HIW 09.30.2014 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 September 30, 2014
 
HIGHWOODS PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
 
Maryland
001-13100
56-1871668
 
 
(State or other jurisdiction
of incorporation or organization)
(Commission
File Number)
(I.R.S. Employer
Identification Number)
 
 
HIGHWOODS REALTY LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
 
North Carolina
000-21731
56-1869557
 
 
(State or other jurisdiction
of incorporation or organization)
(Commission
File Number)
(I.R.S. Employer
Identification Number)
 
 
3100 Smoketree Court, Suite 600
Raleigh, NC 27604
(Address of principal executive offices) (Zip Code)
919-872-4924
(Registrants’ telephone number, including area code)
______________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Highwoods Properties, Inc.  Yes  x    No ¨    Highwoods Realty Limited Partnership  Yes  x    No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Highwoods Properties, Inc.  Yes  x    No ¨    Highwoods Realty Limited Partnership  Yes  x    No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer 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 x    Accelerated filer ¨      Non-accelerated filer ¨      Smaller reporting company ¨
Highwoods Realty Limited Partnership
Large accelerated filer ¨    Accelerated filer ¨      Non-accelerated filer x      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 x    Highwoods Realty Limited Partnership  Yes  ¨    No x
 
The Company had 91,270,024 shares of Common Stock outstanding as of October 20, 2014.
 




EXPLANATORY NOTE

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

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

Certain information contained herein is presented as of October 20, 2014, the latest practicable date for financial information prior to the filing of this Quarterly Report.

This report combines the Quarterly Reports on Form 10-Q for the period ended September 30, 2014 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;

the following Notes to Consolidated Financial Statements:

Note 8 - Noncontrolling Interests; and

Note 13 - Earnings Per Share and Per Unit;

Item 4 - Controls and Procedures; and

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





HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP

QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 2014

TABLE OF CONTENTS

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



3

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HIGHWOODS PROPERTIES, INC.
Consolidated Balance Sheets
(Unaudited and in thousands, except share and per share data)
 
September 30,
2014
 
December 31,
2013
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
386,333

 
$
393,602

Buildings and tenant improvements
3,756,655

 
3,748,869

Development in process
184,238

 
44,621

Land held for development
89,010

 
110,374

 
4,416,236

 
4,297,466

Less-accumulated depreciation
(1,013,071
)
 
(985,244
)
Net real estate assets
3,403,165

 
3,312,222

Real estate and other assets, net, held for sale
1,032

 

Cash and cash equivalents
11,600

 
10,184

Restricted cash
10,633

 
14,169

Accounts receivable, net of allowance of $1,408 and $1,648, respectively
29,970

 
26,430

Mortgages and notes receivable, net of allowance of $255 and $302, respectively
10,501

 
26,409

Accrued straight-line rents receivable, net of allowance of $601 and $1,063, respectively
136,578

 
126,014

Investments in unconsolidated affiliates
30,248

 
29,901

Deferred financing and leasing costs, net of accumulated amortization of $108,878 and $92,220, respectively
218,725

 
222,211

Prepaid expenses and other assets, net of accumulated amortization of $13,913 and $12,905,
respectively
42,635

 
39,561

Total Assets
$
3,895,087

 
$
3,807,101

Liabilities, Noncontrolling Interests in the Operating Partnership and Equity:
 
 
 
Mortgages and notes payable
$
2,013,824

 
$
1,956,299

Accounts payable, accrued expenses and other liabilities
229,996

 
218,962

Financing obligations
23,519

 
26,664

Total Liabilities
2,267,339

 
2,201,925

Commitments and contingencies

 

Noncontrolling interests in the Operating Partnership
114,248

 
106,480

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;
 
 
 
91,270,024 and 89,920,915 shares issued and outstanding, respectively
913

 
899

Additional paid-in capital
2,413,662

 
2,370,368

Distributions in excess of net income available for common stockholders
(948,929
)
 
(920,433
)
Accumulated other comprehensive loss
(2,831
)
 
(2,611
)
Total Stockholders’ Equity
1,491,892

 
1,477,300

Noncontrolling interests in consolidated affiliates
21,608

 
21,396

Total Equity
1,513,500

 
1,498,696

Total Liabilities, Noncontrolling Interests in the Operating Partnership and Equity
$
3,895,087

 
$
3,807,101


See accompanying notes to consolidated financial statements.
HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Income
(Unaudited and in thousands, except per share amounts)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Rental and other revenues
$
152,629

 
$
144,827

 
$
453,804

 
$
407,822

Operating expenses:
 
 
 
 
 
 
 
Rental property and other expenses
57,383

 
54,102

 
169,048

 
148,013

Depreciation and amortization
48,287

 
47,338

 
146,895

 
128,050

Impairments of real estate assets

 

 
588

 

General and administrative
7,526

 
8,969

 
26,973

 
27,948

Total operating expenses
113,196

 
110,409

 
343,504

 
304,011

Interest expense:
 
