Attached files

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EX-10.2 - AMENDMENT NO. 1, DATED AS OF JULY 27, 2011, TO CREDIT AGREEMENT, DATED AS OF FEBRUARY 2, 2011 - HIGHWOODS PROPERTIES, INC.exh10_2.htm
EX-12.1 - STATEMENT RE: COMPUTATION OF RATIOS FOR THE COMPANY - HIGHWOODS PROPERTIES, INC.exh12_1.htm
EX-32.2 - CERTIFICATION PURSUANT TO SECTION 906 FOR THE COMPANY - HIGHWOODS PROPERTIES, INC.exh32_2.htm
EX-32.1 - CERTIFICATION PURSUANT TO SECTION 906 FOR THE COMPANY - HIGHWOODS PROPERTIES, INC.exh32_1.htm
EX-31.3 - CERTIFICATION PURSUANT TO SECTION 302 FOR THE OPERATING PARTNERSHIP - HIGHWOODS PROPERTIES, INC.exh31_3.htm
EX-31.1 - CERTIFICATION PURSUANT TO SECTION 302 FOR THE COMPANY - HIGHWOODS PROPERTIES, INC.exh31_1.htm
EX-32.4 - CERTIFICATION PURSUANT TO SECTION 906 FOR THE OPERATING PARTNERSHIP - HIGHWOODS PROPERTIES, INC.exh32_4.htm
EX-31.2 - CERTIFICATION PURSUANT TO SECTION 302 FOR THE COMPANY - HIGHWOODS PROPERTIES, INC.exh31_2.htm
EX-31.4 - CERTIFICATION PURSUANT TO SECTION 302 FOR THE OPERATING PARTNERSHIP - HIGHWOODS PROPERTIES, INC.exh31_4.htm
EX-10.1 - THIRD AMENDED AND RESTATED CREDIT AGREEMENT, DATED AS OF JULY 27, 2011 - HIGHWOODS PROPERTIES, INC.exh10_1.htm
EX-32.3 - CERTIFICATION PURSUANT TO SECTION 906 FOR THE OPERATING PARTNERSHIP - HIGHWOODS PROPERTIES, INC.exh32_3.htm
EX-12.2 - STATEMENT RE: COMPUTATION OF RATIOS FOR THE OPERATING PARTNERSHIP - HIGHWOODS PROPERTIES, INC.exh12_2.htm




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, 2011
______________

HIW Logo

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  £    No £            Highwoods Realty Limited Partnership  Yes  £    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 72,399,428 shares of Common Stock outstanding as of July 20, 2011.



 
 

 


HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP

QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 2011

TABLE OF CONTENTS
 
PART I – FINANCIAL INFORMATION
 
   
ITEM 1.    FINANCIAL STATEMENTS
2
   
HIGHWOODS PROPERTIES, INC.:
 
   
Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010
3
   
Consolidated Statements of Income for the three and six months ended June 30, 2011 and 2010
4
   
Consolidated Statements of Equity for the six months ended June 30, 2011 and 2010
5
   
Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010
6
   
Notes to Consolidated Financial Statements
8
   
HIGHWOODS REALTY LIMITED PARTNERSHIP:
 
   
Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010
24
   
Consolidated Statements of Income for the three and six months ended June 30, 2011 and 2010
25
   
Consolidated Statements of Equity for the six months ended June 30, 2011 and 2010
26
   
Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010
27
   
Notes to Consolidated Financial Statements
29
   
ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
43
   
Disclosure Regarding Forward-Looking Statements
43
   
Executive Summary
44
   
Results of Operations
45
   
Liquidity and Capital Resources
48
   
Critical Accounting Estimates
51
   
Non-GAAP Information
51
   
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
55
   
ITEM 4.    CONTROLS AND PROCEDURES
55
   
PART II – OTHER INFORMATION
 
   
ITEM 1A.  RISK FACTORS
56
   
ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
63
   
ITEM 5.    OTHER EVENTS  63
 
 
ITEM 6.    EXHIBITS
63

 
1

 



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 rental residential units) 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 20, 2011, the latest practicable date prior to the filing of this Quarterly Report.

 
2

 


HIGHWOODS PROPERTIES, INC.
 
Consolidated Balance Sheets
 
(Unaudited and in thousands, except share and per share amounts)
 
   
June 30,
2011
 
December 31,
2010
 
Assets:
           
Real estate assets, at cost:
             
Land
 
$
345,791
 
$
345,088
 
Buildings and tenant improvements
   
2,886,871
   
2,883,092
 
Development in process
   
13,317
   
4,524
 
Land held for development
   
106,871
   
107,101
 
     
3,352,850
   
3,339,805
 
Less-accumulated depreciation
   
(863,730
)
 
(830,153
)
Net real estate assets
   
2,489,120
   
2,509,652
 
For-sale residential condominiums
   
5,840
   
8,225
 
Real estate and other assets, net, held for sale
   
11,609
   
13,607
 
Cash and cash equivalents
   
9,239
   
14,206
 
Restricted cash
   
7,619
   
4,399
 
Accounts receivable, net of allowance of $3,470 and $3,595, respectively
   
22,952
   
20,716
 
Mortgages and notes receivable, net of allowance of $617 and $868, respectively
   
18,809
   
19,044
 
Accrued straight-line rents receivable, net of allowance of $1,360 and $2,209, respectively
   
99,466
   
93,178
 
Investment in and advances to unconsolidated affiliates
   
103,025
   
63,607
 
Deferred financing and leasing costs, net of accumulated amortization of $62,542 and $59,360, respectively
   
85,168
   
85,001
 
Prepaid expenses and other assets
   
36,633
   
40,200
 
Total Assets
 
$
2,889,480
 
$
2,871,835
 
               
Liabilities, Noncontrolling Interests in the Operating Partnership and Equity:
             
Mortgages and notes payable
 
$
1,615,068
 
$
1,522,945
 
Accounts payable, accrued expenses and other liabilities
   
106,105
   
106,716
 
Financing obligations
   
32,869
   
33,114
 
Total Liabilities
   
1,754,042
   
1,662,775
 
Commitments and contingencies
             
Noncontrolling interests in the Operating Partnership
   
125,075
   
120,838
 
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), 29,087 and 29,092 shares issued and outstanding, respectively
   
29,087
   
29,092
 
8.000% Series B Cumulative Redeemable Preferred Shares (liquidation preference $25 per share), 0 and 2,100,000 shares issued and outstanding, respectively
   
   
52,500
 
Common Stock, $.01 par value, 200,000,000 authorized shares;
             
72,399,428 and 71,690,487 shares issued and outstanding, respectively
   
724
   
717
 
Additional paid-in capital
   
1,782,889
   
1,766,886
 
Distributions in excess of net income available for common stockholders
   
(802,606
)
 
(761,785
)
Accumulated other comprehensive loss
   
(4,177
)
 
(3,648
)
Total Stockholders’ Equity
   
1,005,917
   
1,083,762
 
Noncontrolling interests in consolidated affiliates
   
4,446
   
4,460
 
Total Equity
   
1,010,363
   
1,088,222
 
Total Liabilities, Noncontrolling Interests in the Operating Partnership and Equity
 
$
2,889,480
 
$
2,871,835
 

See accompanying notes to consolidated financial statements.

