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Section 1: 10-Q (10-Q)

Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2018
 
393155905_logotree04.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 103,421,754 shares of Common Stock outstanding as of April 17, 2018.
 




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 17, 2018, 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, 2018 of the Company and the Operating Partnership. We believe combining the quarterly reports into this single report results in the following benefits:

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

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

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

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

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

Consolidated Financial Statements;

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

Item 4 - Controls and Procedures; and

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





HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP

QUARTERLY REPORT FOR THE PERIOD ENDED MARCH 31, 2018

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,
2018
 
December 31,
2017
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
485,956

 
$
485,956

Buildings and tenant improvements
4,617,003

 
4,590,490

Development in-process
131,671

 
88,452

Land held for development
125,841

 
74,765

 
5,360,471

 
5,239,663

Less-accumulated depreciation
(1,239,383
)
 
(1,202,424
)
Net real estate assets
4,121,088

 
4,037,239

Real estate and other assets, net, held for sale
14,017

 
14,118

Cash and cash equivalents
31,034

 
3,272

Restricted cash
36,848

 
85,061

Accounts receivable, net of allowance of $784 and $753, respectively
22,943

 
24,397

Mortgages and notes receivable, net of allowance of $69 and $72, respectively
6,158

 
6,425

Accrued straight-line rents receivable, net of allowance of $909 and $819, respectively
206,698

 
200,131

Investments in and advances to unconsolidated affiliates
23,095

 
23,897

Deferred leasing costs, net of accumulated amortization of $146,909 and $143,512, respectively
196,302

 
200,679

Prepaid expenses and other assets, net of accumulated depreciation of $19,860 and $19,092,
respectively
37,272

 
28,572

Total Assets
$
4,695,455

 
$
4,623,791

Liabilities, Noncontrolling Interests in the Operating Partnership and Equity:
 
 
 
Mortgages and notes payable, net
$
2,112,584

 
$
2,014,333

Accounts payable, accrued expenses and other liabilities
206,258

 
228,215

Total Liabilities
2,318,842

 
2,242,548

Commitments and contingencies

 

Noncontrolling interests in the Operating Partnership
123,113

 
144,009

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), 28,887 and 28,892 shares issued and outstanding, respectively
28,887

 
28,892

Common Stock, $.01 par value, 200,000,000 authorized shares;
 
 
 
103,421,754 and 103,266,875 shares issued and outstanding, respectively
1,034

 
1,033

Additional paid-in capital
2,953,148

 
2,929,399

Distributions in excess of net income available for common stockholders
(762,642
)
 
(747,344
)
Accumulated other comprehensive income
15,609

 
7,838

Total Stockholders’ Equity
2,236,036

 
2,219,818

Noncontrolling interests in consolidated affiliates
17,464

 
17,416

Total Equity
2,253,500

 
2,237,234

Total Liabilities, Noncontrolling Interests in the Operating Partnership and Equity
$
4,695,455

 
$
4,623,791

 
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,
 
2018
 
2017
Rental and other revenues
$
180,438

 
$
169,408

Operating expenses:
 
 
 
Rental property and other expenses
59,432

 
57,396

Depreciation and amortization
57,568

 
56,145

General and administrative
11,778

 
11,490

Total operating expenses
128,778

 
125,031

Interest expense:
 
 
 
Contractual
17,705

 
17,023

Amortization of debt issuance costs
686

 
840

 
18,391

 
17,863

Other income:
 
 
 
Interest and other income
455

 
684

 
455


684

Income before disposition of investment properties and activity in unconsolidated affiliates
33,724

 
27,198

Gains on disposition of property

 
5,332

Equity in earnings of unconsolidated affiliates
522

 
955

Net income
34,246

 
33,485

Net (income) attributable to noncontrolling interests in the Operating Partnership
(888
)
 
(888
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(286
)
 
(300
)
Dividends on Preferred Stock
(623
)
 
(623
)
Net income available for common stockholders
$
32,449


$
31,674

Earnings per Common Share – basic:
 
 
 
Net income available for common stockholders
$
0.31

 
$
0.31

Weighted average Common Shares outstanding – basic
103,324

 
101,738

Earnings per Common Share – diluted:
 
 
 
Net income available for common stockholders
$
0.31

 
$
0.31

Weighted average Common Shares outstanding – diluted
106,165

 
104,661

Dividends declared per Common Share
$
0.4625

 
$
0.4400


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,
 
2018
 
2017
Comprehensive income:
 
 
 
Net income
$
34,246

 
$
33,485

Other comprehensive income:
 
 
 
Unrealized gains on cash flow hedges
7,877

 
452

Amortization of cash flow hedges
(106
)
 
484

Total other comprehensive income
7,771

 
936

Total comprehensive income
42,017

 
34,421

Less-comprehensive (income) attributable to noncontrolling interests
(1,174
)
 
(1,188
)
Comprehensive income attributable to common stockholders
$
40,843

 
$
33,233


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, 2017
103,266,875

 
$
1,033

 
$
28,892

 
$
2,929,399

 
$
7,838

 
$
17,416

 
$
(747,344
)
 
