HIW 06.30.2012 10Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2012
 
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  S    No £    Highwoods Realty Limited Partnership  Yes  S    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  S    No £    Highwoods Realty Limited Partnership  Yes  S    No £
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of 'large accelerated filer,' 'accelerated filer' and 'smaller reporting company' in Rule 12b-2 of the Securities Exchange Act.
Highwoods Properties, Inc.
Large accelerated filer S    Accelerated filer £      Non-accelerated filer £      Smaller reporting company £
Highwoods Realty Limited Partnership
Large accelerated filer £    Accelerated filer £      Non-accelerated filer S      Smaller reporting company £
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).
Highwoods Properties, Inc.  Yes  £    No S    Highwoods Realty Limited Partnership  Yes  £    No S
 
The Company had 76,070,588 shares of Common Stock outstanding as of July 19, 2012.
 



HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP

QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 2012

TABLE OF CONTENTS

 
Page
 
 
PART I - FINANCIAL INFORMATION
 
HIGHWOODS PROPERTIES, INC.:
 
HIGHWOODS REALTY LIMITED PARTNERSHIP:
 
 
 
PART II - OTHER INFORMATION
 
ITEM 6. EXHIBITS



2

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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,” the Operating Partnership’s preferred partnership interests as “Preferred Units” and in-service properties (excluding for-sale residential condominiums) to which the Company and/or the Operating Partnership have title and 100.0% ownership rights as the “Wholly Owned Properties.” References to “we” and “our” mean the Company and the Operating Partnership, collectively, unless the context indicates otherwise.

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

Certain information contained herein is presented as of July 19, 2012, the latest practicable date for financial information prior to the filing of this Quarterly Report.


3

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Balance Sheets
(Unaudited and in thousands, except share and per share data)

 
June 30,
2012
 
December 31,
2011
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
366,925

 
$
364,022

Buildings and tenant improvements
3,117,730

 
3,078,308

Development in process
6,094

 

Land held for development
102,482

 
105,206

 
3,593,231

 
3,547,536

Less-accumulated depreciation
(913,016
)
 
(877,383
)
Net real estate assets
2,680,215

 
2,670,153

For-sale residential condominiums
2,434

 
4,751

Real estate and other assets, net, held for sale
36,751

 
50,335

Cash and cash equivalents
6,527

 
11,188

Restricted cash
20,757

 
26,666

Accounts receivable, net of allowance of $3,262 and $3,548, respectively
21,882

 
30,093

Mortgages and notes receivable, net of allowance of $118 and $61, respectively
17,056

 
18,600

Accrued straight-line rents receivable, net of allowance of $866 and $1,294, respectively
113,695

 
104,284

Investments in and advances to unconsolidated affiliates
77,089

 
100,367

Deferred financing and leasing costs, net of accumulated amortization of $70,572 and $62,319, respectively
126,680

 
127,774

Prepaid expenses and other assets
41,907

 
36,781

Total Assets
$
3,144,993

 
$
3,180,992

Liabilities, Noncontrolling Interests in the Operating Partnership and Equity:
 
 
 
Mortgages and notes payable
$
1,823,128

 
$
1,903,213

Accounts payable, accrued expenses and other liabilities
137,108

 
148,821

Financing obligations
30,822

 
31,444

Total Liabilities
1,991,058

 
2,083,478

Commitments and contingencies

 

Noncontrolling interests in the Operating Partnership
124,880

 
110,655

Equity:
 
 
 
Preferred Stock, $.01 par value, 50,000,000 authorized shares;
 
 
 
8.625% Series A Cumulative Redeemable Preferred Shares (liquidation preference $1,000 per share), 29,077 shares issued and outstanding
29,077

 
29,077

Common Stock, $.01 par value, 200,000,000 authorized shares;
 
 
 
75,619,288 and 72,647,697 shares issued and outstanding, respectively
756

 
726

Additional paid-in capital
1,884,392

 
1,803,997

Distributions in excess of net income available for common stockholders
(878,984
)
 
(845,853
)
Accumulated other comprehensive loss
(10,779
)
 
(5,734
)
Total Stockholders’ Equity
1,024,462

 
982,213

Noncontrolling interests in consolidated affiliates
4,593

 
4,646

Total Equity
1,029,055

 
986,859

Total Liabilities, Noncontrolling Interests in the Operating Partnership and Equity
$
3,144,993

 
$
3,180,992


See accompanying notes to consolidated financial statements.



4

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Income
(Unaudited and in thousands, except per share amounts)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Rental and other revenues
$
130,735

 
$
114,651

 
$
258,768

 
$
226,981

Operating expenses:
 
 
 
 
 
 
 
Rental property and other expenses
47,089

 
39,931

 
92,288

 
79,838

Depreciation and amortization
40,276

 
32,684

 
78,105

 
65,621

General and administrative
8,900

 
7,978

 
18,573

 
15,771

Total operating expenses
96,265

 
80,593

 
188,966

 
161,230

Interest expense:
 
 
 
 
 
 
 
Contractual
23,643

 
22,940

 
47,591

 
45,371

Amortization of deferred financing costs
900

 
821

 
1,802

 
1,642

Financing obligations
(48
)
 
146

 
(96
)
 
437

 
24,495

 
23,907

 
49,297

 
47,450

Other income:
 
 
 
 
 
 
 
Interest and other income
1,737

 
1,899

 
3,967

 
3,772

Losses on debt extinguishment
(973
)
 
(24
)
 
(973
)
 
(24
)
 
764

 
1,875


2,994


3,748

Income from continuing operations before disposition of property and condominiums and equity in earnings of unconsolidated affiliates
10,739

 
12,026

 
23,499

 
22,049

Gains on disposition of property

 
200

 

