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Section 1: 10-Q

Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2017
 
389594565_logotree063017a01.jpg
HIGHWOODS PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
 
Maryland
001-13100
56-1871668
 
 
(State or other jurisdiction
of incorporation or organization)
(Commission
File Number)
(I.R.S. Employer
Identification Number)
 
 
HIGHWOODS REALTY LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
 
North Carolina
000-21731
56-1869557
 
 
(State or other jurisdiction
of incorporation or organization)
(Commission
File Number)
(I.R.S. Employer
Identification Number)
 
 
3100 Smoketree Court, Suite 600
Raleigh, NC 27604
(Address of principal executive offices) (Zip Code)
919-872-4924
(Registrants’ telephone number, including area code)
______________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Highwoods Properties, Inc.  Yes  x    No ¨    Highwoods Realty Limited Partnership  Yes  x    No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Highwoods Properties, Inc.  Yes  x    No ¨    Highwoods Realty Limited Partnership  Yes  x    No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of 'large accelerated filer,' 'accelerated filer,' 'smaller reporting company,' and 'emerging growth company' in Rule 12b-2 of the Exchange Act.
Highwoods Properties, Inc.
Large accelerated filer x   Accelerated filer ¨   Non-accelerated filer ¨ (Do not check if a smaller reporting company)  
Smaller reporting company ¨   Emerging growth company ¨
Highwoods Realty Limited Partnership
Large accelerated filer ¨   Accelerated filer ¨   Non-accelerated filer x (Do not check if a smaller reporting company)  
Smaller reporting company ¨   Emerging growth company ¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Highwoods Properties, Inc.  ¨        Highwoods Realty Limited Partnership   ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Highwoods Properties, Inc.  Yes  ¨    No x    Highwoods Realty Limited Partnership  Yes  ¨    No x
 
The Company had 103,236,237 shares of Common Stock outstanding as of July 18, 2017.
 




EXPLANATORY NOTE

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

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

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

This report combines the Quarterly Reports on Form 10-Q for the period ended June 30, 2017 of the Company and the Operating Partnership. We believe combining the quarterly reports into this single report results in the following benefits:

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

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

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

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

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

Consolidated Financial Statements;

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

Item 4 - Controls and Procedures; and

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





HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP

QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 2017

TABLE OF CONTENTS

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



2

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HIGHWOODS PROPERTIES, INC.
Consolidated Balance Sheets
(Unaudited and in thousands, except share and per share data)
 
June 30,
2017
 
December 31,
2016
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
470,185

 
$
474,375

Buildings and tenant improvements
4,374,143

 
4,313,373

Development in-process
245,593

 
279,602

Land held for development
82,326

 
77,355

 
5,172,247

 
5,144,705

Less-accumulated depreciation
(1,163,778
)
 
(1,134,103
)
Net real estate assets
4,008,469

 
4,010,602

Real estate and other assets, net, held for sale
54,543

 

Cash and cash equivalents
13,346

 
49,490

Restricted cash
20,612

 
29,141

Accounts receivable, net of allowance of $376 and $624, respectively
15,701

 
17,372

Mortgages and notes receivable, net of allowance of $88 and $105, respectively
6,750

 
8,833

Accrued straight-line rents receivable, net of allowance of $205 and $692, respectively
185,632

 
172,829

Investments in and advances to unconsolidated affiliates
15,243

 
18,846

Deferred leasing costs, net of accumulated amortization of $147,744 and $140,081, respectively
205,256

 
213,500

Prepaid expenses and other assets, net of accumulated amortization of $21,517 and $19,904,
respectively
34,947

 
40,437

Total Assets
$
4,560,499

 
$
4,561,050

Liabilities, Noncontrolling Interests in the Operating Partnership and Equity:
 
 
 
Mortgages and notes payable, net
$
2,005,038

 
$
1,948,047

Accounts payable, accrued expenses and other liabilities
200,981

 
313,885

Liabilities held for sale
1,122

 

Total Liabilities
2,207,141

 
2,261,932

Commitments and contingencies

 

Noncontrolling interests in the Operating Partnership
143,646

 
144,802

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

 
28,920

Common Stock, $.01 par value, 200,000,000 authorized shares;
 
 
 
103,236,237 and 101,665,554 shares issued and outstanding, respectively
1,032

 
1,017

Additional paid-in capital
2,926,128

 
2,850,881

Distributions in excess of net income available for common stockholders
(770,101
)
 
(749,412
)
Accumulated other comprehensive income
6,046

 
4,949

Total Stockholders’ Equity
2,192,010

 
2,136,355

Noncontrolling interests in consolidated affiliates
17,702

 
17,961

Total Equity
2,209,712

 
2,154,316

Total Liabilities, Noncontrolling Interests in the Operating Partnership and Equity
$
4,560,499

 
$
4,561,050

 
See accompanying notes to consolidated financial statements.