$
2,237,234

Issuances of Common Stock, net of issuance costs and tax withholdings
(36,757
)
 

 

 
(1,029
)
 

 

 

 
(1,029
)
Conversions of Common Units to Common Stock
19,196

 

 

 
902

 

 

 

 
902

Dividends on Common Stock


 

 

 

 

 

 
(47,747
)
 
(47,747
)
Dividends on Preferred Stock


 

 

 

 

 

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


 

 

 
19,582

 

 

 

 
19,582

Distributions to noncontrolling interests in consolidated affiliates


 

 

 

 

 
(238
)
 

 
(238
)
Issuances of restricted stock
172,440

 

 

 

 

 

 

 

Redemptions/repurchases of Preferred Stock
 
 

 
(5
)
 

 

 

 

 
(5
)
Share-based compensation expense, net of forfeitures

 
1

 

 
4,294

 

 

 

 
4,295

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


 

 

 

 

 

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


 

 

 

 

 
286

 
(286
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income


 

 

 

 

 

 
34,246

 
34,246

Other comprehensive income


 

 

 

 
7,771

 

 

 
7,771

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
42,017

Balance at March 31, 2018
103,421,754

 
$
1,034

 
$
28,887

 
$
2,953,148

 
$
15,609

 
$
17,464

 
$
(762,642
)
 
$
2,253,500



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

 
$
1,017

 
$
28,920

 
$
2,850,881

 
$
4,949

 
$
17,961

 
$
(749,412
)
 
$
2,154,316

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

 
2

 

 
9,132

 

 

 

 
9,134

Conversions of Common Units to Common Stock
2,000

 

 

 
102

 

 

 

 
102

Dividends on Common Stock

 

 

 

 

 

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

 

 

 

 

 

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

 

 

 
4,972

 

 

 

 
4,972

Distributions to noncontrolling interests in consolidated affiliates

 

 

 

 

 
(466
)
 

 
(466
)
Issuances of restricted stock
110,748

 

 

 

 

 

 

 

Redemptions/repurchases of Preferred Stock

 

 
(15
)
 

 

 

 

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

 
1

 

 
3,782

 

 

 

 
3,783

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

 

 

 

 

 

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

 

 

 

 

 
300

 
(300
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 

 
33,485

 
33,485

Other comprehensive income

 

 

 

 
936

 

 

 
936

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
34,421

Balance at March 31, 2017
102,018,119

 
$
1,020

 
$
28,905

 
$
2,868,869

 
$
5,885

 
$
17,795

 
$
(762,655
)
 
$
2,159,819


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,
 
2018
 
2017
Operating activities:
 
 
 
Net income
$
34,246

 
$
33,485

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
57,568

 
56,145

Amortization of lease incentives and acquisition-related intangible assets and liabilities
(509
)
 
(10
)
Share-based compensation expense
4,295

 
3,783

Allowance for losses on accounts and accrued straight-line rents receivable
227

 
61

Accrued interest on mortgages and notes receivable
(112
)
 
(132
)
Amortization of debt issuance costs
686

 
840

Amortization of cash flow hedges
(106
)
 
484

Amortization of mortgages and notes payable fair value adjustments
317

 
(30
)
Net gains on disposition of property

 
(5,332
)
Equity in earnings of unconsolidated affiliates
(522
)
 
(955
)
Distributions of earnings from unconsolidated affiliates
881

 
2,431

Settlement of cash flow hedges
7,216

 
7,322

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
3,288

 
3,922

Prepaid expenses and other assets
(7,692
)
 
(5,959
)
Accrued straight-line rents receivable
(6,619
)
 
(6,185
)
Accounts payable, accrued expenses and other liabilities
(14,636
)
 
(20,951
)
Net cash provided by operating activities
78,528

 
68,919

Investing activities:
 
 
 
Investments in acquired real estate and related intangible assets, net of cash acquired
(50,649
)
 

Investments in development in-process
(42,438
)
 
(59,408
)
Investments in tenant improvements and deferred leasing costs
(33,071
)
 
(24,649
)
Investments in building improvements
(19,293
)
 
(17,194
)
Net proceeds from disposition of real estate assets

 
11,532

Distributions of capital from unconsolidated affiliates
105

 
6,512

Repayments of mortgages and notes receivable
379

 
1,178

Changes in other investing activities
(586
)
 
(1,596
)
Net cash used in investing activities
(145,553
)
 
(83,625
)
Financing activities:
 
 
 
Dividends on Common Stock
(47,747
)
 
(44,917
)
Special dividend on Common Stock

 
(81,205
)
Redemptions/repurchases of Preferred Stock
(5
)
 
(15
)
Dividends on Preferred Stock
(623
)
 
(623
)
Distributions to noncontrolling interests in the Operating Partnership
(1,300
)
 
(1,249
)
Special distribution to noncontrolling interests in the Operating Partnership

 
(2,271
)
Distributions to noncontrolling interests in consolidated affiliates
(238
)
 