 
3

 


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,
 
   
2011
 
2010
 
2011
 
2010
 
Rental and other revenues                                                                               
 
$
117,057
 
$
113,765
 
$
232,036
 
$
228,268
 
Operating expenses:
                         
Rental property and other expenses
   
41,143
   
38,143
   
82,341
   
79,647
 
Depreciation and amortization
   
33,430
   
33,260
   
67,147
   
65,898
 
General and administrative
   
7,978
   
6,980
   
15,771
   
15,487
 
Total operating expenses
   
82,551
   
78,383
   
165,259
   
161,032
 
Interest expense:
                         
Contractual
   
22,940
   
21,705
   
45,371
   
43,507
 
Amortization of deferred financing costs
   
821
   
835
   
1,642
   
1,670
 
Financing obligations
   
146
   
394
   
437
   
870
 
     
23,907
   
22,934
   
47,450
   
46,047
 
Other income:
                         
Interest and other income
   
1,899
   
965
   
3,772
   
2,665
 
Loss on debt extinguishment
   
(24
)
 
   
(24
)
 
 
     
1,875
   
965
   
3,748
   
2,665
 
Income from continuing operations before disposition of property, condominiums and investment in unconsolidated affiliates and equity in earnings of unconsolidated affiliates
   
12,474
   
13,413
   
23,075
   
23,854
 
Gains on disposition of property
   
200
   
17
   
200
   
36
 
Gains on disposition of for-sale residential condominiums
   
116
   
163
   
154
   
353
 
Gains on disposition of investment in unconsolidated affiliates
   
   
25,330
   
   
25,330
 
Equity in earnings of unconsolidated affiliates
   
1,353
   
888
   
2,820
   
1,683
 
Income from continuing operations                                                                               
   
14,143
   
39,811
   
26,249
   
51,256
 
Discontinued operations:
                         
Income from discontinued operations
   
291
   
498
   
628
   
961
 
Net losses on disposition of discontinued operations
   
   
(260
)
 
   
(86
)
     
291
   
238
   
628
   
875
 
Net income                                                                               
   
14,434
   
40,049
   
26,877
   
52,131
 
Net (income) attributable to noncontrolling interests in the Operating Partnership
   
(623
)
 
(1,933
)
 
(1,130
)
 
(2,453
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
   
(182
)
 
(215
)
 
(305
)
 
(429
)
Dividends on Preferred Stock
   
(1,622
)
 
(1,677
)
 
(3,299
)
 
(3,354
)
Excess of Preferred Stock redemption/repurchase cost over carrying value
   
(1,895
)
 
   
(1,895
)
 
 
Net income available for common stockholders
 
$
10,112
 
$
36,224
 
$
20,248
 
$
45,895
 
Earnings per Common Share - basic:
                         
Income from continuing operations available for common stockholders
 
$
0.14
 
$
0.51
 
$
0.27
 
$
0.63
 
Income from discontinued operations available for common stockholders
   
   
   
0.01
   
0.01
 
Net income available for common stockholders
 
$
0.14
 
$
0.51
 
$
0.28
 
$
0.64
 
Weighted average Common Shares outstanding - basic
   
72,211
   
71,601
   
72,015
   
71,508
 
Earnings per Common Share - diluted:
                         
Income from continuing operations available for common stockholders
 
$
0.14
 
$
0.50
 
$
0.27
 
$
0.63
 
Income from discontinued operations available for common stockholders
   
   
   
0.01
   
0.01
 
Net income available for common stockholders
 
$
0.14
 
$
0.50
 
$
0.28
 
$
0.64
 
Weighted average Common Shares outstanding - diluted
   
76,197
   
75,607
   
75,987
   
75,504
 
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
 
$
9,836
 
$
35,998
 
$
19,652
 
$
45,064
 
Income from discontinued operations available for common stockholders
   
276
   
226
   
596
   
831
 
Net income available for common stockholders
 
$
10,112
 
$
36,224
 
$
20,248
 
$
45,895
 
 
See accompanying notes to consolidated financial statements.

 
4

 


HIGHWOODS PROPERTIES, INC.
 
Consolidated Statements of Equity
 
Six Months Ended June 30, 2011 and 2010
 
(Unaudited and in thousands, except share amounts)
 
   
Number of Common
 Shares
 
Common Stock
 
Series A Cumulative Redeemable Preferred Shares
 
Series B Cumulative Redeemable Preferred Shares
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive
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
 
Conversion 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, net
 
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
 
 
   
Number of Common
 Shares
 
Common Stock
 
Series A Cumulative Redeemable Preferred Shares
 
Series B Cumulative Redeemable Preferred Shares
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive
Loss
 
Non-Controlling Interests in
Consolidated Affiliates
 
Distributions in Excess of Net Income Available for Common Stockholders
 
Total
 
Balance at December 31, 2009
 
71,285,303
 
$
713
 
$
29,092
 
$
52,500
 
$
1,751,398
 
$
(3,811
)
$
5,183
 
$
(701,932
)
$
1,133,143
 
Issuances of Common Stock, net
 
71,568
   
1
   
   
   
1,061
   
   
   
   
1,062
 
Conversion of Common Units to Common Stock
 
93,971
   
1
   
   
   
2,957
   
   
   
   
2,958
 
Dividends on Common Stock
 
   
   
   
   
   
   
   
(60,753
)
 
(60,753
)
Dividends on Preferred Stock
 
   
   
   
   
   
   
   
(3,354
)
 
(3,354
)
Adjustment of noncontrolling interests
in the Operating Partnership to fair value
 
   
   
   
   
20,612
   
   
   
   
20,612
 
Distributions to noncontrolling interests in consolidated affiliates
 
   
   
   
   
   
   
(324
)
 
   
(324
)
Issuances of restricted stock, net
 
164,143
   
   
   
   
   
   
   
   
 
Share-based compensation expense
 
   
1
   
   
   
3,496
   
   
   
   
3,497
 
Net (income) attributable to noncontrolling interests in the Operating Partnership
 
   
   
   
   
   
   
   
(2,453
)
 
(2,453
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
 
   
   
   
   
   
   
429
   
(429
)
 
 
Comprehensive income:
                                                     
Net income
 
   
   
   
   
   
   
   
52,131
   
52,131
 
Other comprehensive income
 
   
   
   
   
   
536
   
   
   
536
 
Total comprehensive income
                                                 
52,667
 
Balance at June 30, 2010
 
71,614,985
 
$
716
 
$
29,092
 
$
52,500
 
$
1,779,524
 
$
(3,275
)
$
5,288
 
$
(716,790
)
$
1,147,055
 

See accompanying notes to consolidated financial statements.

