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Section 1: 10-Q (10-Q)

10-Q

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2016
 
HIGHWOODS PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
 
Maryland
001-13100
56-1871668
 
 
(State or other jurisdiction
of incorporation or organization)
(Commission
File Number)
(I.R.S. Employer
Identification Number)
 
 
HIGHWOODS REALTY LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
 
North Carolina
000-21731
56-1869557
 
 
(State or other jurisdiction
of incorporation or organization)
(Commission
File Number)
(I.R.S. Employer
Identification Number)
 
 
3100 Smoketree Court, Suite 600
Raleigh, NC 27604
(Address of principal executive offices) (Zip Code)
919-872-4924
(Registrants’ telephone number, including area code)
______________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Highwoods Properties, Inc.  Yes  x    No ¨    Highwoods Realty Limited Partnership  Yes  x    No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Highwoods Properties, Inc.  Yes  x    No ¨    Highwoods Realty Limited Partnership  Yes  x    No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of 'large accelerated filer,' 'accelerated filer' and 'smaller reporting company' in Rule 12b-2 of the Securities Exchange Act.
Highwoods Properties, Inc.
Large accelerated filer x    Accelerated filer ¨      Non-accelerated filer ¨      Smaller reporting company ¨
Highwoods Realty Limited Partnership
Large accelerated filer ¨    Accelerated filer ¨      Non-accelerated filer x      Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).
Highwoods Properties, Inc.  Yes  ¨    No x    Highwoods Realty Limited Partnership  Yes  ¨    No x
 
The Company had 97,409,163 shares of Common Stock outstanding as of April 19, 2016.
 




EXPLANATORY NOTE

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

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

Certain information contained herein is presented as of April 19, 2016, the latest practicable date for financial information prior to the filing of this Quarterly Report.

This report combines the Quarterly Reports on Form 10-Q for the period ended March 31, 2016 of the Company and the Operating Partnership. We believe combining the quarterly reports into this single report results in the following benefits:

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

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

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

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

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

Consolidated Financial Statements;

Note 13 to Consolidated Financial Statements - Earnings Per Share and Per Unit;

Item 4 - Controls and Procedures; and

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





HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP

QUARTERLY REPORT FOR THE PERIOD ENDED MARCH 31, 2016

TABLE OF CONTENTS

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



2

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HIGHWOODS PROPERTIES, INC.
Consolidated Balance Sheets
(Unaudited and in thousands, except share and per share data)
 
March 31,
2016
 
December 31,
2015
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
448,706

 
$
443,705

Buildings and tenant improvements
4,113,001

 
4,063,328

Development in-process
180,150

 
194,050

Land held for development
68,244

 
68,244

 
4,810,101

 
4,769,327

Less-accumulated depreciation
(1,033,127
)
 
(1,007,104
)
Net real estate assets
3,776,974

 
3,762,223

Real estate and other assets, net, held for sale

 
240,948

Cash and cash equivalents
3,345

 
5,036

Restricted cash
258,444

 
16,769

Accounts receivable, net of allowance of $1,003 and $928, respectively
25,912

 
29,077

Mortgages and notes receivable, net of allowance of $282 and $287, respectively
9,661

 
2,096

Accrued straight-line rents receivable, net of allowance of $468 and $257, respectively
156,323

 
150,392

Investments in and advances to unconsolidated affiliates
19,225

 
20,676

Deferred leasing costs, net of accumulated amortization of $122,630 and $115,172, respectively
224,459

 
231,765

Prepaid expenses and other assets, net of accumulated amortization of $18,590 and $17,830,
respectively
39,681

 
26,649

Total Assets
$
4,514,024

 
$
4,485,631

Liabilities, Noncontrolling Interests in the Operating Partnership and Equity:
 
 
 
Mortgages and notes payable, net
$
2,100,937

 
$
2,491,813

Accounts payable, accrued expenses and other liabilities
212,106

 
233,988

Liabilities held for sale

 
14,119

Total Liabilities
2,313,043

 
2,739,920

Commitments and contingencies

 

Noncontrolling interests in the Operating Partnership
138,637

 
126,429

Equity:
 
 
 
Preferred Stock, $.01 par value, 50,000,000 authorized shares;
 
 
 
8.625% Series A Cumulative Redeemable Preferred Shares (liquidation preference $1,000 per share), 29,030 and 29,050 shares issued and outstanding, respectively
29,030

 
29,050

Common Stock, $.01 par value, 200,000,000 authorized shares;
 
 
 
97,392,301 and 96,091,932 shares issued and outstanding, respectively
974

 
961

Additional paid-in capital
2,652,254

 
2,598,242

Distributions in excess of net income available for common stockholders
(631,226
)
 
(1,023,135
)
Accumulated other comprehensive loss
(6,651
)
 
(3,811
)
Total Stockholders’ Equity
2,044,381

 
1,601,307

Noncontrolling interests in consolidated affiliates
17,963

 
17,975

Total Equity
2,062,344

 
1,619,282

Total Liabilities, Noncontrolling Interests in the Operating Partnership and Equity
$
4,514,024

 
$
4,485,631

 
See accompanying notes to consolidated financial statements.

