance responsibilities on some of our contractors. Our failure to comply with these laws could subject us to fines and penalties, cause us to be in default of our leases and other contracts with the Federal government and bar us from entering into future leases and other contracts with the Federal government.

We face risks associated with security breaches through cyber attacks, cyber intrusions or otherwise, as well as other significant disruptions of our information technology (IT) networks and related systems. We face risks associated with security breaches, whether through cyber attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, and other significant disruptions of our IT networks and related systems. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our IT networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations (including managing our building systems) and, in some cases, may be critical to the operations of certain of our customers. Although we make efforts to maintain the security and integrity of these types of IT networks and related systems, and we have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed not be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is impossible for us to entirely mitigate this risk.

A security breach or other significant disruption involving our IT networks and related systems could:

disrupt the proper functioning of our networks and systems and therefore our operations and/or those of certain of our customers;

result in misstated financial reports, violations of loan covenants, missed reporting deadlines and/or missed permitting deadlines;

result in our inability to properly monitor our compliance with the rules and regulations regarding our qualification as a REIT;

result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of, proprietary, confidential, sensitive or otherwise valuable information of ours or others, which others could use to compete against us or which could expose us to damage claims by third-parties for disruptive, destructive or otherwise harmful purposes and outcomes;

result in our inability to maintain the building systems relied upon by our customers for the efficient use of their leased space;

require significant management attention and resources to remedy any damages that result;

subject us to claims for breach of contract, damages, credits, penalties or termination of leases or other agreements; or

damage our reputation among our customers and investors generally.
 
Any or all of the foregoing could have a material adverse effect on our results of operations, financial condition and cash flows.

The Company may be subject to taxation as a regular corporation if it fails to maintain its REIT status, which would also have a material adverse effect on the Company's stockholders and on the Operating Partnership. We may be subject

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to adverse consequences if the Company fails to continue to qualify as a REIT for federal income tax purposes. While we intend to operate in a manner that will allow the Company to continue to qualify as a REIT, we cannot provide any assurances that the Company will remain qualified as such in the future, which would have particularly adverse consequences to the Company's stockholders. Many of the requirements for taxation as a REIT are highly technical and complex and depend upon various factual matters and circumstances that may not be entirely within our control. The fact that the Company holds its assets through the Operating Partnership and its subsidiaries further complicates the application of the REIT requirements. Even a technical or inadvertent mistake could jeopardize our REIT status. Furthermore, Congress and the Internal Revenue Service might change the tax laws and regulations and the courts might issue new rulings that make it more difficult, or impossible, for the Company to remain qualified as a REIT. If the Company fails to qualify as a REIT, it would (a) not be allowed a deduction for dividends paid to stockholders in computing its taxable income, (b) be subject to federal income tax at regular corporate rates (and potentially the alternative minimum tax and increased state and local taxes) and (c) unless entitled to relief under the tax laws, not be able to re-elect REIT status until the fifth calendar year after it failed to qualify as a REIT. Additionally, the Company would no longer be required to make distributions. As a result of these factors, the Company's failure to qualify as a REIT would likely impair our ability to expand our business and would adversely affect the price of our Common Stock.

Even if we remain qualified as a REIT, we may face other tax liabilities that adversely affect our financial condition and results of operations. Even if we remain qualified for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes. In addition, our taxable REIT subsidiary is subject to regular corporate federal, state and local taxes. Any of these taxes would adversely affect our financial condition and results of operations.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive investments. To remain qualified as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our capital stock. In order to meet these tests, we may be required to forego investments we might otherwise make. Thus, compliance with the REIT requirements may hinder our performance.

In particular, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investment in securities (other than government securities, securities of taxable REIT subsidiaries and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities, securities of taxable REIT subsidiaries and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our total assets can be represented by the securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments, which could adversely affect our financial condition and results of operations.

The prohibited transactions tax may limit our ability to sell properties. A REIT's net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property held primarily for sale to customers in the ordinary course of business. We may be subject to the prohibited transaction tax equal to 100% of net gain upon a disposition of real property. Although a safe harbor to the characterization of the sale of real property by a REIT as a prohibited transaction is available, we cannot assure you that we can in all cases comply with the safe harbor or that we will avoid owning property that may be characterized as held primarily for sale to customers in the ordinary course of business. Consequently, we may choose not to engage in certain sales of our properties or may conduct such sales through our taxable REIT subsidiary, which would be subject to federal and state income taxation.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends. The maximum tax rate applicable to “qualified dividend income” payable to U.S. stockholders that are taxed at individual rates is 20%. Dividends payable by REITs, however, generally are not eligible for the reduced rates on qualified dividend income. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are taxed at individual rates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our stock.

We face possible state and local tax audits. Because we are organized and qualify as a REIT, we are generally not subject to federal income taxes, but we are subject to certain state and local taxes. In the normal course of business, certain entities through which we own real estate have undergone tax audits. Collectively, tax deficiency notices received to date from the jurisdictions

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conducting previous audits have not been material. However, there can be no assurance that future audits will not occur with increased frequency or that the ultimate result of such audits will not have a material adverse effect on our results of operations.

The price of our Common Stock is volatile and may decline. As with any public company, a number of factors may adversely influence the public market price of our Common Stock. These factors include:

the level of institutional interest in us;

the perceived attractiveness of investment in us, in comparison to other REITs;

the attractiveness of securities of REITs in comparison to other asset classes;

our financial condition and performance;

the market's perception of our growth potential and potential future cash dividends;

government action or regulation, including changes in tax laws;

increases in market interest rates, which may lead investors to expect a higher annual yield from our distributions in relation to the price of our Common Stock;

changes in our credit ratings; and

any negative change in the level or stability of our dividend.

We cannot assure you that we will continue to pay dividends at historical rates. We generally expect to use cash flows from operating activities to fund dividends. The following factors will affect such cash flows and, accordingly, influence the decisions of the Company's board of directors regarding dividends:

debt service requirements after taking into account debt covenants and the repayment and restructuring of certain indebtedness and the availability of alternative sources of debt and equity capital and their impact on our ability to refinance existing debt and grow our business;

scheduled increases in base rents of existing leases;

changes in rents attributable to the renewal of existing leases or replacement leases;

changes in occupancy rates at existing properties and execution of leases for newly acquired or developed properties;

changes in operating expenses;

anticipated leasing capital expenditures attributable to the renewal of existing leases or replacement leases;

anticipated building improvements; and
 
expected cash flows from financing and investing activities, including from the sale of assets generating significant taxable gains to the extent such assets are not sold in a tax-deferred exchange under Section 1031 of the Internal Revenue Code or another tax-free or tax-deferred transaction.

The decision to declare and pay dividends on our Common Stock in the future, as well as the timing, amount and composition of any such future dividends, will be at the sole discretion of the Company's board of directors. Any change in our dividend policy could have a material effect on the market price of our Common Stock.

Cash distributions reduce the amount of cash that would otherwise be available for other business purposes, including funding debt maturities or future growth initiatives. For the Company to maintain its qualification as a REIT, it must annually distribute to its stockholders at least 90% of REIT taxable income, excluding net capital gains. In addition, although capital gains are not required to be distributed to maintain REIT status, taxable capital gains, if any, that are generated as part of our capital recycling program are subject to federal and state income tax unless such gains are distributed to our stockholders. Cash distributions

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made to stockholders to maintain REIT status or to distribute otherwise taxable capital gains limit our ability to accumulate capital for other business purposes, including funding debt maturities or growth initiatives.

Further issuances of equity securities may adversely affect the market price of our Common Stock and may be dilutive to current stockholders. The sales of a substantial number of Common Shares, or the perception that such sales could occur, could adversely affect the market price of our Common Stock. The Company’s board of directors may authorize the issuance of additional authorized but unissued Common Shares or other authorized but unissued securities at any time. We have filed a registration statement with the SEC allowing us to offer, from time to time, an indefinite amount of equity securities (including Common Stock and Preferred Stock) on an as-needed basis and subject to our ability to affect offerings on satisfactory terms based on prevailing conditions. In addition, the Company’s board of directors has authorized the Company to issue shares of Common Stock pursuant to the Company’s equity sales agreements. The interests of our existing stockholders could be diluted if additional equity securities are issued to finance future developments and acquisitions or repay indebtedness.  Our ability to execute our business strategy depends on our access to an appropriate blend of debt financing, including unsecured lines of credit and other forms of secured and unsecured debt, and equity financing, including common equity.

We may change our policies without obtaining the approval of our stockholders. Our operating and financial policies, including our policies with respect to acquisitions of real estate, growth, operations, indebtedness, capitalization and dividends, are exclusively determined by the Company’s Board of Directors. Accordingly, our stockholders do not control these policies.

Limits on changes in control may discourage takeover attempts beneficial to stockholders. Provisions in the Company's charter and bylaws as well as Maryland general corporation law may have anti-takeover effects that delay, defer or prevent a takeover attempt. For example, these provisions may defer or prevent tender offers for our Common Stock or purchases of large blocks of our Common Stock, thus limiting the opportunities for the Company's stockholders to receive a premium for their shares of Common Stock over then-prevailing market prices. These provisions include the following:

Ownership limit. The Company's charter prohibits direct, indirect or constructive ownership by any person or entity of more than 9.8% of the Company's outstanding capital stock. Any attempt to own or transfer shares of capital stock in excess of the ownership limit without the consent of the Company's board of directors will be void.

Preferred Stock. The Company's charter authorizes the board of directors to issue preferred stock in one or more classes and to establish the preferences and rights of any class of preferred stock issued. These actions can be taken without stockholder approval. The issuance of preferred stock could have the effect of delaying or preventing someone from taking control of the Company, even if a change in control were in our best interest.

Business combinations. Pursuant to the Company's charter and Maryland law, the Company cannot merge into or consolidate with another corporation or enter into a statutory share exchange transaction in which the Company is not the surviving entity or sell all or substantially all of its assets unless the board of directors adopts a resolution declaring the proposed transaction advisable and a majority of the stockholders voting together as a single class approve the transaction. Maryland law prohibits stockholders from taking action by written consent unless all stockholders consent in writing. The practical effect of this limitation is that any action required or permitted to be taken by the Company's stockholders may only be taken if it is properly brought before an annual or special meeting of stockholders. The Company's bylaws further provide that in order for a stockholder to properly bring any matter before a meeting, the stockholder must comply with requirements regarding advance notice. The foregoing provisions could have the effect of delaying until the next annual meeting stockholder actions that the holders of a majority of the Company's outstanding voting securities favor. These provisions may also discourage another person from making a tender offer for the Company's common stock, because such person or entity, even if it acquired a majority of the Company's outstanding voting securities, would likely be able to take action as a stockholder, such as electing new directors or approving a merger, only at a duly called stockholders meeting. Maryland law also establishes special requirements with respect to business combinations between Maryland corporations and interested stockholders unless exemptions apply. Among other things, the law prohibits for five years a merger and other similar transactions between a company and an interested stockholder and requires a supermajority vote for such transactions after the end of the five-year period. The Company's charter contains a provision exempting the Company from the Maryland business combination statute. However, we cannot assure you that this charter provision will not be amended or repealed at any point in the future.

Control share acquisitions. Maryland general corporation law also provides that control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares owned by the acquirer or by officers or employee directors. The control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction, or to acquisitions approved or exempted by the corporation's charter or bylaws.

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The Company's bylaws contain a provision exempting from the control share acquisition statute any stock acquired by any person. However, we cannot assure you that this bylaw provision will not be amended or repealed at any point in the future.

Maryland unsolicited takeover statute. Under Maryland law, the Company's board of directors could adopt various anti-takeover provisions without the consent of stockholders. The adoption of such measures could discourage offers for the Company or make an acquisition of the Company more difficult, even when an acquisition would be in the best interest of the Company's stockholders.

Anti‑takeover protections of operating partnership agreement. Upon a change in control of the Company, the partnership agreement of the Operating Partnership requires certain acquirers to maintain an umbrella partnership real estate investment trust structure with terms at least as favorable to the limited partners as are currently in place. For instance, the acquirer would be required to preserve the limited partner's right to continue to hold tax-deferred partnership interests that are redeemable for capital stock of the acquirer. Exceptions would require the approval of two-thirds of the limited partners of our Operating Partnership (other than the Company). These provisions may make a change of control transaction involving the Company more complicated and therefore might decrease the likelihood of such a transaction occurring, even if such a transaction would be in the best interest of the Company's stockholders.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

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ITEM 2. PROPERTIES

Our core portfolio consists primarily of office properties in Raleigh, Atlanta, Tampa, Nashville, Memphis, Pittsburgh, Richmond and Orlando, office and industrial properties in Greensboro and retail and office properties in Kansas City.