(466
)
Proceeds from the issuance of Common Stock
561

 
13,191

Costs paid for the issuance of Common Stock
(46
)
 
(250
)
Repurchase of shares related to tax withholdings
(1,544
)
 
(3,807
)
Borrowings on revolving credit facility
32,000

 
200,300

Repayments of revolving credit facility
(277,000
)
 
(69,300
)
Borrowings on mortgages and notes payable
345,863

 
346,001

Repayments of mortgages and notes payable
(444
)
 
(380,261
)
Changes in debt issuance costs and other financing activities
(2,903
)
 
(4,894
)
Net cash provided by/(used in) financing activities
46,574

 
(29,766
)
Net decrease in cash and cash equivalents and restricted cash
$
(20,451
)
 
$
(44,472
)
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,
 
2018
 
2017
Net decrease in cash and cash equivalents and restricted cash
$
(20,451
)
 
$
(44,472
)
Cash and cash equivalents and restricted cash at beginning of the period
88,333

 
78,631

Cash and cash equivalents and restricted cash at end of the period
$
67,882

 
$
34,159


Reconciliation of cash and cash equivalents and restricted cash:

 
Three Months Ended
March 31,
 
2018
 
2017
Cash and cash equivalents at end of the period
$
31,034

 
$
4,918

Restricted cash at end of the period
36,848

 
29,241

Cash and cash equivalents and restricted cash at end of the period
$
67,882

 
$
34,159


Supplemental disclosure of cash flow information:
 
 
Three Months Ended
March 31,
 
2018
 
2017
Cash paid for interest, net of amounts capitalized
$
15,986

 
$
18,909


Supplemental disclosure of non-cash investing and financing activities:
 
 
Three Months Ended
March 31,
 
2018
 
2017
Unrealized gains on cash flow hedges
$
7,877

 
$
452

Conversions of Common Units to Common Stock
902

 
102

Changes in accrued capital expenditures
(7,333
)
 
(6,741
)
Write-off of fully depreciated real estate assets
10,511

 
10,649

Write-off of fully amortized leasing costs
7,112

 
10,091

Write-off of fully amortized debt issuance costs

 
3,161

Adjustment of noncontrolling interests in the Operating Partnership to fair value
(19,582
)
 
(4,972
)

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,
2018
 
December 31,
2017
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
485,956

 
$
485,956

Buildings and tenant improvements
4,617,003

 
4,590,490

Development in-process
131,671

 
88,452

Land held for development
125,841

 
74,765

 
5,360,471

 
5,239,663

Less-accumulated depreciation
(1,239,383
)
 
(1,202,424
)
Net real estate assets
4,121,088

 
4,037,239

Real estate and other assets, net, held for sale
14,017

 
14,118

Cash and cash equivalents
31,034

 
3,272

Restricted cash
36,848

 
85,061

Accounts receivable, net of allowance of $784 and $753, respectively
22,943

 
24,397

Mortgages and notes receivable, net of allowance of $69 and $72, respectively
6,158

 
6,425

Accrued straight-line rents receivable, net of allowance of $909 and $819, respectively
206,698

 
200,131

Investments in and advances to unconsolidated affiliates
23,095

 
23,897

Deferred leasing costs, net of accumulated amortization of $146,909 and $143,512, respectively
196,302

 
200,679

Prepaid expenses and other assets, net of accumulated depreciation of $19,860 and $19,092,
respectively
37,272

 
28,572

Total Assets
$
4,695,455

 
$
4,623,791

Liabilities, Redeemable Operating Partnership Units and Capital:
 
 
 
Mortgages and notes payable, net
$
2,112,584

 
$
2,014,333

Accounts payable, accrued expenses and other liabilities
206,258

 
228,215

Total Liabilities
2,318,842

 
2,242,548

Commitments and contingencies

 

Redeemable Operating Partnership Units:
 
 
 
Common Units, 2,809,508 and 2,828,704 outstanding, respectively
123,113

 
144,009

Series A Preferred Units (liquidation preference $1,000 per unit), 28,887 and 28,892 units issued and
outstanding, respectively
28,887

 
28,892

Total Redeemable Operating Partnership Units
152,000

 
172,901

Capital:
 
 
 
Common Units:
 
 
 
General partner Common Units, 1,058,225 and 1,056,868 outstanding, respectively
21,915

 
21,830

Limited partner Common Units, 101,954,720 and 101,801,198 outstanding, respectively
2,169,625

 
2,161,258

Accumulated other comprehensive income
15,609

 
7,838

Noncontrolling interests in consolidated affiliates
17,464

 
17,416

Total Capital
2,224,613

 
2,208,342

Total Liabilities, Redeemable Operating Partnership Units and Capital
$
4,695,455

 
$
4,623,791


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,
 
2018
 
2017
Rental and other revenues
$
180,438

 
$
169,408

Operating expenses:
 
 
 
Rental property and other expenses
59,432

 
57,396

Depreciation and amortization
57,568

 
56,145

General and administrative
11,778

 
11,490

Total operating expenses
128,778

 
125,031

Interest expense:
 