 
 
 
 
 
 
Contractual
20,962

 
22,683

 
62,352

 
67,879

Amortization of deferred financing costs
819

 
963

 
2,270

 
2,860

Financing obligations
567

 
26

 
301

 
87

 
22,348

 
23,672

 
64,923

 
70,826

Other income:
 
 
 
 
 
 
 
Interest and other income
1,054

 
1,582

 
3,863

 
4,982

Losses on debt extinguishment
(326
)
 
(32
)
 
(308
)
 
(196
)
 
728

 
1,550


3,555


4,786

Income from continuing operations before disposition of investment properties and activity in unconsolidated affiliates
17,813

 
12,296

 
48,932

 
37,771

Gains/(losses) on disposition of property
36,238

 
34

 
42,185

 
(3
)
Gain on acquisition of controlling interest in unconsolidated affiliate

 
7,451

 

 
7,451

Equity in earnings/(losses) of unconsolidated affiliates
248

 
(3,173
)
 
886

 
(1,824
)
Income from continuing operations
54,299

 
16,608

 
92,003

 
43,395

Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations

 
1,514

 

 
5,853

Impairments of real estate assets

 

 

 
(2,194
)
Net gains on disposition of discontinued operations

 
37,946

 
384

 
52,353

 

 
39,460

 
384

 
56,012

Net income
54,299

 
56,068

 
92,387

 
99,407

Net (income) attributable to noncontrolling interests in the Operating Partnership
(1,673
)
 
(1,889
)
 
(2,813
)
 
(3,713
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(291
)
 
(203
)
 
(1,152
)
 
(593
)
Dividends on Preferred Stock
(627
)
 
(627
)
 
(1,881
)
 
(1,881
)
Net income available for common stockholders
$
51,708

 
$
53,349


$
86,541


$
93,220

Earnings per Common Share – basic:
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
0.57

 
$
0.17

 
$
0.96

 
$
0.47

Income from discontinued operations available for common stockholders

 
0.44

 

 
0.64

Net income available for common stockholders
$
0.57

 
$
0.61

 
$
0.96

 
$
1.11

Weighted average Common Shares outstanding – basic
90,668

 
87,467

 
90,299

 
83,793

Earnings per Common Share – diluted:
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
0.57

 
$
0.17

 
$
0.96

 
$
0.47

Income from discontinued operations available for common stockholders

 
0.44

 

 
0.64

Net income available for common stockholders
$
0.57

 
$
0.61

 
$
0.96

 
$
1.11

Weighted average Common Shares outstanding – diluted
93,723

 
90,769

 
93,358

 
87,443

Dividends declared per Common Share
$
0.425

 
$
0.425

 
$
1.275

 
$
1.275

Net income available for common stockholders:
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
51,708

 
$
15,290

 
$
86,169

 
$
39,321

Income from discontinued operations available for common stockholders

 
38,059

 
372

 
53,899

Net income available for common stockholders
$
51,708

 
$
53,349

 
$
86,541

 
$
93,220

See accompanying notes to consolidated financial statements.

4

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Comprehensive Income
(Unaudited and in thousands)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
54,299

 
$
56,068

 
$
92,387

 
$
99,407

Other comprehensive income/(loss):
 
 
 
 
 
 
 
Unrealized gains on tax increment financing bond
23

 
97

 
293

 
396

Unrealized gains/(losses) on cash flow hedges
913

 
(1,798
)
 
(3,337
)
 
4,801

Amortization of cash flow hedges
952

 
840

 
2,824

 
2,428

Total other comprehensive income/(loss)
1,888

 
(861
)
 
(220
)
 
7,625

Total comprehensive income
56,187

 
55,207

 
92,167

 
107,032

Less-comprehensive (income) attributable to noncontrolling interests
(1,964
)
 
(2,092
)
 
(3,965
)
 
(4,306
)
Comprehensive income attributable to common stockholders
$
54,223

 
$
53,115

 
$
88,202

 
$
102,726


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 Loss
 
Non-controlling Interests in Consolidated Affiliates
 
Distributions in Excess of Net Income Available for Common Stockholders
 
Total
Balance at December 31, 2013
89,920,915

 
$
899

 
$
29,077

 
$
2,370,368

 
$
(2,611
)
 
$
21,396

 
$
(920,433
)
 
$
1,498,696

Issuances of Common Stock, net of shares redeemed for tax withholdings
1,175,191

 
12

 

 
45,910

 

 

 

 
45,922

Conversions of Common Units to Common Stock
4,417

 

 

 
162

 

 

 

 
162

Dividends on Common Stock


 

 

 

 

 

 
(115,037
)
 
(115,037
)
Dividends on Preferred Stock


 

 

 

 

 

 
(1,881
)
 
(1,881
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value


 

 

 
(8,955
)
 

 

 

 
(8,955
)
Distributions to noncontrolling interests in consolidated affiliates


 