3

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Income
(Unaudited and in thousands, except per share amounts)
 
Three Months Ended
March 31,
 
2016
 
2015
Rental and other revenues
$
164,859

 
$
145,236

Operating expenses:
 
 
 
Rental property and other expenses
57,580

 
52,514

Depreciation and amortization
53,494

 
46,867

General and administrative
11,137

 
11,243

Total operating expenses
122,211

 
110,624

Interest expense:
 
 
 
Contractual
19,715

 
20,442

Amortization of debt issuance costs
990

 
800

 
20,705

 
21,242

Other income:
 
 
 
Interest and other income
517

 
582

 
517


582

Income from continuing operations before disposition of investment properties and activity in unconsolidated affiliates
22,460

 
13,952

Gains on disposition of property
4,397

 
1,157

Equity in earnings of unconsolidated affiliates
1,285

 
1,811

Income from continuing operations
28,142

 
16,920

Discontinued operations:
 
 
 
Income from discontinued operations
4,097

 
3,915

Net gains on disposition of discontinued operations
414,496

 

 
418,593

 
3,915

Net income
446,735

 
20,835

Net (income) attributable to noncontrolling interests in the Operating Partnership
(13,011
)
 
(596
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(308
)
 
(296
)
Dividends on Preferred Stock
(626
)
 
(627
)
Net income available for common stockholders
$
432,790


$
19,316

Earnings per Common Share – basic:
 
 
 
Income from continuing operations available for common stockholders
$
0.27

 
$
0.17

Income from discontinued operations available for common stockholders
4.22

 
0.04

Net income available for common stockholders
$
4.49

 
$
0.21

Weighted average Common Shares outstanding – basic
96,373

 
93,222

Earnings per Common Share – diluted:
 
 
 
Income from continuing operations available for common stockholders
$
0.27

 
$
0.17

Income from discontinued operations available for common stockholders
4.22

 
0.04

Net income available for common stockholders
$
4.49

 
$
0.21

Weighted average Common Shares outstanding – diluted
99,357

 
96,279

Dividends declared per Common Share
$
0.425

 
$
0.425

Net income available for common stockholders:
 
 
 
Income from continuing operations available for common stockholders
$
26,462

 
$
15,521

Income from discontinued operations available for common stockholders
406,328

 
3,795

Net income available for common stockholders
$
432,790

 
$
19,316

See accompanying notes to consolidated financial statements.

4

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Comprehensive Income
(Unaudited and in thousands)
 
Three Months Ended
March 31,
 
2016
 
2015
Comprehensive income:
 
 
 
Net income
$
446,735

 
$
20,835

Other comprehensive loss:
 
 
 
Unrealized gains on tax increment financing bond

 
193

Unrealized losses on cash flow hedges
(3,635
)
 
(2,914
)
Amortization of cash flow hedges
795

 
924

Total other comprehensive loss
(2,840
)
 
(1,797
)
Total comprehensive income
443,895

 
19,038

Less-comprehensive (income) attributable to noncontrolling interests
(13,319
)
 
(892
)
Comprehensive income attributable to common stockholders
$
430,576

 
$
18,146


See accompanying notes to consolidated financial statements.



5

Table of Contents

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

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

 
$
961

 
$
29,050

 
$
2,598,242

 
$
(3,811
)
 
$
17,975

 
$
(1,023,135
)
 
$
1,619,282

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

 
12

 

 
50,886

 

 

 

 
50,898

Dividends on Common Stock


 

 

 

 

 

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


 

 

 

 

 

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


 

 

 
(429
)
 

 

 

 
(429
)
Distributions to noncontrolling interests in consolidated affiliates


 

 

 

 

 
(320
)
 

 
(320
)
Issuances of restricted stock
122,832

 

 

 

 

 

 

 

Redemptions/repurchases of Preferred Stock
 
 

 
(20
)
 

 

 

 

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

 

 
3,555

 

 

 

 
3,556

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


 

 

 

 

 

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


 

 

 

 

 
308

 
(308
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income


 

 

 

 

 

 
446,735

 
446,735

Other comprehensive loss


 

 

 

 
(2,840
)
 

 

 
(2,840
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
443,895

Balance at March 31, 2016
97,392,301

 
$
974

 
$
29,030

 
$
2,652,254

 
$
(6,651
)
 
$
17,963

 
$
(631,226
)
 
$
2,062,344



 
Number of Common Shares
 
Common Stock
 
Series A Cumulative Redeemable Preferred Shares
 
Additional Paid-In Capital
 
Accumulated Other Compre-hensive Loss
 
Non-controlling Interests in Consolidated Affiliates
 
Distributions in Excess of Net Income Available for Common Stockholders
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(as revised)
 
(as revised)
Balance at December 31, 2014
92,907,310

 
$
929

 
$
29,060

 
$
2,464,275

 
$
(3,912
)
 
$
18,109

 
$
(957,370
)
 
$
1,551,091

Issuances of Common Stock, net of issuance costs and tax withholdings
989,417

 
10

 

 
40,557

 

 

 

 
40,567

Conversions of Common Units to Common Stock
26,820

 

 

 
1,206

 

 

 

 
1,206

Dividends on Common Stock

 

 

 

 

 

 
(39,563
)
 
(39,563
)
Dividends on Preferred Stock

 

 

 

 

 

 
(627
)
 
(627
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value

 

 

 
(5,036
)
 

 

 

 
(5,036
)
Distributions to noncontrolling interests in consolidated affiliates

 

 

 

 

 
(321
)
 

 
(321
)
Issuances of restricted stock
123,571

 

 

 

 

 

 

 

Redemptions/repurchases of Preferred Stock

 

 
(10
)
 

 

 

 

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

 
1

 

 
3,865

 

 

 

 
3,866

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

 

 

 

 

 

 
(596
)
 
(596
)
Net (income) attributable to noncontrolling interests in consolidated affiliates

 

 

 

 

 
296

 
(296
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 

 
20,835

 
20,835

Other comprehensive loss

 

 

 

 
(1,797
)
 

 

 
(1,797
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
19,038

Balance at March 31, 2015
94,047,118

 
$
940

 
$
29,050

 
$
2,504,867

 
$
(5,709
)
 
$
18,084

 
$
(977,617
)
 
$
1,569,615


See accompanying notes to consolidated financial statements.

