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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, 2019
 
397617595_logotree08.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 every Interactive Data File required to be submitted 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 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 103,692,619 shares of Common Stock outstanding as of April 16, 2019.
 




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 16, 2019, 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, 2019 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 11 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, 2019

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. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

HIGHWOODS PROPERTIES, INC.
Consolidated Balance Sheets
(Unaudited and in thousands, except share and per share data)
 
March 31,
2019
 
December 31,
2018
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
491,613

 
$
491,441

Buildings and tenant improvements
4,728,637

 
4,676,862

Development in-process
162,076

 
165,537

Land held for development
94,312

 
128,248

 
5,476,638

 
5,462,088

Less-accumulated depreciation
(1,324,447
)
 
(1,296,562
)
Net real estate assets
4,152,191

 
4,165,526

Real estate and other assets, net, held for sale
24,893

 

Cash and cash equivalents
4,827

 
3,769

Restricted cash
7,640

 
6,374

Accounts receivable
30,646

 
25,952

Mortgages and notes receivable, net of allowance of $36 and $44, respectively
1,623

 
5,599

Accrued straight-line rents receivable
219,870

 
220,088

Investments in and advances to unconsolidated affiliates
23,296

 
23,585

Deferred leasing costs, net of accumulated amortization of $149,863 and $149,275, respectively
194,848

 
195,273

Prepaid expenses and other assets, net of accumulated depreciation of $18,751 and $18,074, respectively
66,282

 
28,843

Total Assets
$
4,726,116

 
$
4,675,009

Liabilities, Noncontrolling Interests in the Operating Partnership and Equity:
 
 
 
Mortgages and notes payable, net
$
2,160,594

 
$
2,085,831

Accounts payable, accrued expenses and other liabilities
237,278

 
218,922

Total Liabilities
2,397,872

 
2,304,753

Commitments and contingencies

 

Noncontrolling interests in the Operating Partnership
127,976

 
105,960

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), 28,859 and 28,877 shares issued and outstanding, respectively
28,859

 
28,877

Common Stock, $.01 par value, 200,000,000 authorized shares;
 
 
 
103,690,619 and 103,557,065 shares issued and outstanding, respectively
1,037

 
1,036

Additional paid-in capital
2,956,517

 
2,976,197

Distributions in excess of net income available for common stockholders
(811,223
)
 
(769,303
)
Accumulated other comprehensive income
7,494

 
9,913

Total Stockholders’ Equity
2,182,684

 
2,246,720

Noncontrolling interests in consolidated affiliates
17,584

 
17,576

Total Equity
2,200,268

 
2,264,296

Total Liabilities, Noncontrolling Interests in the Operating Partnership and Equity
$
4,726,116

 
$
4,675,009

 
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,
 
2019
 
2018
Rental and other revenues
$
172,363

 
$
180,438

Operating expenses:
 
 
 
Rental property and other expenses
60,551

 
59,432

Depreciation and amortization
69,204

 
57,568

General and administrative
12,381

 
11,778

Total operating expenses
142,136

 
128,778

Interest expense
18,739

 
18,391

Other income/(loss)
(3,766
)
 
455

Equity in earnings of unconsolidated affiliates
664

 
522

Net income
8,386

 
34,246

Net (income) attributable to noncontrolling interests in the Operating Partnership
(193
)
 
(888
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(316
)
 
(286
)
Dividends on Preferred Stock
(622
)
 
(623
)
Net income available for common stockholders
$
7,255


$
32,449

Earnings per Common Share – basic:
 
 
 
Net income available for common stockholders
$
0.07

 
$
0.31

Weighted average Common Shares outstanding – basic
103,600

 
103,324

Earnings per Common Share – diluted:
 
 
 
Net income available for common stockholders
$
0.07

 
$
0.31

Weighted average Common Shares outstanding – diluted
106,357

 
106,165

 
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,
 
2019
 
2018
Comprehensive income:
 
 
 
Net income
$
8,386

 
$
34,246

Other comprehensive income/(loss):
 
 
 
Unrealized gains/(losses) on cash flow hedges
(1,904
)
 
7,877

Amortization of cash flow hedges
(515
)
 
(106
)
Total other comprehensive income/(loss)
(2,419
)
 
7,771

Total comprehensive income
5,967

 
42,017

Less-comprehensive (income) attributable to noncontrolling interests
(509
)
 
(1,174
)
Comprehensive income attributable to common stockholders
$
5,458

 
$
40,843

 
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, 2018
103,557,065

 
$
1,036

 
$
28,877

 
$
2,976,197

 
$
9,913

 
$
17,576

 
$
(769,303
)
 
$
2,264,296

Issuances of Common Stock, net of issuance costs and tax withholdings
(33,377
)
 

 

 
(1,128
)
 

 

 

 
(1,128
)
Conversions of Common Units to Common Stock
3,000

 

 

 
131

 

 

 

 
131

Dividends on Common Stock ($0.475 per share)


 

 

 

 

 

 
(49,175
)
 
(49,175
)
Dividends on Preferred Stock ($21.5625 per share)


 

 

 

 

 

 
(622
)
 
(622
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value


 

 

 
(23,254
)
 

 

 

 
(23,254
)
Distributions to noncontrolling interests in consolidated affiliates


 

 

 

 

 
(308
)
 

 
(308
)
Issuances of restricted stock
164,190

 

 

 

 

 

 

 