3

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Income
(Unaudited and in thousands, except per share amounts)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Rental and other revenues
$
177,283

 
$
166,860

 
$
346,691

 
$
331,719

Operating expenses:
 
 
 
 
 
 
 
Rental property and other expenses
58,854

 
57,515

 
116,250

 
115,095

Depreciation and amortization
55,816

 
55,317

 
111,961

 
108,811

General and administrative
9,050

 
8,327

 
20,540

 
19,464

Total operating expenses
123,720

 
121,159

 
248,751

 
243,370

Interest expense:
 
 
 
 
 
 
 
Contractual
15,345

 
18,674

 
32,368

 
38,389

Amortization of debt issuance costs
809

 
811

 
1,649

 
1,801

 
16,154

 
19,485

 
34,017

 
40,190

Other income:
 
 
 
 
 
 
 
Interest and other income
564

 
534

 
1,248

 
1,051

Gains on debt extinguishment
826

 

 
826

 

 
1,390

 
534


2,074


1,051

Income from continuing operations before disposition of investment properties and activity in unconsolidated affiliates
38,799

 
26,750

 
65,997

 
49,210

Gains on disposition of property

 
5,861

 
5,332

 
10,258

Equity in earnings of unconsolidated affiliates
755

 
917

 
1,710

 
2,202

Income from continuing operations
39,554

 
33,528

 
73,039

 
61,670

Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations

 

 

 
4,097

Net gains on disposition of discontinued operations

 

 

 
414,496

 

 

 

 
418,593

Net income
39,554

 
33,528

 
73,039

 
480,263

Net (income) attributable to noncontrolling interests in the Operating Partnership
(1,043
)
 
(939
)
 
(1,931
)
 
(13,950
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(299
)
 
(314
)
 
(599
)
 
(622
)
Dividends on Preferred Stock
(623
)
 
(627
)
 
(1,246
)
 
(1,253
)
Net income available for common stockholders
$
37,589

 
$
31,648


$
69,263


$
464,438

Earnings per Common Share – basic:
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
0.37

 
$
0.32

 
$
0.68

 
$
0.60

Income from discontinued operations available for common stockholders

 

 

 
4.19

Net income available for common stockholders
$
0.37

 
$
0.32

 
$
0.68

 
$
4.79

Weighted average Common Shares outstanding – basic
102,475

 
97,648

 
102,109

 
97,010

Earnings per Common Share – diluted:
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
0.37

 
$
0.32

 
$
0.68

 
$
0.60

Income from discontinued operations available for common stockholders

 

 

 
4.18

Net income available for common stockholders
$
0.37

 
$
0.32

 
$
0.68

 
$
4.78

Weighted average Common Shares outstanding – diluted
105,386

 
100,628

 
105,026

 
99,992

Dividends declared per Common Share
$
0.440

 
$
0.425

 
$
0.880

 
$
0.850

Net income available for common stockholders:
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
37,589

 
$
31,648

 
$
69,263

 
$
58,110

Income from discontinued operations available for common stockholders

 

 

 
406,328

Net income available for common stockholders
$
37,589

 
$
31,648

 
$
69,263

 
$
464,438

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
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
39,554

 
$
33,528

 
$
73,039

 
$
480,263

Other comprehensive income/(loss):
 
 
 
 
 
 
 
Unrealized gains/(losses) on cash flow hedges
(136
)
 
(5,760
)
 
316

 
(9,395
)
Amortization of cash flow hedges
297

 
783

 
781

 
1,578

Total other comprehensive income/(loss)
161

 
(4,977
)
 
1,097

 
(7,817
)
Total comprehensive income
39,715

 
28,551

 
74,136

 
472,446

Less-comprehensive (income) attributable to noncontrolling interests
(1,342
)
 
(1,253
)
 
(2,530
)
 
(14,572
)
Comprehensive income attributable to common stockholders
$
38,373

 
$
27,298

 
$
71,606

 
$
457,874


See accompanying notes to consolidated financial statements.