6

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
 
Three Months Ended
March 31,
 
2016
 
2015
Operating activities:
 
 
 
Net income
$
446,735

 
$
20,835

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
53,494

 
50,308

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

 
(67
)
Share-based compensation expense
3,556

 
3,866

Allowance for losses on accounts and accrued straight-line rents receivable
1,077

 
417

Accrued interest on mortgages and notes receivable
(42
)
 
(170
)
Amortization of debt issuance costs
990

 
800

Amortization of cash flow hedges
795

 
924

Amortization of mortgages and notes payable fair value adjustments
(59
)
 
57

Net gains on disposition of property
(418,893
)
 
(1,157
)
Equity in earnings of unconsolidated affiliates
(1,285
)
 
(1,811
)
Distributions of earnings from unconsolidated affiliates
717

 
1,386

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
601

 
3,166

Prepaid expenses and other assets
(6,577
)
 
(6,769
)
Accrued straight-line rents receivable
(6,624
)
 
(5,591
)
Accounts payable, accrued expenses and other liabilities
(26,358
)
 
(33,088
)
Net cash provided by operating activities
48,235

 
33,106

Investing activities:
 
 
 
Investments in development in-process
(33,188
)
 
(11,232
)
Investments in tenant improvements and deferred leasing costs
(23,513
)
 
(30,008
)
Investments in building improvements
(16,479
)
 
(12,081
)
Net proceeds from disposition of real estate assets
661,390

 
5,650

Distributions of capital from unconsolidated affiliates
2,118

 
394

Investments in mortgages and notes receivable
(7,602
)
 
(938
)
Repayments of mortgages and notes receivable
79

 
87

Investments in and advances to unconsolidated affiliates
(105
)
 

Changes in restricted cash and other investing activities
(248,865
)
 
993

Net cash provided by/(used in) investing activities
333,835

 
(47,135
)
Financing activities:
 
 
 
Dividends on Common Stock
(40,881
)
 
(39,563
)
Redemptions/repurchases of Preferred Stock
(20
)
 
(10
)
Dividends on Preferred Stock
(626
)
 
(627
)
Distributions to noncontrolling interests in the Operating Partnership
(1,232
)
 
(1,248
)
Distributions to noncontrolling interests in consolidated affiliates
(320
)
 
(321
)
Proceeds from the issuance of Common Stock
54,915

 
44,937

Costs paid for the issuance of Common Stock
(788
)
 
(643
)
Repurchase of shares related to tax withholdings
(3,229
)
 
(3,727
)
Borrowings on revolving credit facility
66,400

 
110,900

Repayments of revolving credit facility
(107,400
)
 
(91,900
)
Repayments of mortgages and notes payable
(350,535
)
 
(1,220
)
Changes in debt issuance costs and other financing activities
(45
)
 

Net cash provided by/(used in) financing activities
(383,761
)
 
16,578

Net increase/(decrease) in cash and cash equivalents
$
(1,691
)
 
$
2,549

See accompanying notes to consolidated financial statements.

7

Table of Contents


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

 
Three Months Ended
March 31,
 
2016
 
2015
Net increase/(decrease) in cash and cash equivalents
$
(1,691
)
 
$
2,549

Cash and cash equivalents at beginning of the period
5,036

 
8,832

Cash and cash equivalents at end of the period
$
3,345

 
$
11,381


Supplemental disclosure of cash flow information:
 
 
Three Months Ended
March 31,
 
2016
 
2015
Cash paid for interest, net of amounts capitalized
$
20,951

 
$
21,480


Supplemental disclosure of non-cash investing and financing activities:
 
 
Three Months Ended
March 31,
 
2016
 
2015
Unrealized losses on cash flow hedges
$
(3,635
)
 
$
(2,914
)
Conversions of Common Units to Common Stock

 
1,206

Changes in accrued capital expenditures
(5,978
)
 
(2,697
)
Write-off of fully depreciated real estate assets
12,579

 
15,020

Write-off of fully amortized debt issuance and leasing costs
5,282

 
10,147

Adjustment of noncontrolling interests in the Operating Partnership to fair value
429

 
5,036

Unrealized gains on tax increment financing bond

 
193


See accompanying notes to consolidated financial statements.

8

Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Balance Sheets
(Unaudited and in thousands, except unit and per unit data)
 
March 31,
2016
 
December 31,
2015
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
448,706

 
$
443,705

Buildings and tenant improvements
4,113,001

 
4,063,328

Development in-process
180,150

 
194,050

Land held for development
68,244

 
68,244

 
4,810,101

 
4,769,327

Less-accumulated depreciation
(1,033,127
)
 
(1,007,104
)
Net real estate assets
3,776,974

 
3,762,223

Real estate and other assets, net, held for sale

 
240,948

Cash and cash equivalents
3,345

 
5,036

Restricted cash
258,444

 
16,769

Accounts receivable, net of allowance of $1,003 and $928, respectively
25,912

 
29,077

Mortgages and notes receivable, net of allowance of $282 and $287, respectively
9,661

 
2,096

Accrued straight-line rents receivable, net of allowance of $468 and $257, respectively
156,323

 
150,392

Investments in and advances to unconsolidated affiliates
19,225

 
20,676

Deferred leasing costs, net of accumulated amortization of $122,630 and $115,172, respectively
224,459

 
231,765

Prepaid expenses and other assets, net of accumulated amortization of $18,590 and $17,830,
respectively
39,681

 
26,649

Total Assets
$
4,514,024

 
$
4,485,631

Liabilities, Redeemable Operating Partnership Units and Capital:
 
 
 