Redemptions/repurchases of Preferred Stock
 
 

 
(18
)
 

 

 

 

 
(18
)
Share-based compensation expense, net of forfeitures
(259
)
 
1

 

 
4,571

 

 

 

 
4,572

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


 

 

 

 

 

 
(193
)
 
(193
)
Net (income) attributable to noncontrolling interests in consolidated affiliates


 

 

 

 

 
316

 
(316
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income


 

 

 

 

 

 
8,386

 
8,386

Other comprehensive loss


 

 

 

 
(2,419
)
 

 

 
(2,419
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5,967

Balance at March 31, 2019
103,690,619

 
$
1,037

 
$
28,859

 
$
2,956,517

 
$
7,494

 
$
17,584

 
$
(811,223
)
 
$
2,200,268



 
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 ($0.4625 per share)

 

 

 

 

 

 
(47,747
)
 
(47,747
)
Dividends on Preferred Stock ($21.5625 per share)

 

 

 

 

 

 
(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

 
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,
 
2019
 
2018
Operating activities:
 
 
 
Net income
$
8,386

 
$
34,246

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
69,204

 
57,568

Amortization of lease incentives and acquisition-related intangible assets and liabilities
1,689

 
(509
)
Share-based compensation expense
4,572

 
4,295

Credit losses on operating lease receivables
7,315

 
227

Write-off of mortgages and notes receivable
4,087

 

Accrued interest on mortgages and notes receivable
(85
)
 
(112
)
Amortization of debt issuance costs
736

 
686

Amortization of cash flow hedges
(515
)
 
(106
)
Amortization of mortgages and notes payable fair value adjustments
385

 
317

Losses on debt extinguishment
375

 

Equity in earnings of unconsolidated affiliates
(664
)
 
(522
)
Distributions of earnings from unconsolidated affiliates
609

 
881

Settlement of cash flow hedges
(5,144
)
 
7,216

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(2,583
)
 
3,288

Prepaid expenses and other assets
(6,953
)
 
(7,692
)
Accrued straight-line rents receivable
(6,903
)
 
(6,619
)
Accounts payable, accrued expenses and other liabilities
(11,798
)
 
(14,636
)
Net cash provided by operating activities
62,713

 
78,528

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

 
(50,649
)
Investments in development in-process
(28,555
)
 
(42,438
)
Investments in tenant improvements and deferred leasing costs
(38,544
)
 
(33,071
)
Investments in building improvements
(12,517
)
 
(19,293
)
Distributions of capital from unconsolidated affiliates
29

 
105

Repayments of mortgages and notes receivable
74

 
379

Changes in other investing activities
(1,989
)
 
(586
)
Net cash used in investing activities
(81,502
)
 
(145,553
)
Financing activities:
 
 
 
Dividends on Common Stock
(49,175
)
 
(47,747
)
Redemptions/repurchases of Preferred Stock
(18
)
 
(5
)
Dividends on Preferred Stock
(622
)
 
(623
)
Distributions to noncontrolling interests in the Operating Partnership
(1,300
)
 
(1,300
)
Distributions to noncontrolling interests in consolidated affiliates
(308
)
 
(238
)
Proceeds from the issuance of Common Stock
652

 
561

Costs paid for the issuance of Common Stock

 
(46
)
Repurchase of shares related to tax withholdings
(1,780
)
 
(1,544
)
Borrowings on revolving credit facility
98,300

 
32,000

Repayments of revolving credit facility
(145,300
)
 
(277,000
)
Borrowings on mortgages and notes payable
349,010

 
345,863

Repayments of mortgages and notes payable
(225,462
)
 
(444
)
Changes in debt issuance costs and other financing activities
(2,884
)
 
(2,903
)
Net cash provided by financing activities
21,113

 
46,574

Net increase/(decrease) in cash and cash equivalents and restricted cash
$
2,324

 
$
(20,451
)
 
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,
 
2019
 
2018
Net increase/(decrease) in cash and cash equivalents and restricted cash
$
2,324

 
$
(20,451
)
Cash and cash equivalents and restricted cash at beginning of the period
10,143

 
88,333

Cash and cash equivalents and restricted cash at end of the period
$
12,467

 
$
67,882


Reconciliation of cash and cash equivalents and restricted cash:

 
Three Months Ended
March 31,
 
2019
 
2018
Cash and cash equivalents at end of the period
$
4,827

 
$
31,034

Restricted cash at end of the period
7,640

 
36,848

Cash and cash equivalents and restricted cash at end of the period
$
12,467

 
$
67,882


Supplemental disclosure of cash flow information:
 
 
Three Months Ended
March 31,
 
2019
 
2018
Cash paid for interest, net of amounts capitalized
$
23,924

 
$
15,986


Supplemental disclosure of non-cash investing and financing activities:
 
 
Three Months Ended
March 31,
 
2019
 
2018
Unrealized gains/(losses) on cash flow hedges
$
(1,904
)
 
$
7,877

Conversions of Common Units to Common Stock
131

 
902

Changes in accrued capital expenditures
(119
)
 
(7,333
)
Write-off of fully depreciated real estate assets
23,880

 
10,511

Write-off of fully amortized leasing costs
12,671

 
7,112

Write-off of fully amortized debt issuance costs
828

 

Adjustment of noncontrolling interests in the Operating Partnership to fair value
23,254

 
(19,582
)
Initial recognition of lease liabilities related to right of use assets
35,349