 
 
Contractual
17,705

 
17,023

Amortization of debt issuance costs
686

 
840

 
18,391

 
17,863

Other income:
 
 
 
Interest and other income
455

 
684

 
455

 
684

Income before disposition of investment properties and activity in unconsolidated affiliates
33,724

 
27,198

Gains on disposition of property

 
5,332

Equity in earnings of unconsolidated affiliates
522

 
955

Net income
34,246

 
33,485

Net (income) attributable to noncontrolling interests in consolidated affiliates
(286
)
 
(300
)
Distributions on Preferred Units
(623
)
 
(623
)
Net income available for common unitholders
$
33,337

 
$
32,562

Earnings per Common Unit – basic:
 
 
 
Net income available for common unitholders
$
0.32

 
$
0.31

Weighted average Common Units outstanding – basic
105,730

 
104,167

Earnings per Common Unit – diluted:
 
 
 
Net income available for common unitholders
$
0.32

 
$
0.31

Weighted average Common Units outstanding – diluted
105,756

 
104,252

Distributions declared per Common Unit
$
0.4625

 
$
0.4400


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,
 
2018
 
2017
Comprehensive income:
 
 
 
Net income
$
34,246

 
$
33,485

Other comprehensive income:
 
 
 
Unrealized gains on cash flow hedges
7,877

 
452

Amortization of cash flow hedges
(106
)
 
484

Total other comprehensive income
7,771

 
936

Total comprehensive income
42,017

 
34,421

Less-comprehensive (income) attributable to noncontrolling interests
(286
)
 
(300
)
Comprehensive income attributable to common unitholders
$
41,731

 
$
34,121


See accompanying notes to consolidated financial statements.


11

Table of Contents

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

 
Common Units
 
Accumulated
Other
Comprehensive Income
 
Noncontrolling
Interests in
Consolidated
Affiliates
 
Total
 
General
Partners’
Capital
 
Limited
Partners’
Capital
 
Balance at December 31, 2017
$
21,830

 
$
2,161,258

 
$
7,838

 
$
17,416

 
$
2,208,342

Issuances of Common Units, net of issuance costs and tax withholdings
(10
)
 
(1,019
)
 

 

 
(1,029
)
Distributions on Common Units
(488
)
 
(48,370
)
 

 

 
(48,858
)
Distributions on Preferred Units
(6
)
 
(617
)
 

 

 
(623
)
Share-based compensation expense, net of forfeitures
43

 
4,252

 

 

 
4,295

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(238
)
 
(238
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
207

 
20,500

 

 

 
20,707

Net (income) attributable to noncontrolling interests in consolidated affiliates
(3
)
 
(283
)
 

 
286

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
342

 
33,904

 

 

 
34,246

Other comprehensive income

 

 
7,771

 

 
7,771

Total comprehensive income
 
 
 
 
 
 
 
 
42,017

Balance at March 31, 2018
$
21,915

 
$
2,169,625

 
$
15,609

 
$
17,464

 
$
2,224,613



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

 
$
2,081,463

 
$
4,949

 
$
17,961

 
$
2,125,396

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

 
9,043

 

 

 
9,134

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

 

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

 

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

 
3,745

 

 

 
3,783

Distributions to noncontrolling interests in consolidated affiliates

 

 

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

 
5,203

 

 

 
5,255

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

 
300

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
335

 
33,150

 

 

 
33,485

Other comprehensive income

 

 
936

 

 
936

Total comprehensive income
 
 
 
 
 
 
 
 
34,421

Balance at March 31, 2017
$
21,070

 
$
2,086,164

 
$
5,885

 
$
17,795

 
$
2,130,914


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,
 
2018
 
2017
Operating activities:
 
 
 
Net income
$
34,246

 
$
33,485

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
57,568

 
56,145

Amortization of lease incentives and acquisition-related intangible assets and liabilities
(509
)
 
(10
)
Share-based compensation expense
4,295

 
3,783

Allowance for losses on accounts and accrued straight-line rents receivable
227

 
61

Accrued interest on mortgages and notes receivable
(112
)
 
(132
)
Amortization of debt issuance costs
686

 
840

Amortization of cash flow hedges
(106
)
 
484

Amortization of mortgages and notes payable fair value adjustments
317

 
(30
)
Net gains on disposition of property

 
(5,332
)
Equity in earnings of unconsolidated affiliates
(522
)
 
(955
)
Distributions of earnings from unconsolidated affiliates
881

 
2,431

Settlement of cash flow hedges
7,216

 
7,322

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
3,288

 
3,922

Prepaid expenses and other assets
(7,692
)
 
(5,959
)
Accrued straight-line rents receivable
(6,619
)
 
(6,185
)
Accounts payable, accrued expenses and other liabilities
(14,636
)
 
(20,951
)
Net cash provided by operating activities
78,528

 
68,919

Investing activities:
 
 
 
Investments in acquired real estate and related intangible assets, net of cash acquired
(50,649
)
 