Mortgages and notes payable, net
$
2,100,937

 
$
2,491,813

Accounts payable, accrued expenses and other liabilities
212,106

 
233,988

Liabilities held for sale

 
14,119

Total Liabilities
2,313,043

 
2,739,920

Commitments and contingencies

 

Redeemable Operating Partnership Units:
 
 
 
Common Units, 2,899,752 outstanding
138,637

 
126,429

Series A Preferred Units (liquidation preference $1,000 per unit), 29,030 and 29,050 units issued and
outstanding, respectively
29,030

 
29,050

Total Redeemable Operating Partnership Units
167,667

 
155,479

Capital:
 
 
 
Common Units:
 
 
 
General partner Common Units, 998,832 and 985,829 outstanding, respectively
20,219

 
15,759

Limited partner Common Units, 95,984,660 and 94,697,294 outstanding, respectively
2,001,783

 
1,560,309

Accumulated other comprehensive loss
(6,651
)
 
(3,811
)
Noncontrolling interests in consolidated affiliates
17,963

 
17,975

Total Capital
2,033,314

 
1,590,232

Total Liabilities, Redeemable Operating Partnership Units and Capital
$
4,514,024

 
$
4,485,631


See accompanying notes to consolidated financial statements.

9

Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Income
(Unaudited and in thousands, except per unit amounts)
 
Three Months Ended
March 31,
 
2016
 
2015
Rental and other revenues
$
164,859

 
$
145,236

Operating expenses:
 
 
 
Rental property and other expenses
57,580

 
52,514

Depreciation and amortization
53,494

 
46,867

General and administrative
11,137

 
11,243

Total operating expenses
122,211

 
110,624

Interest expense:
 
 
 
Contractual
19,715

 
20,442

Amortization of debt issuance costs
990

 
800

 
20,705

 
21,242

Other income:
 
 
 
Interest and other income
517

 
582

 
517

 
582

Income from continuing operations before disposition of investment properties and activity in unconsolidated affiliates
22,460

 
13,952

Gains on disposition of property
4,397

 
1,157

Equity in earnings of unconsolidated affiliates
1,285

 
1,811

Income from continuing operations
28,142

 
16,920

Discontinued operations:
 
 
 
Income from discontinued operations
4,097

 
3,915

Net gains on disposition of discontinued operations
414,496

 

 
418,593

 
3,915

Net income
446,735

 
20,835

Net (income) attributable to noncontrolling interests in consolidated affiliates
(308
)
 
(296
)
Distributions on Preferred Units
(626
)
 
(627
)
Net income available for common unitholders
$
445,801

 
$
19,912

Earnings per Common Unit – basic:
 
 
 
Income from continuing operations available for common unitholders
$
0.28

 
$
0.17

Income from discontinued operations available for common unitholders
4.23

 
0.04

Net income available for common unitholders
$
4.51

 
$
0.21

Weighted average Common Units outstanding – basic
98,864

 
95,746

Earnings per Common Unit – diluted:
 
 
 
Income from continuing operations available for common unitholders
$
0.28

 
$
0.17

Income from discontinued operations available for common unitholders
4.23

 
0.04

Net income available for common unitholders
$
4.51

 
$
0.21

Weighted average Common Units outstanding – diluted
98,948

 
95,870

Distributions declared per Common Unit
$
0.425

 
$
0.425

Net income available for common unitholders:
 
 
 
Income from continuing operations available for common unitholders
$
27,208

 
$
15,997

Income from discontinued operations available for common unitholders
418,593

 
3,915

Net income available for common unitholders
$
445,801

 
$
19,912

See accompanying notes to consolidated financial statements.

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Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Comprehensive Income
(Unaudited and in thousands)
 
Three Months Ended
March 31,
 
2016
 
2015
Comprehensive income:
 
 
 
Net income
$
446,735

 
$
20,835

Other comprehensive loss:
 
 
 
Unrealized gains on tax increment financing bond

 
193

Unrealized losses on cash flow hedges
(3,635
)
 
(2,914
)
Amortization of cash flow hedges
795

 
924

Total other comprehensive loss
(2,840
)
 
(1,797
)
Total comprehensive income
443,895

 
19,038

Less-comprehensive (income) attributable to noncontrolling interests
(308
)
 
(296
)
Comprehensive income attributable to common unitholders
$
443,587

 
$
18,742


See accompanying notes to consolidated financial statements.


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Table of Contents

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

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

 
$
1,560,309

 
$
(3,811
)
 
$
17,975

 
$
1,590,232

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

 
50,389

 

 

 
50,898

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

 

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

 

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

 
3,520

 

 

 
3,556

Distributions to noncontrolling interests in consolidated affiliates

 

 

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

 

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

 
308

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
4,467

 
442,268

 

 

 
446,735

Other comprehensive loss

 

 
(2,840
)
 

 
(2,840
)
Total comprehensive income
 
 
 
 
 
 
 
 
443,895

Balance at March 31, 2016
$
20,219

 
$
2,001,783

 
$
(6,651
)
 
$
17,963

 
$
2,033,314



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

 
$
1,492,948

 
$
(3,912
)
 
$
18,109

 
$
1,522,223

Issuances of Common Units, net of issuance costs and tax withholdings
406

 
40,161

 

 

 
40,567

Distributions paid on Common Units
(406
)
 
(40,231
)
 

 

 
(40,637
)
Distributions paid on Preferred Units
(6
)
 
(621
)
 

 

 
(627
)
Share-based compensation expense, net of forfeitures
39

 
3,827

 

 

 
3,866

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(321
)
 
(321
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
(36
)
 
(3,508
)
 

 

 
(3,544
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(3
)
 
(293
)
 

 
296

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
208

 
20,627

 

 

 
20,835

Other comprehensive loss

 

 
(1,797
)
 

 
(1,797
)
Total comprehensive income
 
 
 
 
 
 
 
 
19,038

Balance at March 31, 2015
$
15,280

 
$
1,512,910

 
$
(5,709
)
 
$
18,084

 
$
1,540,565


See accompanying notes to consolidated financial statements.