 

 

 

 
(940
)
 

 
(940
)
Issuances of restricted stock
169,501

 

 

 

 

 

 

 

Share-based compensation expense, net of forfeitures


 
2

 

 
6,177

 

 

 

 
6,179

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


 

 

 

 

 

 
(2,813
)
 
(2,813
)
Net (income) attributable to noncontrolling interests in consolidated affiliates


 

 

 

 

 
1,152

 
(1,152
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income


 

 

 

 

 

 
92,387

 
92,387

Other comprehensive loss


 

 

 

 
(220
)
 

 

 
(220
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
92,167

Balance at September 30, 2014
91,270,024

 
$
913

 
$
29,077

 
$
2,413,662

 
$
(2,831
)
 
$
21,608

 
$
(948,929
)
 
$
1,513,500



 
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, 2012
80,311,437

 
$
803

 
$
29,077

 
$
2,040,306

 
$
(12,628
)
 
$
4,753

 
$
(897,418
)
 
$
1,164,893

Issuances of Common Stock, net of shares redeemed for tax withholdings
8,660,546

 
87

 

 
305,514

 

 

 

 
305,601

Conversions of Common Units to Common Stock
789,144

 

 

 
28,788

 

 

 

 
28,788

Dividends on Common Stock

 

 

 

 

 

 
(107,750
)
 
(107,750
)
Dividends on Preferred Stock

 

 

 

 

 

 
(1,881
)
 
(1,881
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value

 

 

 
(8,570
)
 

 

 

 
(8,570
)
Distributions to noncontrolling interests in consolidated affiliates

 

 

 

 

 
(408
)
 

 
(408
)
Contributions from noncontrolling interests in consolidated affiliates
 
 

 

 

 

 
16,240

 

 
16,240

Issuances of restricted stock
151,630

 

 

 

 

 

 

 

Share-based compensation expense, net of forfeitures
(1,813
)
 
9

 

 
5,887

 

 

 

 
5,896

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

 

 

 

 

 

 
(3,713
)
 
(3,713
)
Net (income) attributable to noncontrolling interests in consolidated affiliates

 

 

 

 

 
593

 
(593
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 

 
99,407

 
99,407

Other comprehensive income

 

 

 

 
7,625

 

 

 
7,625

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
107,032

Balance at September 30, 2013
89,910,944

 
$
899

 
$
29,077

 
$
2,371,925

 
$
(5,003
)
 
$
21,178

 
$
(911,948
)
 
$
1,506,128


See accompanying notes to consolidated financial statements.

6

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
 
Nine Months Ended
September 30,
 
2014
 
2013
Operating activities:
 
 
 
Net income
$
92,387

 
$
99,407

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
146,895

 
133,556

Amortization of lease incentives and acquisition-related intangible assets and liabilities
249

 
258

Share-based compensation expense
6,179

 
5,896

Allowance for losses on accounts and accrued straight-line rents receivable
1,942

 
1,029

Accrued interest on mortgages and notes receivable
(354
)
 

Amortization of deferred financing costs
2,270

 
2,860

Amortization of cash flow hedges
2,824

 
2,428

Amortization of mortgages and notes payable fair value adjustments
(845
)
 
(1,015
)
Impairments of real estate assets
588

 
2,194

Losses on debt extinguishment
308

 
196

Net gains on disposition of property
(42,569
)
 
(52,350
)
Gain on acquisition of controlling interest in unconsolidated affiliate

 
(7,451
)
Equity in (earnings)/losses of unconsolidated affiliates
(886
)
 
1,824

Changes in financing obligations
(241
)
 
(591
)
Distributions of earnings from unconsolidated affiliates
1,634

 
3,129

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(1,762
)
 
(508
)
Prepaid expenses and other assets
(2,927
)
 
(2,188
)
Accrued straight-line rents receivable
(16,202
)
 
(12,368
)
Accounts payable, accrued expenses and other liabilities
(5,815
)
 
10,206

Net cash provided by operating activities
183,675

 
186,512

Investing activities:
 
 
 
Investments in acquired real estate and related intangible assets, net of cash acquired
(83,751
)
 
(418,796
)
Investment in acquired controlling interest in unconsolidated affiliate

 
(32,818
)
Investments in development in process
(122,106
)
 
(16,634
)
Investments in tenant improvements and deferred leasing costs
(80,132
)
 
(77,456
)
Investments in building improvements
(39,401
)
 
(38,702
)
Net proceeds from disposition of real estate assets
151,987

 
161,970

Distributions of capital from unconsolidated affiliates
725

 
16,671

Investments in mortgages and notes receivable
(419
)
 
(1,301
)
Repayments of mortgages and notes receivable
16,974

 
437

Investments in unconsolidated affiliates
(6,425
)
 
(429
)
Redemption of investment in unconsolidated affiliate
4,660

 

Changes in restricted cash and other investing activities
(1,296
)
 