 
5

 


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

   
Six Months Ended
June 30,
 
   
2011
 
2010
 
Operating activities:
             
Net income
 
$
26,877
 
$
52,131
 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Depreciation and amortization
   
67,274
   
66,447
 
Amortization of lease incentives and acquisition-related intangible assets and liabilities
   
968
   
537
 
Share-based compensation expense
   
3,453
   
3,497
 
Allowance for losses on accounts and accrued straight-line rents receivable
   
1,029
   
2,636
 
Amortization of deferred financing costs
   
1,642
   
1,670
 
Amortization of settled cash-flow hedges
   
(58
)
 
287
 
Loss on debt extinguishment
   
24
   
 
Net (gains)/losses on disposition of property
   
(200
)
 
50
 
Gains on disposition of for-sale residential condominiums
   
(154
)
 
(353
)
Gains on disposition of investment in unconsolidated affiliates
   
   
(25,330
)
Equity in earnings of unconsolidated affiliates
   
(2,820
)
 
(1,683
)
Changes in financing obligations
   
(245
)
 
81
 
Distributions of earnings from unconsolidated affiliates
   
2,162
   
1,717
 
Changes in operating assets and liabilities:
             
Accounts receivable
   
(1,821
)
 
(1,430
)
Prepaid expenses and other assets
   
(644
)
 
1,734
 
Accrued straight-line rents receivable
   
(6,098
)
 
(5,296
)
Accounts payable, accrued expenses and other liabilities
   
(3,794
)
 
3,352
 
Net cash provided by operating activities
   
87,595
   
100,047
 
Investing activities:
             
Additions to real estate assets and deferred leasing costs
   
(44,447
)
 
(38,292
)
Net proceeds from disposition of real estate assets
   
2,063
   
6,801
 
Net proceeds from disposition of for-sale residential condominiums
   
2,401
   
3,186
 
Proceeds from disposition of investment in unconsolidated affiliates
   
   
15,000
 
Distributions of capital from unconsolidated affiliates
   
632
   
1,106
 
Repayments of mortgages and notes receivable
   
235
   
29
 
Investment in and advances to unconsolidated affiliates
   
(39,402
)
 
(303
)
Changes in restricted cash and other investing activities
   
(395
)
 
(3,178
)
Net cash used in investing activities
   
(78,913
)
 
(15,651
)
Financing activities:
             
Dividends on Common Stock
   
(61,069
)
 
(60,753
)
Redemptions/repurchases of Preferred Stock
   
(52,505
)
 
 
Dividends on Preferred Stock
   
(3,299
)
 
(3,354
)
Distributions to noncontrolling interests in the Operating Partnership
   
(3,215
)
 
(3,243
)
Distributions to noncontrolling interests in consolidated affiliates
   
(319
)
 
(324
)
Net proceeds from the issuance of Common Stock
   
16,984
   
1,062
 
Borrowings on revolving credit facility
   
124,700
   
4,000
 
Repayments of revolving credit facility
   
(79,300
)
 
(4,000
)
Borrowings on mortgages and notes payable
   
200,000
   
 
Repayments of mortgages and notes payable
   
(153,522
)
 
(5,452
)
Additions to deferred financing costs and other financing activities
   
(2,104
)
 
(188
)
Net cash used in financing activities
   
(13,649
)
 
(72,252
)
Net increase/(decrease) in cash and cash equivalents
   
(4,967
)
 
12,144
 
Cash and cash equivalents at beginning of the period
   
14,206
   
23,699
 
Cash and cash equivalents at end of the period
 
$
9,239
 
$
35,843
 

See accompanying notes to consolidated financial statements.

 
6

 


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

Supplemental disclosure of cash flow information:

   
Six Months Ended
June 30,
 
   
2011
 
2010
 
Cash paid for interest, net of amounts capitalized
 
$
44,948
 
$
43,204
 

Supplemental disclosure of non-cash investing and financing activities:

   
Six Months Ended
June 30,
 
   
2011
 
2010
 
Conversion of Common Units to Common Stock                                                                                                         
 
$
635
 
$
2,958
 
Change in accrued capital expenditures                                                                                                         
 
$
1,525
 
$
(2,294
)
Write-off of fully depreciated real estate assets                                                                                                         
 
$
23,352
 
$
24,273
 
Write-off of fully amortized deferred financing and leasing costs                                                                                                         
 
$
8,247
 
$
7,963
 
Unrealized gains on marketable securities of non-qualified deferred compensation plan
 
$
210
 
$
174
 
Settlement of financing obligation
 
$
 
$
4,184
 
Adjustment of noncontrolling interests in the Operating Partnership to fair value
 
$
6,957
 
$
(20,612
)
Unrealized gain/(loss) on tax increment financing bond                                                                                                         
 
$
(471
)
$
146
 
Mortgages receivable from seller financing                                                                                                         
 
$
 
$
17,030
 

See accompanying notes to consolidated financial statements.


 
7

 

HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements
 
June 30, 2011
 
(tabular dollar amounts in thousands, except per share data)
 
(Unaudited)

1.      Description of Business and Significant Accounting Policies

Description of Business

The Company is a fully-integrated, self-administered and self-managed equity real estate investment trust (“REIT”) that operates in the Southeastern and Midwestern United States. The Company conducts virtually all of its activities through the Operating Partnership. At June 30, 2011, the Company and/or the Operating Partnership wholly owned: 296 in-service office, industrial and retail properties, comprising 27.3 million square feet; 96 rental residential units; 19 for-sale residential condominiums; 603 acres of undeveloped land suitable for future development, of which 523 acres are considered core holdings; and an additional office property that is considered completed but not yet stabilized.

The Company is the sole general partner of the Operating Partnership. At June 30, 2011, the Company owned all of the Preferred Units and 72.0 million, or 95.0%, of the Common Units. Limited partners (including one officer and two directors of the Company) own the remaining 3.8 million Common Units. Generally, the Operating Partnership is obligated to redeem each Common Unit at the request of the holder thereof for cash equal to the value of one share of Common Stock, $.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, 2011, the Company redeemed 18,737 Common Units for a like number of shares of Common Stock.

Common Stock Offering

In the second quarter of 2011, we entered into equity sales agreements with various financial institutions to offer and sell, from time to time, shares of our Common Stock having an aggregate offering price of up to $150.0 million. During the second quarter of 2011, we issued 236,000 shares of Common Stock under these agreements at an average price of $35.62 per share raising net proceeds, after sales commissions and expenses, of $8.3 million.