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Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
 
Three Months Ended
March 31,
 
2016
 
2015
Operating activities:
 
 
 
Net income
$
446,735

 
$
20,835

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
53,494

 
50,308

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

 
(67
)
Share-based compensation expense
3,556

 
3,866

Allowance for losses on accounts and accrued straight-line rents receivable
1,077

 
417

Accrued interest on mortgages and notes receivable
(42
)
 
(170
)
Amortization of debt issuance costs
990

 
800

Amortization of cash flow hedges
795

 
924

Amortization of mortgages and notes payable fair value adjustments
(59
)
 
57

Net gains on disposition of property
(418,893
)
 
(1,157
)
Equity in earnings of unconsolidated affiliates
(1,285
)
 
(1,811
)
Distributions of earnings from unconsolidated affiliates
717

 
1,386

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
601

 
3,166

Prepaid expenses and other assets
(6,577
)
 
(6,769
)
Accrued straight-line rents receivable
(6,624
)
 
(5,591
)
Accounts payable, accrued expenses and other liabilities
(26,358
)
 
(33,002
)
Net cash provided by operating activities
48,235

 
33,192

Investing activities:
 
 
 
Investments in development in-process
(33,188
)
 
(11,232
)
Investments in tenant improvements and deferred leasing costs
(23,513
)
 
(30,008
)
Investments in building improvements
(16,479
)
 
(12,081
)
Net proceeds from disposition of real estate assets
661,390

 
5,650

Distributions of capital from unconsolidated affiliates
2,118

 
394

Investments in mortgages and notes receivable
(7,602
)
 
(938
)
Repayments of mortgages and notes receivable
79

 
87

Investments in and advances to unconsolidated affiliates
(105
)
 

Changes in restricted cash and other investing activities
(248,865
)
 
993

Net cash provided by/(used in) investing activities
333,835

 
(47,135
)
Financing activities:
 
 
 
Distributions on Common Units
(41,939
)
 
(40,637
)
Redemptions/repurchases of Preferred Units
(20
)
 
(10
)
Distributions on Preferred Units
(626
)
 
(627
)
Distributions to noncontrolling interests in consolidated affiliates
(320
)
 
(321
)
Proceeds from the issuance of Common Units
54,915

 
44,937

Costs paid for the issuance of Common Units
(788
)
 
(643
)
Repurchase of units related to tax withholdings
(3,229
)
 
(3,727
)
Borrowings on revolving credit facility
66,400

 
110,900

Repayments of revolving credit facility
(107,400
)
 
(91,900
)
Repayments of mortgages and notes payable
(350,535
)
 
(1,220
)
Changes in debt issuance costs and other financing activities
(219
)
 
(366
)
Net cash provided by/(used in) financing activities
(383,761
)
 
16,386

Net increase/(decrease) in cash and cash equivalents
$
(1,691
)
 
$
2,443

See accompanying notes to consolidated financial statements.

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Table of Contents


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

 
Three Months Ended
March 31,
 
2016
 
2015
Net increase/(decrease) in cash and cash equivalents
$
(1,691
)
 
$
2,443

Cash and cash equivalents at beginning of the period
5,036

 
8,938

Cash and cash equivalents at end of the period
$
3,345

 
$
11,381


Supplemental disclosure of cash flow information:
 
 
Three Months Ended
March 31,
 
2016
 
2015
Cash paid for interest, net of amounts capitalized
$
20,951

 
$
21,480


Supplemental disclosure of non-cash investing and financing activities:
 
 
Three Months Ended
March 31,
 
2016
 
2015
Unrealized losses on cash flow hedges
$
(3,635
)
 
$
(2,914
)
Changes in accrued capital expenditures
(5,978
)
 
(2,697
)
Write-off of fully depreciated real estate assets
12,579

 
15,020

Write-off of fully amortized debt issuance and leasing costs
5,282

 
10,147

Adjustment of Redeemable Common Units to fair value
12,208

 
3,178

Unrealized gains on tax increment financing bond

 
193


See accompanying notes to consolidated financial statements.

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Table of Contents

HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(tabular dollar amounts in thousands, except per share and per unit data)
(Unaudited)

1.    Description of Business and Significant Accounting Policies

Description of Business

Highwoods Properties, Inc. (the “Company”) is a fully integrated real estate investment trust (“REIT”) that provides leasing, management, development, construction and other customer-related services for its properties and for third parties. The Company conducts its activities through Highwoods Realty Limited Partnership (the “Operating Partnership”). At March 31, 2016, we owned or had an interest in 31.2 million rentable square feet of in-service properties, 1.3 million rentable square feet of properties under development and approximately 500 acres of development land.
 
The Company is the sole general partner of the Operating Partnership. At March 31, 2016, the Company owned all of the Preferred Units and 97.0 million, or 97.1%, of the Common Units in the Operating Partnership. Limited partners owned the remaining 2.9 million Common Units.

Common Stock Offerings
 
During the three months ended March 31, 2016, the Company issued 1,054,496 shares of Common Stock under its equity distribution agreements at an average gross sales price of $45.86 per share and received net proceeds, after sales commissions, of $47.6 million.