 
200

Gains on for-sale residential condominiums
110

 
116

 
175

 
154

Equity in earnings of unconsolidated affiliates
1,508

 
1,353

 
1,346

 
2,820

Income from continuing operations
12,357

 
13,695

 
25,020

 
25,223

Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations
756

 
739

 
1,291

 
1,654

Net gains on disposition of discontinued operations
1,385

 

 
6,519

 

 
2,141

 
739

 
7,810

 
1,654

Net income
14,498

 
14,434

 
32,830

 
26,877

Net (income) attributable to noncontrolling interests in the Operating Partnership
(686
)
 
(623
)
 
(1,513
)
 
(1,130
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(223
)
 
(182
)
 
(407
)
 
(305
)
Dividends on Preferred Stock
(627
)
 
(1,622
)
 
(1,254
)
 
(3,299
)
Excess of Preferred Stock redemption/repurchase cost over carrying value

 
(1,895
)
 

 
(1,895
)
Net income available for common stockholders
$
12,962

 
$
10,112


$
29,656


$
20,248

Earnings per Common Share – basic:
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
0.15

 
$
0.13

 
$
0.30

 
$
0.26

Income from discontinued operations available for common stockholders
0.02

 
0.01

 
0.10

 
0.02

Net income available for common stockholders
$
0.17

 
$
0.14

 
$
0.40

 
$
0.28

Weighted average Common Shares outstanding – basic
74,662

 
72,211

 
73,749

 
72,015

Earnings per Common Share – diluted:
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
0.15

 
$
0.13

 
$
0.30

 
$
0.26

Income from discontinued operations available for common stockholders
0.02

 
0.01

 
0.10

 
0.02

Net income available for common stockholders
$
0.17

 
$
0.14

 
$
0.40

 
$
0.28

Weighted average Common Shares outstanding – diluted
78,521

 
76,197

 
77,601

 
75,987

Dividends declared per Common Share
$
0.425

 
$
0.425

 
$
0.850

 
$
0.850

Net income available for common stockholders:
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
10,923

 
$
9,410

 
$
22,226

 
$
18,677

Income from discontinued operations available for common stockholders
2,039

 
702

 
7,430

 
1,571

Net income available for common stockholders
$
12,962

 
$
10,112

 
$
29,656

 
$
20,248


See accompanying notes to consolidated financial statements.

5

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Comprehensive Income
(Unaudited and in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Comprehensive income/(loss):
 
 
 
 
 
 
 
Net income
$
14,498

 
$
14,434

 
$
32,830

 
$
26,877

Other comprehensive income/(loss):
 
 
 
 
 
 
 
Unrealized gains/(losses) on tax increment financing bond
296

 
(336
)
 
583

 
(471
)
Unrealized losses on cash flow hedges
(7,481
)
 

 
(7,087
)
 

Amortization of cash flow hedges
782

 
(29
)
 
1,459

 
(58
)
Total other comprehensive loss
(6,403
)
 
(365
)
 
(5,045
)
 
(529
)
Total comprehensive income
8,095

 
14,069

 
27,785

 
26,348

Less-comprehensive (income) attributable to noncontrolling interests
(909
)
 
(805
)
 
(1,920
)
 
(1,435
)
Comprehensive income attributable to the Company
$
7,186

 
$
13,264

 
$
25,865

 
$
24,913


See accompanying notes to consolidated financial statements.



6

Table of Contents

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

 
Number of Common Shares
 
Common Stock
 
Series A Cumulative Redeemable Preferred Shares
 
Additional Paid-In Capital
 
Accumulated Other Compre-hensive Loss
 
Non-Controlling Interests in Consolidated Affiliates
 
Distributions in Excess of Net Income Available for Common Stockholders
 
Total
Balance at December 31, 2011
72,647,697

 
$
726

 
$
29,077

 
$
1,803,997

 
$
(5,734
)
 
$
4,646

 
$
(845,853
)
 
$
986,859

Issuances of Common Stock, net
2,794,340

 
28

 

 
91,808

 

 

 

 
91,836

Conversions of Common Units to Common Stock
18,366

 

 

 
631

 

 

 

 
631

Dividends on Common Stock


 

 

 

 

 

 
(62,787
)
 
(62,787
)
Dividends on Preferred Stock


 

 

 

 

 

 
(1,254
)
 
(1,254
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value


 

 

 
(16,501
)
 

 

 

 
(16,501
)
Distributions to noncontrolling interests in consolidated affiliates


 

 

 

 

 
(460
)
 

 
(460
)
Issuances of restricted stock
158,885

 

 

 

 

 

 

 

Share-based compensation expense


 
2

 

 
4,457

 

 

 

 
4,459

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


 

 

 

 

 

 
(1,513
)
 
(1,513
)
Net (income) attributable to noncontrolling interests in consolidated affiliates


 

 

 

 

 
407

 
(407
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income


 

 

 

 

 

 
32,830

 
32,830

Other comprehensive loss


 

 

 

 
(5,045
)
 

 

 
(5,045
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
27,785

Balance at June 30, 2012
75,619,288

 
$
756

 
$
29,077

 
$
1,884,392

 
$
(10,779
)
 
$
4,593

 
$
(878,984
)
 
$
1,029,055



 
Number of Common Shares
 
Common Stock
 
Series A Cumulative Redeemable Preferred Shares
 
Series B Cumulative Redeemable Preferred Shares
 
Additional Paid-In Capital
 
Accumulated Other Compre-hensive Loss
 
Non-Controlling Interests in Consolidated Affiliates
 
Distributions in Excess of Net Income Available for Common Stockholders
 
Total
Balance at December 31, 2010
71,690,487

 
$
717

 
$
29,092

 
$
52,500

 
$
1,766,886

 
$
(3,648
)
 