Preferred Stock Retirements

In the second quarter of 2011, we redeemed the remaining 2.1 million outstanding 8.0% Series B Cumulative Redeemable Preferred Shares for an aggregate redemption price of $52.5 million, excluding accrued dividends. In connection with this redemption, the $1.9 million excess of the redemption cost over the net carrying amount of the redeemed shares was recorded as a reduction to net income available for common stockholders in the second quarter of 2011.

Basis of Presentation

Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). Our Consolidated Balance Sheet at December 31, 2010 was revised from previously reported amounts to reflect those properties which required held for sale presentation. Our Consolidated Statements of Income for the three and six months ended June 30, 2010 were revised from previously reported amounts to reflect those properties sold or held for sale which required discontinued operations presentation.

Our Consolidated Financial Statements include the Operating Partnership, wholly owned subsidiaries and those entities in which we have the controlling financial interest. All significant intercompany transactions and accounts have been eliminated. At June 30, 2011 and December 31, 2010, we were not involved with any entities that were determined to be variable interest entities.


 
8

 
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 2010 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

Beginning with our Quarterly Report on Form 10-Q for the three months ended March 31, 2012, we will be required to enhance our disclosure of assets and liabilities measured at fair value. This includes disclosing any significant transfers between Levels 1 and 2 of the fair value hierarchy, additional quantitative and qualitative information regarding fair value measurements categorized as Level 3 of the fair value hierarchy and the hierarchy classification for items whose fair value is not recorded on our Consolidated Balance Sheets but is disclosed in our Notes to Consolidated Financial Statements. Additionally, we will be required to present comprehensive income on the face of our Consolidated Statements of Income, which previously has been disclosed in our Notes to Consolidated Financial Statements.

2.      Real Estate Assets

Acquisitions

During the second quarter of 2011, we acquired a 48,000 square foot medical office property in Raleigh, NC for approximately $9.0 million in cash and incurred $0.1 million of acquisition-related costs.

3.      Mortgages and Notes Receivable

The following table sets forth our mortgages and notes receivable:

   
June 30,
2011
 
December 31,
2010
 
Seller financing (first mortgages)
 
$
17,180
 
$
17,180
 
Less allowance
   
   
 
     
17,180
   
17,180
 
Promissory notes
   
2,246
   
2,732
 
Less allowance
   
(617
)
 
(868
)
     
1,629
   
1,864
 
Mortgages and notes receivable, net
 
$
18,809
 
$
19,044
 


 
9

 
HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per share data)
 



3.      Mortgages and Notes Receivable - Continued

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,
 
   
2011
 
2010
 
2011
 
2010
 
Beginning notes receivable allowance
 
$
497
 
$
732
 
$
868
 
$
698
 
Bad debt expense
   
162
   
25
   
184
   
88
 
Write-offs
   
   
(5
)
 
(364
)
 
(5
)
Recoveries/other
   
(42
)
 
19
   
(71
)
 
(10
)
Total notes receivable allowance
 
$
617
 
$
771
 
$
617
 
$
771
 

Our mortgages and notes receivable consists primarily of seller financing issued in conjunction with two disposition transactions in the second quarter of 2010. As of June 30, 2011, the interest payments on both mortgages receivable were current and there were no indications of impairment on the receivables.

4.      Investment in and Advances to Unconsolidated Affiliates

We have equity interests ranging from 10.0% to 50.0% in various joint ventures with unrelated third parties and a 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:

   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2011
 
2010
 
2011
 
2010
 
Income Statements:
                         
Revenues                                                                      
 
$
24,779
 
$
31,714
 
$
49,996
 
$
67,302
 
Expenses:
                         
Rental property and other expenses
   
10,774
   
15,632
   
22,771
   
32,799
 
Depreciation and amortization
   
6,295
   
7,778
   
12,911
   
17,378
 
Interest expense
   
5,858
   
7,233
   
11,865
   
15,798
 
Total expenses
   
22,927
   
30,643
   
47,547
   
65,975
 
Net income
 
$
1,852
 
$
1,071
 
$
2,449
 
$
1,327
 
Our share of:
                         
Depreciation and amortization of real estate assets
 
$
2,033
 
$
2,737
 
$
4,126
 
$
6,078
 
Interest expense
 
$
2,033
 
$
2,755
 
$
4,194
 
$
6,178
 
Net income
 
$
749
 
$
308
 
$
1,670
 
$
520
 
                           
Our share of net income
 
$
749
 
$
308
 
$
1,670
 
$
520
 
Purchase accounting and management, leasing and other fees adjustments
   
604
   
580
   
1,150
   
1,163
 
Equity in earnings of unconsolidated affiliates
 
$
1,353
 
$
888
 
$
2,820
 
$
1,683
 


 
10

 
HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per share data)
 



4.      Investment in and Advances to Unconsolidated Affiliates - Continued

In the second quarter of 2011, we provided a one-year $38.3 million interest-only secured loan to an unconsolidated joint venture, which was used to repay a secured loan before maturity to a third party lender. The loan bears interest at LIBOR plus 500 basis points, which may be reduced by up to 50 basis points upon the use of proceeds from the sale of certain assets by the joint venture to repay the loan.

During the second quarter of 2010, we sold our equity interests in a series of unconsolidated joint ventures relating to properties in Des Moines, IA. For information regarding this sale, see Note 3 to the Consolidated Financial Statements in our 2010 Annual Report on Form 10-K.

5.      Intangible Assets and Liabilities

The following table sets forth total intangible assets and liabilities, net of accumulated amortization:

   
June 30,
2011
 
December 31,
2010
 
Assets:
             
Deferred financing costs
 
$
17,295
 
$
16,412
 
Less accumulated amortization
   
(7,996
)
 
(7,054
)
     
9,299
   
9,358
 
Deferred leasing costs (including lease incentives and acquisition-related intangible assets)
   
130,415
   
127,949
 
Less accumulated amortization
   
(54,546
)
 
(52,306
)
     
75,869
   
75,643
 
Deferred financing and leasing costs, net
 
$
85,168
 
$
85,001
 
               
Liabilities (in accounts payable, accrued expenses and other liabilities):
             
Acquisition-related intangible liabilities
 
$
720
 
$
658
 
Less accumulated amortization
   
(226
)
 
(125
)
   
$
494
 
$
533
 

The following table sets forth amortization of intangible assets and liabilities:

   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2011
 
2010
 
2011
 
2010
 
Amortization of deferred financing costs
 
$
821
 
$
835
 
$
1,642
 
$
1,670
 
Amortization of deferred leasing costs and acquisition-related intangible assets (in depreciation and amortization)
 
$
4,401
 
$
3,817
 
$
8,757
 
$
7,583
 
Amortization of lease incentives (in rental and other revenues)
 