On January 4, 2016, we announced our agreement to sell substantially all of our wholly-owned Country Club Plaza assets in Kansas City (which we refer to as the "Plaza assets") for $660.0 million. The Plaza assets, which are currently 95% leased in the aggregate, consist of 18 properties encompassing 776,000 square feet of in-service retail space, 468,000 square feet of in-service office space and a 28,000 square foot retail redevelopment project. The parties have entered into a series of definitive agreements, dated as of December 21, 2015, relating to the sale of the Plaza assets. The sales, which are subject to customary closing conditions, are scheduled to close on March 1, 2016. The buyer’s contractual due diligence investigation period ended on December 31, 2015. The buyer has posted earnest money deposits, held by a third party, totaling $25.0 million that are non-refundable and the buyer would be obligated to pay us an additional $25.0 million in the event of a default, except in limited circumstances.

Properties

The following table sets forth information about in-service properties that we wholly own:
 
 
December 31,
 
2015
 
2014
 
Occupied
 
Vacant
 
Total
 
Occupied
 
Vacant
 
Total
 
(rentable square feet)
 
(rentable square feet)
Office
25,261,000

 
2,021,000

 
27,282,000

 
23,156,000

 
2,248,000

 
25,404,000

Industrial
2,347,000

 
66,000

 
2,413,000

 
2,362,000

 
51,000

 
2,413,000

Retail
802,000

 
33,000

 
835,000

 
748,000

 
31,000

 
779,000

Total
28,410,000

 
2,120,000

 
30,530,000

 
26,266,000

 
2,330,000

 
28,596,000


The following table sets forth the net changes in rentable square footage of in-service properties that we wholly own:
 
 
Year Ended December 31,
 
2015
 
2014
 
2013
 
(rentable square feet in thousands)
Acquisitions
1,592

 
686

 
3,425

Developments Placed In-Service
503

 
282

 
221

Redevelopment/Other
14

 
(19
)
 
(30
)
Dispositions
(175
)
 
(1,645
)
 
(4,012
)
Net Change in Rentable Square Footage
1,934

 
(696
)
 
(396
)


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The following table sets forth information about in-service properties that we wholly own by geographic location at December 31, 2015:
 
 
 
Rentable
Square Feet
 
Occupancy
 
Percentage of Annualized Cash Rental Revenue (1)
Market
 
Office
 
Industrial
 
Retail
 
Total
Atlanta
 
5,361,000

 
92.4
%
 
17.9
%
 
%
 
%
 
17.9
%
Raleigh
 
4,882,000

 
92.8

 
15.8

 

 

 
15.8

Nashville
 
3,379,000

 
99.2

 
13.2

 

 
0.2

 
13.4

Tampa
 
3,649,000

 
87.4

 
12.1

 

 

 
12.1

Pittsburgh
 
2,157,000

 
95.7

 
8.6

 

 

 
8.6

Kansas City
 
1,393,000

 
97.2

 
2.3

 

 
5.2

 
7.5

Memphis
 
2,226,000

 
91.0

 
7.3

 

 
0.1

 
7.4

Orlando
 
1,978,000

 
86.0

 
6.7

 

 

 
6.7

Richmond
 
1,941,000

 
93.9

 
5.5

 

 

 
5.5

Greensboro
 
3,564,000

 
95.8

 
3.3

 
1.8

 

 
5.1

Total
 
30,530,000

 
93.1
%
 
92.7
%
 
1.8
%
 
5.5
%
 
100.0
%
__________
(1)
Annualized Cash Rental Revenue is cash rental revenue (base rent plus cost recovery income, excluding straight-line rent) for the month of December 2015 multiplied by 12.

The following table sets forth operating information about in-service properties that we wholly own:

 
Average
Occupancy
 
Annualized GAAP Rent
Per Square
Foot (1)
 
Annualized Cash Rent
Per Square
Foot (2)
2011
89.6
%
 
$
18.58

 
$
17.84

2012
90.3
%
 
$
17.90

 
$
18.42

2013
90.0
%
 
$
21.42

 
$
20.48

2014
90.4
%
 
$
22.13

 
$
21.29

2015
92.3
%
 
$
23.30

 
$
22.55

__________
(1)
Annualized GAAP Rent Per Square Foot is rental revenue (base rent plus cost recovery income, including straight-line rent) for the month of December of the respective year multiplied by 12, divided by total occupied rentable square footage.
(2)
Annualized Cash Rent Per Square Foot is cash rental revenue (base rent plus cost recovery income, excluding straight-line rent) for the month of December of the respective year multiplied by 12, divided by total occupied rentable square footage.

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Customers

The following table sets forth information concerning the 20 largest customers of properties that we wholly own at December 31, 2015:
 
Customer
 
Rentable Square
Feet
 
Annualized
Cash Rental
Revenue (1)
 
Percent of
Total
Annualized
Cash Rental
Revenue (1)
 
Weighted
Average
Remaining
Lease Term in
Years
 
 
 
 
(in thousands)
 
 
 
 
Federal Government
 
1,457,229

 
$
34,896

 
5.45
%
 
3.8

Metropolitan Life Insurance
 
634,775

 
14,755

 
2.30

 
11.5

PPG Industries
 
356,215

 
9,050

 
1.41

 
15.3

HCA Corporation
 
297,909

 
7,790

 
1.22

 
1.3

EQT Corporation
 
317,052

 
7,423

 
1.16

 
8.8

International Paper
 
299,538

 
6,969

 
1.09

 
11.8

Healthways
 
263,598

 
6,653

 
1.04

 
7.2

Bass, Berry & Sims
 
195,846

 
6,290

 
0.98

 
9.1

State of Georgia
 
318,796

 
6,018

 
0.94

 
5.0

Lockton Companies
 
229,192

 
5,546

 
0.87

 
14.2

Aon
 
190,683

 
5,255

 
0.82

 
3.9

PNC Bank
 
187,076

 
5,170

 
0.81

 
10.9

Marsh USA
 
175,390

 
5,117

 
0.80

 
6.3

Syniverse Technologies
 
218,678

 
5,065

 
0.79

 
10.9

AT&T
 
217,400

 
4,862

 
0.76

 
3.4

Novelis
 
168,949

 
4,849

 
0.76

 
8.7

Vanderbilt University
 
208,921

 
4,771

 
0.74

 
4.8

Lifepoint Corporate Services
 
202,991

 
4,563

 
0.71

 
13.3

BB&T
 
245,543

 
4,500

 
0.70

 
4.1

SunTrust
 
146,646

 
4,495

 
0.70

 
1.7

Total
 
6,332,427

 
$
154,037

 
24.05
%
 
7.4

__________
(1)
Annualized Cash Rental Revenue is cash rental revenue (base rent plus cost recovery income, excluding straight-line rent) for the month of December 2015 multiplied by 12.


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Lease Expirations
 
The following tables set forth scheduled lease expirations for existing leases at office properties (other than in-process development) that we wholly owned at December 31, 2015:

Lease Expiring
 
Number of Leases Expiring
 
Rentable
Square Feet
Subject to
Expiring
Leases
 
Percentage of
Leased Square
Footage
Represented
by Expiring
Leases
 
Annualized
Cash Rental
Revenue
Under Expiring
Leases (1)
 
Average
Annual Cash
Rental Rate
Per Square
Foot for
Expirations
 
Percent of
Annualized
Cash Rental
Revenue
Represented
by Expiring
Leases (1)
 
 
 
 
 
 
 
($ in thousands)
 
 
 
2016 (2)
 
435

 
1,957,791

 
7.8
%
 
$
45,592

 
$
23.29

 
7.7
%
2017
 
379

 
2,957,467

 
11.7

 
71,321

 
24.12

 
12.0

2018
 
388

 
2,641,931

 
10.5

 
62,144

 
23.52

 
10.5

2019
 
315

 
3,417,711

 
13.5

 
80,663

 
23.60

 
13.6

2020
 
266

 
2,727,093

 
10.8

 
73,257

 
26.86

 
12.3

2021
 
142

 
2,437,730

 
9.7

 
54,503

 
22.36

 
9.2

2022
 
94

 
1,304,809

 
5.2

 
29,432

 
22.56

 
5.0

2023
 
63

 
1,485,624

 
5.9

 
31,455

 
21.17

 
5.3

2024
 
49

 
1,522,574

 
6.0

 
38,719

 
25.43

 
6.5

2025
 
38

 
893,132

 
3.5

 
25,383

 
28.42

 
4.3

Thereafter
 
170

 
3,913,894

 
15.4

 
80,991

 
20.69

 
13.6

 
 
2,339

 
25,259,756

 
100.0
%
 
$
593,460

 
$
23.49

 
100.0
%
__________
(1)
Annualized Cash Rental Revenue is cash rental revenue (base rent plus cost recovery income, excluding straight-line rent) for the month of December 2015 multiplied by 12.
(2)
Includes 81,000 rentable square feet of leases that are on a month-to-month basis, which represent 0.3% of total annualized cash rental revenue.

Note: 2016 and beyond expirations that have been renewed are reflected above based on the renewal expiration date. Expirations include leases related to completed not stabilized development properties and exclude leases related to developments in-process.

In-Process Development
 
As of December 31, 2015, we were developing 1,454,200 rentable square feet of properties. The following table summarizes these developments:
 
Property
 
Market
 
Rentable Square Feet
 
Anticipated Total Investment (1)
 
Investment As Of December 31, 2015 (1)
 
Pre - Leased %
 
Estimated Completion
 
Estimated Stabilization
 
 
 
 
 
 
($ in thousands)
 
 
 
 
 
 
Laser Spine Institute (Office)
 
Tampa
 
176,000

 
$
56,000

 
$
49,853

 
100.0
%
 
1Q 16
 
1Q 16
Seven Springs West (Office)
 
Nashville
 
203,000

 
59,000

 
38,748

 
85.6

 
3Q 16
 
1Q 17
Bridgestone Americas (Office)
 
Nashville
 
514,000

 
200,000

 
57,918

 
98.5

 
3Q 17
 
3Q 17
Riverwood 200 (Office)
 
Atlanta
 
299,000

 
107,000

 
21,416

 
66.2

 
2Q 17
 
2Q 19
Enterprise V (Industrial)
 
Greensboro
 
131,200

 
7,600

 
4,642

 

 
2Q 16
 
2Q 17
Seven Springs II (Office)
 
Nashville
 
131,000

 
38,100

 
3,849

 
42.9

 
2Q 17
 
3Q 18
 
 
 
 
1,454,200

 
$
467,700

 
$
176,426

 
76.3
%
 
 
 
 
__________
(1)
Includes deferred lease commissions which are classified in deferred leasing costs on our Consolidated Balance Sheets.

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Land Held for Development
 
We wholly owned 465 acres of development land at December 31, 2015. We estimate that we can develop approximately 4.4 million and 2.3 million rentable square feet of office and industrial space, respectively, on the 391 acres that we consider core assets for our future development needs. Our core development land is zoned and available for development, and nearly all of the land has utility infrastructure in place. We believe that our commercially zoned and unencumbered land gives us a development advantage over other commercial real estate development companies in many of our markets.
 
Other Properties
 
The following table sets forth information about other in-service office properties in which we own an interest (50.0% or less) by geographic location at December 31, 2015:
 
 
 
Rentable
Square Feet
 
Weighted
Average
Ownership
Interest (1)
 
Occupancy
 
Percentage of
Annualized
Cash Rental
Revenue (2)
Market
 
Kansas City
 
553,000

 
32.3
%
 
91.8
%
 
41.2
%
Raleigh
 
635,000

 
25.0

 
95.4

 
28.3

Richmond (3)
 
345,000

 
50.0

 
99.8

 
19.4

Orlando
 
306,000

 
28.0

 
74.3

 
8.7

Greensboro
 
118,000

 
50.0

 
36.8

 
2.4

Total
 
1,957,000

 
33.4
%
 
88.3
%
 
100.0
%
__________
(1)
Weighted Average Ownership Interest is calculated using Rentable Square Feet.
(2)
Annualized Cash Rental Revenue is cash rental revenue (base rent plus cost recovery income, excluding straight-line rent) for the month of December 2015 multiplied by 12.
(3)
This joint venture is consolidated.