$
4,460

 
$
(761,785
)
 
$
1,088,222

Issuances of Common Stock, net
556,652

 
6

 

 

 
16,978

 

 

 

 
16,984

Conversions of Common Units to Common Stock
18,737

 

 

 

 
635

 

 

 

 
635

Dividends on Common Stock

 

 

 

 

 

 

 
(61,069
)
 
(61,069
)
Dividends on Preferred Stock

 

 

 

 

 

 

 
(3,299
)
 
(3,299
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value

 

 

 

 
(6,957
)
 

 

 

 
(6,957
)
Distributions to noncontrolling interests in consolidated affiliates

 

 

 

 

 

 
(319
)
 

 
(319
)
Issuances of restricted stock
133,552

 

 

 

 

 

 

 

 

Redemptions/repurchases of Preferred Stock

 

 
(5
)
 
(52,500
)
 
1,895

 

 

 
(1,895
)
 
(52,505
)
Share-based compensation expense

 
1

 

 

 
3,452

 

 

 

 
3,453

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

 

 

 

 

 

 

 
(1,130
)
 
(1,130
)
Net (income) attributable to noncontrolling interests in consolidated affiliates

 

 

 

 

 

 
305

 
(305
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 

 

 
26,877

 
26,877

Other comprehensive loss

 

 

 

 

 
(529
)
 

 

 
(529
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
26,348

Balance at June 30, 2011
72,399,428

 
$
724

 
$
29,087

 
$

 
$
1,782,889

 
$
(4,177
)
 
$
4,446

 
$
(802,606
)
 
$
1,010,363


See accompanying notes to consolidated financial statements.

7

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
 
Six Months Ended June 30,
 
2012
 
2011
Operating activities:
 
 
 
Net income
$
32,830

 
$
26,877

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
79,113

 
67,274

Amortization of lease incentives and acquisition-related intangible assets and liabilities
180

 
968

Share-based compensation expense
4,459

 
3,453

Allowance for losses on accounts and accrued straight-line rents receivable
538

 
1,029

Amortization of deferred financing costs
1,802

 
1,642

Amortization of cash flow hedges
1,459

 
(58
)
Losses on debt extinguishment
973

 
24

Net gains on disposition of property
(6,519
)
 
(200
)
Gains on for-sale residential condominiums
(175
)
 
(154
)
Equity in earnings of unconsolidated affiliates
(1,346
)
 
(2,820
)
Changes in financing obligations
(584
)
 
(245
)
Distributions of earnings from unconsolidated affiliates
2,225

 
2,162

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
7,298

 
(1,821
)
Prepaid expenses and other assets
(3,158
)
 
(644
)
Accrued straight-line rents receivable
(9,415
)
 
(6,098
)
Accounts payable, accrued expenses and other liabilities
(16,352
)
 
(3,794
)
Net cash provided by operating activities
93,328

 
87,595

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

 
(7,761
)
Investment in development in process
(1,531
)
 
(2,598
)
Investment in tenant improvements and deferred leasing costs
(43,851
)
 
(28,456
)
Investment in building improvements
(19,758
)
 
(5,632
)
Net proceeds from disposition of real estate assets
19,898

 
2,063

Net proceeds from disposition of for-sale residential condominiums
2,492

 
2,401

Distributions of capital from unconsolidated affiliates
901

 
632

Repayments of mortgages and notes receivable
1,544

 
235

Investments in and advances to unconsolidated affiliates
(2,750
)
 
(39,402
)
Changes in restricted cash and other investing activities
4,031

 
(395
)
Net cash used in investing activities
(39,024
)
 
(78,913
)
Financing activities:
 
 
 
Dividends on Common Stock
(62,787
)
 
(61,069
)
Redemptions/repurchases of Preferred Stock

 
(52,505
)
Dividends on Preferred Stock
(1,254
)
 
(3,299
)
Distributions to noncontrolling interests in the Operating Partnership
(3,158
)
 
(3,215
)
Distributions to noncontrolling interests in consolidated affiliates
(460
)
 
(319
)
Proceeds from the issuance of Common Stock
95,289

 
16,984

Costs paid for the issuance of Common Stock
(1,316
)
 

Repurchase of shares related to tax withholdings
(2,137
)
 

Borrowings on revolving credit facility
106,300

 
124,700

Repayments of revolving credit facility
(392,800
)
 
(79,300
)
Borrowings on mortgages and notes payable
225,000

 
200,000

Repayments of mortgages and notes payable
(19,359
)
 
(153,522
)
Payments on financing obligations
(38
)
 

Additions to deferred financing costs and other financing activities
(2,245
)
 
(2,104
)
Net cash used in financing activities
(58,965
)
 
(13,649
)
Net decrease in cash and cash equivalents
(4,661
)
 
(4,967
)
Cash and cash equivalents at beginning of the period
11,188

 
14,206

Cash and cash equivalents at end of the period
$
6,527

 
$
9,239

See accompanying notes to consolidated financial statements.

8

Table of Contents


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

Supplemental disclosure of cash flow information:

 
Six Months Ended June 30,
 
2012
 
2011
Cash paid for interest, net of amounts capitalized
$
48,063

 
$
44,948


Supplemental disclosure of non-cash investing and financing activities:

 
Six Months Ended June 30,
 
2012
 
2011
Unrealized losses on cash flow hedges
$
(7,087
)
 
$

Conversion of Common Units to Common Stock
631

 
635

Changes in accrued capital expenditures
(2,448
)
 
1,525

Write-off of fully depreciated real estate assets
28,629

 
23,352

Write-off of fully amortized deferred financing and leasing costs
8,765

 
8,247

Unrealized gains on marketable securities of non-qualified deferred compensation plan
216

 
210

Adjustment of noncontrolling interests in the Operating Partnership to fair value
16,501

 
6,957

Unrealized gains/(losses) on tax increment financing bond
583

 
(471
)
Reduction of advances to unconsolidated affiliates related to acquisition activities
26,000

 


See accompanying notes to consolidated financial statements.