Basis of Presentation
 
Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Our Consolidated Statements of Income for the three months ended March 31, 2015 were retrospectively revised from previously reported amounts to reclassify the operations for those properties classified as discontinued operations. The Company's Consolidated Financial Statements include the Operating Partnership, wholly owned subsidiaries and those entities in which the Company has the controlling interest. The Operating Partnership's Consolidated Financial Statements include wholly owned subsidiaries and those entities in which the Operating Partnership has the controlling interest. In addition, we consolidate those entities deemed to be variable interest entities in which we are determined to be the primary beneficiary. At March 31, 2016, we had involvement with, but are not the primary beneficiary in, an entity that we concluded to be a variable interest entity. All intercompany transactions and accounts have been eliminated.

The unaudited interim consolidated financial statements and accompanying unaudited consolidated financial information, in the opinion of management, contain all adjustments (including normal recurring accruals) necessary for a fair presentation of our financial position, results of operations and cash flows. We have condensed or omitted certain notes and other information from the interim Consolidated Financial Statements presented in this Quarterly Report as permitted by SEC rules and regulations. These Consolidated Financial Statements should be read in conjunction with our 2015 Annual Report on Form 10-K.

During 2015, as a result of our partner’s irrevocable exercise of a buy-sell provision in our SF-HIW Harborview Plaza, LP joint venture agreement, our partner’s right to put its 80.0% equity interest back to us became no longer exercisable. As a result, we recorded the original contribution transaction as a partial sale. Our investment in this joint venture then qualified for the equity method of accounting, which resulted in the retrospective revision of our Consolidated Balance Sheets and Consolidated Statements of Equity and Capital for prior periods. Such retrospective revision is denoted using "as revised" on our Consolidated Statements of Equity and Capital as of March 31, 2015.

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


1.    Description of Business and Significant Accounting Policies – Continued

Use of Estimates

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

Recently Issued Accounting Standards

The Financial Accounting Standards Board ("FASB") recently issued an accounting standards update that requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that we identify the contract with the customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when we satisfy the performance obligations. We will also be required to disclose information regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The accounting standards update is required to be adopted in 2018. Retrospective application is required either to all periods presented or with the cumulative effect of initial adoption recognized in the period of adoption. We are in the process of evaluating this accounting standards update.
 
The FASB recently issued an accounting standards update that amended consolidation requirements. The amendments significantly change the consolidation analysis required under GAAP and require companies to reevaluate all previous consolidation conclusions. We adopted the accounting standards update as of January 1, 2016 and there was no impact to consolidated entities included in our Consolidated Financial Statements. However, in reevaluating our previous consolidation conclusions upon adoption of the accounting standards update, we determined our 12.5% equity interest in an unconsolidated affiliate to be an interest in a variable interest entity because certain of its limited partners do not have substantive kick-out or participating rights. We do not qualify as the primary beneficiary since our obligation to absorb losses and receive benefits of the variable interest entity is less than that of the other general partner. Accordingly, the entity is not consolidated. Our maximum exposure to loss with respect to this arrangement is limited to the $1.6 million carrying value of our 12.5% investment in the unconsolidated affiliate.
 
The FASB recently issued an accounting standards update that requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability to which they relate, consistent with debt discounts, as opposed to being presented as assets. For debt issuance costs related to revolving credit facilities, the FASB allows the presentation of debt issuance costs as an asset. We adopted the accounting standards update as of January 1, 2016 with retrospective application to our December 31, 2015 Consolidated Balance Sheets. The effect of the adoption was to reclassify debt issuance costs from deferred financing and leasing costs, net of accumulated amortization, as follows: $7.8 million to a contra account as a deduction from the related mortgages and notes payable and $2.1 million to prepaid expenses and other assets. There was no effect on our Consolidated Statements of Income.

The FASB recently issued an accounting standards update which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors.  The accounting standards update requires lessors to account for leases using an approach that is substantially equivalent to the existing guidance and is effective for reporting periods beginning after December 15, 2018 with early adoption permitted.  We are in the process of evaluating this accounting standards update.

2.    Real Estate Assets
 
Dispositions
 
During the first quarter of 2016, we sold:
 
substantially all of our wholly-owned Country Club Plaza assets in Kansas City (which we refer to as the “Plaza assets”) for a sale price of $660.0 million (before closing credits to buyer of $4.8 million). We recorded gains on disposition of discontinued operations of $414.5 million and a gain on disposition of property of $1.3 million related to the land;
 

16

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


2.    Real Estate Assets - Continued

a 32,000 square foot building for a sale price of $4.7 million (before closing credits to buyer of $0.1 million) and recorded a gain on disposition of property of $1.1 million. The buyer, which leased 79% of the building, is a family business controlled by a director of the Company. The sale price exceeded the value set forth in an appraisal performed by a reputable independent commercial real estate services firm that has no relationship with the director or any of his affiliates; and

a building for a sale price of $6.4 million (before closing credits to buyer of $0.5 million) and recorded a gain on disposition of property of $2.0 million.

3.    Mortgages and Notes Receivable

Mortgages and notes receivable were $9.7 million and $2.1 million at March 31, 2016 and December 31, 2015, respectively. We evaluate the ability to collect our mortgages and notes receivable by monitoring the leasing statistics and/or market fundamentals of these assets. As of March 31, 2016, our mortgages and notes receivable were not in default and there were no other indicators of impairment.

4.    Investments in and Advances to Unconsolidated Affiliates

We have equity interests of up to 50.0% in various joint ventures with unrelated third parties that are accounted for using the equity method of accounting because we have the ability to exercise significant influence over their operating and financial policies.
 