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ITEM 3. LEGAL PROCEEDINGS

We are from time to time a party to a variety of legal proceedings, claims and assessments arising in the ordinary course of our business. We regularly assess the liabilities and contingencies in connection with these matters based on the latest information available. For those matters where it is probable that we have incurred or will incur a loss and the loss or range of loss can be reasonably estimated, the estimated loss is accrued and charged to income in our Consolidated Financial Statements. In other instances, because of the uncertainties related to both the probable outcome and amount or range of loss, a reasonable estimate of liability, if any, cannot be made. Based on the current expected outcome of such matters, none of these proceedings, claims or assessments is expected to have a material adverse effect on our business, financial condition, results of operations or cash flows.

ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT

The Company is the sole general partner of the Operating Partnership. The following table sets forth information with respect to the Company’s executive officers:

Name
 
Age
 
Position and Background
Edward J. Fritsch
 
57
 
Director, President and Chief Executive Officer.
Mr. Fritsch has been a director since January 2001. Mr. Fritsch became our chief executive officer and chair of the investment committee of our board of directors on July 1, 2004 and our president in December 2003. Prior to that, Mr. Fritsch was our chief operating officer from January 1998 to July 2004 and was a vice president and secretary from June 1994 to January 1998. Mr. Fritsch joined our predecessor in 1982 and was a partner of that entity at the time of our initial public offering in June 1994. Mr. Fritsch currently serves as a director and member of the audit and compensation committees of National Retail Properties, Inc., a publicly-traded REIT (NYSE:NNN). Mr. Fritsch is also chair of the National Association of Real Estate Investment Trusts ("NAREIT"). Mr. Fritsch is also a member of Wells Fargo's central regional advisory board, a member of the University of North Carolina at Chapel Hill Foundation board, a director of the University of North Carolina at Chapel Hill Real Estate Holdings, a member of the University of North Carolina Kenan-Flagler Business School board of visitors and a member of the Dix Park Conservancy board.

Theodore J. Klinck
 
50
 
Executive Vice President and Chief Operating and Investment Officer.
Mr. Klinck became executive vice president and chief operating and investment officer in September 2015. Prior to that, Mr. Klinck was our senior vice president and chief investment officer since March 2012. Before joining us, Mr. Klinck served as principal and chief investment officer with Goddard Investment Group, a privately owned real estate investment firm. Previously, Mr. Klinck had been a managing director at Morgan Stanley Real Estate.


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Mark F. Mulhern
 
56
 
Senior Vice President and Chief Financial Officer.
Mr. Mulhern became senior vice president and chief financial officer in September 2014. Prior to that, Mr. Mulhern was a director of the Company since January 2012. Mr. Mulhern served as executive vice president and chief financial officer of Exco Resources, Inc. (NYSE:XCO), an oil and gas exploration and production company, from April 2013 until September 2014. Mr. Mulhern served as senior vice president and chief financial officer of Progress Energy, Inc. (NYSE:PGN) from September 2008 until its merger with Duke Energy Corporation (NYSE:DUK) in July 2012. Mr. Mulhern first joined Progress Energy in 1996. Mr. Mulhern previously served as chief financial officer at Hydra Co Enterprises, the independent power subsidiary of Niagara Mohawk. He also spent eight years at Price Waterhouse. Mr. Mulhern currently serves as a director and member of the audit committee of Azure Midstream Partners, a publicly-traded energy company (NYSE:AZUR), and McKim and Creed, a private engineering services firm. Mr. Mulhern is a certified public accountant, a certified management accountant and a certified internal auditor.
 
Jeffrey D. Miller
 
45
 
Senior Vice President, General Counsel and Secretary.
Prior to joining us in March 2007, Mr. Miller was a partner with DLA Piper US, LLP, where he practiced since 2005. Previously, Mr. Miller had been a partner with Alston & Bird LLP. Mr. Miller is admitted to practice in North Carolina. Mr. Miller currently serves as lead independent director of Hatteras Financial Corp., a publicly-traded mortgage REIT (NYSE:HTS).


Kevin E. Penn
 
44
 
Senior Vice President of Strategy and Administration.
Mr. Penn became senior vice president of strategy and administration in January 2012. Mr. Penn joined us in 1997 and was our vice president of strategy from August 2005 to January 2012 and chief information officer from April 2002 to August 2005. Mr. Penn is chair of the Urban Land Institute Triangle District Council, chair of the executive committee of the Office, Technology and Operations Consortium and chair of the North Carolina Leukemia Lymphoma Society.




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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The following table sets forth high and low stock prices per share reported on the NYSE and dividends paid per share:

 
 
2015
 
2014
Quarter Ended
 
High
 
Low
 
Dividend
 
High
 
Low
 
Dividend
March 31
 
$
48.34

 
$
43.09

 
$
0.425

 
$
38.60

 
$
35.44

 
$
0.425

June 30
 
$
47.10

 
$
39.72

 
$
0.425

 
$
42.54

 
$
37.32

 
$
0.425

September 30
 
$
42.78

 
$
36.57

 
$
0.425

 
$
43.06

 
$
38.42

 
$
0.425

December 31
 
$
44.61

 
$
38.18

 
$
0.425

 
$
45.67

 
$
38.63

 
$
0.425


On December 31, 2015, the last reported stock price of our Common Stock on the NYSE was $43.60 per share and the Company had 902 common stockholders of record. There is no public trading market for the Common Units. On December 31, 2015, the Operating Partnership had 104 holders of record of Common Units (other than the Company). At December 31, 2015, there were 96.1 million shares of Common Stock outstanding and 2.9 million Common Units outstanding not owned by the Company.

Because the Company is a REIT, the partnership agreement requires the Operating Partnership to distribute at least enough cash for the Company to be able to distribute to its stockholders at least 90.0% of its REIT taxable income, excluding net capital gains. See “Item 1A. Risk Factors – Cash distributions reduce the amount of cash that would otherwise be available for other business purposes, including funding debt maturities or future growth initiatives.”

We generally expect to use cash flows from operating activities to fund distributions. The following factors will affect such cash flows and, accordingly, influence the decisions of the Company’s Board of Directors regarding dividends and distributions:

debt service requirements after taking into account debt covenants and the repayment and restructuring of certain indebtedness and the availability of alternative sources of debt and equity capital and their impact on our ability to refinance existing debt and grow our business;

scheduled increases in base rents of existing leases;

changes in rents attributable to the renewal of existing leases or replacement leases;

changes in occupancy rates at existing properties and execution of leases for newly acquired or developed properties;

changes in operating expenses;

anticipated leasing capital expenditures attributable to the renewal of existing leases or replacement leases;

anticipated building improvements; and

expected cash flows from financing and investing activities, including from the sale of assets generating significant taxable gains to the extent such assets are not sold in a tax-deferred exchange under Section 1031 of the Internal Revenue Code or another tax-free or tax-deferred transaction.

The following stock price performance graph compares the performance of our Common Stock to the S&P 500 and the FTSE NAREIT All Equity REITs Index. The stock price performance graph assumes an investment of $100 in our Common Stock and the three indices on December 31, 2010 and further assumes the reinvestment of all dividends. The FTSE NAREIT All Equity REITs Index is a free-float adjusted, market capitalization-weighted index of U.S. equity REITs. Constituents of the Index include all tax-qualified REITs with more than 50% of total assets in qualifying real estate assets other than mortgages secured by real property. Stock price performance is not necessarily indicative of future results.


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For the Period from December 31, 2010 to December 31,
Index
 
2011
 
2012
 
2013
 
2014
 
2015
Highwoods Properties, Inc.
 
98.23

 
116.63

 
132.10

 
168.66

 
172.72

S&P 500
 
102.11

 
118.45

 
156.82

 
178.28

 
180.75

FTSE NAREIT All Equity REITs Index
 
108.29

 
127.85

 
131.01

 
170.49

 
175.94

 
The performance graph above is being furnished as part of this Annual Report solely in accordance with the requirement under Rule 14a-3(b)(9) to furnish the Company’s stockholders with such information and, therefore, is not deemed to be filed, or incorporated by reference in any filing, by the Company or the Operating Partnership under the Securities Act of 1933 or the Securities Exchange Act of 1934.
 
During 2015, cash dividends on Common Stock totaled $1.70 per share, approximately $0.07 of which represented return of capital and approximately $0.13 of which represented capital gains for income tax purposes. The minimum dividend per share of Common Stock required for the Company to maintain its REIT status was $1.31 per share in 2015.
 
During the fourth quarter of 2015, the Company issued an aggregate of 10,383 shares of Common Stock to holders of Common Units in the Operating Partnership upon the redemption of a like number of Common Units in private offerings exempt from the registration requirements pursuant to Section 4(2) of the Securities Act. Each of the holders of Common Units was an accredited investor under Rule 501 of the Securities Act. The resale of such shares was registered by the Company under the Securities Act.
 
The Company has a Dividend Reinvestment and Stock Purchase Plan (“DRIP”) under which holders of Common Stock may elect to automatically reinvest their dividends in additional shares of Common Stock and make optional cash payments for additional shares of Common Stock.
 
The Company has an Employee Stock Purchase Plan pursuant to which employees may contribute up to 25.0% of their cash compensation for the purchase of Common Stock. At the end of each three-month offering period, each participant’s account balance, which includes accumulated dividends, is applied to acquire shares of Common Stock at a cost that is calculated at 85.0% of the average closing price on the NYSE on the five consecutive days preceding the last day of the quarter.
 
Information about the Company’s equity compensation plans and other related stockholder matters is incorporated herein by reference to the Company’s Proxy Statement to be filed in connection with its annual meeting of stockholders to be held on May 11, 2016.

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ITEM 6. SELECTED FINANCIAL DATA

The operating results and certain liabilities of the Company as of and for the years ended December 31, 2014, 2013, 2012 and 2011 were retrospectively revised from previously reported amounts to reclassify those properties classified as held for sale, and in discontinued operations the operations for those properties classified as discontinued operations. The information in the following tables should be read in conjunction with the Company’s Consolidated Financial Statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein ($ in thousands, except per share data):

 
Year Ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
Rental and other revenues
$
604,671

 
$
555,871

 
$
505,008

 
$
434,890

 
$
386,198

Income from continuing operations
$
85,521

 
$
96,987

 
$
42,641

 
$
21,578

 
$
25,623

Income from discontinued operations
$
15,739

 
$
18,985

 
$
88,456

 
$
62,657

 
$
22,348

Income from continuing operations available for common stockholders
$
79,308

 
$
90,069

 
$
37,890

 
$
17,394

 
$
17,444

Net income
$
101,260

 
$
115,972

 
$
131,097

 
$
84,235

 
$
47,971

Net income available for common stockholders
$
94,572

 
$
108,457

 
$
122,949

 
$
77,087

 
$
38,677

Earnings per Common Share – basic:
 
 
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
0.84

 
$
1.00

 
$
0.44

 
$
0.23

 
$
0.24

Net income available for common stockholders
$
1.00

 
$
1.20

 
$
1.44

 
$
1.02

 
$
0.54

Earnings per Common Share – diluted:
 
 
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
0.84

 
$
0.99

 
$
0.44

 
$
0.23

 
$
0.24

Net income available for common stockholders
$
1.00

 
$
1.19

 
$
1.44

 
$
1.02

 
$
0.54

Dividends declared and paid per Common Share
$
1.70

 
$
1.70

 
$
1.70

 
$
1.70

 
$
1.70


 
December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
Total assets (as revised)
$
4,493,432

 
$
3,999,123

 
$
3,801,315

 
$
3,344,642

 
$
3,154,157

Mortgages and notes payable
$
2,499,614

 
$
2,071,389

 
$
1,956,299

 
$
1,859,162

 
$
1,847,857



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The operating results and certain liabilities of the Operating Partnership as of and for the years ended December 31, 2014, 2013, 2012 and 2011 were retrospectively revised from previously reported amounts to reclassify those properties classified as held for sale, and in discontinued operations the operations for those properties classified as discontinued operations. The information in the following tables should be read in conjunction with the Operating Partnership’s Consolidated Financial Statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein ($ in thousands, except per unit data):