$
303
 
$
276
 
$
641
 
$
537
 
Amortization of acquisition-related intangible assets and liabilities (in rental and other revenues)
 
$
166
 
$
36
 
$
327
 
$
76
 


 
11

 
HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per share data)
 



5.      Intangible Assets and Liabilities - Continued

The following table sets forth scheduled future amortization of intangible assets and 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 and Liabilities (in Rental and Other Revenues)
 
July 1, 2011 through December 31, 2011
 
$
1,724
 
$
8,653
 
$
613
 
$
320
 
2012                                                             
   
3,093
   
15,087
   
1,141
   
561
 
2013                                                             
   
1,486
   
12,106
   
983
   
390
 
2014                                                             
   
1,098
   
9,398
   
819
   
298
 
2015                                                             
   
1,098
   
6,966
   
603
   
188
 
Thereafter                                                             
   
800
   
14,690
   
2,088
   
471
 
   
$
9,299
 
$
66,900
 
$
6,247
 
$
2,228
 

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) and acquisition-related intangible assets and liabilities (in rental and other revenues) were 3.3 years, 6.1 years, 7.9 years and 6.3 years, respectively, as of June 30, 2011.

In connection with the acquisition of a medical office property in Raleigh, NC in the second quarter of 2011, we recorded $0.1 million of above market lease intangible assets and $0.9 million of in-place lease intangible assets with weighted average amortization periods of 3.0 years each at the date of the acquisition.


 
12

 
HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per share data)
 



6.      Mortgages and Notes Payable

The following table sets forth our consolidated mortgages and notes payable:

   
June 30,
2011
 
December 31,
2010
 
Secured indebtedness                                                                                                      
 
$
748,563
 
$
754,399
 
Unsecured indebtedness                                                                                                      
   
866,505
   
768,546
 
Total mortgages and notes payable
 
$
1,615,068
 
$
1,522,945
 

At June 30, 2011, our secured mortgage loans were secured by real estate assets with an aggregate undepreciated book value of $1.2 billion.

Our $400.0 million unsecured revolving credit facility is scheduled to mature on February 21, 2013 and includes an accordion feature that allows for an additional $50.0 million of borrowing capacity subject to additional lender commitments. Assuming we continue to have three publicly announced ratings from the credit rating agencies, the interest rate and facility fee under our revolving credit facility are based on the lower of the two highest publicly announced ratings. Based on our current credit ratings, the interest rate is LIBOR plus 290 basis points and the annual facility fee is 60 basis points. There was $75.4 million and $77.0 million outstanding under our revolving credit facility at June 30, 2011 and July 20, 2011, respectively. At both June 30, 2011 and July 20, 2011, we had $0.2 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, 2011 and July 20, 2011 was $324.4 million and $322.8 million, respectively.

Our secured construction facility, which has $52.1 million outstanding at June 30, 2011, is scheduled to mature on December 20, 2011. Assuming no defaults have occurred, we have the option to extend the maturity date for an additional one-year period. The interest rate is LIBOR plus 85 basis points. During the second quarter of 2011, we exercised our right to reduce the borrowing capacity of this facility to $52.1 million.

In the second quarter of 2011, we repaid the remaining $10.0 million of a three-year unsecured term loan before maturity. We incurred no penalties related to this repayment.

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


 
13

 
HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per share data)
 



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

   
Six Months Ended
June 30,
 
   
2011
 
2010
 
Beginning noncontrolling interests in the Operating Partnership
 
$
120,838
 
$
129,769
 
Adjustments of noncontrolling interests in the Operating Partnership to fair value
   
6,957
   
(20,612
)
Conversion of Common Units to Common Stock
   
(635
)
 
(2,958
)
Net income attributable to noncontrolling interests in the Operating Partnership
   
1,130
   
2,453
 
Distributions to noncontrolling interests in the Operating Partnership
   
(3,215
)
 
(3,243
)
Total noncontrolling interests in the Operating Partnership
 
$
125,075
 
$
105,409
 

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,
 
   
2011
 
2010
 
2011
 
2010
 
Net income available for common stockholders                                                                               
 
$
10,112
 
$
36,224
 
$
20,248
 
$
45,895
 
Increase in additional paid in capital from conversion of Common Units to Common Stock
   
449
   
33
   
635
   
2,957
 
Change in equity from net income available for common stockholders and conversion of Common Units to Common Stock
 
$
10,561
 
$
36,257
 
$
20,883
 
$
48,852
 

Noncontrolling Interests in Consolidated Affiliates

At June 30, 2011, 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.

8.      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 which 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.


 
14

 
HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per share data)
 



8.      Disclosure About Fair Value of Financial Instruments - Continued

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.

We had no Level 2 assets or liabilities at both June 30, 2011 and December 31, 2010.

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 asset is our tax increment financing bond, which is not routinely traded but whose fair value is determined using an estimate of projected redemption value based on quoted bid/ask prices for similar unrated municipal bonds.

The following tables set forth the assets, noncontrolling interests in the Operating Partnership and liability 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.

   
June 30,
2011
 
Level 1
 
Level 3
 
Assets:
                   
Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)
 
$
3,876
 
$
3,876
 
$
 
Tax increment financing bond (in prepaid expenses and other assets)
   
15,228
   
   
15,228
 
Total Assets
 
$
19,104
 
$
3,876
 
$
15,228
 
                     
Noncontrolling Interests in the Operating Partnership
 
$
125,075
 
$
125,075
 
$
 
                     
Liability:
                   
Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)
 
$
3,876
 
$
3,876
 
$
 


   
December 31,
2010
 
Level 1
 
Level 3
 
Assets:
                   
Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)
 
$
3,479
 
$
3,479
 
$
 
Tax increment financing bond (in prepaid expenses and other assets)
   
15,699
   
   
15,699
 
Total Assets
 
$
19,178
 
$
3,479
 
$
15,699
 
                     
Noncontrolling Interests in the Operating Partnership
 
$
120,838
 
$
120,838
 
$
 
                     
Liability:
                   
Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)
 
$
4,091
 
$
4,091
 
$
 


 
15

 
HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per share data)
 



8.      Disclosure About Fair Value of Financial Instruments – Continued

The following table sets forth our Level 3 asset:

   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2011
 
2010
 
2011
 
2010
 
Asset:
                         
Tax Increment Financing Bond
                         
Beginning balance
 
$
15,564
 
$
17,090
 
$
15,699
 
$
16,871
 
Unrealized gain/(loss) (in AOCL)
   
(336
)
 
(73
)
 
(471
)
 
146
 
Ending balance
 
$
15,228
 
$
17,017
 
$
15,228
 
$
17,017
 

We own a tax increment financing bond associated with a property developed by us. This bond amortizes to maturity in 2020. The estimated fair value at June 30, 2011 was $3.0 million below the outstanding principal due on the bond. If the yield-to-maturity 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 higher, respectively, as of June 30, 2011. Currently, 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 and, therefore, we have recorded no credit losses related to the bond in the three and six months ended June 30, 2011 and 2010. There is no legal right of offset with the liability, which we report as a financing obligation, related to this tax increment financing bond.