Investments in development in-process
(42,438
)
 
(59,408
)
Investments in tenant improvements and deferred leasing costs
(33,071
)
 
(24,649
)
Investments in building improvements
(19,293
)
 
(17,194
)
Net proceeds from disposition of real estate assets

 
11,532

Distributions of capital from unconsolidated affiliates
105

 
6,512

Repayments of mortgages and notes receivable
379

 
1,178

Changes in other investing activities
(586
)
 
(1,596
)
Net cash used in investing activities
(145,553
)
 
(83,625
)
Financing activities:
 
 
 
Distributions on Common Units
(48,858
)
 
(45,986
)
Special distribution on Common Units

 
(83,149
)
Redemptions/repurchases of Preferred Units
(5
)
 
(15
)
Distributions on Preferred Units
(623
)
 
(623
)
Distributions to noncontrolling interests in consolidated affiliates
(238
)
 
(466
)
Proceeds from the issuance of Common Units
561

 
13,191

Costs paid for the issuance of Common Units
(46
)
 
(250
)
Repurchase of units related to tax withholdings
(1,544
)
 
(3,807
)
Borrowings on revolving credit facility
32,000

 
200,300

Repayments of revolving credit facility
(277,000
)
 
(69,300
)
Borrowings on mortgages and notes payable
345,863

 
346,001

Repayments of mortgages and notes payable
(444
)
 
(380,261
)
Changes in debt issuance costs and other financing activities
(3,092
)
 
(5,401
)
Net cash provided by/(used in) financing activities
46,574

 
(29,766
)
Net decrease in cash and cash equivalents and restricted cash
$
(20,451
)
 
$
(44,472
)
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,
 
2018
 
2017
Net decrease in cash and cash equivalents and restricted cash
$
(20,451
)
 
$
(44,472
)
Cash and cash equivalents and restricted cash at beginning of the period
88,333

 
78,631

Cash and cash equivalents and restricted cash at end of the period
$
67,882

 
$
34,159


Reconciliation of cash and cash equivalents and restricted cash:

 
Three Months Ended
March 31,
 
2018
 
2017
Cash and cash equivalents at end of the period
$
31,034

 
$
4,918

Restricted cash at end of the period
36,848

 
29,241

Cash and cash equivalents and restricted cash at end of the period
$
67,882

 
$
34,159


Supplemental disclosure of cash flow information:
 
 
Three Months Ended
March 31,
 
2018
 
2017
Cash paid for interest, net of amounts capitalized
$
15,986

 
$
18,909


Supplemental disclosure of non-cash investing and financing activities:
 
 
Three Months Ended
March 31,
 
2018
 
2017
Unrealized gains on cash flow hedges
$
7,877

 
$
452

Changes in accrued capital expenditures
(7,333
)
 
(6,741
)
Write-off of fully depreciated real estate assets
10,511

 
10,649

Write-off of fully amortized leasing costs
7,112

 
10,091

Write-off of fully amortized debt issuance costs

 
3,161

Adjustment of Redeemable Common Units to fair value
(20,896
)
 
(5,435
)

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, 2018
(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, 2018, we owned or had an interest in 30.7 million rentable square feet of in-service properties, 1.5 million rentable square feet of properties under development and approximately 400 acres of development land.
 
The Company is the sole general partner of the Operating Partnership. At March 31, 2018, the Company owned all of the Preferred Units and 103.0 million, or 97.4%, of the Common Units in the Operating Partnership. Limited partners owned the remaining 2.8 million Common Units. During the three months ended March 31, 2018, the Company redeemed 19,196 Common Units for a like number of shares of Common Stock.

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 2017 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.

Insurance

Beginning in 2018, we are primarily self-insured for health care claims for eligible participating employees. We have stop-loss coverage to limit our exposure to significant claims on a per claim and annual aggregate basis. We determine our liabilities for claims, including incurred but not reported losses, based on all relevant information, including actuarial estimates of claim liabilities. At March 31, 2018, a reserve of $0.4 million was recorded to cover estimated reported and unreported claims.

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") which superseded the revenue recognition requirements under previous guidance. We adopted the ASU on January 1, 2018. Several updates have been issued subsequently which were intended to promote a more consistent interpretation and application of the principles outlined in the ASU. The ASU requires the use of a new five-step model to recognize revenue from contracts with customers. 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 are also required to disclose information regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In analyzing our contracts with customers, we determined that the most material potential impact from the adoption of this ASU would be in how revenue is recognized for sales of real estate with continuing involvement. Prior to the adoption of this ASU, profit for such sales transactions was recognized and then reduced by the maximum exposure to loss related to the nature of the continuing involvement at the time of sale. Upon adoption of this ASU, any continuing involvement must be analyzed as a separate performance obligation in the contract and a portion of the sales price allocated to each performance obligation. When the continuing involvement performance obligation is satisfied, the sales price allocated to it will be recognized. We had no sales of real estate with continuing involvement during the first quarter of 2018 or prior periods; however, we will use such methodology for any future real estate sales with continuing involvement. Our internal controls with respect to accounting for such sales have been updated accordingly. The adoption of this ASU resulted in no other changes with respect to the timing of revenue recognition or internal controls related to our other contracts with customers which include primarily management, development and construction fees and transient parking income, all of which are not material to our Consolidated Financial Statements. As such, there is no cumulative-effect adjustment from the adoption of this ASU reflected in our Consolidated Financial Statements.
 