 
Year Ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
Rental and other revenues
$
604,671

 
$
555,871

 
$
505,008

 
$
434,890

 
$
386,198

Income from continuing operations
$
85,521

 
$
96,987

 
$
42,590

 
$
21,638

 
$
25,684

Income from discontinued operations
$
15,739

 
$
18,985

 
$
88,456

 
$
62,657

 
$
22,348

Income from continuing operations available for common unitholders
$
81,751

 
$
93,014

 
$
39,133

 
$
18,344

 
$
18,481

Net income
$
101,260

 
$
115,972

 
$
131,046

 
$
84,295

 
$
48,032

Net income available for common unitholders
$
97,490

 
$
111,999

 
$
127,589

 
$
81,001

 
$
40,829

Earnings per Common Unit – basic:
 
 
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
0.84

 
$
1.00

 
$
0.44

 
$
0.23

 
$
0.24

Net income available for common unitholders
$
1.01

 
$
1.20

 
$
1.44

 
$
1.02

 
$
0.54

Earnings per Common Unit – diluted:
 
 
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
0.84

 
$
1.00

 
$
0.44

 
$
0.23

 
$
0.24

Net income available for common unitholders
$
1.01

 
$
1.20

 
$
1.44

 
$
1.02

 
$
0.54

Distributions declared and paid per Common Unit
$
1.70

 
$
1.70

 
$
1.70

 
$
1.70

 
$
1.70


 
December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
Total assets (as revised)
$
4,493,432

 
$
3,999,229

 
$
3,801,412

 
$
3,343,739

 
$
3,153,049

Mortgages and notes payable
$
2,499,614

 
$
2,071,389

 
$
1,956,299

 
$
1,859,162

 
$
1,847,857



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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis in conjunction with the accompanying Consolidated Financial Statements and related notes contained elsewhere herein. Unless otherwise noted, same property information contained herein includes all in-service properties included in continuing operations that were wholly-owned during the entirety of the periods presented (from January 1, 2014 to December 31, 2015). As a result, the Plaza assets, which were classified as held for sale at December 31, 2015, are excluded from our same property portfolio.

Disclosure Regarding Forward-Looking Statements

Some of the information in this Annual Report may contain forward-looking statements. Such statements include, in particular, statements about our plans, strategies and prospects under this section and under the heading “Item 1. Business.” You can identify forward-looking statements by our use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “continue” or other similar words. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that our plans, intentions or expectations will be achieved. When considering such forward-looking statements, you should keep in mind the following important factors that could cause our actual results to differ materially from those contained in any forward-looking statement:

the planned disposition of the Plaza assets in Kansas City may not occur on the terms described herein, if at all (see "Investment Activity");

the financial condition of our customers could deteriorate;

we may not be able to lease or re-lease second generation space, defined as previously occupied space that becomes available for lease, quickly or on as favorable terms as old leases;

we may not be able to lease our newly constructed buildings as quickly or on as favorable terms as originally anticipated;

we may not be able to complete development, acquisition, reinvestment, disposition or joint venture projects as quickly or on as favorable terms as anticipated;

development activity by our competitors in our existing markets could result in an excessive supply relative to customer demand;

our markets may suffer declines in economic growth;

unanticipated increases in interest rates could increase our debt service costs;

unanticipated increases in operating expenses could negatively impact our operating results;

we may not be able to meet our liquidity requirements or obtain capital on favorable terms to fund our working capital needs and growth initiatives or repay or refinance outstanding debt upon maturity; and

the Company could lose key executive officers.

This list of risks and uncertainties, however, is not intended to be exhaustive. You should also review the other cautionary statements we make in “Item 1A. Business – Risk Factors” set forth in this Annual Report. Given these uncertainties, you should not place undue reliance on forward-looking statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements to reflect any future events or circumstances or to reflect the occurrence of unanticipated events.


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Executive Summary
 
Our Strategic Plan focuses on:
 
owning high-quality, differentiated office buildings in the BBDs of our core markets;

improving the operating results of our existing properties through concentrated leasing, asset management, cost control and customer service efforts;

developing and acquiring office buildings in BBDs that improve the overall quality of our portfolio and generate attractive returns over the long term for our stockholders;

disposing of properties no longer considered to be core assets primarily due to location, age, quality and overall strategic fit; and

maintaining a conservative and flexible balance sheet with ample liquidity to meet our funding needs and growth prospects.
 
Revenues

Our operating results depend heavily on successfully leasing and operating the office space in our portfolio. Economic growth and employment levels in our core markets are and will continue to be important factors in predicting our future operating results.
 
The key components affecting our rental and other revenues are average occupancy, rental rates, cost recovery income, new developments placed in service, acquisitions and dispositions. Average occupancy generally increases during times of improving economic growth, as our ability to lease space outpaces vacancies that occur upon the expirations of existing leases. Average occupancy generally declines during times of slower economic growth, when new vacancies tend to outpace our ability to lease space. Asset acquisitions, dispositions and new developments placed in service directly impact our rental revenues and could impact our average occupancy, depending upon the occupancy rate of the properties that are acquired, sold or placed in service. A further indicator of the predictability of future revenues is the expected lease expirations of our portfolio. As a result, in addition to seeking to increase our average occupancy by leasing current vacant space, we also must concentrate our leasing efforts on renewing our existing leases prior to expiration. For more information regarding our lease expirations, see “Item 2. Properties - Lease Expirations.” Occupancy in our office portfolio increased from 91.2% at December 31, 2014 to 92.6% at December 31, 2015.
 
Whether or not our rental revenue tracks average occupancy proportionally depends upon whether GAAP rents under signed new and renewal leases are higher or lower than the GAAP rents under expiring leases. Annualized rental revenues from second generation leases expiring during any particular year are generally less than 15% of our total annual rental revenues. The following table sets forth information regarding second generation office leases signed during the fourth quarter of 2015 (we define second generation office leases as leases with new customers and renewals of existing customers in office space that has been previously occupied under our ownership and leases with respect to vacant space in acquired buildings):
 
 
New
 
Renewal
 
All Office
Leased space (in rentable square feet)
237,493

 
809,940

 
1,047,433

Average term (in years - rentable square foot weighted)
6.7

 
7.0

 
6.9

Base rents (per rentable square foot) (1)
$
26.49

 
$
24.43

 
$
24.90

Rent concessions (per rentable square foot) (1)
(0.96
)
 
(0.52
)
 
(0.62
)
GAAP rents (per rentable square foot) (1)
$
25.53

 
$
23.91

 
$
24.28

Tenant improvements (per rentable square foot) (1)
$
4.05

 
$
1.85

 
$
2.35

Leasing commissions (per rentable square foot) (1)
$
1.03

 
$
0.76

 
$
0.82

__________
(1)
Weighted average per rentable square foot on an annual basis over the lease term.

Compared to previous leases in the same office spaces, annual combined GAAP rents for new and renewal leases signed in the fourth quarter were $24.28 per rentable square foot, or 10.6% higher.


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We strive to maintain a diverse, stable and creditworthy customer base. We have an internal guideline whereby customers that account for more than 3% of our revenues are periodically reviewed with the Company's Board of Directors. As of December 31, 2015, no customer accounted for more than 3% of our cash revenues other than the Federal Government, which accounted for less than 6% of our cash revenues on an annualized basis. See “Item 2. Properties - Customers.” Upon completion of the Bridgestone Americas development project in Nashville, which is scheduled for delivery in mid-to-late 2017, it is expected that Bridgestone Americas, Inc., the U.S. subsidiary of Bridgestone Corporation, will account for approximately 3% of our revenues based on annualized cash revenues for December 2015. See “Item 2. Properties - In-Process Development.”
 
Operating Expenses
 
Our expenses primarily consist of rental property expenses, depreciation and amortization, general and administrative expenses and interest expense. From time to time, expenses also include impairments of real estate assets. Rental property expenses are expenses associated with our ownership and operation of rental properties and include expenses that vary somewhat proportionately to occupancy levels, such as janitorial services and utilities, and expenses that do not vary based on occupancy, such as property taxes and insurance. Depreciation and amortization is a non-cash expense associated with the ownership of real property and generally remains relatively consistent each year, unless we buy, place in service or sell assets, since we depreciate our properties and related building and tenant improvement assets on a straight-line basis over fixed lives. General and administrative expenses consist primarily of management and employee salaries and other personnel costs, corporate overhead and short and long-term incentive compensation.

Net Operating Income

Whether or not we record growing same property net operating income (“NOI”) depends upon our ability to garner higher rental revenues, whether from higher average occupancy, higher GAAP rents per rentable square foot or higher cost recovery income, that exceed any corresponding growth in operating expenses. Same property NOI from continuing operations was $19.5 million, or 5.9%, higher in 2015 as compared to 2014 due to an increase in same property revenues of $24.5 million offset by an increase of $5.0 million in same property expenses. We expect same property NOI to be higher in 2016 than 2015 as higher rental revenues, mostly from higher average occupancy and higher average GAAP rents per rentable square foot, are expected to more than offset a corresponding increase in same property operating expenses.

In addition to the effect of same property NOI, whether or not NOI from continuing operations increases depends upon whether the NOI from our acquired properties and development properties placed in service exceeds the NOI from sold properties. NOI from continuing operations was $38.7 million, or 11.1%, higher in 2015 as compared to 2014 due to the full year impact of acquisitions and development properties placed in service in 2014 and the partial year impact of acquisitions and development properties placed in service in 2015, offset by NOI lost from sold properties not classified as discontinued operations. We expect NOI from continuing operations to be higher in 2016 than 2015 due to our net investment activity in 2015 and higher same property revenues resulting mostly from an increase in average occupancy and higher average GAAP rents per rentable square foot.

Cash Flows

In calculating net cash related to operating activities, depreciation and amortization, which are non-cash expenses, are added back to net income. As a result, we have historically generated a positive amount of cash from operating activities. From period to period, cash flow from operations depends primarily upon changes in our net income, as discussed more fully below under “Results of Operations,” changes in receivables and payables, and net additions or decreases in our overall portfolio.

Net cash related to investing activities generally relates to capitalized costs incurred for leasing and major building improvements and our acquisition, development, disposition and joint venture capital activity. During periods of significant net acquisition and/or development activity, our cash used in such investing activities will generally exceed cash provided by investing activities, which typically consists of cash received upon the sale of properties and distributions of capital from our joint ventures.

Net cash related to financing activities generally relates to distributions, incurrence and repayment of debt, and issuances, repurchases or redemptions of Common Stock, Common Units and Preferred Stock. As discussed previously, we use a significant amount of our cash to fund distributions. Whether or not we have increases in the outstanding balances of debt during a period depends generally upon the net effect of our acquisition, disposition, development and joint venture activity. We generally use our revolving credit facility for daily working capital purposes, which means that during any given period, in order to minimize interest expense, we may record significant repayments and borrowings under our revolving credit facility.


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Table of Contents

Liquidity and Capital Resources
 
We intend to maintain a conservative and flexible balance sheet with access to multiple sources of debt and equity capital and sufficient availability under our revolving credit facility that allows us to capitalize on favorable development and acquisition opportunities as they arise.

Rental and other revenues are our principal source of funds to meet our short-term liquidity requirements. Other sources of funds for short-term liquidity needs include available working capital and borrowings under our existing revolving credit facility, which had $161.1 million of availability at January 29, 2016. Our short-term liquidity requirements primarily consist of operating expenses, interest and principal amortization on our debt, distributions and capital expenditures, including building improvement costs, tenant improvement costs and lease commissions. Building improvements are capital costs to maintain or enhance existing buildings not typically related to a specific customer. Tenant improvements are the costs required to customize space for the specific needs of customers. We anticipate that our available cash and cash equivalents and cash provided by operating activities, together with cash available from borrowings under our revolving credit facility, will be adequate to meet our short-term liquidity requirements. We use our revolving credit facility for working capital purposes and for the short-term funding of our development and acquisition activity and, in certain instances, the repayment of other debt. The continued ability to borrow under the revolving credit facility allows us to quickly capitalize on strategic opportunities at short-term interest rates.
 