5,484

Net cash (used in) investing activities
(159,184
)
 
(401,574
)
Financing activities:
 
 
 
Dividends on Common Stock
(115,037
)
 
(107,750
)
Redemptions of Common Units
(93
)
 

Dividends on Preferred Stock
(1,881
)
 
(1,881
)
Distributions to noncontrolling interests in the Operating Partnership
(3,745
)
 
(4,416
)
Distributions to noncontrolling interests in consolidated affiliates
(940
)
 
(408
)
Proceeds from the issuance of Common Stock
49,216

 
315,818

Costs paid for the issuance of Common Stock
(600
)
 
(7,678
)
Repurchase of shares related to tax withholdings
(2,694
)
 
(2,539
)
Borrowings on revolving credit facility
377,700

 
695,300

Repayments of revolving credit facility
(443,400
)
 
(511,900
)
Borrowings on mortgages and notes payable
296,949

 

Repayments of mortgages and notes payable
(172,810
)
 
(157,001
)
Payments on financing obligations
(2,904
)
 
(575
)
Payments of debt extinguishment costs
(369
)
 

Contributions from noncontrolling interests in consolidated affiliates

 
16,240

Additions to deferred financing costs and other financing activities
(2,467
)
 
(242
)
Net cash (used in)/provided by financing activities
(23,075
)
 
232,968

Net increase in cash and cash equivalents
$
1,416

 
$
17,906

See accompanying notes to consolidated financial statements.

7

Table of Contents


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

 
Nine Months Ended
September 30,
 
2014
 
2013
Net increase in cash and cash equivalents
$
1,416

 
$
17,906

Cash and cash equivalents at beginning of the period
10,184

 
13,783

Cash and cash equivalents at end of the period
$
11,600

 
$
31,689


Supplemental disclosure of cash flow information:
 
 
Nine Months Ended
September 30,
 
2014
 
2013
Cash paid for interest, net of amounts capitalized
$
63,340

 
$
67,786


Supplemental disclosure of non-cash investing and financing activities:
 
 
Nine Months Ended
September 30,
 
2014
 
2013
Unrealized gains/(losses) on cash flow hedges
$
(3,337
)
 
$
4,801

Conversions of Common Units to Common Stock
162

 
28,788

Changes in accrued capital expenditures
17,255

 
12,778

Write-off of fully depreciated real estate assets
29,953

 
24,498

Write-off of fully amortized deferred financing and leasing costs
17,138

 
17,500

Unrealized gains on marketable securities of non-qualified deferred compensation plan
149

 
558

Adjustment of noncontrolling interests in the Operating Partnership to fair value
8,955

 
8,570

Unrealized gains on tax increment financing bond
293

 
396

Assumption of mortgages and notes payable related to acquisition activities

 
165,515

Reclass of aggregate differences between historical cost basis and the basis reflected at the joint venture level for assets acquired

 
8,206


See accompanying notes to consolidated financial statements.

8

Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Balance Sheets
(Unaudited and in thousands, except unit and per unit data)
 
September 30,
2014
 
December 31,
2013
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
386,333

 
$
393,602

Buildings and tenant improvements
3,756,655

 
3,748,869

Development in process
184,238

 
44,621

Land held for development
89,010

 
110,374

 
4,416,236

 
4,297,466

Less-accumulated depreciation
(1,013,071
)
 
(985,244
)
Net real estate assets
3,403,165

 
3,312,222

Real estate and other assets, net, held for sale
1,032

 

Cash and cash equivalents
11,706

 
10,281

Restricted cash
10,633

 
14,169

Accounts receivable, net of allowance of $1,408 and $1,648, respectively
29,970

 
26,430

Mortgages and notes receivable, net of allowance of $255 and $302, respectively
10,501

 
26,409

Accrued straight-line rents receivable, net of allowance of $601 and $1,063, respectively
136,578

 
126,014

Investments in unconsolidated affiliates
30,248

 
29,901

Deferred financing and leasing costs, net of accumulated amortization of $108,878 and $92,220, respectively
218,725

 
222,211

Prepaid expenses and other assets, net of accumulated amortization of $13,913 and $12,905,
respectively
42,593

 
39,561

Total Assets
$
3,895,151

 
$
3,807,198

Liabilities, Redeemable Operating Partnership Units and Capital:
 
 
 
Mortgages and notes payable
$
2,013,824

 
$
1,956,299

Accounts payable, accrued expenses and other liabilities
229,932

 
218,887

Financing obligations
23,519

 
26,664

Total Liabilities
2,267,275

 
2,201,850

Commitments and contingencies

 

Redeemable Operating Partnership Units:
 
 
 
Common Units, 2,936,955 and 2,943,872 outstanding, respectively
114,248

 
106,480

Series A Preferred Units (liquidation preference $1,000 per unit), 29,077 units issued and
outstanding
29,077

 
29,077

Total Redeemable Operating Partnership Units
143,325

 
135,557

Capital:
 
 
 
Common Units:
 
 
 
General partner Common Units, 937,982 and 924,560 outstanding, respectively
14,655

 
14,508

Limited partner Common Units, 89,923,233 and 88,587,546 outstanding, respectively
1,451,119

 
1,436,498

Accumulated other comprehensive loss
(2,831
)
 
(2,611
)
Noncontrolling interests in consolidated affiliates
21,608

 
21,396

Total Capital
1,484,551

 
1,469,791

Total Liabilities, Redeemable Operating Partnership Units and Capital
$
3,895,151

 
$
3,807,198


See accompanying notes to consolidated financial statements.