5

Table of Contents

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

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

 
$
1,017

 
$
28,920

 
$
2,850,881

 
$
4,949

 
$
17,961

 
$
(749,412
)
 
$
2,154,316

Issuances of Common Stock, net of issuance costs and tax withholdings
1,453,935

 
15

 

 
69,818

 

 

 

 
69,833

Conversions of Common Units to Common Stock
6,000

 

 

 
305

 

 

 

 
305

Dividends on Common Stock


 

 

 

 

 

 
(89,952
)
 
(89,952
)
Dividends on Preferred Stock


 

 

 

 

 

 
(1,246
)
 
(1,246
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value


 

 

 
287

 

 

 

 
287

Distributions to noncontrolling interests in consolidated affiliates


 

 

 

 

 
(858
)
 

 
(858
)
Issuances of restricted stock
110,748

 

 

 

 

 

 

 

Redemptions/repurchases of Preferred Stock
 
 

 
(15
)
 

 

 

 

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

 

 

 
4,837

 

 

 

 
4,837

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


 

 

 

 

 

 
(1,931
)
 
(1,931
)
Net (income) attributable to noncontrolling interests in consolidated affiliates


 

 

 

 

 
599

 
(599
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income


 

 

 

 

 

 
73,039

 
73,039

Other comprehensive income


 

 

 

 
1,097

 

 

 
1,097

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
74,136

Balance at June 30, 2017
103,236,237

 
$
1,032

 
$
28,905

 
$
2,926,128

 
$
6,046

 
$
17,702

 
$
(770,101
)
 
$
2,209,712



 
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
2,324,850

 
23

 

 
104,449

 

 

 

 
104,472

Conversions of Common Units to Common Stock
32,328

 

 

 
1,558

 

 

 

 
1,558

Dividends on Common Stock

 

 

 

 

 

 
(82,272
)
 
(82,272
)
Dividends on Preferred Stock

 

 

 

 

 

 
(1,253
)
 
(1,253
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value

 

 

 
(15,042
)
 

 

 

 
(15,042
)
Distributions to noncontrolling interests in consolidated affiliates

 

 

 

 

 
(900
)
 

 
(900
)
Issuances of restricted stock
130,752

 

 

 

 

 

 

 

Redemptions/repurchases of Preferred Stock

 

 
(115
)
 

 

 

 

 
(115
)
Share-based compensation expense, net of forfeitures
(8,888
)
 
2

 

 
4,548

 

 

 

 
4,550

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

 

 

 

 

 

 
(13,950
)
 
(13,950
)
Net (income) attributable to noncontrolling interests in consolidated affiliates

 

 

 

 

 
622

 
(622
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 

 
480,263

 
480,263

Other comprehensive loss

 

 

 

 
(7,817
)
 

 

 
(7,817
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
472,446

Balance at June 30, 2016
98,570,974

 
$
986

 
$
28,935

 
$
2,693,755

 
$
(11,628
)
 
$
17,697

 
$
(640,969
)
 
$
2,088,776


See accompanying notes to consolidated financial statements.

6

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
 
Six Months Ended
June 30,
 
2017
 
2016
Operating activities:
 
 
 
Net income
$
73,039

 
$
480,263

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
111,961

 
108,811

Amortization of lease incentives and acquisition-related intangible assets and liabilities
(345
)
 
(1,179
)
Share-based compensation expense
4,837

 
4,550

Allowance for losses on accounts and accrued straight-line rents receivable
110

 
1,218

Accrued interest on mortgages and notes receivable
(274
)
 
(212
)
Amortization of debt issuance costs
1,649

 
1,801

Amortization of cash flow hedges
781

 
1,578

Amortization of mortgages and notes payable fair value adjustments
139

 
(116
)
Gains on debt extinguishment
(826
)
 

Net gains on disposition of property
(5,332
)
 
(424,754
)
Equity in earnings of unconsolidated affiliates
(1,710
)
 
(2,202
)
Distributions of earnings from unconsolidated affiliates
2,907

 
1,095

Settlement of cash flow hedges
7,322

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
4,358

 
(181
)
Prepaid expenses and other assets
(1,455
)
 
(5,297
)
Accrued straight-line rents receivable
(15,228
)
 
(13,600
)
Accounts payable, accrued expenses and other liabilities
(9,818
)
 
(13,970
)
Net cash provided by operating activities
172,115

 
137,805

Investing activities:
 
 
 
Investments in acquired real estate and related intangible assets, net of cash acquired

 
(9,058
)
Investments in development in-process
(97,096
)
 
(74,668
)
Investments in tenant improvements and deferred leasing costs
(54,119
)
 