Our long-term liquidity uses generally consist of the retirement or refinancing of debt upon maturity (including mortgage debt, our revolving credit facility, bridge facility, term loans and other unsecured debt), funding of existing and new building development and land infrastructure projects and funding acquisitions of buildings and development land. Additionally, we may, from time to time, retire some or all of our remaining outstanding Preferred Stock and/or unsecured debt securities through redemptions, open market repurchases, privately negotiated acquisitions or otherwise.
 
We expect to meet our long-term liquidity needs through a combination of:
 
cash flow from operating activities;
 
bank term loans and borrowings under our revolving credit facility;
 
the issuance of unsecured debt;
 
the issuance of secured debt;
 
the issuance of equity securities by the Company or the Operating Partnership; and
 
the disposition of non-core assets.

We generally expect to grow our company on a leverage-neutral basis. Before the decision to sell the Plaza assets, we have generally operated within a targeted leverage range of 40% to 45% as measured by the ratio of the undepreciated book value of our assets to our mortgages and notes payable and outstanding preferred stock. The Plaza assets, which are under contract to sell for $660.0 million, have an undepreciated book value of approximately $372 million. As of December 31, 2015, our leverage ratio was 44.9% using the undepreciated book value of the Plaza assets and 42.7% using the contracted sales price of the Plaza assets.

Assuming the sale of the Plaza assets had occurred as of December 31, 2015 and the net proceeds had been used as described under “Investment Activity,” our leverage would have been 38.3%. The sale of the Plaza assets is expected to close on March 1, 2016. Once the sale of the Plaza assets is completed, we believe it prudent and appropriate to adjust our targeted leverage range to reflect the impact of the significant difference between the undepreciated book value and contracted sales price of the Plaza assets. As a result, going forward, our plan will be to operate within a targeted leverage range of 38% to 43%.

This forward-looking statement is subject to risks and uncertainties. See "Disclosure Regarding Forward-Looking Statements."

Investment Activity

As noted above, a key tenet of our strategic plan is to continuously upgrade the quality of our office portfolio through acquisitions, dispositions and development. We generally seek to acquire and develop office buildings that improve the average quality of our overall portfolio and deliver consistent and sustainable value for our stockholders over the long-term. Whether or not an asset acquisition or new development results in higher per share net income or funds from operations ("FFO") in any given period depends upon a number of factors, including whether the NOI for any such period exceeds the actual cost of capital used

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to finance the acquisition or development. Additionally, given the length of construction cycles, development projects are not placed in service until, in some cases, several years after commencement. Sales of non-core assets could result in lower per share net income or FFO in any given period in the event the resulting use of proceeds does not exceed the capitalization rate on the sold properties.

Results of Operations

As noted previously, we entered into a series of definitive agreements, dated as of December 21, 2015, pursuant to which we intend to sell the Plaza assets for $660.0 million. The sales, which are subject to customary closing conditions, are scheduled to close on March 1, 2016. The buyer’s contractual due diligence investigation period ended on December 31, 2015. The buyer has posted earnest money deposits, held by a third party, totaling $25.0 million that are non-refundable and the buyer would be obligated to pay us an additional $25.0 million in the event of a default, except in limited circumstances. As a result of the foregoing, the Plaza assets and related liabilities were classified as held for sale at December 31, 2015 and 2014 and, accordingly, the revenues and expenses of the Plaza assets have been reclassified to income from discontinued operations in the presentation of our results of operations.

Comparison of 2015 to 2014

Rental and Other Revenues
 
Rental and other revenues were $48.8 million, or 8.8%, higher in 2015 as compared to 2014 primarily due to recent acquisitions, higher same property revenues and development properties placed in service, which increased rental and other revenues by $25.5 million, $24.5 million and $17.2 million, respectively. Same property rental and other revenues were higher primarily due to an increase in average occupancy to 92.3% in 2015 from 90.5% in 2014, higher average GAAP rents per rentable square foot and higher cost recovery income. These increases were partly offset by lost revenue of $18.0 million from property dispositions. We expect rental and other revenues to again be higher in 2016 as compared to 2015 due to the full year contribution of acquisitions closed and development properties placed in service in 2015 and higher same property revenues, partly offset by lost revenue from 2015 property dispositions.

Operating Expenses
 
Rental property and other expenses were $10.1 million, or 4.9%, higher in 2015 as compared to 2014 primarily due to recent acquisitions, higher same property operating expenses and development properties placed in service, which increased operating expenses by $9.6 million, $5.0 million and $3.4 million, respectively. Same property operating expenses were higher primarily due to higher property taxes, janitorial and other building-related services and repairs and maintenance, partly offset by lower property insurance and utilities. These increases were partly offset by a $6.7 million decrease in operating expenses from property dispositions. We expect rental property and other expenses to again be higher in 2016 as compared to 2015 due to the full year contribution of acquisitions closed and development properties placed in service in 2015 and higher same property operating expenses, partly offset by lower operating expenses due to 2015 property dispositions.

Depreciation and amortization was $21.3 million, or 11.8%, higher in 2015 as compared to 2014 primarily due to recent acquisitions and development properties placed in service, partly offset by property dispositions. We expect 2016 depreciation and amortization to increase over 2015 primarily due to the full year contribution of acquisitions closed and development properties placed in service in 2015, partly offset by lower depreciation and amortization due to 2015 property dispositions.

We recorded an impairment of real estate assets of $0.6 million in 2014 on a building in Greensboro, NC, which resulted from a change in the assumed timing of future disposition and leasing assumptions. We recorded no such impairment in 2015.

General and administrative expenses were $2.4 million, or 6.8%, higher in 2015 as compared to 2014 primarily due to higher company-wide base salaries and benefits, incentive compensation and acquisition costs. We expect 2016 general and administrative expenses to decrease over 2015 primarily due to lower incentive compensation and acquisition costs, partly offset by higher company-wide base salaries.

Interest Expense
 
Interest expense was $0.9 million, or 1.1%, higher in 2015 as compared to 2014 primarily due to higher average debt balances and financing obligation interest expense, partly offset by higher capitalized interest. We expect 2016 interest expense to decrease over 2015 primarily due to lower average interest rates and higher capitalized interest.


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Other Income
 
Other income was $0.7 million, or 29.0%, lower in 2015 as compared to 2014 primarily due to the repayments of mortgages receivable in 2014 and 2015. We expect 2016 other income to continue to decrease over 2015 primarily due to the repayments of mortgages receivable in 2015.

Gains on Disposition of Property and Net Gains on Disposition of Discontinued Operations
 
With the adoption of the discontinued operations accounting standards update in the second quarter of 2014, gains on disposition of property are now generally included in continuing operations. Prior to adoption, such gains were generally classified as discontinued operations. Total gains were $33.3 million lower in 2015 as compared to 2014 due to the net effect of the disposition activity in such years. We expect to record a significant net gain on disposition of discontinued operations during the first quarter of 2016 in connection with the sale of the Plaza assets.

Gain on Disposition of Investment in Unconsolidated Affiliate
 
We recorded a gain on disposition of investment in unconsolidated affiliate of $4.2 million in 2015 due to the sale of our 20.0% interest in SF-HIW Harborview Plaza, LP ("Harborview") to our partner. We had no comparable transaction in 2014.

Equity in Earnings of Unconsolidated Affiliates
 
Equity in earnings of unconsolidated affiliates was $3.3 million higher in 2015 as compared to 2014 primarily due to our share of gains recognized by certain of our unconsolidated affiliates in 2015, lower interest expense in 2015 and a net impairment of one of our previous investments in 2014. These increases were partly offset by less net operating income in our unconsolidated affiliates as a result of disposition activity. We expect 2016 equity in earnings of unconsolidated affiliates to decrease over 2015 primarily due to our share of gains recognized in 2015 and as a result of disposition activity by certain of our joint ventures.

Income From Discontinued Operations
 
Income from discontinued operations was $2.9 million, or 15.4%, lower in 2015 as compared to 2014 primarily due to lower termination fees in 2015 and anticipated severance costs required to be accrued in 2015 due to our intent to close our Kansas City division office upon the sale of the Plaza assets.

Earnings Per Common Share - Diluted
 
Diluted earnings per common share was $0.19, or 16.0%, lower in 2015 as compared to 2014 due to a decrease in net income for the reasons discussed above and an increase in the weighted average Common Shares outstanding.

Comparison of 2014 to 2013
 
Rental and Other Revenues
 
Rental and other revenues were $50.9 million, or 10.1%, higher in 2014 as compared to 2013 primarily due to 2013 and 2014 acquisitions and development properties placed in service and higher same property revenues, which increased rental and other revenues by $55.2 million and $4.8 million, respectively. Same property rental and other revenues were higher primarily due to higher average GAAP rents per rentable square foot and higher cost recovery income, partly offset by lower termination fees and a decrease in average occupancy to 90.7% in 2014 from 91.1% in 2013. These increases were partly offset by $6.6 million in lost revenue from property dispositions and the recognition of $1.1 million of deferred leasing commission income in 2013.

Operating Expenses
 
Rental property and other expenses were $21.7 million, or 11.8%, higher in 2014 as compared to 2013 primarily due to 2013 and 2014 acquisitions and development properties placed in service and higher same property operating expenses, which increased operating expenses by $19.5 million and $5.4 million, respectively. Same property operating expenses were higher primarily due to higher utilities and snow removal costs as a result of harsher than normal winter conditions and higher property taxes, partly offset by lower repairs and maintenance. These increases were partly offset by a $2.4 million decrease in operating expenses from property dispositions in 2014.


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Depreciation and amortization was $17.7 million, or 10.9%, higher in 2014 as compared to 2013 primarily due to 2013 and 2014 acquisitions and development properties placed in service.

We recorded an impairment of real estate assets of $0.6 million in 2014 on a building in Greensboro, NC. Prior to the adoption of the discontinued operations accounting standards update in the second quarter of 2014, such comparable impairments were classified as discontinued operations in 2013. We recorded impairments of real estate assets of $1.1 million on seven buildings in Atlanta, GA and $1.1 million on four buildings in a single office park in Winston-Salem, NC in 2013. These impairments were due to a change in the assumed timing of future dispositions and leasing assumptions.

General and administrative expenses were $1.1 million, or 3.1%, lower in 2014 as compared to 2013 primarily due to lower acquisition costs, partly offset by higher company-wide base salaries, benefits and incentive compensation.

Interest Expense
 
Interest expense was $6.8 million, or 7.4%, lower in 2014 as compared to 2013 primarily due to lower average interest rates and higher capitalized interest, partly offset by higher average debt balances.

Other Income
 
Other income was $0.9 million, or 26.6%, lower in 2014 as compared to 2013 primarily due to the repayments in the first quarter of 2014 of $16.5 million of mortgages receivable, which consisted of seller financing provided in connection with 2010 disposition transactions

Gains on Disposition of Property and Net Gains on Disposition of Discontinued Operations
 
With the adoption of the discontinued operations accounting standards update in the second quarter of 2014, gains on disposition of property are now generally included in continuing operations. Prior to adoption, such gains were generally classified as discontinued operations. Total gains were $19.1 million lower in 2014 as compared to 2013 due to the net effect of the disposition activity in such years.

Gain on Acquisition of Controlling Interest in Unconsolidated Affiliate
 
We recorded a gain on acquisition of controlling interest in unconsolidated affiliate of $7.5 million in 2013 due to acquiring our joint venture partner’s 60.0% interest in our HIW-KC Orlando, LLC joint venture. We had no comparable transaction in 2014.

Income From Discontinued Operations
 
The revenues and expenses of the Plaza assets, which we plan to dispose of in March 2016, have been reclassified to income from discontinued operations in 2014 and 2013. Additionally, 2013 amounts include properties which qualified for discontinued operations treatment prior to adoption of the discontinued operations accounting standards update in the second quarter of 2014. Income from discontinued operations was $8.3 million, or 30.7%, lower in 2014 as compared to 2013 due to the net effect of the disposition activity in such years.

Equity in Earnings of Unconsolidated Affiliates
 
Equity in earnings of unconsolidated affiliates was $0.4 million, or 19.3%, lower in 2014 as compared to 2013 primarily due to our share of a gain recognized by the Lofts at Weston, LLC joint venture in 2013, the acquisitions of certain joint venture interests and assets in the third quarter of 2013 and a net impairment of our previous investment in Board of Trade Investment Company in 2014. Partly offsetting this decrease is our share of impairments of real estate assets on certain buildings in our Highwoods DLF 98/29, LLC joint venture in 2013.