9

Table of Contents

HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(tabular dollar amounts in thousands, except per share data)
(Unaudited)

1.    Description of Business and Significant Accounting Policies

Description of Business

Highwoods Properties, Inc., together with its consolidated subsidiaries (the “Company”), is a fully-integrated, self-administered and self-managed equity 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 virtually all of its activities through Highwoods Realty Limited Partnership (the “Operating Partnership”). At June 30, 2012, the Company and/or the Operating Partnership wholly owned: 304 in-service office, industrial and retail properties, comprising 29.5 million square feet; nine for-sale residential condominiums; 581 acres of undeveloped land suitable for future development, of which 518 acres are considered core assets; and one office property under development.

The Company is the sole general partner of the Operating Partnership. At June 30, 2012, the Company owned all of the Preferred Units and 75.2 million, or 95.3%, of the Common Units in the Operating Partnership. Limited partners, including one officer and two directors of the Company, own the remaining 3.7 million Common Units. In the event the Company issues shares of Common Stock, the net proceeds are contributed to the Operating Partnership in exchange for additional Common Units. Generally, the Operating Partnership is required to redeem each Common Unit at the request of the holder thereof for cash equal to the value of one share of the Company’s Common Stock, $0.01 par value, based on the average of the market price for the 10 trading days immediately preceding the notice date of such redemption, provided that the Company at its option may elect to acquire any such Common Units presented for redemption for cash or one share of Common Stock. The Common Units owned by the Company are not redeemable. During the six months ended June 30, 2012, the Company redeemed 18,366 Common Units for a like number of shares of Common Stock. The redemptions, in conjunction with the proceeds from issuances of Common Stock contributed to the Operating Partnership in exchange for additional Common Units, increased the percentage of Common Units owned by the Company from 95.1% at December 31, 2011 to 95.3% at June 30, 2012.

Common Stock Offerings
 
The Company has entered into equity sales agreements with various financial institutions to offer and sell, from time to time, shares of its Common Stock by means of ordinary brokers' transactions on the New York Stock Exchange or otherwise at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices or as otherwise agreed with any of the institutions. During the three and six months ended June 30, 2012, the Company issued 1,836,976 and 2,622,476 shares, respectively, of Common Stock under these agreements at an average gross sales price of $33.72 and $33.45 per share, respectively, raising net proceeds, after sales commissions and expenses, of $61.0 million and $86.4 million, respectively.

Basis of Presentation

Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Our Consolidated Balance Sheet at December 31, 2011 was recast from previously reported amounts to reflect in real estate and other assets, net, held for sale those properties which qualified as held for sale during the three months ended June 30, 2012. Our Consolidated Statements of Income for the three and six months ended June 30, 2011 were recast from previously reported amounts to reflect in discontinued operations the operations for those properties that qualified for discontinued operations. Prior period amounts related to capital expenditures in our Consolidated Statements of Cash Flows have been reclassified to conform to the current period presentation.

Our Consolidated Financial Statements include the Operating Partnership, wholly owned subsidiaries and those entities in which we have the controlling financial interest. All intercompany transactions and accounts have been eliminated. At June 30, 2012 and December 31, 2011, we had involvement with no entities that we concluded to be variable interest entities.

10

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


1.    Description of Business and Significant Accounting Policies – Continued

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 omitted certain notes and other information from the interim consolidated financial statements presented in this Quarterly Report on Form 10-Q as permitted by SEC rules and regulations. These Consolidated Financial Statements should be read in conjunction with our 2011 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 the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Recently Issued Accounting Standards
 
As a result of adopting certain new or amended accounting pronouncements in the first quarter of 2012, we have enhanced our disclosure of assets and liabilities measured at fair value and elected to continue use of credit valuation adjustments on a net basis by counterparty as part of the calculation to determine the fair value of our derivatives. Our disclosures now include: (1) significant transfers between Levels 1 and 2 of the fair value hierarchy, if any; (2) additional quantitative and qualitative information regarding fair value measurements categorized as Level 3 of the fair value hierarchy; and (3) the hierarchy classification for items whose fair value is not recorded on our Consolidated Balance Sheets but was disclosed previously in our Notes to Consolidated Financial Statements. Additionally, we have presented comprehensive income in a separate financial statement entitled Consolidated Statements of Comprehensive Income.

2.    Real Estate Assets
 
Acquisitions
 
During the second quarter of 2012, we acquired a 178,300 square foot office property in Cary, NC from our DLF I joint venture for an agreed upon value of $26.0 million by reducing the balance of the advance due to us from the joint venture.
 
Dispositions
 
During the second quarter of 2012, we sold a non-core office property in Pinellas County, FL for gross proceeds of $9.5 million. We recorded gain on disposition of discontinued operations of $1.4 million related to this disposition.
 
During the first quarter of 2012, we sold 96 vacant rental residential units in Kansas City, MO for gross proceeds of $11.0 million. We recorded gain on disposition of discontinued operations of $5.1 million related to this disposition.