The FASB issued an ASU that requires entities to show changes in total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, restricted cash and restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning of period and end of period balances rather than presented as transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. We adopted the ASU as of January 1, 2018 with retrospective application to our Consolidated Statements of Cash Flows. Accordingly, our Consolidated Statements of Cash Flows present a reconciliation of the changes in cash and cash equivalents and restricted cash. The effect of the adoption resulted in a $0.1 million decrease in net cash used in investing activities for the three months ended March 31, 2017. Restricted cash represents cash deposits that are legally restricted or held by third parties on our behalf, such as construction-related escrows, property disposition proceeds set aside and designated or intended to fund future tax-deferred exchanges of qualifying real estate investments, escrows and reserves for debt service, real estate taxes and property insurance established pursuant to certain mortgage financing arrangements and any deposits made with lenders to unencumber secured properties.
 
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. We adopted the ASU prospectively as of January 1, 2018. 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. We adopted the ASU as of January 1, 2018 with no effect on our Consolidated Financial Statements.


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)


1.    Description of Business and Significant Accounting Policies – Continued
 
The FASB issued an ASU which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. We are continuing to conduct our analysis of the impact of the guidance on our Consolidated Financial Statements and have an active project team working on the evaluation and implementation of the guidance. We continue to monitor FASB activity with respect to possible amendments to this ASU, particularly the FASB’s recent vote to provide an optional practical expedient to lessors that removes the requirement to separate lease and non-lease components when the pattern of recognition of those components are the same and, when combined as a single unit, those would be classified as operating leases. Should the proposed amendment be issued, we expect to elect the practical expedient as our initial analysis of our leases indicates that the pattern of recognition of our material non-lease components (primarily cost recovery income) are the same as the lease components and will not require the use of the five-step revenue recognition model discussed above. We currently believe that the adoption of the ASU will not significantly change the accounting for operating leases on our Consolidated Balance Sheets where we are the lessor, and that such leases will be accounted for in a similar method to existing standards with the underlying leased asset being reported and recognized as a real estate asset. In addition, the guidance requires lessors to capitalize and amortize only incremental direct leasing costs. As a result, upon the adoption of the ASU, we will no longer be able to capitalize and amortize certain leasing related costs and instead will expense these costs as incurred. We are in the process of evaluating the impact to our results of operations of expensing such costs. The ASU is required to be adopted in 2019 using a modified retrospective approach which requires a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Leases where we are the lessee include primarily our operating ground leases which are not material to our Consolidated Financial Statements. We will continue to refine our evaluation and finalize our implementation plan throughout 2018.

The FASB issued an ASU that eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item when the hedged item affects earnings. The ASU is required to be adopted in 2019 using a modified retrospective approach. We do not expect such adoption to have a material effect on our Consolidated Financial Statements.

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 2018, we acquired two development parcels totaling approximately nine acres in Nashville for an aggregate purchase price, including capitalized acquisition costs, of $50.6 million.

3.    Mortgages and Notes Receivable
 
Mortgages and notes receivable were $6.2 million and $6.4 million at March 31, 2018 and December 31, 2017, 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, 2018, our mortgages and notes receivable were not in default and there were no other indicators of impairment.

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
 
The following table sets forth total intangible assets and acquisition-related below market lease liabilities, net of accumulated amortization:
 
 
March 31,
2018
 
December 31,
2017
Assets:
 
 
 
Deferred leasing costs (including lease incentives and above market lease and in-place lease acquisition-related intangible assets)
$
343,211

 
$
344,191

Less accumulated amortization
(146,909
)
 
(143,512
)
 
$
196,302

 
$
200,679

Liabilities (in accounts payable, accrued expenses and other liabilities):
 
 
 
Acquisition-related below market lease liabilities
$
59,646

 
$
59,947

Less accumulated amortization
(29,436
)
 
(28,214
)
 
$
30,210

 
$
31,733

 
The following table sets forth amortization of intangible assets and below market lease liabilities:
 
 
Three Months Ended
March 31,
 
2018
 
2017
Amortization of deferred leasing costs and acquisition-related intangible assets (in depreciation and amortization)
$
9,495

 
$
10,619

Amortization of lease incentives (in rental and other revenues)
$
429

 
$
397

Amortization of acquisition-related intangible assets (in rental and other revenues)
$
448

 
$
1,036

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

 
$
137

Amortization of acquisition-related below market lease liabilities (in rental and other revenues)
$
(1,523
)
 
$
(1,580
)