Earnings Per Common Share - Diluted
 
Diluted earnings per common share was $0.25, or 17.4%, lower in 2014 as compared to 2013 due to a decrease in net income for the reasons discussed above and an increase in the weighted average Common Shares outstanding.


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Liquidity and Capital Resources

Statements of Cash Flows

We report and analyze our cash flows based on operating activities, investing activities and financing activities. The following table sets forth the changes in the Company’s cash flows ($ in thousands):

 
Year Ended December 31,
 
 
 
 
 
2015
 
2014
 
2013
 
2015-2014 Change
 
2014-2013 Change
Net Cash Provided By Operating Activities
$
288,879

 
$
266,911

 
$
256,437

 
$
21,968

 
$
10,474

Net Cash Used In Investing Activities
(654,157
)
 
(328,178
)
 
(356,603
)
 
(325,979
)
 
28,425

Net Cash Provided By Financing Activities
361,482

 
59,915

 
96,567

 
301,567

 
(36,652
)
Total Cash Flows
$
(3,796
)
 
$
(1,352
)
 
$
(3,599
)
 
$
(2,444
)
 
$
2,247


Comparison of 2015 to 2014

The increase in net cash provided by operating activities in 2015 as compared to 2014 was primarily due to higher net cash from the operations of recent acquisitions and development properties placed in service in 2014 and 2015, partly offset by higher cash paid for operating expenses in 2015. We expect net cash related to operating activities to be higher in 2016 as compared to 2015 due to the full year impact of properties acquired in 2015 and higher cash flows from leases signed in 2015 and prior years as free rent periods expire, partly offset by the sale of the Plaza assets in 2016.

The increase in net cash used in investing activities in 2015 as compared to 2014 was primarily due to higher acquisition activity and lower net proceeds from disposition of real estate assets in 2015, partly offset by lower development activity and the repayment of an advance from an unconsolidated affiliate in 2015. We expect uses of cash for investing activities in 2016 to be primarily driven by our plans to acquire and commence development of office buildings in the BBDs of our markets. Additionally, as of December 31, 2015, we have $294 million left to fund of our previously-announced development activity. We expect these uses of cash for investing activities will be partly offset by the sale of the Plaza assets in 2016.

The increase in net cash provided by financing activities in 2015 as compared to 2014 was primarily due to higher net debt borrowings and higher proceeds from the issuance of Common Stock in 2015.

Comparison of 2014 to 2013

The increase in net cash provided by operating activities in 2014 as compared to 2013 was primarily due to higher net cash from the operations of properties acquired in 2014 and 2013 partly offset by higher cash paid for operating expenses in 2014.

The decrease in net cash used in investing activities in 2014 as compared to 2013 was primarily due to lower acquisition activity and higher repayments of mortgages and notes receivable in 2014, partly offset by higher development activity, lower net proceeds from dispositions of real estate assets and lower distributions of capital from unconsolidated affiliates in 2014.

The decrease in net cash provided by financing activities in 2014 as compared to 2013 was primarily due to lower proceeds from the issuance of Common Stock, higher aggregate dividends on Common Stock due to a higher number of shares outstanding and lower contributions from noncontrolling interests in consolidated affiliates in 2014, partly offset by higher net debt borrowings in 2014.


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Capitalization
 
The following table sets forth the Company’s capitalization (in thousands, except per share amounts):
 
 
December 31,
 
2015
 
2014
 
 
 
(as revised)
Mortgages and notes payable, at recorded book value
$
2,499,614

 
$
2,071,389

Financing obligation (in liabilities held for sale)
$
7,402

 
$
8,962

Preferred Stock, at liquidation value
$
29,050

 
$
29,060

Common Stock outstanding
96,092

 
92,907

Common Units outstanding (not owned by the Company)
2,900

 
2,937

Per share stock price at year end
$
43.60

 
$
44.28

Market value of Common Stock and Common Units
$
4,316,051

 
$
4,243,972

Total capitalization
$
6,852,117

 
$
6,353,383

 
At December 31, 2015, our mortgages and notes payable and outstanding preferred stock represented 36.9% of our total capitalization and 44.9% of the undepreciated book value of our assets. See also "Executive Summary - Liquidity and Capital Resources."

Our mortgages and notes payable as of December 31, 2015 consisted of $175.3 million of secured indebtedness with a weighted average interest rate of 5.13% and $2,324.3 million of unsecured indebtedness with a weighted average interest rate of 3.32%. The secured indebtedness was collateralized by real estate assets with an aggregate undepreciated book value of $314.2 million. As of December 31, 2015, $974.0 million of our debt does not bear interest at fixed rates or is not protected by interest rate hedge contracts. Approximately $430 million of variable rate debt will be paid off in connection with the sale of the Plaza assets.
 
Dividends and Distributions
 
To maintain its qualification as a REIT, the Company must pay dividends to stockholders that are at least 90.0% of its annual REIT taxable income, excluding net capital gains. The partnership agreement requires the Operating Partnership to distribute at least enough cash for the Company to be able to pay such dividends. The Company's REIT taxable income, as determined by the federal tax laws, does not equal its net income under generally accepted accounting principles in the United States of America (“GAAP”). In addition, although capital gains are not required to be distributed to maintain REIT status, capital gains, if any, are subject to federal and state income tax unless such gains are distributed to stockholders.
 
Cash dividends and distributions reduce the amount of cash that would otherwise be available for other business purposes, including funding debt maturities or future growth initiatives. The amount of future distributions that will be made is at the discretion of the Company's Board of Directors. For a discussion of the factors that will influence decisions of the Board of Directors regarding distributions, see “Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”
 
Investment Activity
 
During the third quarter of 2015, we acquired:

a building in the central business district of 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 the Buckhead submarket of 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


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our Highwoods DLF 98/29, LLC joint venture partner’s 77.2% interest in a building in the central business district of Orlando, FL encompassing 168,000 rentable square feet in exchange for the assumption of secured debt recorded at fair value of $19.3 million (see "Financing Activity").

During 2015, we expensed $1.0 million of acquisition costs (included in general and administrative expenses) related to these acquisitions. The assets acquired and liabilities assumed were recorded at fair value as determined by management based on information available at the acquisition date and on current assumptions as to future operations. We have invested or intend to invest an additional $17.5 million in the aggregate of planned building improvements in the buildings acquired in 2015. As of the respective closing dates, based on the total anticipated investment of $440.6 million, the weighted average capitalization rate for the acquisitions of these buildings, which were 86.9% occupied on average as of the closing dates, is 6.0% using projected annual GAAP net operating income for the first 12 months of ownership. These forward-looking statements are subject to risks and uncertainties. See “Disclosure Regarding Forward-Looking Statements.”

In the normal course of business, we regularly evaluate potential acquisitions. As a result, from time to time, we may have one or more potential acquisitions under consideration that are in varying stages of evaluation, negotiation or due diligence, including potential acquisitions that are subject to non-binding letters of intent or enforceable contracts. Consummation of any transaction is subject to a number of contingencies, including the satisfaction of customary closing conditions. No assurances can be provided that we will acquire any properties in the future. See "Item 1A. Risk Factors - Recent and future acquisitions and development properties may fail to perform in accordance with our expectations and may require renovation and development costs exceeding our estimates."

We entered into an agreement, dated as of January 29, 2016, to sell a 32,000 square foot building for $4.7 million. The buyer, which currently leases 79% of the building, is a family business controlled by a director of the Company. The sale price exceeds the value set forth in an appraisal performed by a reputable commercial real estate services firm that has no relationship with the director or any of his affiliates. We expect to record a gain of approximately $1.0 million upon completion of the sale, which is expected to close in the second quarter of 2016.

On January 4, 2016, we announced our agreement to sell the Plaza assets for $660.0 million. The Plaza assets, which are currently 95% leased in the aggregate, consist of 18 properties encompassing 776,000 square feet of in-service retail space, 468,000 square feet of in-service office space and a 28,000 square foot redevelopment project. The parties have entered into a series of definitive agreements, dated as of December 21, 2015, relating to the sale of the Plaza assets. The sales, which are subject to customary closing conditions, are scheduled to close on March 1, 2016. The buyer’s contractual due diligence investigation period ended on December 31, 2015. The buyer has posted earnest money deposits, held by a third party, totaling $25.0 million that are non-refundable and the buyer would be obligated to pay us an additional $25.0 million in the event of a default, except in limited circumstances.

We intend to: (1) use $430.0 million of the expected net sale proceeds from the sale of the Plaza assets to repay debt incurred to acquire three buildings in the third quarter of 2015; and (2) hold $220.0 million of the expected net sale proceeds in escrow pending reinvestment in 1031 exchanges qualifying for tax-deferred treatment, repayment of additional debt and/or other general corporate purposes. We intend to close our Kansas City division office upon such sale. In the fourth quarter of 2015, we accrued $1.6 million of the total $2.6 million severance costs expected to be incurred in connection with the sale.

During the fourth quarter of 2015, we sold land for a sale price of $4.2 million and recorded a gain on disposition of property of $0.9 million, net of $0.5 million in taxes payable by our taxable REIT subsidiary.

During the third quarter of 2015, we sold:

a building for a sale price of $15.3 million and recorded a gain on disposition of property of $6.5 million; and

land for a sale price of $1.8 million and recorded a gain on disposition of property of $0.5 million.

During the second quarter of 2015, we sold land for a sale price of $0.5 million and recorded a gain on disposition of property of $0.2 million.

During the first quarter of 2015, we sold:

two buildings for an aggregate sale price of $3.5 million and recorded aggregate gains on disposition of property of $0.4 million; and


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land for a sale price of $2.5 million and recorded a gain on disposition of property of $0.8 million.

During the second quarter of 2015, $9.9 million of secured acquisition financing provided to a third party in 2012 was repaid, including accrued interest.

Financing Activity
 
In 2014, we entered into separate sales agreements with each of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Robert W. Baird & Co. Incorporated, BB&T Capital Markets, a division of BB&T Securities, LLC, Capital One Securities, Inc., Comerica Securities, Inc., Jefferies LLC, Mitsubishi UFJ Securities (USA), Inc., Morgan Stanley & Co. LLC, Piper Jaffray & Co., RBC Capital Markets, LLC and Wells Fargo Securities, LLC. Under the terms of the sales agreements, the Company could offer and sell up to $250.0 million in aggregate gross sales price of shares of Common Stock from time to time through such firms, acting as agents of the Company or as principals. Sales of the shares, if any, may be made by means of ordinary brokers' transactions on the New York Stock Exchange or otherwise at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices or as otherwise agreed with any of such firms. During 2015, the Company issued 2,922,905 shares of Common Stock at an average gross sales price of $43.39 per share and received net proceeds, after sales commissions, of $124.9 million. We paid an aggregate of $1.9 million in sales commissions to Wells Fargo Securities, LLC, Jefferies LLC, Capital One Securities, Inc., Robert W. Baird & Co. Incorporated, Mitsubishi UFJ Securities (USA), Inc. and Morgan Stanley & Co. LLC during 2015.

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. The interest rate and facility fee are based on the higher of the publicly announced ratings from Moody's Investors Service or Standard & Poor's Ratings Services. There was $299.0 million and $313.7 million outstanding under our revolving credit facility at December 31, 2015 and January 29, 2016, respectively. At both December 31, 2015 and January 29, 2016, 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 December 31, 2015 and January 29, 2016 was $175.8 million and $161.1 million, respectively.

During the fourth quarter of 2015, we prepaid without penalty a secured mortgage loan with a fair market value of $5.9 million with an effective interest rate of 7.65% that was originally scheduled to mature in February 2016 and prepaid without penalty the remaining $106.0 million balance on a secured mortgage loan with an effective interest rate of 6.88% that was originally scheduled to mature in January 2016.

During the third quarter of 2015, we obtained a $350.0 million, six-month unsecured bridge facility. The bridge facility is originally scheduled to mature on March 28, 2016. Assuming no defaults have occurred, we have an option to extend the maturity for an additional six-month period. The interest rate on the bridge facility at our current credit ratings is LIBOR plus 110 basis points. The interest rate is based on the higher of the publicly announced ratings from Moody's Investors Service or Standard & Poor's Ratings Services. The financial and other covenants under the bridge facility are similar to our revolving credit facility. The purpose of the bridge facility is for the short-term funding of our third quarter acquisition activity and other general corporate purposes. There was $350.0 million outstanding under our bridge facility at December 31, 2015. We expect to repay all amounts outstanding under the bridge facility on or about March 1, 2016 in connection with the sale of the Plaza assets.