 

 
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,
2019
 
December 31,
2018
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
491,613

 
$
491,441

Buildings and tenant improvements
4,728,637

 
4,676,862

Development in-process
162,076

 
165,537

Land held for development
94,312

 
128,248

 
5,476,638

 
5,462,088

Less-accumulated depreciation
(1,324,447
)
 
(1,296,562
)
Net real estate assets
4,152,191

 
4,165,526

Real estate and other assets, net, held for sale
24,893

 

Cash and cash equivalents
4,827

 
3,769

Restricted cash
7,640

 
6,374

Accounts receivable
30,646

 
25,952

Mortgages and notes receivable, net of allowance of $36 and $44, respectively
1,623

 
5,599

Accrued straight-line rents receivable
219,870

 
220,088

Investments in and advances to unconsolidated affiliates
23,296

 
23,585

Deferred leasing costs, net of accumulated amortization of $149,863 and $149,275, respectively
194,848

 
195,273

Prepaid expenses and other assets, net of accumulated depreciation of $18,751 and $18,074, respectively
66,282

 
28,843

Total Assets
$
4,726,116

 
$
4,675,009

Liabilities, Redeemable Operating Partnership Units and Capital:
 
 
 
Mortgages and notes payable, net
$
2,160,594

 
$
2,085,831

Accounts payable, accrued expenses and other liabilities
237,278

 
218,922

Total Liabilities
2,397,872

 
2,304,753

Commitments and contingencies

 

Redeemable Operating Partnership Units:
 
 
 
Common Units, 2,735,703 and 2,738,703 outstanding, respectively
127,976

 
105,960

Series A Preferred Units (liquidation preference $1,000 per unit), 28,859 and 28,877 units issued and outstanding, respectively
28,859

 
28,877

Total Redeemable Operating Partnership Units
156,835

 
134,837

Capital:
 
 
 
Common Units:
 
 
 
General partner Common Units, 1,060,175 and 1,058,870 outstanding, respectively
21,463

 
22,078

Limited partner Common Units, 102,221,635 and 102,089,386 outstanding, respectively
2,124,868

 
2,185,852

Accumulated other comprehensive income
7,494

 
9,913

Noncontrolling interests in consolidated affiliates
17,584

 
17,576

Total Capital
2,171,409

 
2,235,419

Total Liabilities, Redeemable Operating Partnership Units and Capital
$
4,726,116

 
$
4,675,009

 
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,
 
2019
 
2018
Rental and other revenues
$
172,363

 
$
180,438

Operating expenses:
 
 
 
Rental property and other expenses
60,551

 
59,432

Depreciation and amortization
69,204

 
57,568

General and administrative
12,381

 
11,778

Total operating expenses
142,136

 
128,778

Interest expense
18,739

 
18,391

Other income/(loss)
(3,766
)
 
455

Equity in earnings of unconsolidated affiliates
664

 
522

Net income
8,386

 
34,246

Net (income) attributable to noncontrolling interests in consolidated affiliates
(316
)
 
(286
)
Distributions on Preferred Units
(622
)
 
(623
)
Net income available for common unitholders
$
7,448

 
$
33,337

Earnings per Common Unit – basic:
 
 
 
Net income available for common unitholders
$
0.07

 
$
0.32

Weighted average Common Units outstanding – basic
105,928

 
105,730

Earnings per Common Unit – diluted:
 
 
 
Net income available for common unitholders
$
0.07

 
$
0.32

Weighted average Common Units outstanding – diluted
105,948

 
105,756

 
See accompanying notes to consolidated financial statements.

10

Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Comprehensive Income
(Unaudited and in thousands)
 
Three Months Ended
March 31,
 
2019
 
2018
Comprehensive income:
 
 
 
Net income
$
8,386

 
$
34,246

Other comprehensive income/(loss):
 
 
 
Unrealized gains/(losses) on cash flow hedges
(1,904
)
 
7,877

Amortization of cash flow hedges
(515
)
 
(106
)
Total other comprehensive income/(loss)
(2,419
)
 
7,771

Total comprehensive income
5,967

 
42,017

Less-comprehensive (income) attributable to noncontrolling interests
(316
)
 
(286
)
Comprehensive income attributable to common unitholders
$
5,651

 
$
41,731

 
See accompanying notes to consolidated financial statements.


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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, 2018
$
22,078

 
$
2,185,852

 
$
9,913

 
$
17,576

 
$
2,235,419

Issuances of Common Units, net of issuance costs and tax withholdings
(11
)
 
(1,117
)
 

 

 
(1,128
)
Distributions on Common Units ($0.475 per unit)
(503
)
 
(49,778
)
 

 

 
(50,281
)
Distributions on Preferred Units ($21.5625 per unit)
(6
)
 
(616
)
 

 

 
(622
)
Share-based compensation expense, net of forfeitures
46

 
4,526

 

 

 
4,572

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(308
)
 
(308
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
(222
)
 
(21,988
)
 

 

 
(22,210
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(3
)
 
(313
)
 

 
316

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
84

 
8,302

 

 

 
8,386

Other comprehensive loss

 

 
(2,419
)
 

 
(2,419
)
Total comprehensive income
 
 
 
 
 
 
 
 
5,967

Balance at March 31, 2019
$
21,463

 
$
2,124,868

 
$
7,494

 
$
17,584

 
$
2,171,409



 
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 ($0.4625 per unit)
(488
)
 
(48,370
)
 

 

 
(48,858
)
Distributions on Preferred Units ($21.5625 per unit)
(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

 
See accompanying notes to consolidated financial statements.