The following table sets forth the summarized income statements of our unconsolidated affiliates:
 
 
Three Months Ended
March 31,
 
2016
 
2015
Income Statements:
 
 
 
Rental and other revenues
$
10,772

 
$
12,231

Expenses:
 
 
 
Rental property and other expenses
4,715

 
5,667

Depreciation and amortization
2,747

 
3,115

Interest expense
1,377

 
2,149

Total expenses
8,839

 
10,931

Income before disposition of property
1,933

 
1,300

Gains on disposition of property
902

 
2,127

Net income
$
2,835

 
$
3,427


During the first quarter of 2016, Concourse Center Associates, LLC sold two buildings and land to an unrelated third party for an aggregate sale price of $11.0 million and recorded losses on disposition of property of $0.1 million. As our cost basis was different from the basis reflected at the joint venture level, we recorded $0.4 million of gains through equity in earnings of unconsolidated affiliates. Simultaneously with the sale, the joint venture repaid all $6.6 million of its secured debt.

During the first quarter of 2016, 4600 Madison Associates, LP sold land to an unrelated third party for a sale price of $3.4 million and recorded a gain on disposition of property of $1.0 million. We recorded $0.1 million as our share of this gain through equity in earnings of unconsolidated affiliates. Simultaneously with the sale, the joint venture used all of the proceeds to pay down $3.4 million on its secured mortgage loan with an effective interest rate of 6.85%.

17

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

 
5.    Intangible Assets and Below Market Lease Liabilities
 
The following table sets forth total intangible assets and acquisition-related below market lease liabilities, net of accumulated amortization:
 
 
March 31,
2016
 
December 31,
2015
Assets:
 
 
 
Deferred leasing costs (including lease incentives and above market lease and in-place lease acquisition-related intangible assets)
$
347,089

 
$
346,937

Less accumulated amortization
(122,630
)
 
(115,172
)
 
$
224,459

 
$
231,765

 
 
 
 
Liabilities (in accounts payable, accrued expenses and other liabilities):
 
 
 
Acquisition-related below market lease liabilities
$
63,628

 
$
63,830

Less accumulated amortization
(19,497
)
 
(17,927
)
 
$
44,131

 
$
45,903


The following table sets forth amortization of intangible assets and below market lease liabilities:
 
 
Three Months Ended
March 31,
 
2016
 
2015
Amortization of deferred leasing costs and acquisition-related intangible assets (in depreciation and amortization)
$
11,335

 
$
10,001

Amortization of lease incentives (in rental and other revenues)
$
711

 
$
351

Amortization of acquisition-related intangible assets (in rental and other revenues)
$
1,031

 
$
1,166

Amortization of acquisition-related intangible assets (in rental property and other expenses)
$
138

 
$
137

Amortization of acquisition-related below market lease liabilities (in rental and other revenues)
$
(1,772
)
 
$
(1,732
)

The following table sets forth scheduled future amortization of intangible assets and below market lease liabilities:
 
 
 
Amortization of Deferred Leasing Costs and Acquisition-Related Intangible Assets (in Depreciation and Amortization)
 
Amortization of Lease Incentives (in Rental and Other Revenues)
 
Amortization of Acquisition-Related Intangible Assets (in Rental and Other Revenues)
 
Amortization of Acquisition-Related Intangible Assets (in Rental Property and Other Expenses)
 
Amortization of Acquisition-Related Below Market Lease Liabilities (in Rental and Other Revenues)
April 1 through December 31, 2016
 
$
34,295

 
$
1,011

 
$
2,805

 
$
415

 
$
(5,225
)
2017
 
38,954

 
1,275

 
2,650

 
553

 
(6,619
)
2018
 
32,108

 
1,171

 
1,706

 
553

 
(6,228
)
2019
 
26,469

 
961

 
1,305

 
553

 
(5,737
)
2020
 
21,882

 
725

 
988

 
525

 
(5,408
)
Thereafter
 
48,940

 
2,056

 
2,559

 

 
(14,914
)
 
 
$
202,648

 
$
7,199

 
$
12,013

 
$
2,599

 
$
(44,131
)
Weighted average remaining amortization periods as of March 31, 2016 (in years)
 
6.7

 
7.2

 
6.1

 
4.7

 
7.7


18

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

 
6.    Mortgages and Notes Payable
 
The following table sets forth our mortgages and notes payable:
 
 
March 31,
2016
 
December 31,
2015
Secured indebtedness
$
174,475

 
$
175,281

Unsecured indebtedness
1,933,536

 
2,324,333

Less-unamortized debt issuance costs
(7,074
)
 
(7,801
)
Total mortgages and notes payable, net
$
2,100,937

 
$
2,491,813

 
At March 31, 2016, our secured mortgage loans were collateralized by real estate assets with an aggregate undepreciated book value of $315.8 million.
 
Our $475.0 million unsecured revolving credit facility is scheduled to mature in January 2018 and includes an accordion feature that allows for an additional $75.0 million of borrowing capacity subject to additional lender commitments. Assuming no defaults have occurred, we have an option to extend the maturity for two additional six-month periods. The interest rate at our current credit ratings is LIBOR plus 110 basis points and the annual facility fee is 20 basis points. There was $258.0 million and $257.0 million outstanding under our revolving credit facility at March 31, 2016 and April 19, 2016, respectively. At both March 31, 2016 and April 19, 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 March 31, 2016 and April 19, 2016 was $216.8 million and $217.8 million, respectively.

During the first quarter of 2016, we prepaid without penalty the $350.0 million balance on our unsecured bridge facility that was originally scheduled to mature in March 2016.

We are currently in compliance with financial covenants and other requirements with respect to our consolidated debt.

7.
Derivative Financial Instruments
 
During the first quarter of 2016, we obtained $150.0 million notional amount of forward-starting swaps that effectively lock the underlying treasury rate at 1.90% with respect to a forecasted debt issuance expected to occur between June 15, 2016 and March 15, 2017. The counterparties under the swaps are major financial institutions.

Our interest rate swaps have been designated as and are being accounted for as cash flow hedges with changes in fair value recorded in other comprehensive income/(loss) each reporting period. No gain or loss was recognized related to hedge ineffectiveness or to amounts excluded from effectiveness testing on our cash flow hedges during the three months ended March 31, 2016 and 2015. We have no collateral requirements related to our interest rate swaps.

Amounts reported in accumulated other comprehensive loss ("AOCL") related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the period from April 1, 2016 through March 31, 2017, we estimate that $3.3 million will be reclassified to interest expense.

The following table sets forth the fair value of our derivatives:
 
 
March 31,
2016
 
December 31,
2015
Derivatives:
 
 
 
Derivatives designated as cash flow hedges in accounts payable, accrued expenses and other liabilities:
 
 
 
Interest rate swaps
$
5,992

 
$
3,073




19

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


7.
Derivative Financial Instruments - Continued

The following table sets forth the effect of our cash flow hedges on AOCL and interest expense:
 
 
Three Months Ended
March 31,
 
2016
 
2015
Derivatives Designated as Cash Flow Hedges:
 
 
 
Amount of unrealized losses recognized in AOCL on derivatives (effective portion):
 
 
 
Interest rate swaps
$
(3,635
)
 
$
(2,914
)
Amount of losses reclassified out of AOCL into contractual interest expense (effective portion):
 
 
 
Interest rate swaps
$
795

 
$
924


8.
Noncontrolling Interests

Noncontrolling Interests in Consolidated Affiliates
 
At March 31, 2016, our noncontrolling interests in consolidated affiliates relate to our joint venture partner's 50.0% interest in office properties in Richmond, VA. Our joint venture partner is an unrelated third party.

Noncontrolling Interests in the Operating Partnership

The following table sets forth the Company's noncontrolling interests in the Operating Partnership:
 
 
Three Months Ended
March 31,
 
2016
 
2015
Beginning noncontrolling interests in the Operating Partnership
$
126,429

 
$
130,048

Adjustment of noncontrolling interests in the Operating Partnership to fair value
429

 
5,036

Conversions of Common Units to Common Stock

 
(1,206
)
Net income attributable to noncontrolling interests in the Operating Partnership
13,011

 
596

Distributions to noncontrolling interests in the Operating Partnership
(1,232
)
 
(1,248
)
Total noncontrolling interests in the Operating Partnership
$
138,637

 
$
133,226


The following table sets forth net income available for common stockholders and transfers from the Company's noncontrolling interests in the Operating Partnership:
 
 
Three Months Ended
March 31,
 
2016
 
2015
Net income available for common stockholders
$
432,790

 
$
19,316

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

 
1,206

Change from net income available for common stockholders and transfers from noncontrolling interests
$
432,790

 
$
20,522


20

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

 
9.
Disclosure About Fair Value of Financial Instruments

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

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

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

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

Our Level 2 asset is the fair value of our mortgages and notes receivable. Our Level 2 liabilities include the fair value of our mortgages and notes payable and interest rate swaps.

The fair value of mortgages and notes receivable and mortgages and notes payable is estimated by the income approach utilizing contractual cash flows and market-based interest rates to approximate the price that would be paid in an orderly transaction between market participants. The fair value of interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments of interest rate swaps are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves. In addition, credit valuation adjustments are considered in the fair values to account for potential nonperformance risk, but were concluded to not be significant inputs to the calculation for the periods presented.
 
Level 3. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
Our Level 3 asset included our tax increment financing bond, which was not routinely traded but whose fair value was determined by the income approach utilizing contractual cash flows and market-based interest rates to estimate the projected redemption value based on quoted bid/ask prices for similar unrated municipal bonds.
 
Our Level 3 liability was the fair value of our financing obligation, which was estimated by the income approach to approximate the price that would be paid in an orderly transaction between market participants, utilizing: (1) contractual cash flows; (2) market-based interest rates; and (3) a number of other assumptions including demand for space, competition for customers, changes in market rental rates, costs of operation and expected ownership periods.


21

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


9.
Disclosure About Fair Value of Financial Instruments - Continued

The following table sets forth our assets and liabilities and the Company's noncontrolling interests in the Operating Partnership that are measured at fair value within the fair value hierarchy.
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
 
Total
 
Quoted Prices
in Active
Markets for Identical Assets or Liabilities
 
Significant Observable Inputs
 
Significant Unobservable Inputs
Fair Value at March 31, 2016:
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Mortgages and notes receivable, at fair value (1)
 
$
9,661

 
$

 
$
9,661

 
$

Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)
 
2,521

 
2,521

 

 

Total Assets
 
$
12,182

 
$
2,521

 
$
9,661

 
$

Noncontrolling Interests in the Operating Partnership
 
$
138,637

 
$
138,637

 
$

 
$

Liabilities:
 
 
 
 
 
 
 
 
Mortgages and notes payable, net, at fair value (1)
 
$
2,131,771

 
$

 
$
2,131,771

 
$

Interest rate swaps (in accounts payable, accrued expenses and other liabilities)
 
5,992

 

 
5,992

 

Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)
 
2,521

 
2,521

 

 

Total Liabilities
 
$
2,140,284

 
$
2,521

 
$
2,137,763

 
$

<
Fair Value at December 31, 2015:
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Mortgages and notes receivable, at fair value (1)
 
$
2,096

 
$

 
$
2,096

 
$

Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)
 
2,736

 
2,736

 

 

Tax increment financing bond (in real estate and other assets, net, held for sale) (2)
 
11,197

 

 

 
11,197

Total Assets
 
$
16,029

 
$
2,736

 
$
2,096

 
$
11,197

Noncontrolling Interests in the Operating Partnership
 
$
126,429

 
$
126,429

 
$

 
$