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Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Income
(Unaudited and in thousands, except per unit amounts)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Rental and other revenues
$
152,629

 
$
144,827

 
$
453,804

 
$
407,822

Operating expenses:
 
 
 
 
 
 
 
Rental property and other expenses
57,383

 
54,080

 
169,015

 
147,995

Depreciation and amortization
48,287

 
47,338

 
146,895

 
128,050

Impairments of real estate assets

 

 
588

 

General and administrative
7,526

 
8,991

 
27,006

 
27,966

Total operating expenses
113,196

 
110,409

 
343,504

 
304,011

Interest expense:
 
 
 
 
 
 
 
Contractual
20,962

 
22,683

 
62,352

 
67,879

Amortization of deferred financing costs
819

 
963

 
2,270

 
2,860

Financing obligations
567

 
26

 
301

 
87

 
22,348

 
23,672

 
64,923

 
70,826

Other income:
 
 
 
 
 
 
 
Interest and other income
1,054

 
1,582

 
3,863

 
4,982

Losses on debt extinguishment
(326
)
 
(32
)
 
(308
)
 
(196
)
 
728

 
1,550

 
3,555

 
4,786

Income from continuing operations before disposition of investment properties and activity in unconsolidated affiliates
17,813

 
12,296

 
48,932

 
37,771

Gains/(losses) on disposition of property
36,238

 
34

 
42,185

 
(3
)
Gain on acquisition of controlling interest in unconsolidated affiliate

 
7,451

 

 
7,451

Equity in earnings/(losses) of unconsolidated affiliates
248

 
(3,174
)
 
886

 
(1,875
)
Income from continuing operations
54,299

 
16,607

 
92,003

 
43,344

Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations

 
1,514

 

 
5,853

Impairments of real estate assets

 

 

 
(2,194
)
Net gains on disposition of discontinued operations

 
37,946

 
384

 
52,353

 

 
39,460

 
384

 
56,012

Net income
54,299

 
56,067

 
92,387

 
99,356

Net (income) attributable to noncontrolling interests in consolidated affiliates
(291
)
 
(203
)
 
(1,152
)
 
(593
)
Distributions on Preferred Units
(627
)
 
(627
)
 
(1,881
)
 
(1,881
)
Net income available for common unitholders
$
53,381

 
$
55,237

 
$
89,354

 
$
96,882

Earnings per Common Unit – basic:
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
0.57

 
$
0.17

 
$
0.96

 
$
0.47

Income from discontinued operations available for common unitholders

 
0.44

 

 
0.64

Net income available for common unitholders
$
0.57

 
$
0.61

 
$
0.96

 
$
1.11

Weighted average Common Units outstanding – basic
93,196

 
90,259

 
92,828

 
86,920

Earnings per Common Unit – diluted:
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
0.57

 
$
0.17

 
$
0.96

 
$
0.47

Income from discontinued operations available for common unitholders

 
0.44

 

 
0.64

Net income available for common unitholders
$
0.57

 
$
0.61

 
$
0.96

 
$
1.11

Weighted average Common Units outstanding – diluted
93,314

 
90,360

 
92,949

 
87,034

Distributions declared per Common Unit
$
0.425

 
$
0.425

 
$
1.275

 
$
1.275

Net income available for common unitholders:
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
53,381

 
$
15,777

 
$
88,970

 
$
40,870

Income from discontinued operations available for common unitholders

 
39,460

 
384

 
56,012

Net income available for common unitholders
$
53,381

 
$
55,237

 
$
89,354

 
$
96,882

See accompanying notes to consolidated financial statements.

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Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Comprehensive Income
(Unaudited and in thousands)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
54,299

 
$
56,067

 
$
92,387

 
$
99,356

Other comprehensive income/(loss):
 
 
 
 
 
 
 
Unrealized gains on tax increment financing bond
23

 
97

 
293

 
396

Unrealized gains/(losses) on cash flow hedges
913

 
(1,798
)
 
(3,337
)
 
4,801

Amortization of cash flow hedges
952

 
840

 
2,824

 
2,428

Total other comprehensive income/(loss)
1,888

 
(861
)
 
(220
)
 
7,625

Total comprehensive income
56,187

 
55,206

 
92,167

 
106,981

Less-comprehensive (income) attributable to noncontrolling interests
(291
)
 
(203
)
 
(1,152
)
 
(593
)
Comprehensive income attributable to common unitholders
$
55,896


$
55,003

 
$
91,015

 
$
106,388


See accompanying notes to consolidated financial statements.