The following table sets forth the carrying amounts and fair values of our financial instruments not disclosed elsewhere in this Quarterly Report on Form 10-Q:

   
Carrying
Amount
 
Fair Value
 
June 30, 2011
             
Mortgages and notes receivable
 
$
18,809
 
$
19,141
 
Mortgages and notes payable
 
$
1,615,068
 
$
1,725,186
 
Financing obligations
 
$
32,869
 
$
20,852
 
               
December 31, 2010
             
Mortgages and notes receivable                                                                                                
 
$
19,044
 
$
19,093
 
Mortgages and notes payable                                                                                                
 
$
1,522,945
 
$
1,581,518
 
Financing obligations                                                                                                
 
$
33,114
 
$
23,880
 

The fair values of our mortgages and notes receivable, mortgages and notes payable and financing obligations were estimated using the income or market approaches to approximate the price that would be paid in an orderly transaction between market participants on the respective measurement dates. The carrying values of our cash and cash equivalents, restricted cash, accounts receivable, marketable securities of non-qualified deferred compensation plan, tax increment financing bond, non-qualified deferred compensation obligation and noncontrolling interests in the Operating Partnership are equal to or approximate fair value.


 
16

 
HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per share data)
 



9.      Share-Based Payments

During the six months ended June 30, 2011, we granted 146,581 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 $6.47. During the six months ended June 30, 2011, we also granted 76,166 shares of time-based restricted stock and 57,386 shares of total return-based restricted stock with weighted average grant date fair values per share of $33.74 and $41.02, respectively. We recorded stock-based compensation expense of $1.4 million each during the three months ended June 30, 2011 and 2010, and $3.5 million each during the six months ended June 30, 2011 and 2010. At June 30, 2011, there was $7.9 million of total unrecognized stock-based compensation costs, which will be recognized over a weighted average remaining service period of 2.4 years.

10.           Comprehensive Income and Accumulated Other Comprehensive Loss

The following table sets forth the components of comprehensive income:

   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2011
 
2010
 
2011
 
2010
 
Net income                                                                             
 
$
14,434
 
$
40,049
 
$
26,877
 
$
52,131
 
Other comprehensive income/(loss):
                         
Unrealized gain/(loss) on tax increment financing bond
   
(336
)
 
(73
)
 
(471
)
 
146
 
Amortization of settled cash-flow hedges
   
(29
)
 
48
   
(58
)
 
287
 
Sale of cash-flow hedge related to disposition of investment
in unconsolidated affiliate
   
   
103
   
   
103
 
Total other comprehensive income/(loss)
   
(365
)
 
78
   
(529
)
 
536
 
Total comprehensive income
 
$
14,069
 
$
40,127
 
$
26,348
 
$
52,667
 

The following table sets forth the components of AOCL:

   
June 30,
2011
 
December 31,
2010
 
Tax increment financing bond                                                                                                      
 
$
3,013
 
$
2,543
 
Settled cash-flow hedges                                                                                                      
   
1,164
   
1,105
 
Total accumulated other comprehensive loss
 
$
4,177
 
$
3,648
 


 
17

 
HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per share data)
 



11.      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,
 
   
2011
 
2010
 
2011
 
2010
 
Rental and other revenues                                                                                     
 
$
500
 
$
1,227
 
$
1,113
 
$
2,557
 
Operating expenses:
                         
Rental property and other expenses
   
178
   
455
   
359
   
1,048
 
Depreciation and amortization
   
32
   
275
   
127
   
549
 
Total operating expenses
   
210
   
730
   
486
   
1,597
 
Other income
   
1
   
1
   
1
   
1
 
Income from discontinued operations
   
291
   
498
   
628
   
961
 
Net losses on disposition of discontinued operations
   
   
(260
)
 
   
(86
)
Total discontinued operations                                                                                     
 
$
291
 
$
238
 
$
628
 
$
875
 

The following table sets forth the major classes of assets and liabilities of the properties classified as held for sale:

   
June 30,
2011
 
December 31,
2010
 
Assets:
             
Land
 
$
2,788
 
$
2,788
 
Buildings and tenant improvements                                                                                                 
   
12,663
   
12,707
 
Land held for development                                                                                                 
   
967
   
2,766
 
Total real estate assets                                                                                            
   
16,418
   
18,261
 
Less accumulated depreciation                                                                                                 
   
(5,113
)
 
(5,012
)
Net real estate assets
   
11,305
   
13,249
 
Deferred leasing costs, net
   
55
   
58
 
Accrued straight line rents receivable
   
249
   
257
 
Prepaid expenses and other assets
   
   
43
 
Real estate and other assets, net, held for sale
 
$
11,609
 
$
13,607
 
Tenant security deposits, deferred rents and accrued costs (1)                                                                                                      
 
$
123
 
$
11
 

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


 
18

 
HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per share data)
 


 

12.      Earnings Per Share

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

   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2011
 
2010
 
2011
 
2010
 
Earnings per Common Share - basic:
                         
Numerator:
                         
Income from continuing operations
 
$
14,143
 
$
39,811
 
$
26,249
 
$
51,256
 
Net (income) attributable to noncontrolling  interests in the Operating Partnership from continuing operations
   
(608
)
 
(1,921
)
 
(1,098
)
 
(2,409
)
Net (income) attributable to noncontrolling interests in consolidated affiliates from continuing operations
   
(182
)
 
(215
)
 
(305
)
 
(429
)
Dividends on Preferred Stock
   
(1,622
)
 
(1,677
)
 
(3,299
)
 
(3,354
)
Excess of Preferred Stock redemption/repurchase cost over carrying value
   
(1,895
)
 
   
(1,895
)
 
 
Income from continuing operations available for common stockholders
   
9,836
   
35,998
   
19,652
   
45,064
 
Income from discontinued operations
   
291
   
238
   
628
   
875
 
Net (income) attributable to noncontrolling interests in the Operating Partnership from discontinued operations
   
(15
)
 
(12
)
 
(32
)
 
(44
)
Income from discontinued operations available for common stockholders
   
276
   
226
   
596
   
831
 
Net income available for common stockholders
 
$
10,112
 
$
36,224
 
$
20,248
 
$
45,895
 
Denominator:
                         
Denominator for basic earnings per Common Share – weighted average
shares
   
72,211
   
71,601
   
72,015
   
71,508
 
Earnings per Common Share – basic:
                         