During the second quarter of 2015, we amended our $225.0 million, seven-year unsecured bank term loan, which was scheduled to mature in January 2019. We increased the borrowed amount to $350.0 million and used the $125.0 million of incremental new proceeds to repay amounts outstanding under our $475.0 million unsecured revolving credit facility. The amended term loan is now scheduled to mature in June 2020 and the interest rate, based on our current credit ratings, was reduced from LIBOR plus 175 basis points to LIBOR plus 110 basis points. The interest rate is based on the higher of the publicly announced ratings from Moody’s Investors Service or Standard & Poor’s Ratings Services. The financial and other covenants under the amended term loan are unchanged.

During the second quarter of 2015, we prepaid without penalty the remaining $39.4 million balance on a secured mortgage loan with an effective interest rate of 6.43% that was originally scheduled to mature in November 2015.

During the second quarter of 2015, we acquired our joint venture partner’s 77.2% interest in a building in Orlando, FL. Simultaneously with this acquisition, the joint venture's previously existing mortgage note was restructured into a new $18.0 million first mortgage note and a $10.2 million subordinated note, both of which are scheduled to mature in July 2017. The first mortgage note is interest only with an effective interest rate of 5.36%, payable monthly. The subordinated note has an effective

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interest rate of 8.6%. Additionally, we deposited $3.0 million into escrow to fund tenant improvements, leasing commissions and building improvements. The first mortgage note and subordinated note can be prepaid at any time commencing October 2016 upon a sale or refinancing of the property. In such event, the subordinated note and any and all accrued interest thereon would be deemed fully satisfied upon payment of a "waterfall payment," if any. Such "waterfall payment" would be a cash payment equal to 50.0% of the amount, if any, by which the net sale proceeds or appraised value in the event of a refinancing exceeds (1) the outstanding principal of the first mortgage note, (2) the funds deposited by us into escrow to fund tenant improvements, leasing commissions and building improvements and (3) a 10.0% return on such funds deposited by us into escrow. The fair value of the first mortgage note was $18.3 million and the fair value of the subordinated note equaled the projected waterfall payment of $1.0 million.

We regularly evaluate the financial condition of the financial institutions that participate in our credit facilities and as counterparties under interest rate swap agreements using publicly available information. Based on this review, we currently expect these financial institutions to perform their obligations under our existing facilities and swap agreements.
 
For information regarding our interest hedging activities and other market risks associated with our debt financing activities, see "Item 7A. Quantitative and Qualitative Disclosures About Market Risk."

Covenant Compliance
 
We are currently in compliance with financial covenants and other requirements with respect to our consolidated debt. Although we expect to remain in compliance with these covenants and ratios for at least the next year, depending upon our future operating performance, property and financing transactions and general economic conditions, we cannot assure you that we will continue to be in compliance.

Our revolving credit facility, bridge facility and bank term loans require us to comply with customary operating covenants and various financial requirements. Upon an event of default on the revolving credit facility, the lenders having at least 51.0% of the total commitments under the revolving credit facility can accelerate all borrowings then outstanding, and we could be prohibited from borrowing any further amounts under our revolving credit facility, which would adversely affect our ability to fund our operations.

As of December 31, 2015, the Operating Partnership had the following unsecured notes outstanding ($ in thousands):

 
Face Amount
 
Carrying Amount
 
Stated Interest Rate
 
Effective Interest Rate
Notes due March 2017
$
379,685

 
$
379,544

 
5.850
%
 
5.880
%
Notes due April 2018
$
200,000

 
$
200,000

 
7.500
%
 
7.500
%
Notes due June 2021
$
300,000

 
$
297,639

 
3.200
%
 
3.363
%
Notes due January 2023
$
250,000

 
$
248,150

 
3.625
%
 
3.752
%

The indenture that governs these outstanding notes requires us to comply with customary operating covenants and various financial ratios. The trustee or the holders of at least 25.0% in principal amount of either series of bonds can accelerate the principal amount of such series upon written notice of a default that remains uncured after 60 days.
 
We may not be able to repay, refinance or extend any or all of our debt at maturity or upon any acceleration. If any refinancing is done at higher interest rates, the increased interest expense could adversely affect our cash flow and ability to pay distributions. Any such refinancing could also impose tighter financial ratios and other covenants that restrict our ability to take actions that could otherwise be in our best interest, such as funding new development activity, making opportunistic acquisitions, repurchasing our securities or paying distributions.


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Contractual Obligations
 
The following table sets forth a summary regarding our known contractual obligations, including required interest payments for those items that are interest bearing, at December 31, 2015 ($ in thousands):

 
 
 
Amounts due during the years ending December 31,
 
 
 
Total
 
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
Mortgages and Notes Payable:
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal payments (1)
$
2,502,023

 
$
395,817

 
$
507,206

 
$
499,000

 
$
200,000

 
$
350,000

 
$
550,000

Interest payments
246,055

 
80,874

 
59,219

 
34,039

 
26,768

 
22,226

 
22,929

Financing Obligation:
 
 
 
 
 
 
 
 
 
 
 
 
 
Tax increment financing bond (2)
7,402

 
1,669

 
1,785

 
1,908

 
2,040

 

 

Interest on financing obligation
1,326

 
513

 
397

 
274

 
142

 

 

Capitalized Lease Obligations
117

 
63

 
43

 
11

 

 

 

Purchase Obligations:

 
 
 
 
 
 
 
 
 
 
 
 
Lease and contractual commitments and contingent consideration (3)
340,022

 
237,436

 
96,489

 
34

 
1,301

 
3,406

 
1,356

Operating Lease Obligations:

 
 
 
 
 
 
 
 
 
 
 
 
Operating ground leases
124,679

 
3,033

 
3,067

 
3,103

 
3,140

 
3,179

 
109,157

Total
$
3,221,624

 
$
719,405

 
$
668,206

 
$
538,369

 
$
233,391

 
$
378,811

 
$
683,442

__________
(1)
Excludes amortization of premiums, discounts and/or purchase accounting adjustments.
(2)
Recorded on our Consolidated Balance Sheets in liabilities held for sale. See Note 16.
(3)
Amount represents commitments under signed leases and contracts for operating properties, excluding tenant-funded tenant improvements, and contracts for development/redevelopment projects. This includes $188.9 million of contractual commitments related to our in-process development activity. For a description of our development activity, see "Item 2. Properties - In-Process Development." The timing of these lease and contractual commitments may fluctuate.

The interest payments due on mortgages and notes payable are based on the stated rates for the fixed rate debt and on the rates in effect at December 31, 2015 for the variable rate debt. The weighted average interest rate on our fixed (including debt with a variable rate that is effectively fixed by related interest rate swaps) and variable rate debt was 4.71% and 1.46%, respectively, at December 31, 2015. For additional information about our mortgages and notes payable, see Note 6 to our Consolidated Financial Statements. For additional information about our financing obligation, see Note 8 to our Consolidated Financial Statements. For additional information about purchase obligations and operating lease obligations, see Note 9 to our Consolidated Financial Statements.

Off Balance Sheet Arrangements

We generally account for our investments in less than majority owned joint ventures, partnerships and limited liability companies using the equity method. As a result, these joint ventures are not included in our Consolidated Financial Statements, other than as investments in unconsolidated affiliates and equity in earnings of unconsolidated affiliates.

At December 31, 2015, our unconsolidated joint ventures had $217.4 million of total assets and $148.1 million of total liabilities. Our weighted average equity interest based on the total assets of these unconsolidated joint ventures was 33.0%. During 2015, our unconsolidated joint ventures had $24.1 million of aggregate net income. For additional information about our unconsolidated joint venture activity, see Note 4 to our Consolidated Financial Statements.


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At December 31, 2015, our unconsolidated joint ventures had $141.6 million of outstanding mortgage debt. The following table sets forth the scheduled maturities of the Company’s $49.2 million proportionate share of the outstanding debt of its unconsolidated joint ventures at December 31, 2015 ($ in thousands):
 
2016
$
4,407

2017
20,817

2018
19,580

2019
563

2020
562

Thereafter
3,313

 
$
49,242


All of this joint venture debt is non-recourse to us except in the case of customary exceptions pertaining to such matters as misuse of funds, environmental conditions, material misrepresentations and voluntary or uncontested involuntary bankruptcy events.

During the third quarter of 2015, we sold our 20.0% interest in Harborview to our partner for net proceeds of $6.9 million and recorded a $4.2 million gain on disposition of investment in unconsolidated affiliate. The $20.8 million interest-only secured loan previously provided by us to the joint venture was paid in full upon consummation of the sale.

See "Investment Activity" for a description of our acquisition of a building in Orlando, FL from Highwoods DLF 98/29, LLC during the second quarter of 2015. The joint venture recorded a gain on disposition of property of $13.7 million. Our share of $3.1 million was recorded as a reduction to real estate assets.

During the second quarter of 2015, Highwoods KC Glenridge Office, LLC and Highwoods KC Glenridge Land, LLC collectively sold two buildings and land to an unrelated third party for an aggregate sale price of $24.5 million (before closing credits to buyer of $0.3 million for unfunded tenant improvements) and recorded gains on disposition of property of $2.4 million. We recorded $0.9 million as our share of these gains through equity in earnings of unconsolidated affiliates.

During the first quarter of 2015, Highwoods DLF 97/26 DLF 99/32, LP sold a building to an unrelated third party for a sale price of $7.0 million and recorded a gain on disposition of property of $2.1 million. We recorded $1.1 million as our share of this gain through equity in earnings of unconsolidated affiliates.

Financing Arrangements
 
- Harborview
 
We had a 20.0% interest in Harborview, which had been accounted for as a financing obligation since our partner had the right to put its 80.0% equity interest back to us any time prior to September 11, 2015. During 2012, we also provided a three-year $20.8 million interest-only secured loan to Harborview that was scheduled to mature in September 2015.

During the second quarter of 2015, as a result of our partner’s irrevocable exercise of a buy-sell provision in our Harborview joint venture agreement, our partner’s right to put its 80.0% equity interest back to us became no longer exercisable, which resulted in recording the original contribution transaction as a partial sale. As a result, we were required to begin accounting for Harborview using the equity method of accounting. See Note 1 to our Consolidated Financial Statements.

During the third quarter of 2015, we sold our 20.0% interest in Harborview. See "Off Balance Sheet Arrangements."

- Tax Increment Financing Bond

In connection with tax increment financing for a parking garage we constructed in 1999, we are obligated to pay fixed special assessments over a 20-year period ending in 2019. The net present value of these assessments, discounted at the 6.93% interest rate on the underlying tax increment financing, is recorded as a financing obligation and is classified in liabilities held for sale on our Consolidated Balance Sheets. We receive special tax revenues and property tax rebates recorded in interest and other income, which are intended, but not guaranteed, to provide funds to pay the special assessments. We acquired the related tax increment financing bond in a privately negotiated transaction in 2007. Under the definitive agreements, dated as of December 21, 2015,

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relating to the sale of the Plaza assets, this tax increment financing bond will be assigned to the buyer of the Plaza assets as of the closing date at the agreed upon value of the principal amount and accrued interest, if any, then outstanding. Such value is included as part of the $660.0 million purchase price for the Plaza assets. For additional information about this tax increment financing bond, see Notes 8 and 11 to our Consolidated Financial Statements.

Critical Accounting Estimates
 
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from our estimates.
 
The policies used in the preparation of our Consolidated Financial Statements are described in Note 1 to our Consolidated Financial Statements. However, certain of our significant accounting policies contain an increased level of assumptions used or estimates made in determining their impact in our Consolidated Financial Statements. Management has reviewed and determined the appropriateness of our critical accounting policies and estimates with the audit committee of the Company's Board of Directors.
 
We consider our critical accounting estimates to be those used in the determination of the reported amounts and disclosure related to the following:
 
Real estate and related assets;

Impairments of real estate assets and investments in unconsolidated affiliates;

Sales of real estate;

Rental and other revenues; and

Allowance for doubtful accounts.
 