(42,954
)
Investments in building improvements
(31,070
)
 
(31,677
)
Net proceeds from disposition of real estate assets
11,532

 
675,003

Distributions of capital from unconsolidated affiliates
7,445

 
2,118

Investments in mortgages and notes receivable

 
(7,818
)
Repayments of mortgages and notes receivable
2,357

 
155

Investments in and advances to unconsolidated affiliates
(172
)
 
(105
)
Changes in restricted cash and other investing activities
4,496

 
(257,181
)
Net cash provided by/(used in) investing activities
(156,627
)
 
253,815

Financing activities:
 
 
 
Dividends on Common Stock
(89,952
)
 
(82,272
)
Special dividend on Common Stock
(81,205
)
 

Redemptions/repurchases of Preferred Stock
(15
)
 
(115
)
Dividends on Preferred Stock
(1,246
)
 
(1,253
)
Distributions to noncontrolling interests in the Operating Partnership
(2,495
)
 
(2,463
)
Special distribution to noncontrolling interests in the Operating Partnership
(2,271
)
 

Distributions to noncontrolling interests in consolidated affiliates
(858
)
 
(900
)
Proceeds from the issuance of Common Stock
74,987

 
110,158

Costs paid for the issuance of Common Stock
(1,199
)
 
(1,629
)
Repurchase of shares related to tax withholdings
(3,955
)
 
(4,057
)
Borrowings on revolving credit facility
425,300

 
153,800

Repayments of revolving credit facility
(314,300
)
 
(169,800
)
Borrowings on mortgages and notes payable
456,001

 

Repayments of mortgages and notes payable
(506,679
)
 
(394,738
)
Payments of debt extinguishment costs
(57
)
 

Changes in debt issuance costs and other financing activities
(3,688
)
 
(943
)
Net cash used in financing activities
(51,632
)
 
(394,212
)
Net decrease in cash and cash equivalents
$
(36,144
)
 
$
(2,592
)
See accompanying notes to consolidated financial statements.

7

Table of Contents


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

 
Six Months Ended
June 30,
 
2017
 
2016
Net decrease in cash and cash equivalents
$
(36,144
)
 
$
(2,592
)
Cash and cash equivalents at beginning of the period
49,490

 
5,036

Cash and cash equivalents at end of the period
$
13,346

 
$
2,444


Supplemental disclosure of cash flow information:
 
 
Six Months Ended
June 30,
 
2017
 
2016
Cash paid for interest, net of amounts capitalized
$
34,930

 
$
38,222


Supplemental disclosure of non-cash investing and financing activities:
 
 
Six Months Ended
June 30,
 
2017
 
2016
Unrealized gains/(losses) on cash flow hedges
$
316

 
$
(9,395
)
Conversions of Common Units to Common Stock
305

 
1,558

Changes in accrued capital expenditures
(21,961
)
 
9,227

Write-off of fully depreciated real estate assets
28,449

 
21,948

Write-off of fully amortized leasing costs
15,023

 
11,690

Write-off of fully amortized debt issuance costs
4,324

 

Adjustment of noncontrolling interests in the Operating Partnership to fair value
(287
)
 
15,042


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)
 
June 30,
2017
 
December 31,
2016
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
470,185

 
$
474,375

Buildings and tenant improvements
4,374,143

 
4,313,373

Development in-process
245,593

 
279,602

Land held for development
82,326

 
77,355

 
5,172,247

 
5,144,705

Less-accumulated depreciation
(1,163,778
)
 
(1,134,103
)
Net real estate assets
4,008,469

 
4,010,602

Real estate and other assets, net, held for sale
54,543

 

Cash and cash equivalents
13,346

 
49,490

Restricted cash
20,612

 
29,141

Accounts receivable, net of allowance of $376 and $624, respectively
15,701

 
17,372

Mortgages and notes receivable, net of allowance of $88 and $105, respectively
6,750

 
8,833

Accrued straight-line rents receivable, net of allowance of $205 and $692, respectively
185,632

 
172,829

Investments in and advances to unconsolidated affiliates
15,243

 
18,846

Deferred leasing costs, net of accumulated amortization of $147,744 and $140,081, respectively
205,256

 
213,500

Prepaid expenses and other assets, net of accumulated amortization of $21,517 and $19,904,
respectively
34,947

 
40,437

Total Assets
$
4,560,499

 
$
4,561,050

Liabilities, Redeemable Operating Partnership Units and Capital:
 
 
 