3.    Mortgages and Notes Receivable

The following table sets forth our mortgages and notes receivable:

 
June 30,
2012
 
December 31,
2011
Seller financing (first mortgages)
$
15,853

 
$
17,180

Less allowance

 

 
15,853

 
17,180

Promissory notes
1,321

 
1,481

Less allowance
(118
)
 
(61
)
 
1,203

 
1,420

Mortgages and notes receivable, net
$
17,056

 
$
18,600


11

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


3.    Mortgages and Notes Receivable - Continued

Our mortgages and notes receivable consist primarily of seller financing issued in conjunction with two disposition transactions in 2010. This seller financing is evidenced by first mortgages secured by the assignment of rents and the underlying real estate assets. We evaluate the collectibility of the receivables by monitoring the leasing statistics and market fundamentals of these assets. As of June 30, 2012, the payments on both mortgages receivable were current and there were no other indications of impairment on the receivables. We may be required to take impairment charges in the future if and to the extent the underlying collateral diminishes in value.

The following table sets forth our notes receivable allowance, which relates only to promissory notes:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Beginning notes receivable allowance
$
122

 
$
497

 
$
61

 
$
868

Bad debt expense

 
162

 

 
184

Recoveries/write-offs/other
(4
)
 
(42
)
 
57

 
(435
)
Total notes receivable allowance
$
118

 
$
617

 
$
118

 
$
617


4.    Investments in and Advances to Affiliates

Unconsolidated Affiliates

We have equity interests of up to 50.0% in various joint ventures with unrelated third parties and a secured debt interest in one of those joint ventures, as described below. The following table sets forth the combined, summarized income statements for our unconsolidated joint ventures on the purchase accounting basis:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Income Statements:
 
 
 
 
 
 
 
Rental and other revenues
$
26,049

 
$
24,779

 
$
50,869

 
$
49,996

Expenses:
 
 
 
 
 
 
 
Rental property and other expenses
12,666

 
10,774

 
24,082

 
22,771

Depreciation and amortization
5,919

 
6,295

 
12,484

 
12,911

Impairment of real estate assets

 

 
7,180

 

Interest expense
5,267

 
5,858

 
11,097

 
11,865

Total expenses
23,852

 
22,927

 
54,843

 
47,547

Income/(loss) before disposition of properties
2,197

 
1,852

 
(3,974
)
 
2,449

Gains on disposition of properties
6,275

 

 
6,275

 

Net income
$
8,472


$
1,852

 
$
2,301

 
$
2,449

Our share of:
 
 
 
 
 
 
 
Depreciation and amortization of real estate assets
$
1,675

 
$
2,033

 
$
3,773

 
$
4,126

Impairment of real estate assets
$

 
$

 
$
1,002

 
$

Interest expense
$
1,843

 
$
2,033

 
$
3,823

 
$
4,194

Net income
$
1,133

 
$
749

 
$
338

 
$
1,670

 
 
 
 
 
 
 
 
Our share of net income
$
1,133

 
$
749

 
$
338

 
$
1,670

Management and other fees adjustments
375

 
604

 
1,008

 
1,150

Equity in earnings of unconsolidated affiliates
$
1,508

 
$
1,353

 
$
1,346

 
$
2,820



12

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


4.    Investments in and Advances to Affiliates - Continued

In 2011, we provided a $38.3 million interest-only secured loan to our DLF I joint venture that originally was scheduled to mature in March 2012. The loan bears interest at LIBOR plus 500 basis points. The maturity date of the loan has been extended to September 30, 2012. In the second quarter of 2012, we acquired an office property from the joint venture by reducing the balance of the advance due to us from the joint venture. We deferred our share of the gain recorded by the joint venture related to this transaction. We recorded interest income from this loan in interest and other income of $0.2 million and $0.3 million during the three months ended June 30, 2012 and 2011, respectively, and $0.7 million and $0.3 million during the six months ended June 30, 2012 and 2011, respectively.

In the second quarter of 2012, our DLF II joint venture obtained a $50.0 million, three-year secured mortgage loan from a third party lender, bearing a fixed interest rate of 3.5% on $39.1 million of the loan and a floating interest rate of LIBOR plus 250 basis points on $10.9 million of the loan, which was used by the joint venture to repay a secured loan at maturity to a third party lender.

During the first quarter of 2012, we recorded $1.0 million as our share of impairment of real estate assets on two office properties in our DLF I joint venture, due to a decline in projected occupancy and a change in the assumed holding period of those assets, which reduced the expected future cash flows from the properties.

5.    Intangible Assets and Below Market Lease Liabilities
 
The following table sets forth total intangible assets and acquisition-related below market lease liabilities, net of accumulated amortization:
 
 
June 30,
2012
 
December 31,
2011
Assets:
 
 
 
Deferred financing costs
$
20,112

 
$
18,044

Less accumulated amortization
(7,488
)
 
(5,797
)
 
12,624

 
12,247

Deferred leasing costs (including lease incentives and acquisition-related intangible assets)
177,140

 
172,049

Less accumulated amortization
(63,084
)
 
(56,522
)
 
114,056

 
115,527

Deferred financing and leasing costs, net
$
126,680

 
$
127,774

 
 
 
 
Liabilities (in accounts payable, accrued expenses and other liabilities):
 
 
 
Acquisition-related below market lease liabilities
$
16,346

 
$
16,441

Less accumulated amortization
(1,966
)
 
(971
)
 
$
14,380

 
$
15,470

 
The following table sets forth amortization of intangible assets and acquisition-related below market lease liabilities:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Amortization of deferred financing costs
$
900

 
$
821

 
$
1,802

 
$
1,642

Amortization of deferred leasing costs and acquisition-related intangible assets (in depreciation and amortization)
$
7,266

 
$
4,401

 
$
13,706

 
$
8,757

Amortization of lease incentives (in rental and other revenues)
$
340

 
$
303

 
$
683

 
$
641

Amortization of acquisition-related intangible assets (in rental and other revenues)
$
324

 
$
191

 
$
594

 
$
377

Amortization of acquisition-related below market lease liabilities (in rental and other revenues)
$
(553
)
 
$
(25
)
 
$
(1,097
)
 
$
(50
)


13

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


5.    Intangible Assets and Below Market Lease Liabilities - Continued

The following table sets forth scheduled future amortization of intangible assets and below market lease liabilities:

 
 
Amortization
of Deferred Financing
Costs
 
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 Below Market Lease Liabilities (in Rental and Other Revenues)
July 1, 2012 through December 31, 2012
 
$
2,234

 
$
14,242

 
$
772

 
$
579

 
$
(1,229
)
2013
 
3,262

 
21,834

 
1,167

 
765

 
(2,081
)
2014
 
2,987

 
17,877

 
1,013

 
504

 
(2,005
)
2015
 
2,264

 
13,879

 
779

 
328

 
(1,768
)
2016
 
957

 
10,880

 
608

 
280

 
(1,498
)
Thereafter
 
920

 
25,453

 
2,379

 
717

 
(5,799
)
 
 
$
12,624

 
$
104,165

 
$
6,718

 
$
3,173

 
$
(14,380
)

The weighted average remaining amortization periods for deferred financing costs, deferred leasing costs and acquisition-related intangible assets (in depreciation and amortization), lease incentives (in rental and other revenues), acquisition-related intangible assets (in rental and other revenues) and acquisition-related below market lease liabilities (in rental and other revenues) were 3.8 years, 6.2 years, 7.8 years, 5.7 years and 8.9 years, respectively, as of June 30, 2012.

In connection with the acquisition of an office property in Cary, NC in the second quarter of 2012, we recorded $2.7 million of in-place lease intangible assets with a weighted average amortization period of 6.3 years at the date of the acquisition. The contractual rents of the in-place lease acquired were determined to be at market.

6.    Mortgages and Notes Payable

The following table sets forth our mortgages and notes payable:

 
June 30,
2012
 
December 31,
2011
Secured indebtedness
$
743,492

 
$
750,049

Unsecured indebtedness
1,079,636

 
1,153,164

Total mortgages and notes payable
$
1,823,128

 
$
1,903,213


At June 30, 2012, our secured mortgage loans were secured by real estate assets with an aggregate undepreciated book value of $1,237.7 million.

Our $475.0 million unsecured revolving credit facility is scheduled to mature on July 27, 2015 and includes an accordion feature that allows for an additional $75.0 million of borrowing capacity subject to additional lender commitments. Assuming no defaults have occurred, we have an option to extend the maturity for an additional year. The interest rate at our current credit ratings is LIBOR plus 150 basis points and the annual facility fee is 35 basis points. The interest rate and facility fee are based on the higher of the publicly announced ratings from Moody's Investors Service or Standard & Poor's Ratings Services. We use our revolving credit facility for working capital purposes and for the short-term funding of our development and acquisition activity and, in certain instances, the repayment of other debt. Continuing ability to borrow under the revolving credit facility allows us to quickly capitalize on strategic opportunities at short-term interest rates. There was $75.5 million and $28.1 million outstanding under our revolving credit facility at June 30, 2012 and July 19, 2012, respectively. At both June 30, 2012 and July 19, 2012, we had $0.1 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 June 30, 2012 and July 19, 2012 was $399.4 million and $446.8 million, respectively.

14

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


6.    Mortgages and Notes Payable - Continued

In the second quarter of 2012, we repurchased $12.1 million principal amount of unsecured notes due March 2017 bearing interest of 5.85% for a purchase price of 107.5% of par value. We recorded $1.0 million of loss on debt extinguishment related to this repurchase.

In the first quarter of 2012, we obtained a $225.0 million, seven-year unsecured bank term loan bearing interest of LIBOR plus 190 basis points. This floating interest rate effectively was fixed by the interest rate swaps discussed in Note 7. The proceeds were used to pay off amounts then outstanding under our revolving credit facility.

We are currently in compliance with the debt covenants and other requirements with respect to our outstanding debt.

7.
Derivative Financial Instruments

We have six floating-to-fixed interest rate swaps for seven-year periods each with respect to an aggregate of $225.0 million LIBOR-based borrowings. These swaps effectively fix the underlying LIBOR rate at a weighted average of 1.678%. The counterparties under the swaps are major financial institutions. The swap agreements contain a provision whereby if we default on any of our indebtedness, if greater than $10.0 million and that 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 derivative obligations. These swaps have been designated as and are being accounted for as cash flow hedges with changes in fair value recorded in other comprehensive income each reporting period. No gain or loss was recognized related to hedge ineffectiveness or to amounts excluded from effectiveness testing on our cash flow hedges during the six months ended June 30, 2012. As of June 30, 2012, we have not posted any collateral related to our interest rate swap liability.

Amounts reported in accumulated other comprehensive loss ("AOCL") related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the period from July 1, 2012 through June 30, 2013, we estimate that $3.1 million will be reclassified as an increase to interest expense.

The following table sets forth the fair value of our derivative instruments:

 
June 30,
2012
 
December 31,
2011
Liability Derivatives:
 
 
 
Derivatives designated as cash flow hedges in other liabilities:
 
 
 
Interest rate swaps
$
7,763

 
$
2,202


The following table sets forth the effect of our cash flow hedges on AOCL and interest expense:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Derivatives Designated as Cash Flow Hedges:
 
 
 
 
 
 
 
Amount of unrealized losses recognized in AOCL on derivatives (effective portion):
 
 
 
 
 
 
 
Interest rate swaps
$
(7,481
)
 
$

 
$
(7,087
)
 
$

Amount of (gains)/losses reclassified out of AOCL into contractual interest expense (effective portion):
 
 
 
 
 
 
 
Interest rate swaps
$
782

 
$
(29
)
 
$
1,459

 
$
(58
)


15

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



8.
Noncontrolling Interests

Noncontrolling Interests in the Operating Partnership

Noncontrolling interests in the Operating Partnership relate to the ownership of Common Units by various individuals and entities other than the Company. Net income attributable to noncontrolling interests in the Operating Partnership is computed by applying the weighted average percentage of Common Units not owned by the Company during the period, as a percent of the total number of outstanding Common Units, to the Operating Partnership’s net income for the period after deducting distributions on Preferred Units.