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

 
Common Units
 
Accumulated
Other
Comprehensive Loss
 
Noncontrolling
Interests in
Consolidated
Affiliates
 
Total
 
General
Partners’
Capital
 
Limited
Partners’
Capital
 
Balance at December 31, 2013
$
14,508

 
$
1,436,498

 
$
(2,611
)
 
$
21,396

 
$
1,469,791

Issuances of Common Units, net of units redeemed for tax withholdings
459

 
45,463

 

 

 
45,922

Redemptions of Common Units
(1
)
 
(92
)
 

 

 
(93
)
Distributions paid on Common Units
(1,183
)
 
(117,078
)
 

 

 
(118,261
)
Distributions paid on Preferred Units
(19
)
 
(1,862
)
 

 

 
(1,881
)
Share-based compensation expense, net of forfeitures
62

 
6,117

 

 

 
6,179

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(940
)
 
(940
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
(83
)
 
(8,250
)
 

 

 
(8,333
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(12
)
 
(1,140
)
 

 
1,152

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
924

 
91,463

 

 

 
92,387

Other comprehensive loss

 

 
(220
)
 

 
(220
)
Total comprehensive income
 
 
 
 
 
 
 
 
92,167

Balance at September 30, 2014
$
14,655

 
$
1,451,119

 
$
(2,831
)
 
$
21,608

 
$
1,484,551



 
Common Units
 
Accumulated
Other
Comprehensive Loss
 
Noncontrolling
Interests in
Consolidated
Affiliates
 
Total
 
General
Partners’
Capital
 
Limited
Partners’
Capital
 
Balance at December 31, 2012
$
11,427

 
$
1,131,481

 
$
(12,628
)
 
$
4,753

 
$
1,135,033

Issuances of Common Units, net of units redeemed for tax withholdings
3,056

 
302,545

 

 

 
305,601

Distributions paid on Common Units
(1,117
)
 
(110,528
)
 

 

 
(111,645
)
Distributions paid on Preferred Units
(19
)
 
(1,862
)
 

 

 
(1,881
)
Share-based compensation expense, net of forfeitures
59

 
5,837

 

 

 
5,896

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(408
)
 
(408
)
Contributions from noncontrolling interests in consolidated affiliates

 

 

 
16,240

 
16,240

Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
204

 
20,125

 

 

 
20,329

Net (income) attributable to noncontrolling interests in consolidated affiliates
(6
)
 
(587
)
 

 
593

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
994

 
98,362

 

 

 
99,356

Other comprehensive income

 

 
7,625

 

 
7,625

Total comprehensive income
 
 
 
 
 
 
 
 
106,981

Balance at September 30, 2013
$
14,598

 
$
1,445,373

 
$
(5,003
)
 
$
21,178

 
$
1,476,146


See accompanying notes to consolidated financial statements.

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Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
 
Nine Months Ended
September 30,
 
2014
 
2013
Operating activities:
 
 
 
Net income
$
92,387

 
$
99,356

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
146,895

 
133,556

Amortization of lease incentives and acquisition-related intangible assets and liabilities
249

 
258

Share-based compensation expense
6,179

 
5,896

Allowance for losses on accounts and accrued straight-line rents receivable
1,942

 
1,029

Accrued interest on mortgages and notes receivable
(354
)
 

Amortization of deferred financing costs
2,270

 
2,860

Amortization of cash flow hedges
2,824

 
2,428

Amortization of mortgages and notes payable fair value adjustments
(845
)
 
(1,015
)
Impairments of real estate assets
588

 
2,194

Losses on debt extinguishment
308

 
196

Net gains on disposition of property
(42,569
)
 
(52,350
)
Gain on acquisition of controlling interest in unconsolidated affiliate

 
(7,451
)
Equity in (earnings)/losses of unconsolidated affiliates
(886
)
 
1,875

Changes in financing obligations
(241
)
 
(591
)
Distributions of earnings from unconsolidated affiliates
1,634

 
3,109

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(1,762
)
 
(508
)
Prepaid expenses and other assets
(2,885
)
 
(2,141
)
Accrued straight-line rents receivable
(16,202
)
 
(12,368
)
Accounts payable, accrued expenses and other liabilities
(5,804
)
 
10,257

Net cash provided by operating activities
183,728

 
186,590

Investing activities:
 
 
 
Investments in acquired real estate and related intangible assets, net of cash acquired
(83,751
)
 
(418,796
)
Investment in acquired controlling interest in unconsolidated affiliate

 
(32,818
)
Investments in development in process
(122,106
)
 
(16,634
)
Investments in tenant improvements and deferred leasing costs
(80,132
)
 
(77,456
)
Investments in building improvements
(39,401
)
 