Income from continuing operations available for common stockholders
 
$
0.14
 
$
0.51
 
$
0.27
 
$
0.63
 
Income from discontinued operations available for common stockholders
   
   
   
0.01
   
0.01
 
Net income available for common stockholders
 
$
0.14
 
$
0.51
 
$
0.28
 
$
0.64
 
Earnings per Common Share - diluted:
                         
Numerator:
                         
Income from continuing operations
 
$
14,143
 
$
39,811
 
$
26,249
 
$
51,256
 
Net (income) attributable to noncontrolling interests in consolidated affiliates from continuing operations
   
(182
)
 
(215
)
 
(305
)
 
(429
)
Dividends on Preferred Stock
   
(1,622
)
 
(1,677
)
 
(3,299
)
 
(3,354
)
Excess of Preferred Stock redemption/repurchase cost over carrying value
   
(1,895
)
 
   
(1,895
)
 
 
Income from continuing operations available for common stockholders before net (income) attributable to noncontrolling interests in the Operating Partnership
   
10,444
   
37,919
   
20,750
   
47,473
 
Income from discontinued operations available for common stockholders
   
291
   
238
   
628
   
875
 
Net income available for common stockholders before net (income) attributable to noncontrolling interests in the Operating Partnership
 
$
10,735
 
$
38,157
 
$
21,378
 
$
48,348
 
Denominator:
                         
Denominator for basic earnings per Common Share –weighted average
shares
   
72,211
   
71,601
   
72,015
   
71,508
 
Add:
                         
Stock options using the treasury method
   
202
   
209
   
185
   
188
 
Noncontrolling interests partnership units
   
3,784
   
3,797
   
3,787
   
3,808
 
Denominator for diluted earnings per Common Share – adjusted weighted average shares and assumed conversions (1)
   
76,197
   
75,607
   
75,987
   
75,504
 
Earnings per Common Share – diluted:
                         
Income from continuing operations available for common stockholders
 
$
0.14
   
0.50
   
0.27
   
0.63
 
Income from discontinued operations available for common stockholders
   
   
   
0.01
   
0.01
 
Net income available for common stockholders
 
$
0.14
   
0.50
   
0.28
   
0.64
 
__________

 
19

 
HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per share data)
 



12.      Earnings Per Share Continued
 
(1)
There were 0.3 million and 0.6 million options outstanding during the three and six months ended June 30, 2011 and 2010, respectively, that were not included in the computation of diluted earnings per share because the impact of including such options would be anti-dilutive.

13.      Segment Information

The following table summarizes the rental and other revenues and net operating income, the primary industry property-level performance metric which is defined as rental and other revenues less rental property and other expenses, for each reportable segment:

   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2011
 
2010
 
2011
 
2010
 
Rental and Other Revenues: (1)
                         
Office:
                         
Atlanta, GA
 
$
12,341
 
$
12,065
 
$
24,245
 
$
24,198
 
Greenville, SC
   
3,437
   
3,451
   
6,943
   
7,127
 
Kansas City, MO
   
3,586
   
3,663
   
7,243
   
7,371
 
Memphis, TN
   
10,077
   
7,328
   
20,180
   
15,196
 
Nashville, TN
   
15,362
   
14,851
   
29,977
   
29,964
 
Orlando, FL
   
2,619
   
3,059
   
4,937
   
6,064
 
Piedmont Triad, NC
   
5,273
   
5,367
   
10,637
   
10,764
 
Raleigh, NC
   
20,103
   
18,523
   
39,423
   
37,328
 
Richmond, VA
   
11,668
   
11,483
   
23,047
   
23,276
 
Tampa, FL
   
17,458
   
18,037
   
34,250
   
35,979
 
Total Office Segment
   
101,924
   
97,827
   
200,882
   
197,267
 
Industrial:
                         
Atlanta, GA
   
4,028
   
3,842
   
7,962
   
7,817
 
Piedmont Triad, NC
   
2,825
   
3,044
   
5,803
   
6,065
 
Total Industrial Segment
   
6,853
   
6,886
   
13,765
   
13,882
 
Retail:
                         
Kansas City, MO
   
8,203
   
8,749
   
17,104
   
16,437
 
Total Retail Segment
   
8,203
   
8,749
   
17,104
   
16,437
 
Residential:
                         
Kansas City, MO                                                         
   
77
   
303
   
285
   
682
 
Total Residential Segment
   
77
   
303
   
285
   
682
 
Total Rental and Other Revenues                                                                    
 
$
117,057
 
$
113,765
 
$
232,036
 
$
228,268
 


 
20

 
HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per share data)
 


13.      Segment Information – Continued

   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2011
 
2010
 
2011
 
2010
 
Net Operating Income: (1)
                         
Office:
                         
Atlanta, GA
 
$
7,973
 
$
7,828
 
$
15,467
 
$
15,461
 
Greenville, SC
   
2,067
   
2,168
   
4,143
   
4,449
 
Kansas City, MO
   
2,113
   
2,327
   
4,228
   
4,540
 
Memphis, TN
   
5,462
   
4,223
   
11,224
   
9,507
 
Nashville, TN
   
10,329
   
10,065
   
19,981
   
19,934
 
Orlando, FL
   
1,285
   
1,723
   
2,451
   
3,336
 
Piedmont Triad, NC
   
3,452
   
3,791
   
7,055
   
7,091
 
Raleigh, NC
   
14,270
   
13,046
   
27,473
   
25,675
 
Richmond, VA
   
8,232
   
8,405
   
16,092
   
16,355
 
Tampa, FL
   
10,802
   
10,991
   
21,192
   
21,811
 
Total Office Segment
   
65,985
   
64,567
   
129,306
   
128,159
 
Industrial:
                         
Atlanta, GA
   
3,001
   
2,793
   
5,841
   
5,563
 
Piedmont Triad, NC
   
2,107
   
2,328
   
4,332
   
4,375
 
Total Industrial Segment
   
5,108
   
5,121
   
10,173
   
9,938
 
Retail:
                         
Kansas City, MO
   
4,832
   
5,746
   
10,123
   
10,098
 
Total Retail Segment
   
4,832
   
5,746
   
10,123
   
10,098
 
Residential:
                         
Kansas City, MO
   
(11
)
 
188
   
93
   
426
 
Total Residential Segment
   
(11
)
 
188
   
93
   
426
 
Total Net Operating Income                                                                    
   
75,914
   
75,622
   
149,695
   
148,621
 
Reconciliation to income from continuing operations before disposition of property, condominiums and investment in unconsolidated affiliates and equity in earnings of unconsolidated affiliates:
                         
Depreciation and amortization
   
(33,430
)
 
(33,260
)
 
(67,147
)
 
(65,898
)
General and administrative expense
   
(7,978
)
 
(6,980
)
 
(15,771
)
 
(15,487
)
Interest expense
   
(23,907
)
 
(22,934
)
 
(47,450
)
 
(46,047
)
Interest and other income
   
1,875
   
965
   
3,748
   
2,665
 
Income from continuing operations before disposition of property, condominiums and investment in unconsolidated affiliates and equity in earnings of unconsolidated affiliates
 
$
12,474
 
$
13,413
 
$
23,075
 
$
23,854
 
__________
 
(1)
Net of discontinued operations.