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, 2018
 
$
27,309

 
$
1,218

 
$
1,213

 
$
416

 
$
(4,414
)
2019
 
31,646

 
1,503

 
1,273

 
553

 
(5,446
)
2020
 
27,150

 
1,227

 
959

 
518

 
(5,186
)
2021
 
22,748

 
1,002

 
632

 

 
(4,377
)
2022
 
18,565

 
788

 
462

 

 
(3,264
)
Thereafter
 
51,453

 
4,259

 
1,408

 

 
(7,523
)
 
 
$
178,871

 
$
9,997

 
$
5,947

 
$
1,487

 
$
(30,210
)
Weighted average remaining amortization periods as of March 31, 2018 (in years)
 
7.6

 
9.8

 
6.5

 
2.7

 
6.4


18

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

 
5.    Mortgages and Notes Payable
 
The following table sets forth our mortgages and notes payable:
 
 
March 31,
2018
 
December 31,
2017
Secured indebtedness
$
98,537

 
$
98,981

Unsecured indebtedness
2,024,685

 
1,923,513

Less-unamortized debt issuance costs
(10,638
)
 
(8,161
)
Total mortgages and notes payable, net
$
2,112,584

 
$
2,014,333

 
At March 31, 2018, our secured mortgage loans were collateralized by real estate assets with an aggregate undepreciated book value of $147.6 million.
 
Our $600.0 million unsecured revolving credit facility is scheduled to mature in January 2022 and includes an accordion feature that allows for an additional $400.0 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 100 basis points and the annual facility fee is 20 basis points. There were no amounts outstanding under our revolving credit facility at March 31, 2018. There was $172.0 million outstanding under our revolving credit facility at April 17, 2018. At both March 31, 2018 and April 17, 2018, we had $0.5 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, 2018 and April 17, 2018 was $599.5 million and $427.5 million, respectively.
 
During the first quarter of 2018, the Operating Partnership issued $350.0 million aggregate principal amount of 4.125% notes due 2028, less original issuance discount of $4.1 million. These notes were priced to yield 4.271%. Underwriting fees and other expenses were incurred that aggregated $2.9 million; these costs were deferred and will be amortized over the term of the notes.
 
We are currently in compliance with financial covenants with respect to our consolidated debt.
 
We have considered our short-term liquidity needs and the adequacy of our estimated cash flows from operating activities and other available financing sources to meet these needs. We intend to meet these short-term liquidity requirements through a combination of the following:
 
available cash and cash equivalents;
 
cash flows from operating activities;
 
issuance of debt securities by the Operating Partnership;
 
issuance of secured debt;
 
bank term loans;
 
borrowings under our revolving credit facility;
 
issuance of equity securities by the Company or the Operating Partnership; and
 
the disposition of non-core assets.

19

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

 
6.
Derivative Financial Instruments

During 2017, we entered into $150.0 million notional amount of forward-starting swaps that effectively locked the underlying 10-year treasury rate at 2.44% with respect to a planned issuance of debt securities by the Operating Partnership. Upon issuance of the $350.0 million aggregate principal amount of 4.125% notes due 2028 during the first quarter of 2018, we terminated the forward-starting swaps resulting in an unrealized gain of $7.0 million in accumulated other comprehensive income and a gain of $0.2 million of hedge ineffectiveness in interest expense.

The counterparties under our swaps are major financial institutions. The swap agreements contain a provision whereby if we default on certain of our indebtedness and which default results in repayment of such indebtedness being, or becoming capable of being, accelerated by the lender, then we could also be declared in default on our swaps.

Our interest rate swaps have been designated as and are being accounted for as cash flow hedges with the effective portion of changes in fair value recorded in other comprehensive income each reporting period. No significant 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, 2018 and 2017. We have no collateral requirements related to our interest rate swaps.
 
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on our debt. During the period from April 1, 2018 through March 31, 2019, we estimate that $2.4 million will be reclassified as a decrease to interest expense.
 
The following table sets forth the fair value of our derivatives:
 
 
March 31,
2018
 
December 31,
2017
Derivatives:
 
 
 
Derivatives designated as cash flow hedges in prepaid expenses and other assets:
 
 
 
Interest rate swaps
$
2,179

 
$
1,286

 
The following table sets forth the effect of our cash flow hedges on accumulated other comprehensive income and interest expense:
 
 
Three Months Ended
March 31,
 
2018
 
2017
Derivatives Designated as Cash Flow Hedges:
 
 
 
Amount of unrealized gains recognized in accumulated other comprehensive income on derivatives (effective portion):
 
 
 
Interest rate swaps
$
7,877

 
$
452

Amount of (gains)/losses reclassified out of accumulated other comprehensive income into contractual interest expense (effective portion):
 
 
 
Interest rate swaps
$
(106
)
 
$
484


20

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

 
7.
Noncontrolling Interests

Noncontrolling Interests in Consolidated Affiliates
 
At March 31, 2018, our noncontrolling interests in consolidated affiliates relate to our joint venture partner's 50.0% interest in office properties in Richmond. Our joint venture partner is an unrelated third party.