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HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
 
Three Months Ended
March 31,
 
2019
 
2018
Operating activities:
 
 
 
Net income
$
8,386

 
$
34,246

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
69,204

 
57,568

Amortization of lease incentives and acquisition-related intangible assets and liabilities
1,689

 
(509
)
Share-based compensation expense
4,572

 
4,295

Credit losses on operating lease receivables
7,315

 
227

Write-off of mortgages and notes receivable
4,087

 

Accrued interest on mortgages and notes receivable
(85
)
 
(112
)
Amortization of debt issuance costs
736

 
686

Amortization of cash flow hedges
(515
)
 
(106
)
Amortization of mortgages and notes payable fair value adjustments
385

 
317

Losses on debt extinguishment
375

 

Equity in earnings of unconsolidated affiliates
(664
)
 
(522
)
Distributions of earnings from unconsolidated affiliates
609

 
881

Settlement of cash flow hedges
(5,144
)
 
7,216

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(2,583
)
 
3,288

Prepaid expenses and other assets
(6,953
)
 
(7,692
)
Accrued straight-line rents receivable
(6,903
)
 
(6,619
)
Accounts payable, accrued expenses and other liabilities
(11,798
)
 
(14,636
)
Net cash provided by operating activities
62,713

 
78,528

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

 
(50,649
)
Investments in development in-process
(28,555
)
 
(42,438
)
Investments in tenant improvements and deferred leasing costs
(38,544
)
 
(33,071
)
Investments in building improvements
(12,517
)
 
(19,293
)
Distributions of capital from unconsolidated affiliates
29

 
105

Repayments of mortgages and notes receivable
74

 
379

Changes in other investing activities
(1,989
)
 
(586
)
Net cash used in investing activities
(81,502
)
 
(145,553
)
Financing activities:
 
 
 
Distributions on Common Units
(50,281
)
 
(48,858
)
Redemptions/repurchases of Preferred Units
(18
)
 
(5
)
Distributions on Preferred Units
(622
)
 
(623
)
Distributions to noncontrolling interests in consolidated affiliates
(308
)
 
(238
)
Proceeds from the issuance of Common Units
652

 
561

Costs paid for the issuance of Common Units

 
(46
)
Repurchase of units related to tax withholdings
(1,780
)
 
(1,544
)
Borrowings on revolving credit facility
98,300

 
32,000

Repayments of revolving credit facility
(145,300
)
 
(277,000
)
Borrowings on mortgages and notes payable
349,010

 
345,863

Repayments of mortgages and notes payable
(225,462
)
 
(444
)
Changes in debt issuance costs and other financing activities
(3,078
)
 
(3,092
)
Net cash provided by financing activities
21,113

 
46,574

Net increase/(decrease) in cash and cash equivalents and restricted cash
$
2,324

 
$
(20,451
)
 
See accompanying notes to consolidated financial statements.

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

 
Three Months Ended
March 31,
 
2019
 
2018
Net increase/(decrease) in cash and cash equivalents and restricted cash
$
2,324

 
$
(20,451
)
Cash and cash equivalents and restricted cash at beginning of the period
10,143

 
88,333

Cash and cash equivalents and restricted cash at end of the period
$
12,467

 
$
67,882


Reconciliation of cash and cash equivalents and restricted cash:

 
Three Months Ended
March 31,
 
2019
 
2018
Cash and cash equivalents at end of the period
$
4,827

 
$
31,034

Restricted cash at end of the period
7,640

 
36,848

Cash and cash equivalents and restricted cash at end of the period
$
12,467

 
$
67,882


Supplemental disclosure of cash flow information:
 
 
Three Months Ended
March 31,
 
2019
 
2018
Cash paid for interest, net of amounts capitalized
$
23,924

 
$
15,986


Supplemental disclosure of non-cash investing and financing activities:
 
 
Three Months Ended
March 31,
 
2019
 
2018
Unrealized gains/(losses) on cash flow hedges
$
(1,904
)
 
$
7,877

Changes in accrued capital expenditures
(119
)
 
(7,333
)
Write-off of fully depreciated real estate assets
23,880

 
10,511

Write-off of fully amortized leasing costs
12,671

 
7,112

Write-off of fully amortized debt issuance costs
828

 

Adjustment of Redeemable Common Units to fair value
22,016

 
(20,896
)
Initial recognition of lease liabilities related to right of use assets
35,349

 

 
See accompanying notes to consolidated financial statements.

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HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(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, 2019, we owned or had an interest in 30.7 million rentable square feet of in-service properties, 1.6 million rentable square feet of office properties under development and approximately 350 acres of development land.
 
The Company is the sole general partner of the Operating Partnership. At March 31, 2019, the Company owned all of the Preferred Units and 103.3 million, or 97.4%, of the Common Units in the Operating Partnership. Limited partners owned the remaining 2.7 million Common Units. During the three months ended March 31, 2019, the Company redeemed 3,000 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 2018 Annual Report on Form 10-K.
 
Certain amounts within the Consolidated Statements of Income for the three months ended March 31, 2018 were removed and/or combined to conform to the current year presentation.
 
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.
 