(38,702
)
Net proceeds from disposition of real estate assets
151,987

 
161,970

Distributions of capital from unconsolidated affiliates
725

 
16,671

Investments in mortgages and notes receivable
(419
)
 
(1,301
)
Repayments of mortgages and notes receivable
16,974

 
437

Investments in unconsolidated affiliates
(6,425
)
 
(429
)
Redemption of investment in unconsolidated affiliate
4,660

 

Changes in restricted cash and other investing activities
(1,296
)
 
5,484

Net cash (used in) investing activities
(159,184
)
 
(401,574
)
Financing activities:
 
 
 
Distributions on Common Units
(118,261
)
 
(111,645
)
Redemptions of Common Units
(93
)
 

Distributions on Preferred Units
(1,881
)
 
(1,881
)
Distributions to noncontrolling interests in consolidated affiliates
(940
)
 
(408
)
Proceeds from the issuance of Common Units
49,216

 
315,818

Costs paid for the issuance of Common Units
(600
)
 
(7,678
)
Repurchase of units related to tax withholdings
(2,694
)
 
(2,539
)
Borrowings on revolving credit facility
377,700

 
695,300

Repayments of revolving credit facility
(443,400
)
 
(511,900
)
Borrowings on mortgages and notes payable
296,949

 

Repayments of mortgages and notes payable
(172,810
)
 
(157,001
)
Payments on financing obligations
(2,904
)
 
(575
)
Payments of debt extinguishment costs
(369
)
 

Contributions from noncontrolling interests in consolidated affiliates

 
16,240

Additions to deferred financing costs and other financing activities
(3,032
)
 
(834
)
Net cash (used in)/provided by financing activities
(23,119
)
 
232,897

Net increase in cash and cash equivalents
$
1,425

 
$
17,913

See accompanying notes to consolidated financial statements.

12

Table of Contents


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

 
Nine Months Ended
September 30,
 
2014
 
2013
Net increase in cash and cash equivalents
$
1,425

 
$
17,913

Cash and cash equivalents at beginning of the period
10,281

 
13,867

Cash and cash equivalents at end of the period
$
11,706

 
$
31,780


Supplemental disclosure of cash flow information:
 
 
Nine Months Ended
September 30,
 
2014
 
2013
Cash paid for interest, net of amounts capitalized
$
63,340

 
$
67,786


Supplemental disclosure of non-cash investing and financing activities:
 
 
Nine Months Ended
September 30,
 
2014
 
2013
Unrealized gains/(losses) on cash flow hedges
$
(3,337
)
 
$
4,801

Changes in accrued capital expenditures
17,255

 
12,778

Write-off of fully depreciated real estate assets
29,953

 
24,498

Write-off of fully amortized deferred financing and leasing costs
17,138

 
17,500

Unrealized gains on marketable securities of non-qualified deferred compensation plan
149

 
558

Adjustment of Redeemable Common Units to fair value
7,768

 
(20,921
)
Unrealized gains on tax increment financing bond
293

 
396

Assumption of mortgages and notes payable related to acquisition activities

 
165,515

Reclass of aggregate differences between historical cost basis and the basis reflected at the joint venture level for assets acquired

 
8,206


See accompanying notes to consolidated financial statements.

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Table of Contents

HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(tabular dollar amounts in thousands, except per share and per unit data)
(Unaudited)

1.    Description of Business and Significant Accounting Policies

Description of Business

Highwoods Properties, Inc. (the “Company”) is a fully-integrated real estate investment trust (“REIT”) that provides leasing, management, development, construction and other customer-related services for its properties and for third parties. The Company conducts its activities through Highwoods Realty Limited Partnership (the “Operating Partnership”). At September 30, 2014, we owned or had an interest in 31.1 million rentable square feet of in-service office, industrial and retail properties, 0.9 million rentable square feet of office properties under development and approximately 500 acres of development land.
 
The Company is the sole general partner of the Operating Partnership. At September 30, 2014, the Company owned all of the Preferred Units and 90.9 million, or 96.9%, of the Common Units in the Operating Partnership. Limited partners own the remaining 2.9 million Common Units. During the nine months ended September 30, 2014, the Company redeemed 2,500 Common Units for less than $0.1 million in cash and redeemed 4,417 Common Units for a like number of shares of Common Stock.

Common Stock Offerings
 
During the three and nine months ended September 30, 2014, the Company issued 875,701 and 949,578 shares of Common Stock, respectively, under its equity sales agreements at an average gross sales price of $42.44 and $42.12 per share, respectively, and received net proceeds, after sales commissions, of $36.6 million and $39.4 million, respectively. As a result of this activity and the redemptions discussed above, the percentage of Common Units owned by the Company increased from 96.8% at December 31, 2013 to 96.9% at September 30, 2014.

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 Statements of Income for the three and nine months ended September 30, 2013 were retrospectively revised from previously reported amounts to reflect in discontinued operations the operations for those properties classified as discontinued operations.

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. At September 30, 2014 and December 31, 2013, we had involvement with, but are not the primary beneficiary in, an entity that we concluded to be a variable interest entity (see Note 3).

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 2013 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.


14

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


1.    Description of Business and Significant Accounting Policies – Continued
 
Recently Issued Accounting Standards

The Financial Accounting Standards Board ("FASB") recently issued an accounting standard update that requires only those real estate asset sales representing a strategic shift in operations (e.g., a disposal of a major geographic area or a major line of business) to be reflected in discontinued operations. This accounting standard update is required to be adopted in 2015. Early adoption is permitted, but only for real estate asset sales that have not been previously reflected as discontinued operations. We elected to early adopt the accounting standard update in the second quarter of 2014, resulting in the operations of current period dispositions and property classified as held for sale being included in continuing operations on our Consolidated Statements of Income.  Prior to adoption, we were generally required to reflect all real estate asset sales as discontinued operations, which required reclassification of the earnings of the sold assets from continuing operations for all periods presented.

The FASB recently issued an accounting standard update that requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that we identify the contract with the customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when we satisfy the performance obligations. We will also be required to disclose information regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The accounting standard update is required to be adopted in 2017. Retrospective application is required either to all periods presented or with the cumulative effect of initial adoption recognized in the period of adoption. We are in the process of evaluating this accounting standard update.

2.    Real Estate Assets

Acquisitions

During the third quarter of 2014, we acquired an office property in Raleigh, NC encompassing 374,000 rentable square feet for a purchase price of $83.8 million. We expensed $0.2 million of acquisition costs (included in general and administrative expenses) related to this acquisition. The assets acquired and liabilities assumed were recorded at fair value as determined by management based on information available at the acquisition date and on current assumptions as to future operations.

Pro Forma Disclosure

During the third quarter of 2013, we acquired our joint venture partner's 60.0% interest in our HIW-KC Orlando, LLC joint venture, which owned five office properties in Orlando, FL encompassing 1.3 million rentable square feet, for a net purchase price of $112.8 million. We previously accounted for our 40.0% interest in this joint venture using the equity method of accounting. The assets and liabilities of the joint venture are now wholly owned and are recorded in our Consolidated Financial Statements, including assets recorded at fair value of $188.0 million and secured debt recorded at fair value of $127.9 million, with an effective interest rate of 3.11%. This debt has since been repaid. As a result of acquiring a controlling interest in this joint venture, our previously held equity interest was remeasured at a fair value of $75.2 million resulting in a gain of $7.5 million, which represents the difference between the fair market value of our previously held equity interest and the carrying value of our investment on the date of acquisition. The fair market value of our previously held equity interest was determined by management based on information available at the acquisition date and on current assumptions as to future operations.

During the third quarter of 2013, we also acquired an office property in Nashville, TN encompassing 520,000 rentable square feet for a net purchase price of $150.1 million.

During the second quarter of 2013, we acquired an office property in Atlanta, GA encompassing 553,000 rentable square feet for a purchase price of $140.1 million.


15

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


2.    Real Estate Assets – Continued

The following table sets forth a summary of the fair value of the major assets acquired and liabilities assumed relating to the 2013 acquisitions discussed in the preceding paragraphs:
 
 
Total
Purchase Price Allocation
Real estate assets
$
445,396

Acquisition-related intangible assets (in deferred financing and leasing costs)
50,595

Mortgages and notes payable
(127,891
)
Acquisition-related below market lease liabilities (in accounts payable, accrued expenses and other liabilities)
(17,818
)
Total allocation
$
350,282

 
The following table sets forth our revenues and net income, adjusted for interest expense and depreciation and amortization related to purchase price allocations, acquisition costs and equity in earnings of unconsolidated affiliates previously recognized as income assuming the 2013 acquisitions discussed in the preceding paragraphs had been completed as of January 1, 2012:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2013
Pro forma revenues
$
149,754

 
$
443,178

Pro forma net income
$
49,818

 
$
90,064

Pro forma earnings per share - basic
$
0.54

 
$
1.00

Pro forma earnings per share - diluted
$
0.54

 
$
1.00

 
The 2013 acquisitions discussed in the preceding paragraphs resulted in revenues of $10.0 million and $10.3 million and net losses of $0.1 million and $0.4 million recorded in the Consolidated Statements of Income for the three and nine months ended September 30, 2013, respectively.
 
Dispositions
 
During the third quarter of 2014, we sold:

five office properties and a land parcel in a single transaction in Raleigh, NC for a sale price of $58.7 million and recorded a gain on disposition of property of $11.7 million;

11 office properties in Richmond, VA in separate transactions for an aggregate sale price of $40.7 million and recorded aggregate gains on disposition of property of $17.6 million;

six office and eight industrial properties in Greensboro, NC for a sale price of $28.2 million (before closing credits to buyer of $1.2 million for unfunded tenant impr