The following table sets forth noncontrolling interests in the Operating Partnership:

 
Six Months Ended June 30,
 
2012
 
2011
Beginning noncontrolling interests in the Operating Partnership
$
110,655

 
$
120,838

Adjustments of noncontrolling interests in the Operating Partnership to fair value
16,501

 
6,957

Conversion of Common Units to Common Stock
(631
)
 
(635
)
Net income attributable to noncontrolling interests in the Operating Partnership
1,513

 
1,130

Distributions to noncontrolling interests in the Operating Partnership
(3,158
)
 
(3,215
)
Total noncontrolling interests in the Operating Partnership
$
124,880

 
$
125,075


The following table sets forth net income available for common stockholders and transfers from noncontrolling interests in the Operating Partnership:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Net income available for common stockholders
$
12,962

 
$
10,112

 
$
29,656

 
$
20,248

Increase in additional paid in capital from conversion of Common Units to Common Stock
568

 
449

 
631

 
635

Change from net income available for common stockholders and transfers from noncontrolling interests
$
13,530

 
$
10,561

 
$
30,287

 
$
20,883


Noncontrolling Interests in Consolidated Affiliates

At June 30, 2012, noncontrolling interests in consolidated affiliates relates to our joint venture partner's 50.0% interest in office properties located in Richmond, VA. Our joint venture partner is an unrelated third party.

9.
Disclosure About Fair Value of Financial Instruments

The following summarizes the three levels of inputs that we use to measure fair value, as well as the assets, noncontrolling interests in the Operating Partnership and liabilities that we recognize at fair value using those levels of inputs.

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

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

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.

16

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


9.
Disclosure About Fair Value of Financial Instruments - Continued

Our Level 2 asset is the fair value of our mortgages and notes receivable, which was 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.

Our Level 2 liabilities include (1) the fair value of our mortgages and notes payable, which was 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 and (2) interest rate swaps whose fair value 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 our interest rate swaps are based on the expectation of future LIBOR interest rates (forward curves) derived from observed market LIBOR interest rate curves. In addition, credit valuation adjustments are incorporated 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 our tax increment financing bond, which is not routinely traded but whose fair value is determined by the income approach utilizing contractual cash flows and market-based interest rates to estimate the projected redemption value based on quoted bid/ask prices for similar unrated municipal bonds and, if any, real estate assets and for-sale residential condominiums recorded at fair value on a non-recurring basis as a result of our quarterly impairment analysis, which were valued using broker opinion of value and substantiated by internal cash flow projections.

Our Level 3 liability is the fair value of our financing obligations, which was estimated by the income approach to approximate the price that would be paid in an orderly transaction between market participants, utilizing: (1) contractual cash flows; (2) market-based interest rates; and (3) a number of other assumptions including demand for space, competition for customers, changes in market rental rates, costs of operation and expected ownership periods.

The following tables set forth the assets, noncontrolling interests in the Operating Partnership and liabilities that we measure at fair value by level within the fair value hierarchy. We determine the level based on the lowest level of substantive input used to determine fair value.

 
 
 
Level 1
 
Level 2
 
Level 3
 
June 30, 2012
 
Quoted Prices
in Active
Markets for Identical Assets or Liabilities
 
Significant Observable Inputs
 
Significant Unobservable Inputs
Assets:
 
 
 
 
 
 
 
Mortgages and notes receivable, at fair value (1)
$
17,330

 
$

 
$
17,330

 
$

Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)
3,099

 
3,099

 

 

Tax increment financing bond (in prepaid expenses and other assets)
15,371

 

 

 
15,371

Total Assets
$
35,800

 
$
3,099

 
$
17,330

 
$
15,371

Noncontrolling Interests in the Operating Partnership
$
124,880

 
$
124,880

 
$

 
$

Liabilities:
 
 
 
 
 
 
 
Mortgages and notes payable, at fair value (1)
$
1,918,241

 
$

 
$
1,918,241

 
$

Interest rate swaps (in accounts payable, accrued expenses and other liabilities)
7,763

 

 
7,763

 

Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)
3,099

 
3,099

 

 

Financing obligations, at fair value (1)
21,141

 

 

 
21,141

Total Liabilities
$
1,950,244

 
$
3,099

 
$
1,926,004

 
$
21,141



17

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


9.
Disclosure About Fair Value of Financial Instruments - Continued

 
 
 
Level 1
 
Level 2
 
Level 3
 
December 31, 2011
 
Quoted Prices
in Active
Markets for Identical Assets or Liabilities
 
Significant Observable Inputs
 
Significant Unobservable Inputs
Assets:
 
 
 
 
 
 
 
Mortgages and notes receivable, at fair value (1)
$
18,990

 
$

 
$
18,990

 
$

Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)
3,149

 
3,149

 

 

Tax increment financing bond (in prepaid expenses and other assets)
14,788

 

 

 
14,788

Impaired real estate assets and for-sale residential condominiums
12,767

 

 

 
12,767

Total Assets
$
49,694

 
$
3,149

 
$
18,990

 
$
27,555

Noncontrolling Interests in the Operating Partnership
$
110,655

 
$
110,655

 
$

 
$

Liabilities:
 
 
 
 
 
 
 
Mortgages and notes payable, at fair value (1)
$
1,992,937

 
$

 
$
1,992,937

 
$

Interest rate swaps (in accounts payable, accrued expenses and other liabilities)
2,202

 

 
2,202

 

Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)
3,149

 
3,149

 

 

Financing obligations, at fair value (1)
18,866

 

 

 
18,866

Total Liabilities
$
2,017,154

 
$
3,149

 
$
1,995,139

 
$
18,866

__________
(1)    Amounts carried at historical cost on our Consolidated Balance Sheets at June 30, 2012 and December 31, 2011, respectively.

The following table sets forth the changes in our Level 3 asset, which is recorded at fair value on our Consolidated Balance Sheets on a recurring basis:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Asset:
 
 
 
 
 
 
 
Tax Increment Financing Bond:
 
 
 
 
 
 
 
Beginning balance
$
15,075

 
$
15,564

 
$
14,788

 
$
15,699

Unrealized gains/(losses) (in AOCL)
296

 
(336
)
 
583

 
(471
)
Ending balance
$
15,371

 
$
15,228

 
$
15,371

 
$
15,228


In 2007, we acquired a tax increment financing bond associated with a parking garage developed by us. This bond amortizes to maturity in 2020. The estimated fair value at June 30, 2012 was $1.7 million below the outstanding principal due on the bond. If the discount rate used to fair value this bond was 100 basis points higher or lower, the fair value of the bond would have been $0.6 million lower or $0.6 million higher, respectively, as of June 30, 2012. We intend to hold this bond and have concluded that we will not be required to sell this bond before recovery of the bond principal. Payment of the principal and interest for the bond is guaranteed by us. We have recorded no credit losses related to the bond during the three and six months ended June 30, 2012 and 2011. There is no legal right of offset with the liability, which we report as a financing obligation, related to this tax increment financing bond.

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


9.
Disclosure About Fair Value of Financial Instruments - Continued

The following table sets forth quantitative information about the unobservable inputs of our Level 3 asset, which is recorded at fair value on our Consolidated Balance Sheets on a recurring basis:

 
Fair Value at
June 30, 2012
 
Valuation
Technique
 
Unobservable
Input
 
Discount
Rate
Tax increment financing bond
$
15,371

 
Income approach
 
Discount rate
 
9.85
%

10.
Share-based Payments

During the six months ended June 30, 2012, we granted 190,886 stock options with an exercise price equal to the closing market price of a share of our Common Stock on the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, which resulted in a weighted average grant date fair value per share of $5.47. During the six months ended June 30, 2012, we also granted 90,983 shares of time-based restricted stock and 67,902 shares of total return-based restricted stock with weighted average grant date fair values per share of $32.27 and $38.71, respectively. We recorded stock-based compensation expense of $2.0 million and $1.4 million during the three months ended June 30, 2012 and 2011, respectively, and $4.5 million and $3.5 million during the six months ended June 30, 2012 and 2011, respectively. At June 30, 2012, there was $7.6 million of total unrecognized stock-based compensation costs, which will be recognized over a weighted average remaining contractual term of 2.6 years.

11.
Accumulated Other Comprehensive Loss

The following table sets forth the components of accumulated other comprehensive loss:

 
Six Months Ended June 30,
 
2012
 
2011
Tax increment financing bond:
 
 
 
Beginning balance
$
(2,309
)
 
$
(2,543
)
Unrealized gains/(losses) on tax increment financing bond
583

 
(471
)
Ending balance
(1,726
)
 
(3,014
)
Cash flow hedges:
 
 
 
Beginning balance
(3,425
)
 
(1,105
)
Unrealized losses on cash flow hedges
(7,087
)
 

Amortization of cash flow hedges
1,459

 
(58
)
Ending balance
(9,053
)
 
(1,163
)
Total accumulated other comprehensive loss
$
(10,779
)
 
$
(4,177
)

19

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



12.
Discontinued Operations

The following table sets forth our operations which required classification as discontinued operations:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Rental and other revenues
$
2,044

 
$
2,907

 
$
4,383

 
$
6,169

Operating expenses:
 
 
 
 
 
 
 
Rental property and other expenses
966

 
1,390

 
2,084

 
2,862

Depreciation and amortization
322

 
778

 
1,008

 
1,653

Total operating expenses
1,288

 
2,168

 
3,092

 
4,515

Income from discontinued operations
756

 
739

 
1,291

 
1,654

Net gains on disposition of discontinued operations
1,385

 

 
6,519

 

Total discontinued operations
$
2,141

 
$
739

 
$
7,810

 
$
1,654


The following table sets forth the major classes of assets and liabilities of our real estate and other assets held for sale, net:

 
June 30,
2012
 
December 31,
2011
Assets:
 
 
 
Land
$
3,849

 
$
5,749

Buildings and tenant improvements
49,460

 
65,860

Accumulated depreciation
(18,743
)
 
(23,917
)
Net real estate assets
34,566

 
47,692

Accrued straight line rents receivable
1,490

 
1,726

Deferred leasing costs, net
678

 
811

Prepaid expenses and other assets
17

 
106

Real estate and other assets, net, held for sale
$
36,751

 
$
50,335

Tenant security deposits, deferred rents and accrued costs (1)
$
595

 
$
238

__________
(1)
Included in accounts payable, accrued expenses and other liabilities.

As of June 30, 2012, real estate and other assets held for sale, net, included five office properties in Nashville, TN and one office property in Kansas City, MO. As of December 31, 2011, real estate and other assets held for sale, net, included five office properties in Nashville, TN, one office property in Pinellas County, FL and one office property and 96 residential units in Kansas City, MO. All of these properties qualified for discontinued operations.  


20

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



13.
Earnings Per Share

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