Real Estate and Related Assets
 
Real estate and related assets are recorded at cost and stated at cost less accumulated depreciation. Renovations, replacements and other expenditures that improve or extend the life of assets are capitalized and depreciated over their estimated useful lives. Expenditures for ordinary maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful life of 40 years for buildings and depreciable land infrastructure costs, 15 years for building improvements and five to seven years for furniture, fixtures and equipment. Tenant improvements are amortized using the straight-line method over initial fixed terms of the respective leases, which generally are from three to 10 years. Depreciation expense for real estate assets was $58.3 million and $47.5 million for the three months ended March 31, 2019 and 2018, respectively.
 
Leases
 
See Note 2 for policies and related disclosures with respect to our leases as both a lessee and lessor.
 

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Insurance
 
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 March 31, 2019, a reserve of $0.6 million was recorded to cover estimated reported and unreported claims.
 
Other Events
 
During the first quarter of 2019, Laser Spine Institute, which leased a 176,000 square foot building with structured parking in Tampa’s Westshore submarket, suddenly ceased operations. As a result of this sudden closure, we incurred $5.6 million of credit losses on operating lease receivables and $2.3 million of write-offs of lease incentives (in rental and other revenues), $4.1 million of write-offs of notes receivable (in other income/(loss)) and $11.6 million of write-offs of tenant improvements and deferred leasing costs (in depreciation and amortization).
 
Recently Issued Accounting Standards
 
The Financial Accounting Standards Board (“FASB”) issued an accounting standards update (“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. We adopted the ASU as of January 1, 2019 with no material effect on our Consolidated Financial Statements.
 
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.
Leases
 
On January 1, 2019, we adopted Accounting Standards Codification Topic 842 “Leases” (“ASC 842”), which supersedes Accounting Standards Codification Topic 840 “Leases” (“ASC 840”). Information in this Note 2 with respect to our leases and lease related costs as both lessee and lessor and lease related receivables as lessor is presented under ASC 842 as of and for the three months ended March 31, 2019 and under ASC 840 as of and for the year ended December 31, 2018.
 
We adopted ASC 842 using the modified retrospective approach whereby the cumulative effect of adoption was recognized on the adoption date and prior periods were not restated. There was no net cumulative effect adjustment to retained earnings as of January 1, 2019 as a result of this adoption. ASC 842 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. We operate as both a lessor and a lessee. As a lessor, we are required under ASC 842 to account for leases using an approach that is substantially equivalent to ASC 840's guidance for operating leases and other leases such as sales-type leases and direct financing leases. In addition, ASC 842 requires lessors to capitalize and amortize only incremental direct leasing costs. As a lessee, we are required under the new standard to apply a dual approach, classifying leases, such as ground leases, as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase. This classification determines whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. ASC 842 also requires lessees 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. We have also elected the practical expedient not to recognize right of use assets and lease liabilities for leases with a term of a year or less.
 
On adoption of the standard, we elected the package of practical expedients provided for in ASC 842, including:
 
No reassessment of whether any expired or existing contracts were or contained leases;
 
No reassessment of the lease classification for any expired or existing leases; and
 
No reassessment of initial direct costs for any existing leases.
 
The package of practical expedients was made as a single election and was consistently applied to all existing leases as of January 1, 2019. We also elected the practical expedient provided to lessors in a subsequent amendment to ASC 842 that removed the requirement to separate lease and nonlease components, provided certain conditions were met.
 
Information as Lessor Under ASC 842
 
To generate positive cash flow, as a lessor, we lease our office properties to lessees in exchange for fixed monthly payments that cover rent, property taxes, insurance and certain cost recoveries, primarily common area maintenance (“CAM”). Office

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properties owned by us that are under lease are located in Atlanta, Greensboro, Memphis, Nashville, Orlando, Pittsburgh, Raleigh, Richmond and Tampa and are leased to a wide variety of lessees across many industries. Our leases were determined to be operating leases and generally range from three to 10 years. Payments from customers for CAM are considered nonlease components that are separated from lease components and are generally accounted for in accordance with the revenue recognition standard. However, we qualified for and elected the practical expedient related to combining the components because the lease component is classified as an operating lease and the timing and pattern of transfer of CAM income, which is not the predominant component, is the same as the lease component. As such, consideration for CAM is accounted for as part of the overall consideration in the lease. Payments from customers for property taxes and insurance are considered noncomponents of the lease and therefore no consideration is allocated to them because they do not transfer a good or service to the customer. Fixed contractual payments from our leases are recognized on a straight-line basis over the terms of the respective leases. This means that, with respect to a particular lease, actual amounts billed in accordance with the lease during any given period may be higher or lower than the amount of rental revenue recognized for the period. Straight-line rental revenue is commenced when the customer assumes control of the leased premises. Accrued straight-line rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements.
 
Some of our leases are subject to annual changes in the Consumer Price Index (“CPI”). Although increases in the CPI are not estimated as part of our measurement of straight-line rental revenue, to the extent that actual CPI is greater or less than the CPI at lease commencement, the amount of straight-line rent recognized in a given year is affected accordingly.
 
Some of our leases have termination options and/or extension options. Termination options allow the customer to terminate the lease prior to the end of the lease term under certain circumstances. Termination options generally become effective half way or further into the original lease term and require advance notification from the customer and payment of a termination fee that reimburses us for a portion of the remaining rent under the original lease term and the undepreciated lease inception costs such as commissions, tenant improvements and lease incentives. Termination fee income is recognized at the later of when the customer has vacated the space or the lease has expired and a fully executed lease termination agreement has been delivered, the amount of the fee is determinable and collectability of the fee is reasonably assured. Our extension options generally require a re-negotiation with the customer at market rates.
 
Initial direct costs, primarily commissions, related to the leasing of our office properties are included in deferred leasing costs and are stated at amortized cost. Such expenditures are part of the investment necessary to execute leases and, therefore, are classified as investment activities in the statement of cash flows. All leasing commissions paid to third parties and our in-house personnel for new leases or lease renewals are capitalized. Capitalized leasing costs are amortized on a straight-line basis over the initial fixed terms of the respective leases. All other costs to negotiate or arrange a lease are expensed as incurred.
 
Lease incentive costs, which are payments made to or on behalf of a customer as an incentive to sign a lease, are capitalized in deferred leasing costs and amortized on a straight-line basis over the respective lease terms as a reduction of rental revenues.
 
Lease related receivables, which include accounts receivable and accrued straight-line rents receivable, are reduced for credit losses. Such amounts are recognized as a reduction to rental and other revenues. We regularly evaluate the collectability of our lease related receivables. Our evaluation of collectability primarily consists of reviewing past due account balances and considering such factors as the credit quality of our customer, historical trends of the customer and changes in customer payment terms. Additionally, with respect to customers in bankruptcy, we estimate the probable recovery through bankruptcy claims and reduce the related receivable balance for amounts deemed uncollectible. If our assumptions regarding the collectability of lease related receivables prove incorrect, we could experience credit losses in excess of what was recognized in rental and other revenues.
 
We recognized $169.4 million of rental and other revenues related to operating lease payments of which $15.5 million was for variable lease payments for the three months ended March 31, 2019. The following table sets forth the undiscounted cash flows for future minimum base rents to be received from customers for leases in effect at March 31, 2019 for the properties that we wholly own:
 
April 1 through December 31, 2019
 
$
466,042

2020
 
586,386

2021
 
530,336

2022
 
494,060

2023
 
433,593

2024
 
372,614

Thereafter
 
1,679,410

 
 
$
4,562,441

 

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Table of Contents

Information as Lessor Under ASC 840
 
Minimum contractual rents from leases are recognized on a straight-line basis over the terms of the respective leases. This means that, with respect to a particular lease, actual amounts billed in accordance with the lease during any given period may be higher or lower than the amount of rental revenue recognized for the period. Straight-line rental revenue is commenced when the customer assumes control of the leased premises. Accrued straight-line rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements. Contingent rental revenue, such as percentage rent, is accrued when the contingency is removed. Termination fee income is recognized at the later of when the customer has vacated the space or the lease has expired and a fully executed lease termination agreement has been delivered, the amount of the fee is determinable and collectability of the fee is reasonably assured.
 
Cost recovery income is determined on a calendar year and a lease-by-lease basis. The most common types of cost recovery income in our leases are CAM and real estate taxes, for which a customer typically pays its pro-rata share of operating and administrative expenses and real estate taxes in excess of the costs incurred during a contractually specified base year. The computation of cost recovery income is complex and involves numerous judgments, including the interpretation of lease provisions. Leases are not uniform in dealing with such cost recovery income and there are many variations in the computation. Many customers make monthly fixed payments of CAM, real estate taxes and other cost reimbursement items. We accrue income related to these payments each month. We make quarterly accrual adjustments, positive or negative, to cost recovery income to adjust the recorded amounts to our best estimate of the final annual amounts to be billed and collected. After the end of the calendar year, we compute each customer's final cost recovery income and, after considering amounts paid by the customer during the year, issue a bill or credit for the appropriate amount to the customer. The differences between the amounts billed less previously received payments and the accrual adjustment are recorded as increases or decreases to cost recovery income when the final bills are prepared, which occurs during the first half of the subsequent year.
  
Accounts receivable, accrued straight-line rents receivable and mortgages and notes receivable are reduced by an allowance for amounts that may become uncollectible in the future. We regularly evaluate the adequacy of our allowance for doubtful accounts. The evaluation primarily consists of reviewing past due account balances and considering such factors as the credit quality of our customer, historical trends of the customer and changes in customer payment terms. Additionally, with respect to customers in bankruptcy, we estimate the probable recovery through bankruptcy claims and adjust the allowance for amounts deemed uncollectible. If our assumptions regarding the collectability of receivables prove incorrect, we could experience losses in excess of our allowance for doubtful accounts. The allowance and its related receivable are written-off when we have concluded there is a low probability of collection and we have discontinued collection efforts.
 
Lease incentive costs, which are payments made to or on behalf of a customer as an incentive to sign a lease, are capitalized in deferred leasing costs and amortized on a straight-line basis over the respective lease terms as a reduction of rental revenues.
 
Our real estate assets are leased to customers under operating leases. The minimum rental amounts under the leases are generally subject to scheduled fixed increases. Generally, the leases also provide that we receive cost recovery income from customers for increases in certain costs above the costs incurred during a contractually specified base year.  
 
The following table sets forth our scheduled future minimum base rents to be received from customers for leases in effect at December 31, 2018 for the properties that we wholly own:
 
2019
 
$
618,014

2020
 
581,399

2021
 
524,381

2022
 
488,157

2023
 
428,461

Thereafter
 
2,068,891

 
 
$
4,709,303

 
Information as Lessee Under ASC 842
 
We have 20 properties subject to operating ground leases in Atlanta, Nashville, Orlando, Raleigh and Tampa with a weighted average remaining term of 52 years. Rental payments on these leases are adjusted periodically based on either the CPI or on a pre-determined schedule. The monthly payments on a pre-determined schedule are recognized on a straight-line basis over the terms of the respective leases. Changes in the CPI are not estimated as part of our measurement of straight-line rental expense. Upon initial adoption of ASC 842, we recognized a lease liability of $35.3 million (in accounts payable, accrued expenses and other liabilities) and a related right of use asset of $29.7 million (in prepaid expenses and other assets) on our Consolidated Balance

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Table of Contents

Sheets equal to the present value of the minimum lease payments required under each ground lease. The difference between the recorded lease liability and right of use asset represents the accrued straight-line rent liability previously recognized under ASC 840. We used a discount rate of approximately 4.5%, which was derived from our assessment of the credit quality of the Company and adjusted to reflect secured borrowing, estimated yield curves and long-term spread adjustments over appropriate tenors. Some of our ground leases contain extension options; however, these did not impact our calculation of the right of use asset and liability as they extend beyond the useful life of the properties subject to the operating ground leases. We recognized $0.6 million of ground lease expense, of which $0.5 million was paid in cash, during the three months ended March 31, 2019.
 
The following table sets forth the undiscounted cash flows of our scheduled obligations for future minimum payments on operating ground leases at March 31, 2019 and a reconciliation of those cash flows to the operating lease liability at March 31, 2019:
 
April 1 through December 31, 2019
 
$
1,539

2020
 
2,086

2021
 
2,127

2022
 
2,169

2023
 
2,167

2024
 
2,123

Thereafter
 
83,697

 
 
95,908

Discount
 
(60,668
)
Lease liability
 
$
35,240

 
Information as Lessee Under ASC 840
 
Certain of our properties are subject to operating ground leases. Rental payments on these leases are adjusted periodically based on either the CPI or on a pre-determined schedule. Total rental property expense recorded for operating ground leases was $2.5 million, $2.5 million and $2.9 million for the years ended December 31, 2018, 2017 and 2016, respectively.
 
The following table sets forth our scheduled obligations for future minimum payments on operating ground leases at December 31, 2018:
 
2019
 
$
2,184

2020
 
2,223

2021
 
2,263

2022
 
2,305

2023
 
2,308

Thereafter
 
86,577

 
 
$
97,860


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Table of Contents

 
3.    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,
2019
 
December 31,
2018
Assets:
 
 
 
Deferred leasing costs (including lease incentives and above market lease and in-place lease acquisition-related intangible assets)
$
344,711

 
$
344,548

Less accumulated amortization
(149,863
)
 
(149,275
)
 
$
194,848

 
$
195,273

Liabilities (in accounts payable, accrued expenses and other liabilities):
 
 
 
Acquisition-related below market lease liabilities
$
56,865

 
$
57,955

Less accumulated amortization
(32,870
)
 
(32,307
)
 
$
23,995

 
$
25,648

 
The following table sets forth amortization of intangible assets and below market lease liabilities:
 
 
Three Months Ended
March 31,
 
2019
 
2018
Amortization of deferred leasing costs and acquisition-related intangible assets (in depreciation and amortization)
$
10,315

 
$
9,495

Amortization of lease incentives (in rental and other revenues)
$
2,848

 
$
429

Amortization of acquisition-related intangible assets (in rental and other revenues)
$
357

 
$
448

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)
$
(1,653
)
 
$
(1,523
)

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, 2019
 
$
28,419

 
$
1,222

 
$
903

 
$
416

 
$
(4,649
)
2020
 
32,940

 
1,300

 
957

 
514

 
(5,005
)
2021
 
28,377

 
1,060

 
631

 

 
(4,204
)
2022
 
24,053

 
836

 
462

 

 
(3,133
)
2023
 
20,650

 
763

 
308

 

 
(2,753
)
Thereafter
 
46,416

 
3,521

 
1,100

 

 
(4,251
)
 
 
$
180,855

 
$
8,702

 
$
4,361

 
$
930

 
$
(23,995
)
Weighted average remaining amortization periods as of March 31, 2019 (in years)
 
7.1

 
9.2

 
6.5

 
1.7

 
5.5


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4.    Mortgages and Notes Payable
 
The following table sets forth our mortgages and notes payable:
 
 
March 31,
2019
 
December 31,
2018
Secured indebtedness
$
96,717

 
$
97,179

Unsecured indebtedness
2,075,211

 
1,997,816

Less-unamortized debt issuance costs
(11,334
)
 
(9,164
)
Total mortgages and notes payable, net
$
2,160,594

 
$
2,085,831

 
At March 31, 2019, our secured mortgage loan was collateralized by real estate assets with an undepreciated book value of $146.4 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 $135.0 million and $97.0 million outstanding under our revolving credit facility at March 31, 2019 and April 16, 2019, respectively. At March 31, 2019 and April 16, 2019, we had $0.2 million and $0.1 million, respectively, 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, 2019 and April 16, 2019 was $464.8 million and $502.9 million, respectively.
 
During the first quarter of 2019, we prepaid without penalty our $225.0 million, seven-year unsecured bank term loan, which was scheduled to mature in June 2020. The interest rate on the term loan was LIBOR plus 110 basis points. We recorded $0.4 million of loss on debt extinguishment related to this prepayment.