Noncontrolling Interests in the Operating Partnership

The following table sets forth the Company's noncontrolling interests in the Operating Partnership:
 
 
Three Months Ended
March 31,
 
2018
 
2017
Beginning noncontrolling interests in the Operating Partnership
$
144,009

 
$
144,802

Adjustment of noncontrolling interests in the Operating Partnership to fair value
(19,582
)
 
(4,972
)
Conversions of Common Units to Common Stock
(902
)
 
(102
)
Net income attributable to noncontrolling interests in the Operating Partnership
888

 
888

Distributions to noncontrolling interests in the Operating Partnership
(1,300
)
 
(1,249
)
Total noncontrolling interests in the Operating Partnership
$
123,113

 
$
139,367


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,
 
2018
 
2017
Net income available for common stockholders
$
32,449

 
$
31,674

Increase in additional paid in capital from conversions of Common Units
to Common Stock
902

 
102

Change from net income available for common stockholders and transfers from noncontrolling interests
$
33,351

 
$
31,776


8.
Disclosure About Fair Value of Financial Instruments

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

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

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

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

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

21

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


8.
Disclosure About Fair Value of Financial Instruments - Continued

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.

The following table sets forth our assets and liabilities and the Company's noncontrolling interests in the Operating Partnership that are measured or disclosed at fair value within the fair value hierarchy.
 
 
 
 
 
Level 1
 
Level 2
 
 
Total
 
Quoted Prices
in Active
Markets for Identical Assets or Liabilities
 
Significant Observable Inputs
Fair Value at March 31, 2018:
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
Mortgages and notes receivable, at fair value (1)
 
$
6,158

 
$

 
$
6,158

Interest rate swaps (in prepaid expenses and other assets)
 
2,179

 

 
2,179

Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)
 
2,376

 
2,376

 

Total Assets
 
$
10,713

 
$
2,376

 
$
8,337

Noncontrolling Interests in the Operating Partnership
 
$
123,113

 
$
123,113

 
$

Liabilities:
 
 
 
 
 
 
Mortgages and notes payable, net, at fair value (1)
 
$
2,090,232

 
$

 
$
2,090,232

Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)
 
2,376

 
2,376

 

Total Liabilities
 
$
2,092,608

 
$
2,376

 
$
2,090,232

Fair Value at December 31, 2017:
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
Mortgages and notes receivable, at fair value (1)
 
$
6,425

 
$

 
$
6,425

Interest rate swaps (in prepaid expenses and other assets)
 
1,286

 

 
1,286

Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)
 
2,388

 
2,388

 

Total Assets
 
$
10,099

 
$
2,388

 
$
7,711

Noncontrolling Interests in the Operating Partnership
 
$
144,009

 
$
144,009

 
$

Liabilities:
 
 
 
 
 
 
Mortgages and notes payable, net, at fair value (1)
 
$
2,015,689

 
$

 
$
2,015,689

Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)
 
2,388

 
2,388

 

Total Liabilities
 
$
2,018,077

 
$
2,388

 
$
2,015,689

__________
(1)    Amounts recorded at historical cost on our Consolidated Balance Sheets at March 31, 2018 and December 31, 2017.


22

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


9.
Share-Based Payments
 
During the three months ended March 31, 2018, the Company granted 94,984 shares of time-based restricted stock and 77,456 shares of total return-based restricted stock with weighted average grant date fair values per share of $43.01 and $40.81, respectively. We recorded share-based compensation expense of $4.3 million and $3.8 million during the three months ended March 31, 2018 and 2017, respectively. At March 31, 2018, there was $8.1 million of total unrecognized share-based compensation costs, which will be recognized over a weighted average remaining contractual term of 2.7 years.

10.
Accumulated Other Comprehensive Income
 
The following table sets forth the components of accumulated other comprehensive income:
 
 
Three Months Ended
March 31,
 
2018
 
2017
Cash flow hedges:
 
 
 
Beginning balance
$
7,838

 
$
4,949

Unrealized gains on cash flow hedges
7,877

 
452

Amortization of cash flow hedges (1)
(106
)
 
484

Total accumulated other comprehensive income
$
15,609

 
$
5,885

__________
(1)    Amounts reclassified out of accumulated other comprehensive income into contractual interest expense.

11.
Real Estate and Other Assets Held For Sale

The following table sets forth the assets held for sale at March 31, 2018 and December 31, 2017, which are considered non-core:
 
 
March 31,
2018
 
December 31,
2017
Assets:
 
 
 
Land
$
870

 
$
870

Buildings and tenant improvements
21,318

 
21,318

Land held for development
355

 
355

Less-accumulated depreciation
(9,304
)
 
(9,304
)
Net real estate assets
13,239

 
13,239

Accrued straight-line rents receivable
475

 
591

Deferred leasing costs, net
255

 
253

Prepaid expenses and other assets
48

 
35

Real estate and other assets, net, held for sale
$
14,017

 
$
14,118



23

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

12.
Earnings Per Share and Per Unit

The following table sets forth the computation of basic and diluted earnings per share of the Company: