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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 September 30, 2018
 
395446631_logotree07.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 ¨   Smaller reporting company ¨   Emerging growth company ¨
Highwoods Realty Limited Partnership
Large accelerated filer ¨   Accelerated filer ¨   Non-accelerated filer x   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 103,489,326 shares of Common Stock outstanding as of October 16, 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 October 16, 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 September 30, 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 SEPTEMBER 30, 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)
 
September 30,
2018
 
December 31,
2017
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
493,426

 
$
485,956

Buildings and tenant improvements
4,671,689

 
4,590,490

Development in-process
166,849

 
88,452

Land held for development
125,488

 
74,765

 
5,457,452

 
5,239,663

Less-accumulated depreciation
(1,280,910
)
 
(1,202,424
)
Net real estate assets
4,176,542

 
4,037,239

Real estate and other assets, net, held for sale

 
14,118

Cash and cash equivalents
5,324

 
3,272

Restricted cash
6,955

 
85,061

Accounts receivable, net of allowance of $1,269 and $753, respectively
24,187

 
24,397

Mortgages and notes receivable, net of allowance of $52 and $72, respectively
5,659

 
6,425

Accrued straight-line rents receivable, net of allowance of $726 and $819, respectively
218,111

 
200,131

Investments in and advances to unconsolidated affiliates
23,371

 
23,897

Deferred leasing costs, net of accumulated amortization of $147,588 and $143,512, respectively
193,796

 
200,679

Prepaid expenses and other assets, net of accumulated depreciation of $20,033 and $19,092,
respectively
34,466

 
28,572

Total Assets
$
4,688,411

 
$
4,623,791

Liabilities, Noncontrolling Interests in the Operating Partnership and Equity:
 
 
 
Mortgages and notes payable, net
$
2,087,421

 
$
2,014,333

Accounts payable, accrued expenses and other liabilities
229,912

 
228,215

Total Liabilities
2,317,333

 
2,242,548

Commitments and contingencies

 

Noncontrolling interests in the Operating Partnership
132,447

 
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;
 
 
 
103,488,326 and 103,266,875 shares issued and outstanding, respectively
1,035

 
1,033

Additional paid-in capital
2,948,320

 
2,929,399

Distributions in excess of net income available for common stockholders
(774,484
)
 
(747,344
)
Accumulated other comprehensive income
17,489

 
7,838

Total Stockholders’ Equity
2,221,247

 
2,219,818

Noncontrolling interests in consolidated affiliates
17,384

 
17,416

Total Equity
2,238,631

 
2,237,234

Total Liabilities, Noncontrolling Interests in the Operating Partnership and Equity
$
4,688,411

 
$
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
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Rental and other revenues
$
179,417

 
$
180,185

 
$
538,647

 
$
526,876

Operating expenses:
 
 
 
 
 
 
 
Rental property and other expenses
61,153

 
61,234

 
180,248

 
177,484

Depreciation and amortization
57,661

 
56,973

 
171,923

 
168,934

Impairments of real estate assets

 
1,445

 

 
1,445

General and administrative
9,551

 
9,247

 
30,869

 
29,787

Total operating expenses
128,365

 
128,899

 
383,040

 
377,650

Interest expense:
 
 
 
 
 
 
 
Contractual
16,719

 
16,395

 
51,579

 
48,763

Amortization of debt issuance costs
718

 
796

 
2,126

 
2,445

 
17,437

 
17,191

 
53,705

 
51,208

Other income:
 
 
 
 
 
 
 
Interest and other income
818

 
558

 
1,735

 
1,806

Gains on debt extinguishment

 

 

 
826

 
818

 
558


1,735


2,632

Income before disposition of investment properties and activity in unconsolidated affiliates
34,433

 
34,653

 
103,637

 
100,650

Gains on disposition of property
3

 
19,849

 
16,975

 
25,181

Equity in earnings of unconsolidated affiliates
573

 
5,047

 
1,641

 
6,757

Net income
35,009

 
59,549

 
122,253

 
132,588

Net (income) attributable to noncontrolling interests in the Operating Partnership
(902
)
 
(1,571
)
 
(3,171
)
 
(3,502
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(324
)
 
(315
)
 
(918
)
 
(914
)
Dividends on Preferred Stock
(623
)
 
(623
)
 
(1,869
)
 
(1,869
)
Net income available for common stockholders
$
33,160

 
$
57,040


$
116,295


$
126,303

Earnings per Common Share – basic:
 
 
 
 
 
 
 
Net income available for common stockholders
$
0.32

 
$
0.55

 
$
1.12

 
$
1.23

Weighted average Common Shares outstanding – basic
103,471

 
103,237

 
103,408

 
102,489

Earnings per Common Share – diluted:
 
 
 
 
 
 
 
Net income available for common stockholders
$
0.32

 
$
0.55

 
$
1.12

 
$
1.23

Weighted average Common Shares outstanding – diluted
106,333

 
106,145

 
106,256

 
105,402

Dividends declared per Common Share
$
0.4625

 
$
0.4400

 
$
1.3875

 
$
1.3200


See accompanying notes to consolidated financial statements.

4

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Comprehensive Income
(Unaudited and in thousands)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
35,009

 
$
59,549

 
$
122,253

 
$
132,588

Other comprehensive income/(loss):
 
 
 
 
 
 
 
Unrealized gains/(losses) on cash flow hedges
2,187

 
(347
)
 
10,926

 
(31
)
Amortization of cash flow hedges
(654
)
 
211

 
(1,275
)
 
992

Total other comprehensive income/(loss)
1,533

 
(136
)
 
9,651

 
961

Total comprehensive income
36,542

 
59,413

 
131,904

 
133,549

Less-comprehensive (income) attributable to noncontrolling interests
(1,226
)
 
(1,886
)
 
(4,089
)
 
(4,416
)
Comprehensive income attributable to common stockholders
$
35,316

 
$
57,527

 
$
127,815

 
$
129,133


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
22,815

 

 

 
1,476

 

 

 

 
1,476

Conversions of Common Units to Common Stock
26,196

 

 

 
1,231

 

 

 

 
1,231

Dividends on Common Stock


 

 

 

 

 

 
(143,435
)
 
(143,435
)
Dividends on Preferred Stock


 

 

 

 

 

 
(1,869
)
 
(1,869
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value


 

 

 
9,607

 

 

 

 
9,607

Distributions to noncontrolling interests in consolidated affiliates


 

 

 

 

 
(950
)
 

 
(950
)
Issuances of restricted stock
172,440

 

 

 

 

 

 

 

Redemptions/repurchases of Preferred Stock
 
 

 
(5
)
 

 

 

 

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

 
2

 

 
6,607

 

 

 

 
6,609

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


 

 

 

 

 

 
(3,171
)
 
(3,171
)
Net (income) attributable to noncontrolling interests in consolidated affiliates


 

 

 

 

 
918

 
(918
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income


 

 

 

 

 

 
122,253

 
122,253

Other comprehensive income


 

 

 

 
9,651

 

 

 
9,651

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
131,904

Balance at September 30, 2018
103,488,326

 
$
1,035

 
$
28,887

 
$
2,948,320

 
$
17,489

 
$
17,384

 
$
(774,484
)
 
$
2,238,631



 
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
1,464,638

 
15

 

 
70,292

 

 

 

 
70,307

Conversions of Common Units to Common Stock
8,000

 

 

 
408

 

 

 

 
408

Dividends on Common Stock

 

 

 

 

 

 
(135,375
)
 
(135,375
)
Dividends on Preferred Stock

 

 

 

 

 

 
(1,869
)
 
(1,869
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value

 

 

 
(3,297
)
 

 

 

 
(3,297
)
Distributions to noncontrolling interests in consolidated affiliates

 

 

 

 

 
(1,231
)
 

 
(1,231
)
Issuances of restricted stock
110,748

 

 

 

 

 

 

 

Redemptions/repurchases of Preferred Stock

 

 
(28
)
 

 

 

 

 
(28
)
Share-based compensation expense, net of forfeitures

 

 

 
5,764

 

 

 

 
5,764

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

 

 

 

 

 

 
(3,502
)
 
(3,502
)
Net (income) attributable to noncontrolling interests in consolidated affiliates

 

 

 

 

 
914

 
(914
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 

 
132,588

 
132,588

Other comprehensive income

 

 

 

 
961

 

 

 
961

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
133,549

Balance at September 30, 2017
103,248,940

 
$
1,032

 
$
28,892

 
$
2,924,048

 
$
5,910

 
$
17,644

 
$
(758,484
)
 
$
2,219,042


See accompanying notes to consolidated financial statements.

6

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
 
Nine Months Ended
September 30,
 
2018
 
2017
Operating activities:
 
 
 
Net income
$
122,253

 
$
132,588

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
171,923

 
168,934

Amortization of lease incentives and acquisition-related intangible assets and liabilities
(1,488
)
 
(666
)
Share-based compensation expense
6,609

 
5,764

Allowance for losses on accounts and accrued straight-line rents receivable
791

 
435

Accrued interest on mortgages and notes receivable
(336
)
 
(391
)
Amortization of debt issuance costs
2,126

 
2,445

Amortization of cash flow hedges
(1,275
)
 
992

Amortization of mortgages and notes payable fair value adjustments
1,071

 
422

Impairments of real estate assets

 
1,445

Gains on debt extinguishment

 
(826
)
Net gains on disposition of property
(16,975
)
 
(25,181
)
Equity in earnings of unconsolidated affiliates
(1,641
)
 
(6,757
)
Distributions of earnings from unconsolidated affiliates
1,943

 
4,815

Settlement of cash flow hedges
7,216

 
7,322

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
4,778

 
916

Prepaid expenses and other assets
(1,487
)
 
2,735

Accrued straight-line rents receivable
(17,945
)
 
(24,473
)
Accounts payable, accrued expenses and other liabilities
15,395

 
(308
)
Net cash provided by operating activities
292,958

 
270,211

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

Investments in development in-process
(130,241
)
 
(121,367
)
Investments in tenant improvements and deferred leasing costs
(89,875
)
 
(78,691
)
Investments in building improvements
(52,151
)
 
(41,862
)
Net proceeds from disposition of real estate assets
35,441

 
85,538

Distributions of capital from unconsolidated affiliates
105

 
11,670

Repayments of mortgages and notes receivable
1,137

 
2,435

Investments in and advances to unconsolidated affiliates

 
(10,063
)
Changes in other investing activities
(4,671
)
 
(5,605
)
Net cash used in investing activities
(290,904
)
 
(157,945
)
Financing activities:
 
 
 
Dividends on Common Stock
(143,435
)
 
(135,375
)
Special dividend on Common Stock

 
(81,205
)
Redemptions/repurchases of Preferred Stock
(5
)
 
(28
)
Dividends on Preferred Stock
(1,869
)
 
(1,869
)
Distributions to noncontrolling interests in the Operating Partnership
(3,895
)
 
(3,742
)
Special distribution to noncontrolling interests in the Operating Partnership

 
(2,271
)
Distributions to noncontrolling interests in consolidated affiliates
(950
)
 
(1,231
)
Proceeds from the issuance of Common Stock
3,242

 
75,517

Costs paid for the issuance of Common Stock
(95
)
 
(1,244
)
Repurchase of shares related to tax withholdings
(1,671
)
 
(3,966
)
Borrowings on revolving credit facility
336,400

 
492,300

Repayments of revolving credit facility
(397,400
)
 
(420,300
)
Borrowings on mortgages and notes payable
345,863

 
456,001

Repayments of mortgages and notes payable
(211,345
)
 
(507,114
)
Payments of debt extinguishment costs

 
(57
)
Changes in debt issuance costs and other financing activities
(2,948
)
 
(3,688
)
Net cash used in financing activities
(78,108
)
 
(138,272
)
Net decrease in cash and cash equivalents and restricted cash
$
(76,054
)
 
$
(26,006
)
See accompanying notes to consolidated financial statements.

7

Table of Contents


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

 
Nine Months Ended
September 30,
 
2018
 
2017
Net decrease in cash and cash equivalents and restricted cash
$
(76,054
)
 
$
(26,006
)
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
$
12,279

 
$
52,625


Reconciliation of cash and cash equivalents and restricted cash:

 
Nine Months Ended
September 30,
 
2018
 
2017
Cash and cash equivalents at end of the period
$
5,324

 
$
4,864

Restricted cash at end of the period
6,955

 
47,761

Cash and cash equivalents and restricted cash at end of the period
$
12,279

 
$
52,625


Supplemental disclosure of cash flow information:
 
 
Nine Months Ended
September 30,
 
2018
 
2017
Cash paid for interest, net of amounts capitalized
$
56,771

 
$
50,025


Supplemental disclosure of non-cash investing and financing activities:
 
 
Nine Months Ended
September 30,
 
2018
 
2017
Unrealized gains/(losses) on cash flow hedges
$
10,926

 
$
(31
)
Conversions of Common Units to Common Stock
1,231

 
408

Changes in accrued capital expenditures
(10,396
)
 
(6,327
)
Write-off of fully depreciated real estate assets
63,820

 
41,860

Write-off of fully amortized leasing costs
26,660

 
28,343

Write-off of fully amortized debt issuance costs
2,733

 
4,324

Adjustment of noncontrolling interests in the Operating Partnership to fair value
(9,607
)
 
3,297


See accompanying notes to consolidated financial statements.

8

Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Balance Sheets
(Unaudited and in thousands, except unit and per unit data)
 
September 30,
2018
 
December 31,
2017
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
493,426

 
$
485,956

Buildings and tenant improvements
4,671,689

 
4,590,490

Development in-process
166,849

 
88,452

Land held for development
125,488

 
74,765

 
5,457,452

 
5,239,663

Less-accumulated depreciation
(1,280,910
)
 
(1,202,424
)
Net real estate assets
4,176,542

 
4,037,239

Real estate and other assets, net, held for sale

 
14,118

Cash and cash equivalents
5,324

 
3,272

Restricted cash
6,955

 
85,061

Accounts receivable, net of allowance of $1,269 and $753, respectively
24,187

 
24,397

Mortgages and notes receivable, net of allowance of $52 and $72, respectively
5,659

 
6,425

Accrued straight-line rents receivable, net of allowance of $726 and $819, respectively
218,111

 
200,131

Investments in and advances to unconsolidated affiliates
23,371

 
23,897

Deferred leasing costs, net of accumulated amortization of $147,588 and $143,512, respectively
193,796

 
200,679

Prepaid expenses and other assets, net of accumulated depreciation of $20,033 and $19,092,
respectively
34,466

 
28,572

Total Assets
$
4,688,411

 
$
4,623,791

Liabilities, Redeemable Operating Partnership Units and Capital:
 
 
 
Mortgages and notes payable, net
$
2,087,421

 
$
2,014,333

Accounts payable, accrued expenses and other liabilities
229,912

 
228,215

Total Liabilities
2,317,333

 
2,242,548

Commitments and contingencies

 

Redeemable Operating Partnership Units:
 
 
 
Common Units, 2,802,508 and 2,828,704 outstanding, respectively
132,447

 
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
161,334

 
172,901

Capital:
 
 
 
Common Units:
 
 
 
General partner Common Units, 1,058,820 and 1,056,868 outstanding, respectively
21,749

 
21,830

Limited partner Common Units, 102,020,697 and 101,801,198 outstanding, respectively
2,153,122

 
2,161,258

Accumulated other comprehensive income
17,489

 
7,838

Noncontrolling interests in consolidated affiliates
17,384

 
17,416

Total Capital
2,209,744

 
2,208,342

Total Liabilities, Redeemable Operating Partnership Units and Capital
$
4,688,411

 
$
4,623,791


See accompanying notes to consolidated financial statements.

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Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Income
(Unaudited and in thousands, except per unit amounts)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Rental and other revenues
$
179,417

 
$
180,185

 
$
538,647

 
$
526,876

Operating expenses:
 
 
 
 
 
 
 
Rental property and other expenses
61,153

 
61,234

 
180,248

 
177,484

Depreciation and amortization
57,661

 
56,973

 
171,923

 
168,934

Impairments of real estate assets

 
1,445

 

 
1,445

General and administrative
9,551

 
9,247

 
30,869

 
29,787

Total operating expenses
128,365

 
128,899

 
383,040

 
377,650

Interest expense:
 
 
 
 
 
 
 
Contractual
16,719

 
16,395

 
51,579

 
48,763

Amortization of debt issuance costs
718

 
796

 
2,126

 
2,445

 
17,437

 
17,191

 
53,705

 
51,208

Other income:
 
 
 
 
 
 
 
Interest and other income
818

 
558

 
1,735

 
1,806

Gains on debt extinguishment

 

 

 
826

 
818

 
558

 
1,735

 
2,632

Income before disposition of investment properties and activity in unconsolidated affiliates
34,433

 
34,653

 
103,637

 
100,650

Gains on disposition of property
3

 
19,849

 
16,975

 
25,181

Equity in earnings of unconsolidated affiliates
573

 
5,047

 
1,641

 
6,757

Net income
35,009

 
59,549

 
122,253

 
132,588

Net (income) attributable to noncontrolling interests in consolidated affiliates
(324
)
 
(315
)
 
(918
)
 
(914
)
Distributions on Preferred Units
(623
)
 
(623
)
 
(1,869
)
 
(1,869
)
Net income available for common unitholders
$
34,062

 
$
58,611

 
$
119,466

 
$
129,805

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

 
$
0.55

 
$
1.13

 
$
1.24

Weighted average Common Units outstanding – basic
105,866

 
105,660

 
105,808

 
104,914

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

 
$
0.55

 
$
1.13

 
$
1.24

Weighted average Common Units outstanding – diluted
105,924

 
105,736

 
105,847

 
104,993

Distributions declared per Common Unit
$
0.4625

 
$
0.4400

 
$
1.3875

 
$
1.3200


See accompanying notes to consolidated financial statements.

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Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Comprehensive Income
(Unaudited and in thousands)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
35,009

 
$
59,549

 
$
122,253

 
$
132,588

Other comprehensive income/(loss):
 
 
 
 
 
 
 
Unrealized gains/(losses) on cash flow hedges
2,187

 
(347
)
 
10,926

 
(31
)
Amortization of cash flow hedges
(654
)
 
211

 
(1,275
)
 
992

Total other comprehensive income/(loss)
1,533

 
(136
)
 
9,651

 
961

Total comprehensive income
36,542

 
59,413

 
131,904

 
133,549

Less-comprehensive (income) attributable to noncontrolling interests
(324
)
 
(315
)
 
(918
)
 
(914
)
Comprehensive income attributable to common unitholders
$
36,218


$
59,098

 
$
130,986

 
$
132,635


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, 2017
$
21,830

 
$
2,161,258

 
$
7,838

 
$
17,416

 
$
2,208,342

Issuances of Common Units, net of issuance costs and tax withholdings
15

 
1,461

 

 

 
1,476

Distributions on Common Units
(1,467
)
 
(145,296
)
 

 

 
(146,763
)
Distributions on Preferred Units
(19
)
 
(1,850
)
 

 

 
(1,869
)
Share-based compensation expense, net of forfeitures
66

 
6,543

 

 

 
6,609

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(950
)
 
(950
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
110

 
10,885

 

 

 
10,995

Net (income) attributable to noncontrolling interests in consolidated affiliates
(9
)
 
(909
)
 

 
918

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
1,223

 
121,030

 

 

 
122,253

Other comprehensive income

 

 
9,651

 

 
9,651

Total comprehensive income
 
 
 
 
 
 
 
 
131,904

Balance at September 30, 2018
$
21,749

 
$
2,153,122

 
$
17,489

 
$
17,384

 
$
2,209,744



 
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
703

 
69,604

 

 

 
70,307

Distributions on Common Units
(1,386
)
 
(137,191
)
 

 

 
(138,577
)
Distributions on Preferred Units
(19
)
 
(1,850
)
 

 

 
(1,869
)
Share-based compensation expense, net of forfeitures
58

 
5,706

 

 

 
5,764

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(1,231
)
 
(1,231
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
(31
)
 
(3,158
)
 

 

 
(3,189
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(9
)
 
(905
)
 

 
914

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
1,326

 
131,262

 

 

 
132,588

Other comprehensive income

 

 
961

 

 
961

Total comprehensive income
 
 
 
 
 
 
 
 
133,549

Balance at September 30, 2017
$
21,665

 
$
2,144,931

 
$
5,910

 
$
17,644

 
$
2,190,150


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)
 
Nine Months Ended
September 30,
 
2018
 
2017
Operating activities:
 
 
 
Net income
$
122,253

 
$
132,588

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
171,923

 
168,934

Amortization of lease incentives and acquisition-related intangible assets and liabilities
(1,488
)
 
(666
)
Share-based compensation expense
6,609

 
5,764

Allowance for losses on accounts and accrued straight-line rents receivable
791

 
435

Accrued interest on mortgages and notes receivable
(336
)
 
(391
)
Amortization of debt issuance costs
2,126

 
2,445

Amortization of cash flow hedges
(1,275
)
 
992

Amortization of mortgages and notes payable fair value adjustments
1,071

 
422

Impairments of real estate assets

 
1,445

Gains on debt extinguishment

 
(826
)
Net gains on disposition of property
(16,975
)
 
(25,181
)
Equity in earnings of unconsolidated affiliates
(1,641
)
 
(6,757
)
Distributions of earnings from unconsolidated affiliates
1,943

 
4,815

Settlement of cash flow hedges
7,216

 
7,322

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
4,778

 
916

Prepaid expenses and other assets
(1,487
)
 
2,735

Accrued straight-line rents receivable
(17,945
)
 
(24,473
)
Accounts payable, accrued expenses and other liabilities
15,395

 
(308
)
Net cash provided by operating activities
292,958

 
270,211

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

Investments in development in-process
(130,241
)
 
(121,367
)
Investments in tenant improvements and deferred leasing costs
(89,875
)
 
(78,691
)
Investments in building improvements
(52,151
)
 
(41,862
)
Net proceeds from disposition of real estate assets
35,441

 
85,538

Distributions of capital from unconsolidated affiliates
105

 
11,670

Repayments of mortgages and notes receivable
1,137

 
2,435

Investments in and advances to unconsolidated affiliates

 
(10,063
)
Changes in other investing activities
(4,671
)
 
(5,605
)
Net cash used in investing activities
(290,904
)
 
(157,945
)
Financing activities:
 
 
 
Distributions on Common Units
(146,763
)
 
(138,577
)
Special distribution on Common Units

 
(83,149
)
Redemptions/repurchases of Preferred Units
(5
)
 
(28
)
Distributions on Preferred Units
(1,869
)
 
(1,869
)
Distributions to noncontrolling interests in consolidated affiliates
(950
)
 
(1,231
)
Proceeds from the issuance of Common Units
3,242

 
75,517

Costs paid for the issuance of Common Units
(95
)
 
(1,244
)
Repurchase of units related to tax withholdings
(1,671
)
 
(3,966
)
Borrowings on revolving credit facility
336,400

 
492,300

Repayments of revolving credit facility
(397,400
)
 
(420,300
)
Borrowings on mortgages and notes payable
345,863

 
456,001

Repayments of mortgages and notes payable
(211,345
)
 
(507,114
)
Payments of debt extinguishment costs

 
(57
)
Changes in debt issuance costs and other financing activities
(3,515
)
 
(4,555
)
Net cash used in financing activities
(78,108
)
 
(138,272
)
Net decrease in cash and cash equivalents and restricted cash
$
(76,054
)
 
$
(26,006
)
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)

 
Nine Months Ended
September 30,
 
2018
 
2017
Net decrease in cash and cash equivalents and restricted cash
$
(76,054
)
 
$
(26,006
)
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
$
12,279

 
$
52,625


Reconciliation of cash and cash equivalents and restricted cash:

 
Nine Months Ended
September 30,
 
2018
 
2017
Cash and cash equivalents at end of the period
$
5,324

 
$
4,864

Restricted cash at end of the period
6,955

 
47,761

Cash and cash equivalents and restricted cash at end of the period
$
12,279

 
$
52,625


Supplemental disclosure of cash flow information:
 
 
Nine Months Ended
September 30,
 
2018
 
2017
Cash paid for interest, net of amounts capitalized
$
56,771

 
$
50,025


Supplemental disclosure of non-cash investing and financing activities:
 
 
Nine Months Ended
September 30,
 
2018
 
2017
Unrealized gains/(losses) on cash flow hedges
$
10,926

 
$
(31
)
Changes in accrued capital expenditures
(10,396
)
 
(6,327
)
Write-off of fully depreciated real estate assets
63,820

 
41,860

Write-off of fully amortized leasing costs
26,660

 
28,343

Write-off of fully amortized debt issuance costs
2,733

 
4,324

Adjustment of Redeemable Common Units to fair value
(11,562
)
 
2,649


See accompanying notes to consolidated financial statements.

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Table of Contents

HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 September 30, 2018, we owned or had an interest in 30.7 million rentable square feet of in-service properties, 1.8 million rentable square feet of properties under development and approximately 350 acres of development land.
 
The Company is the sole general partner of the Operating Partnership. At September 30, 2018, the Company owned all of the Preferred Units and 103.1 million, or 97.4%, of the Common Units in the Operating Partnership. Limited partners owned the remaining 2.8 million Common Units. During the nine months ended September 30, 2018, the Company redeemed 26,196 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 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 September 30, 2018, a reserve of $0.6 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") that superseded the revenue recognition requirements under previous guidance, which we adopted as of January 1, 2018. Several updates have been issued subsequently that are 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 nine months ended September 30, 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. Adoption of this ASU resulted in no other changes with respect to the timing of revenue recognition or internal controls related to contracts other than leases, such as 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 an $18.6 million decrease in net cash used in investing activities for the nine months ended September 30, 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 and escrows and reserves for debt service, real estate taxes and property insurance established pursuant to certain mortgage financing arrangements.
 
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 that sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. In addition, the guidance requires lessors to capitalize and amortize only incremental direct leasing costs. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right of use asset and a lease liability for all leases with a term of greater than a year regardless of their classification. Leases with a term of a year or less will be accounted for in the same manner as operating leases today. The guidance supersedes previously issued guidance under ASC Topic 840 “Leases.”

An entity may elect a package of practical expedients, which allows for the following:
 
An entity need not reassess whether any expired or existing contracts are or contain leases;
 
An entity need not reassess the lease classification for any expired or existing leases; and
 
An entity need not reassess initial direct costs for any existing leases.
 
This package of practical expedients is available as a single election that must be consistently applied to all existing leases at the date of adoption.

Furthermore, the FASB finalized an amendment that allows entities to present comparative periods, in the year of adoption, under ASC 840, which effectively allows for an initial date of adoption of January 1, 2019. The amendment also provides a practical expedient to lessors that removes the requirement to separate lease and non-lease components, provided certain conditions are met.

Our analysis of our leases indicates that the lease component is the predominant component, that the timing and pattern of transfer of our material non-lease components (primarily cost recovery income) are the same as the lease components and the lease component, if it were accounted for separately, would be classified as an operating lease. As such, we believe the adoption of the ASU will not significantly change the accounting or the related internal controls for rental and other revenues from operating leases where we are the lessor, and that such leases will be accounted for in a manner similar to existing standards with the underlying leased asset being reported and recognized as a real estate asset. 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. Such capitalized costs have averaged approximately $2.5 million annually.

Leases where we are the lessee include primarily our operating ground leases. We currently believe that existing ground leases executed before the adoption date will continue to be accounted for as operating leases and the new guidance will not have a material impact on our recognition of ground lease expense or our results of operations. However, we will be required to recognize a right of use asset and a lease liability on our Consolidated Balance Sheets equal to the present value of the minimum lease payments required under each ground lease. See Note 8 to our Consolidated Financial Statements in our 2017 Annual Report on Form 10-K for information regarding our ground lease commitments.

We will adopt the new ASU effective January 1, 2019 using the modified retrospective approach and will elect the use of all practical expedients provided by the ASU and related amendments as mentioned above.

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.
 

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)


1.    Description of Business and Significant Accounting Policies – Continued
 
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 continue to monitor FASB activity with respect to a recent proposal to exclude operating lease receivables from the scope of this ASU. 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.

The FASB issued an ASU that changes certain disclosure requirements for fair value measurements. The ASU is required to be adopted in 2020 and applied prospectively. We do not expect such adoption to have a material effect on our Notes to Consolidated Financial Statements.

2.    Real Estate Assets
 
Acquisitions
 
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.
 
Dispositions
 
During the third quarter of 2018, we sold various land parcels for an aggregate sale price of $2.1 million and recorded nominal aggregate gains on disposition of property.
 
During the second quarter of 2018, we sold a building and various land parcels for an aggregate sale price of $34.0 million and recorded aggregate gains on disposition of property of $17.0 million.

3.    Mortgages and Notes Receivable
 
Mortgages and notes receivable were $5.7 million and $6.4 million at September 30, 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 September 30, 2018, our mortgages and notes receivable were not in default and there were no other indicators of impairment.

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)

 
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:
 
 
September 30,
2018
 
December 31,
2017
Assets:
 
 
 
Deferred leasing costs (including lease incentives and above market lease and in-place lease acquisition-related intangible assets)
$
341,384

 
$
344,191

Less accumulated amortization
(147,588
)
 
(143,512
)
 
$
193,796

 
$
200,679

Liabilities (in accounts payable, accrued expenses and other liabilities):
 
 
 
Acquisition-related below market lease liabilities
$
58,698

 
$
59,947

Less accumulated amortization
(31,519
)
 
(28,214
)
 
$
27,179

 
$
31,733

 
The following table sets forth amortization of intangible assets and below market lease liabilities:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Amortization of deferred leasing costs and acquisition-related intangible assets (in depreciation and amortization)
$
8,969

 
$
10,130

 
$
27,671

 
$
30,882

Amortization of lease incentives (in rental and other revenues)
$
452

 
$
444

 
$
1,357

 
$
1,284

Amortization of acquisition-related intangible assets (in rental and other revenues)
$
415

 
$
671

 
$
1,292

 
$
2,382

Amortization of acquisition-related intangible assets (in rental property and other expenses)
$
140

 
$
140

 
$
416

 
$
416

Amortization of acquisition-related below market lease liabilities (in rental and other revenues)
$
(1,535
)
 
$
(1,576
)
 
$
(4,553
)
 
$
(4,748
)

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)
October 1 through December 31, 2018
 
$
9,395

 
$
453

 
$
369

 
$
136

 
$
(1,442
)
2019
 
34,011

 
1,647

 
1,273

 
553

 
(5,425
)
2020
 
29,391

 
1,360

 
959

 
518

 
(5,169
)
2021
 
24,873

 
1,132

 
632

 

 
(4,362
)
2022
 
20,584

 
915

 
462

 

 
(3,258
)
Thereafter
 
58,398

 
5,327

 
1,408

 

 
(7,523
)
 
 
$
176,652

 
$
10,834

 
$
5,103

 
$
1,207

 
$
(27,179
)
Weighted average remaining amortization periods as of September 30, 2018 (in years)
 
7.4

 
10.1

 
6.5

 
2.2

 
6.1


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)

 
5.    Mortgages and Notes Payable
 
The following table sets forth our mortgages and notes payable:
 
 
September 30,
2018
 
December 31,
2017
Secured indebtedness
$
97,636

 
$
98,981

Unsecured indebtedness
1,999,439

 
1,923,513

Less-unamortized debt issuance costs
(9,654
)
 
(8,161
)
Total mortgages and notes payable, net
$
2,087,421

 
$
2,014,333

 
At September 30, 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 was $184.0 million and $173.0 million outstanding under our revolving credit facility at September 30, 2018 and October 16, 2018, respectively. At both September 30, 2018 and October 16, 2018, we had $0.4 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 September 30, 2018 and October 16, 2018 was $415.6 million and $426.6 million, respectively.
 
During the second quarter of 2018, we paid off at maturity $200.0 million principal amount of 7.5% unsecured notes.
 
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 (some of which debt securities may be hedged to a fixed interest rate pursuant to the forward-starting swaps referred to in Note 6);
 
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.

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)

 
6.
Derivative Financial Instruments

During the second quarter of 2018, we entered into $150.0 million notional amount of forward-starting swaps that effectively lock the underlying 10-year treasury rate at 2.91% with respect to a planned issuance of debt securities by the Operating Partnership expected to occur prior to June 11, 2019.