Mortgages and notes payable, net
$
2,005,038

 
$
1,948,047

Accounts payable, accrued expenses and other liabilities
200,981

 
313,885

Liabilities held for sale
1,122

 

Total Liabilities
2,207,141

 
2,261,932

Commitments and contingencies

 

Redeemable Operating Partnership Units:
 
 
 
Common Units, 2,832,704 and 2,838,704 outstanding, respectively
143,646

 
144,802

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

 
28,920

Total Redeemable Operating Partnership Units
172,551

 
173,722

Capital:
 
 
 
Common Units:
 
 
 
General partner Common Units, 1,056,601 and 1,040,954 outstanding, respectively
21,568

 
21,023

Limited partner Common Units, 101,770,827 and 100,215,791 outstanding, respectively
2,135,491

 
2,081,463

Accumulated other comprehensive income
6,046

 
4,949

Noncontrolling interests in consolidated affiliates
17,702

 
17,961

Total Capital
2,180,807

 
2,125,396

Total Liabilities, Redeemable Operating Partnership Units and Capital
$
4,560,499

 
$
4,561,050


See accompanying notes to consolidated financial statements.

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Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Income
(Unaudited and in thousands, except per unit amounts)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Rental and other revenues
$
177,283

 
$
166,860

 
$
346,691

 
$
331,719

Operating expenses:
 
 
 
 
 
 
 
Rental property and other expenses
58,854

 
57,515

 
116,250

 
115,095

Depreciation and amortization
55,816

 
55,317

 
111,961

 
108,811

General and administrative
9,050

 
8,327

 
20,540

 
19,464

Total operating expenses
123,720

 
121,159

 
248,751

 
243,370

Interest expense:
 
 
 
 
 
 
 
Contractual
15,345

 
18,674

 
32,368

 
38,389

Amortization of debt issuance costs
809

 
811

 
1,649

 
1,801

 
16,154

 
19,485

 
34,017

 
40,190

Other income:
 
 
 
 
 
 
 
Interest and other income
564

 
534

 
1,248

 
1,051

Gains on debt extinguishment
826

 

 
826

 

 
1,390

 
534

 
2,074

 
1,051

Income from continuing operations before disposition of investment properties and activity in unconsolidated affiliates
38,799

 
26,750

 
65,997

 
49,210

Gains on disposition of property

 
5,861

 
5,332

 
10,258

Equity in earnings of unconsolidated affiliates
755

 
917

 
1,710

 
2,202

Income from continuing operations
39,554

 
33,528

 
73,039

 
61,670

Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations

 

 

 
4,097

Net gains on disposition of discontinued operations

 

 

 
414,496

 

 

 

 
418,593

Net income
39,554

 
33,528

 
73,039

 
480,263

Net (income) attributable to noncontrolling interests in consolidated affiliates
(299
)
 
(314
)
 
(599
)
 
(622
)
Distributions on Preferred Units
(623
)
 
(627
)
 
(1,246
)
 
(1,253
)
Net income available for common unitholders
$
38,632

 
$
32,587

 
$
71,194

 
$
478,388

Earnings per Common Unit – basic:
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
0.37

 
$
0.33

 
$
0.68

 
$
0.60

Income from discontinued operations available for common unitholders

 

 

 
4.21

Net income available for common unitholders
$
0.37

 
$
0.33

 
$
0.68

 
$
4.81

Weighted average Common Units outstanding – basic
104,900

 
100,129

 
104,536

 
99,496

Earnings per Common Unit – diluted:
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
0.37

 
$
0.33

 
$
0.68

 
$
0.60

Income from discontinued operations available for common unitholders

 

 

 
4.20

Net income available for common unitholders
$
0.37

 
$
0.33

 
$
0.68

 
$
4.80

Weighted average Common Units outstanding – diluted
104,977

 
100,219

 
104,617

 
99,583

Distributions declared per Common Unit
$
0.440

 
$
0.425

 
$
0.880

 
$
0.850

Net income available for common unitholders:
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
38,632

 
$
32,587

 
$
71,194

 
$
59,795

Income from discontinued operations available for common unitholders

 

 

 
418,593

Net income available for common unitholders
$
38,632

 
$
32,587

 
$
71,194

 
$
478,388

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
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
39,554

 
$
33,528

 
$
73,039

 
$
480,263

Other comprehensive income/(loss):
 
 
 
 
 
 
 
Unrealized gains/(losses) on cash flow hedges
(136
)
 
(5,760
)
 