During the first quarter of 2019, the Operating Partnership issued $350.0 million aggregate principal amount of 4.20% notes due April 2029, less original issuance discount of $1.0 million. These notes were priced to yield 4.234%. Underwriting fees and other expenses were incurred that aggregated $3.1 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.

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5.
Derivative Financial Instruments
 
During 2018, we entered into an aggregate of $225.0 million notional amount of forward-starting swaps that effectively locked the underlying 10-year treasury rate at a weighted average of 2.86% with respect to a planned issuance of debt securities by the Operating Partnership. Upon issuance of the $350.0 million aggregate principal amount of 4.20% notes due April 2029 during the first quarter of 2019, we terminated the forward-starting swaps and paid cash upon settlement. The unrealized loss of $5.1 million in accumulated other comprehensive income will be reclassified to interest expense as interest payments are made on the debt.

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 changes in fair value recorded in other comprehensive income/(loss) each reporting period. 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, 2019 through March 31, 2020, we estimate that $1.3 million will be reclassified as a net decrease to interest expense.

The following table sets forth the gross fair value of our derivatives:
 
 
March 31,
2019
 
December 31,
2018
Derivatives:
 
 
 
Derivatives designated as cash flow hedges in prepaid expenses and other assets:
 
 
 
Interest rate swaps
$
659

 
$
1,146

Derivatives designated as cash flow hedges in accounts payable, accrued expenses and other liabilities:
 
 
 
Interest rate swaps
$

 
$
3,581

 
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,
 
2019
 
2018
Derivatives Designated as Cash Flow Hedges:
 
 
 
Amount of unrealized gains/(losses) recognized in accumulated other comprehensive income on derivatives:
 
 
 
Interest rate swaps
$
(1,904
)
 
$
7,877

Amount of gains reclassified out of accumulated other comprehensive income into interest expense:
 
 
 
Interest rate swaps
$
(515
)
 
$
(106
)

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6.
Noncontrolling Interests

Noncontrolling Interests in Consolidated Affiliates
 
At March 31, 2019, 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,
 
2019
 
2018
Beginning noncontrolling interests in the Operating Partnership
$
105,960

 
$
144,009

Adjustment of noncontrolling interests in the Operating Partnership to fair value
23,254

 
(19,582
)
Conversions of Common Units to Common Stock
(131
)
 
(902
)
Net income attributable to noncontrolling interests in the Operating Partnership
193

 
888

Distributions to noncontrolling interests in the Operating Partnership
(1,300
)
 
(1,300
)
Total noncontrolling interests in the Operating Partnership
$
127,976

 
$
123,113


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,
 
2019
 
2018
Net income available for common stockholders
$
7,255

 
$
32,449

Increase in additional paid in capital from conversions of Common Units to Common Stock
131

 
902

Change from net income available for common stockholders and transfers from noncontrolling interests
$
7,386

 
$
33,351


7.
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 certain interest rate swaps. Our Level 2 liabilities include the fair value of our mortgages and notes payable and remaining interest rate swaps.

The fair value of mortgages and notes receivable and mortgages and notes payable is estimated by the income approach utilizing contractual cash flows and market-based interest rates to approximate the price that would be paid in an orderly transaction between market participants. The fair value of interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments of interest rate swaps are based on the expectation of future interest rates (forward curves) derived from observed market interest

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Table of Contents

rate curves. In addition, credit valuation adjustments are considered in the fair values to account for potential nonperformance risk, but were concluded to not be significant inputs to the calculation for the periods presented.

Level 3. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
Our Level 3 assets include any real estate assets recorded at fair value on a non-recurring basis as a result of our quarterly impairment analysis, which are valued using the terms of definitive sales contracts or the sales comparison approach.

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
 
Level 3
 
 
Total
 
Quoted Prices
in Active
Markets for Identical Assets or Liabilities
 
Significant Observable Inputs
 
Significant Unobservable Inputs
Fair Value at March 31, 2019:
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Mortgages and notes receivable, at fair value (1)
 
$
1,623

 
$

 
$
1,623

 
$

Interest rate swaps (in prepaid expenses and other assets)
 
659

 

 
659

 

Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)
 
2,074

 
2,074

 

 

Total Assets
 
$
4,356

 
$
2,074

 
$
2,282

 
$

Noncontrolling Interests in the Operating Partnership
 
$
127,976

 
$
127,976

 
$

 
$

Liabilities:
 
 
 
 
 
 
 
 
Mortgages and notes payable, net, at fair value (1)
 
$
2,170,931

 
$

 
$
2,170,931

 
$

Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)
 
2,074

 
2,074

 

 

Total Liabilities
 
$
2,173,005

 
$
2,074

 
$
2,170,931

 
$

Fair Value at December 31, 2018:
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Mortgages and notes receivable, at fair value (1)
 
$
5,599

 
$

 
$
5,599

 
$

Interest rate swaps (in prepaid expenses and other assets)
 
1,146

 

 
1,146

 

Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)
 
1,849

 
1,849

 

 

Impaired real estate assets
 
10,252

 

 

 
10,252

Total Assets
 
$
18,846

 
$
1,849

 
$
6,745

 
$
10,252

Noncontrolling Interests in the Operating Partnership
 
$
105,960

 
$
105,960

 
$

 
$

Liabilities:
 
 
 
 
 
 
 
 
Mortgages and notes payable, net, at fair value (1)