Real Estate and Related Assets
 
Real estate and related assets are recorded at cost and stated at cost less accumulated depreciation. Renovations, replacements and other expenditures that improve or extend the life of assets are capitalized and depreciated over their estimated useful lives. Expenditures for ordinary maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful life of 40 years for buildings and depreciable land infrastructure costs, 15 years for building improvements and five to seven years for furniture, fixtures and equipment. Tenant improvements are amortized using the straight-line method over initial fixed terms of the respective leases, which generally are from three to 10 years.
 
Expenditures directly related to the development and construction of real estate assets are included in net real estate assets and are stated at depreciated cost. Development expenditures include pre-construction costs essential to the development of properties, development and construction costs, interest costs on qualifying assets, real estate taxes, development personnel salaries and related costs and other costs incurred during the period of development. Interest and other carrying costs are capitalized until the building is ready for its intended use, but not later than a year from cessation of major construction activity. We consider a construction project as substantially completed and ready for its intended use upon the completion of tenant improvements. We cease capitalization on the portion that is substantially completed and occupied or held available for occupancy, and capitalize only those costs associated with the portion under construction.
 
Expenditures directly related to the leasing of properties are included in deferred financing and leasing costs and are stated at amortized cost. Such expenditures are part of the investment necessary to execute leases and, therefore, are classified as investment activities in the statement of cash flows. All leasing commissions paid to third parties for new leases or lease renewals are capitalized. Internal leasing costs, which consist primarily of compensation, benefits and other costs, such as legal fees related to leasing activities, that are incurred in connection with successfully obtaining leases of properties are also capitalized. Capitalized leasing costs are amortized on a straight-line basis over the initial fixed terms of the respective leases, which generally are from three to 10 years. Estimated costs related to unsuccessful activities are expensed as incurred.
 
We record liabilities for the performance of asset retirement activities when the obligation to perform such activities is probable even when uncertainty exists about the timing and/or method of settlement.
 

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Upon the acquisition of real estate assets, we assess the fair value of acquired tangible assets such as land, buildings and tenant improvements, intangible assets and liabilities such as above and below market leases, acquired in-place leases, customer relationships and other identifiable intangible assets and assumed liabilities. We assess fair value based on estimated cash flow projections that utilize discount and/or capitalization rates as well as available market information. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.
 
The above and below market rate portions of leases acquired in connection with property acquisitions are recorded in deferred financing and leasing costs and in accounts payable, accrued expenses and other liabilities, respectively, at fair value and amortized into rental revenue over the remaining term of the respective leases as described below. Fair value is calculated as the present value of the difference between (1) the contractual amounts to be paid pursuant to each in-place lease and (2) our estimate of fair market lease rates for each corresponding in-place lease, using a discount rate that reflects the risks associated with the leases acquired and measured over a period equal to the remaining initial term of the lease for above-market leases and the remaining initial term plus the term of any renewal option that the customer would be economically compelled to exercise for below-market leases.
 
In-place leases acquired are recorded at fair value in deferred financing and leasing costs and are amortized to depreciation and amortization expense over the remaining term of the respective lease. The value of in-place leases is based on our evaluation of the specific characteristics of each customer's lease. Factors considered include estimates of carrying costs during hypothetical expected lease-up periods, current market conditions, the customer's credit quality and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, we consider tenant improvements, leasing commissions and legal and other related expenses.
 
Real estate and other assets are classified as long-lived assets held for use or as long-lived assets held for sale. Real estate is classified as held for sale when the sale of the asset is probable, has been duly approved by the Company, a legally enforceable contract has been executed and the buyer's due diligence period, if any, has expired.
 
Impairments of Real Estate Assets and Investments in Unconsolidated Affiliates
 
With respect to assets classified as held for use, we perform an impairment analysis if events or changes in circumstances indicate that the carrying value may be impaired, such as a significant decline in occupancy, identification of materially adverse legal or environmental factors, change in our designation of an asset from core to non-core, which may impact the anticipated holding period, or a decline in market value to an amount less than cost. This analysis is generally performed at the property level, except when an asset is part of an interdependent group such as an office park, and consists of determining whether the asset's carrying amount will be recovered from its undiscounted estimated future operating and residual cash flows. These cash flows are estimated based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for customers, changes in market rental rates, costs to operate each property and expected ownership periods. For properties under development, the cash flows are based on expected service potential of the asset or asset group when development is substantially complete.
 
If the carrying amount of a held for use asset exceeds the sum of its undiscounted future operating and residual cash flows, an impairment loss is recorded for the difference between estimated fair value of the asset and the carrying amount. We generally estimate the fair value of assets held for use by using discounted cash flow analyses. In some instances, appraisal information may be available and is used in addition to a discounted cash flow analysis. As the factors used in generating these cash flows are difficult to predict and are subject to future events that may alter our assumptions, the discounted and/or undiscounted future operating and residual cash flows estimated by us in our impairment analyses or those established by appraisal may not be achieved and we may be required to recognize future impairment losses on properties held for use.
 
We record assets held for sale at the lower of the carrying amount or estimated fair value. Fair value of assets held for sale is equal to the estimated or contracted sales price with a potential buyer, less costs to sell. The impairment loss is the amount by which the carrying amount exceeds the estimated fair value.
 
We also analyze our investments in unconsolidated affiliates for impairment. This analysis consists of determining whether an expected loss in market value of an investment is other than temporary by evaluating the length of time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the unconsolidated affiliate, and our intent and ability to retain our investment for a period of time sufficient to allow for any anticipated recovery in market value. As the factors used in this analysis are difficult to predict and are subject to future events that may alter our assumptions, we may be required to recognize future impairment losses on our investments in unconsolidated affiliates.
 

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Sales of Real Estate
 
For sales transactions meeting the requirements for full profit recognition, the related assets and liabilities are removed from the balance sheet and the resultant gain or loss is recorded in the period the transaction closes. For sales transactions with continuing involvement after the sale, if the continuing involvement with the property is limited by the terms of the sales contract, profit is recognized at the time of sale and is reduced by the maximum exposure to loss related to the nature of the continuing involvement. Sales to entities in which we have or receive an interest are accounted for using partial sale accounting.
 
For transactions that do not meet the criteria for a sale, we evaluate the nature of the continuing involvement, including put and call provisions, if present, and account for the transaction as a financing arrangement, profit-sharing arrangement, leasing arrangement or other alternate method of accounting, rather than as a sale, based on the nature and extent of the continuing involvement. Some transactions may have numerous forms of continuing involvement. In those cases, we determine which method is most appropriate based on the substance of the transaction.
 
Rental and Other Revenues
 
Minimum contractual rents from leases are recognized on a straight-line basis over the terms of the respective leases. This means that, with respect to a particular lease, actual amounts billed in accordance with the lease during any given period may be higher or lower than the amount of rental revenue recognized for the period. Straight-line rental revenue is commenced when the customer assumes control of the leased premises. Accrued straight-line rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements. Contingent rental revenue, such as percentage rent, is accrued when the contingency is removed. Termination fee income is recognized at the later of when the customer has vacated the space or the lease has expired and a fully executed lease termination agreement has been delivered, the amount of the fee is determinable and collectability of the fee is reasonably assured. Rental revenue reductions related to co-tenancy lease provisions, if any, are accrued when events have occurred that trigger such provisions.
 
Cost recovery income is determined on a calendar year and a lease-by-lease basis. The most common types of cost recovery income in our leases are common area maintenance (“CAM”) and real estate taxes, for which a customer typically pays its pro-rata share of operating and administrative expenses and real estate taxes in excess of the costs incurred during a contractually specified base year. The computation of cost recovery income is complex and involves numerous judgments, including the interpretation of lease provisions. Leases are not uniform in dealing with such cost recovery income and there are many variations in the computation. Many customers make monthly fixed payments of CAM, real estate taxes and other cost reimbursement items. We accrue income related to these payments each month. We make quarterly accrual adjustments, positive or negative, to cost recovery income to adjust the recorded amounts to our best estimate of the final annual amounts to be billed and collected. After the end of the calendar year, we compute each customer's final cost recovery income and, after considering amounts paid by the customer during the year, issue a bill or credit for the appropriate amount to the customer. The differences between the amounts billed less previously received payments and the accrual adjustment are recorded as increases or decreases to cost recovery income when the final bills are prepared, which occurs during the first half of the subsequent year.
 
Allowance for Doubtful Accounts
 
Accounts receivable, accrued straight-line rents receivable and mortgages and notes receivable are reduced by an allowance for amounts that may become uncollectible in the future. We regularly evaluate the adequacy of our allowance for doubtful accounts. The evaluation primarily consists of reviewing past due account balances and considering such factors as the credit quality of our customer, historical trends of the customer and changes in customer payment terms. Additionally, with respect to customers in bankruptcy, we estimate the probable recovery through bankruptcy claims and adjust the allowance for amounts deemed uncollectible. If our assumptions regarding the collectability of receivables prove incorrect, we could experience losses in excess of our allowance for doubtful accounts. The allowance and its related receivable are written-off when we have concluded there is a low probability of collection and we have discontinued collection efforts.

Non-GAAP Information

The Company believes that FFO, FFO available for common stockholders and FFO available for common stockholders per share are beneficial to management and investors and are important indicators of the performance of any equity REIT. Because these FFO calculations exclude such factors as depreciation, amortization and impairments of real estate assets and gains or losses from sales of operating real estate assets, which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful life estimates, they facilitate comparisons of operating performance between periods and between other REITs. Management believes that historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with

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market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient on a stand-alone basis. As a result, management believes that the use of FFO, FFO available for common stockholders and FFO available for common stockholders per share, together with the required GAAP presentations, provides a more complete understanding of the Company's performance relative to its competitors and a more informed and appropriate basis on which to make decisions involving operating, financing and investing activities.
 
FFO, FFO available for common stockholders and FFO available for common stockholders per share are non-GAAP financial measures and therefore do not represent net income or net income per share as defined by GAAP. Net income and net income per share as defined by GAAP are the most relevant measures in determining the Company's operating performance because these FFO measures include adjustments that investors may deem subjective, such as adding back expenses such as depreciation, amortization and impairments. Furthermore, FFO available for common stockholders per share does not depict the amount that accrues directly to the stockholders' benefit. Accordingly, FFO, FFO available for common stockholders and FFO available for common stockholders per share should never be considered as alternatives to net income, net income available for common stockholders, or net income available for common stockholders per share as indicators of the Company's operating performance.
 
The Company's presentation of FFO is consistent with FFO as defined by NAREIT, which is calculated as follows:
 
Net income/(loss) computed in accordance with GAAP;
 
Less net income attributable to noncontrolling interests in consolidated affiliates;
 
Plus depreciation and amortization of depreciable operating properties;
 
Less gains, or plus losses, from sales of depreciable operating properties and acquisition of controlling interest in unconsolidated affiliate, plus impairments on depreciable operating properties and excluding items that are classified as extraordinary items under GAAP;
 
Plus or minus our share of adjustments, including depreciation and amortization of depreciable operating properties, for unconsolidated partnerships and joint ventures (to reflect funds from operations on the same basis); and
 
Plus or minus adjustments for depreciation and amortization and gains/(losses) on sales of depreciable operating properties, plus impairments on depreciable operating properties, and noncontrolling interests in consolidated affiliates related to discontinued operations.
 
In calculating FFO, the Company includes net income attributable to noncontrolling interests in the Operating Partnership, which the Company believes is consistent with standard industry practice for REITs that operate through an UPREIT structure. The Company believes that it is important to present FFO on an as-converted basis since all of the Common Units not owned by the Company are redeemable on a one-for-one basis for shares of its Common Stock.
 

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The following table sets forth the Company's FFO, FFO available for common stockholders and FFO available for common stockholders per share ($ in thousands, except per share amounts):


 
Year Ended December 31,
 
2015
 
2014
 
2013
Funds from operations:
 
 
 
 
 
Net income
$
101,260

 
$
115,972

 
$
131,097

Net (income) attributable to noncontrolling interests in consolidated affiliates
(1,264
)
 
(1,466
)
 
(949
)
Depreciation and amortization of real estate assets
199,449

 
178,041

 
160,716

Impairments of depreciable properties

 
588

 

(Gains) on disposition of depreciable properties
(9,147
)