316

 
(9,395
)
Amortization of cash flow hedges
297

 
783

 
781

 
1,578

Total other comprehensive income/(loss)
161

 
(4,977
)
 
1,097

 
(7,817
)
Total comprehensive income
39,715

 
28,551

 
74,136

 
472,446

Less-comprehensive (income) attributable to noncontrolling interests
(299
)
 
(314
)
 
(599
)
 
(622
)
Comprehensive income attributable to common unitholders
$
39,416


$
28,237

 
$
73,537

 
$
471,824


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

 
$
2,081,463

 
$
4,949

 
$
17,961

 
$
2,125,396

Issuances of Common Units, net of issuance costs and tax withholdings
698

 
69,135

 

 

 
69,833

Distributions on Common Units
(920
)
 
(91,167
)
 

 

 
(92,087
)
Distributions on Preferred Units
(12
)
 
(1,234
)
 

 

 
(1,246
)
Share-based compensation expense, net of forfeitures
48

 
4,789

 

 

 
4,837

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(858
)
 
(858
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
7

 
789

 

 

 
796

Net (income) attributable to noncontrolling interests in consolidated affiliates
(6
)
 
(593
)
 

 
599

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
730

 
72,309

 

 

 
73,039

Other comprehensive income

 

 
1,097

 

 
1,097

Total comprehensive income
 
 
 
 
 
 
 
 
74,136

Balance at June 30, 2017
$
21,568

 
$
2,135,491

 
$
6,046

 
$
17,702

 
$
2,180,807



 
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
1,045

 
103,427

 

 

 
104,472

Distributions on Common Units
(844
)
 
(83,543
)
 

 

 
(84,387
)
Distributions on Preferred Units
(13
)
 
(1,240
)
 

 

 
(1,253
)
Share-based compensation expense, net of forfeitures
46

 
4,504

 

 

 
4,550

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(900
)
 
(900
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
(253
)
 
(25,066
)
 

 

 
(25,319
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(6
)
 
(616
)
 

 
622

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
4,803

 
475,460

 

 

 
480,263

Other comprehensive loss

 

 
(7,817
)
 

 
(7,817
)
Total comprehensive income
 
 
 
 
 
 
 
 
472,446

Balance at June 30, 2016
$
20,537

 
$
2,033,235

 
$
(11,628
)
 
$
17,697

 
$
2,059,841


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)
 
Six Months Ended
June 30,
 
2017
 
2016
Operating activities:
 
 
 
Net income
$
73,039

 
$
480,263

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
111,961

 
108,811

Amortization of lease incentives and acquisition-related intangible assets and liabilities
(345
)
 
(1,179
)
Share-based compensation expense
4,837

 
4,550

Allowance for losses on accounts and accrued straight-line rents receivable
110

 
1,218

Accrued interest on mortgages and notes receivable
(274
)
 
(212
)
Amortization of debt issuance costs
1,649

 
1,801

Amortization of cash flow hedges
781

 
1,578

Amortization of mortgages and notes payable fair value adjustments
139

 
(116
)
Gains on debt extinguishment
(826
)
 

Net gains on disposition of property
(5,332
)
 
(424,754
)
Equity in earnings of unconsolidated affiliates
(1,710
)
 
(2,202
)
Distributions of earnings from unconsolidated affiliates
2,907

 
1,095

Settlement of cash flow hedges
7,322

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
4,358

 
(181
)
Prepaid expenses and other assets
(1,455
)
 
(5,297
)
Accrued straight-line rents receivable
(15,228
)
 
(13,600
)
Accounts payable, accrued expenses and other liabilities
(9,818
)
 
(13,970
)
Net cash provided by operating activities
172,115

 
137,805

Investing activities:
 
 
 
Investments in acquired real estate and related intangible assets, net of cash acquired

 
(9,058
)
Investments in development in-process
(97,096
)
 
(74,668
)
Investments in tenant improvements and deferred leasing costs
(54,119
)
 
(42,954
)
Investments in building improvements
(31,070
)
 
(31,677
)
Net proceeds from disposition of real estate assets
11,532

 
675,003

Distributions of capital from unconsolidated affiliates
7,445

 
2,118

Investments in mortgages and notes receivable

 
(7,818
)
Repayments of mortgages and notes receivable
2,357

 
155

Investments in and advances to unconsolidated affiliates
(172
)
 
(105
)
Changes in restricted cash and other investing activities
4,496

 
(257,181
)
Net cash provided by/(used in) investing activities
(156,627
)
 
253,815

Financing activities:
 
 
 
Distributions on Common Units
(92,087
)
 
(84,387
)
Special distribution on Common Units
(83,149
)
 

Redemptions/repurchases of Preferred Units
(15
)
 
(115
)
Distributions on Preferred Units
(1,246
)
 
(1,253
)
Distributions to noncontrolling interests in consolidated affiliates
(858
)
 
(900
)
Proceeds from the issuance of Common Units
74,987

 
110,158

Costs paid for the issuance of Common Units
(1,199
)
 
(1,629
)
Repurchase of units related to tax withholdings
(3,955
)
 
(4,057
)
Borrowings on revolving credit facility
425,300

 
153,800

Repayments of revolving credit facility
(314,300
)
 
(169,800
)
Borrowings on mortgages and notes payable
456,001

 

Repayments of mortgages and notes payable
(506,679
)
 
(394,738
)
Payments of debt extinguishment costs
(57
)
 

Changes in debt issuance costs and other financing activities
(4,375
)
 
(1,291
)
Net cash used in financing activities
(51,632
)
 
(394,212
)
Net decrease in cash and cash equivalents
$
(36,144
)
 
$
(2,592
)
See accompanying notes to consolidated financial statements.

13

Table of Contents


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

 
Six Months Ended
June 30,
 
2017
 
2016
Net decrease in cash and cash equivalents
$
(36,144
)
 
$
(2,592
)
Cash and cash equivalents at beginning of the period
49,490

 
5,036

Cash and cash equivalents at end of the period
$
13,346

 
$
2,444


Supplemental disclosure of cash flow information:
 
 
Six Months Ended
June 30,
 
2017
 
2016
Cash paid for interest, net of amounts capitalized
$
34,930

 
$
38,222


Supplemental disclosure of non-cash investing and financing activities:
 
 
Six Months Ended
June 30,
 
2017
 
2016
Unrealized gains/(losses) on cash flow hedges
$
316

 
$
(9,395
)
Changes in accrued capital expenditures
(21,961
)
 
9,227

Write-off of fully depreciated real estate assets
28,449

 
21,948

Write-off of fully amortized leasing costs
15,023

 
11,690

Write-off of fully amortized debt issuance costs
4,324

 

Adjustment of Redeemable Common Units to fair value
(1,156
)
 
24,971


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
June 30, 2017
(tabular dollar amounts in thousands, except per share and per unit data)
(Unaudited)

1.    Description of Business and Significant Accounting Policies

Description of Business

Highwoods Properties, Inc. (the “Company”) is a fully integrated real estate investment trust (“REIT”) that provides leasing, management, development, construction and other customer-related services for its properties and for third parties. The Company conducts its activities through Highwoods Realty Limited Partnership (the “Operating Partnership”). At June 30, 2017, we owned or had an interest in 32.0 million rentable square feet of in-service properties, 1.2 million rentable square feet of properties under development and approximately 400 acres of development land.
 
The Company is the sole general partner of the Operating Partnership. At June 30, 2017, the Company owned all of the Preferred Units and 102.8 million, or 97.3%, of the Common Units in the Operating Partnership. Limited partners owned the remaining 2.8 million Common Units. During the six months ended June 30, 2017, the Company redeemed 6,000 Common Units for a like number of shares of Common Stock.

Common Stock Offerings
 
During the first quarter of 2017, we entered into separate equity distribution agreements in which the Company may offer and sell up to $300.0 million in aggregate gross sales price of shares of Common Stock. During the three and six months ended June 30, 2017, the Company issued 1,177,734 and 1,363,919 shares, respectively, of Common Stock under its equity distribution agreements at an average gross sales price of $51.03 and $50.85 per share, respectively, and received net proceeds, after sales commissions, of $59.2 million and $68.3 million, respectively.

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

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

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

Use of Estimates

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

15

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


1.    Description of Business and Significant Accounting Policies – Continued

Recently Issued Accounting Standards

The Financial Accounting Standards Board ("FASB") issued an accounting standards update ("ASU") that requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that we identify the contract with the customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when we satisfy the performance obligations. We will also be required to disclose information regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Upon adoption of the ASU in 2018, we expect to utilize the modified retrospective approach. Our initial analysis of our non-lease related revenue contracts indicates that the adoption of this ASU will impact the financial statement disclosure of these contracts with no material impact on the timing of revenue recognition; however, we are still in the process of evaluating this ASU. We expect additional impact of this ASU upon adoption of the ASU related to accounting for leases discussed below for certain lease revenue streams that will be required to be evaluated as non-lease components using the five-step revenue recognition model.
 
The FASB issued an ASU that adds to and clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The ASU is required to be adopted in 2018 with retrospective application required. We do not expect such adoption to have a material effect on our Consolidated Statements of Cash Flows.

The FASB issued an ASU that clarifies and narrows the definition of a business used in determining whether to account for a transaction as an asset acquisition or business combination. The guidance requires evaluation of the fair value of the assets acquired to determine if it is concentrated in a single identifiable asset or a group of similar identifiable assets. If so, the transferred assets would not be a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs. The ASU is required to be adopted in 2018 and applied prospectively. Upon adoption of this ASU, we expect that the majority of our future acquisitions would not meet the definition of a business; therefore, the related acquisition costs would be capitalized as part of the purchase price.

The FASB issued an ASU that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The guidance requires modification accounting if the value, vesting conditions or classification of the award changes. The ASU is required to be adopted in 2018 and applied prospectively. We do not expect such adoption to have a material effect on our Consolidated Financial Statements.

The FASB issued an ASU which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The ASU requires lessors to account for leases using an approach that is substantially equivalent to the existing guidance and is effective for reporting periods beginning in 2019 with early adoption permitted. Our initial analysis of our leases indicates that upon adoption of the ASU, certain lease revenue streams that are currently accounted for using the lease accounting standard will be accounted for as non-lease components using the five-step revenue recognition model discussed above. We are in the process of evaluating this ASU.

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

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


16

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

 
3.    Mortgages and Notes Receivable
 
Mortgages and notes receivable were $6.8 million and $8.8 million at June 30, 2017 and December 31, 2016, respectively. We evaluate the ability to collect our mortgages and notes receivable by monitoring the leasing statistics and/or market fundamentals of these assets. As of June 30, 2017, our mortgages and notes receivable were not in default and there were no other indicators of impairment.

4.    Intangible Assets and Below Market Lease Liabilities
 
The following table sets forth total intangible assets and acquisition-related below market lease liabilities, net of accumulated amortization:
 
 
June 30,
2017
 
December 31,
2016
Assets:
 
 
 
Deferred leasing costs (including lease incentives and above market lease and in-place lease acquisition-related intangible assets)
$
353,000

 
$
353,581

Less accumulated amortization
(147,744
)
 
(140,081
)
 
$
205,256

 
$
213,500

 
 
 
 
Liabilities (in accounts payable, accrued expenses and other liabilities):
 
 
 
Acquisition-related below market lease liabilities
$
60,809

 
$
61,221

Less accumulated amortization
(25,834
)
 
(23,074
)
 
$
34,975

 
$
38,147

 
The following table sets forth amortization of intangible assets and below market lease liabilities:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Amortization of deferred leasing costs and acquisition-related intangible assets (in depreciation and amortization)
$
10,133

 
$
11,731

 
$
20,752

 
$
23,066

Amortization of lease incentives (in rental and other revenues)
$
443

 
$
390

 
$
840

 
$
1,101

Amortization of acquisition-related intangible assets (in rental and other revenues)
$
675

 
$
972

 
$
1,711

 
$
2,003

Amortization of acquisition-related intangible assets (in rental property and other expenses)
$
139

 
$
139

 
$
276

 
$
277

Amortization of acquisition-related below market lease liabilities (in rental and other revenues)
$
(1,592
)
 
$
(2,788
)
 
$
(3,172
)
 
$
(4,560
)
 

17

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

 
4.    Intangible Assets and Below Market Lease Liabilities - Continued

The following table sets forth scheduled future amortization of intangible assets and below market lease liabilities:
 
 
 
Amortization of Deferred Leasing Costs and Acquisition-Related Intangible Assets (in Depreciation and Amortization)
 
Amortization of Lease Incentives (in Rental and Other Revenues)
 
Amortization of Acquisition-Related Intangible Assets (in Rental and Other Revenues)
 
Amortization of Acquisition-Related Intangible Assets (in Rental Property and Other Expenses)
 
Amortization of Acquisition-Related Below Market Lease Liabilities (in Rental and Other Revenues)
July 1 through December 31, 2017
 
$
21,126

 
$
810

 
$
1,140

 
$
274

 
$
(3,073
)
2018
 
36,533

 
1,510

 
1,680

 
553

 
(5,962
)
2019
 
30,942

 
1,286

 
1,286

 
553

 
(5,492
)
2020