 
21

 
HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per share data)
 



14.      Subsequent Events

On July 27, 2011, we obtained a new $475.0 million unsecured revolving credit facility, which replaced our previously existing $400.0 million revolving credit facility. Our new revolving credit facility is originally scheduled to mature on July 27, 2015. Assuming no defaults have occurred, we have an option to extend the maturity for an additional year. The new credit facility includes an accordion feature that allows for an additional $75.0 million of borrowing capacity subject to additional lender commitments. The interest rate on the new facility 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 under the new facility are based on the higher of the publicly announced ratings from Moody’s Investors Service or Standard & Poors. The financial and other covenants under the new facility are substantially the same as our previous credit facility.


 
22

 

















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23

 

HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Consolidated Balance Sheets
 
(Unaudited and in thousands, except unit and per unit amounts)
 
   
June 30,
2011
 
December 31,
2010
 
Assets:
           
Real estate assets, at cost:
             
Land
 
$
345,791
 
$
345,088
 
Buildings and tenant improvements
   
2,886,871
   
2,883,092
 
Development in process
   
13,317
   
4,524
 
Land held for development
   
106,871
   
107,101
 
     
3,352,850
   
3,339,805
 
Less-accumulated depreciation
   
(863,730
)
 
(830,153
)
Net real estate assets
   
2,489,120
   
2,509,652
 
For-sale residential condominiums
   
5,840
   
8,225
 
Real estate and other assets, net, held for sale
   
11,609
   
13,607
 
Cash and cash equivalents
   
9,087
   
14,198
 
Restricted cash
   
7,619
   
4,399
 
Accounts receivable, net of allowance of $3,470 and $3,595, respectively
   
22,952
   
20,716
 
Mortgages and notes receivable, net of allowance of $617 and $868, respectively
   
18,809
   
19,044
 
Accrued straight-line rents receivable, net of allowance of $1,360 and $2,209, respectively
   
99,466
   
93,178
 
Investment in and advances to unconsolidated affiliates
   
101,893
   
62,451
 
Deferred financing and leasing costs, net of accumulated amortization of $62,542 and $59,360, respectively
   
85,168
   
85,001
 
Prepaid expenses and other assets
   
36,533
   
40,200
 
Total Assets
 
$
2,888,096
 
$
2,870,671
 
               
Liabilities, Redeemable Operating Partnership Units and Equity:
             
Mortgages and notes payable
 
$
1,615,068
 
$
1,522,945
 
Accounts payable, accrued expenses and other liabilities
   
106,105
   
106,716
 
Financing obligations
   
32,869
   
33,114
 
Total Liabilities
   
1,754,042
   
1,662,775
 
Commitments and Contingencies
             
Redeemable Operating Partnership Units:
             
Common Units, 3,775,250 and 3,793,987 outstanding, respectively
   
125,075
   
120,838
 
Series A Preferred Units (liquidation preference $1,000 per unit), 29,087 and 29,092 shares issued and outstanding, respectively
   
29,087
   
29,092
 
Series B Preferred Units (liquidation preference $25 per unit), 0 and 2,100,000 shares issued and outstanding, respectively
   
   
52,500
 
Total Redeemable Operating Partnership Units
   
154,162
   
202,430
 
Equity:
             
Common Units:
             
General partner Common Units, 757,659 and 750,757 outstanding, respectively
   
9,794
   
10,044
 
Limited partner Common Units, 71,232,960 and 70,530,921 outstanding, respectively
   
969,829
   
994,610
 
Accumulated other comprehensive loss
   
(4,177
)
 
(3,648
)
Noncontrolling interests in consolidated affiliates
   
4,446
   
4,460
 
Total Equity
   
979,892
   
1,005,466
 
Total Liabilities, Redeemable Operating Partnership Units and Equity
 
$
2,888,096
 
$
2,870,671
 

See accompanying notes to consolidated financial statements.

 
24

 


HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Consolidated Statements of Income
 
(Unaudited and in thousands, except per unit amounts)
 
   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2011
 
2010
 
2011
 
2010
 
Rental and other revenues                                                                               
 
$
117,057
 
$
113,765
 
$
232,036
 
$
228,268
 
Operating expenses:
                         
Rental property and other expenses
   
41,080
   
38,253
   
82,427
   
79,437
 
Depreciation and amortization
   
33,430
   
33,260
   
67,147
   
65,898
 
General and administrative
   
8,041
   
6,870
   
15,685
   
15,697
 
Total operating expenses
   
82,551
   
78,383
   
165,259
   
161,032
 
Interest expense:
                         
Contractual
   
22,940
   
21,705
   
45,371
   
43,507
 
Amortization of deferred financing costs
   
821
   
835
   
1,642
   
1,670
 
Financing obligations
   
146
   
394
   
437
   
870
 
     
23,907
   
22,934
   
47,450
   
46,047
 
Other income:
                         
Interest and other income
   
1,899
   
965
   
3,772
   
2,665
 
Loss on debt extinguishment
   
(24
)
 
   
(24
)
 
 
     
1,875
   
965
   
3,748
   
2,665
 
Income from continuing operations before disposition of property, condominiums and investment in unconsolidated affiliates and equity in earnings of unconsolidated affiliates
   
12,474
   
13,413
   
23,075
   
23,854
 
Gains on disposition of property
   
200
   
17
   
200
   
36
 
Gains on disposition of for-sale residential condominiums
   
116
   
163
   
154
   
353
 
Gains on disposition of investment in unconsolidated affiliates
   
   
25,330
   
   
25,330
 
Equity in earnings of unconsolidated affiliates
   
1,357
   
871
   
2,832
   
1,672
 
Income from continuing operations                                                                               
   
14,147
   
39,794
   
26,261
   
51,245
 
Discontinued operations:
                         
Income from discontinued operations
   
291
   
498
   
628
   
961
 
Net losses on disposition of discontinued operations
   
   
(260
)
 
   
(86
)
     
291
   
238
   
628
   
875
 
Net income                                                                               
   
14,438
   
40,032
   
26,889
   
52,120
 
Net (income) attributable to noncontrolling interests in consolidated affiliates
   
(182
)
 
(215
)
 
(305
)
 
(429
)
Distributions on Preferred Units
   
(1,622
)
 
(1,677
)
 
(3,299
)
 
(3,354
)
Excess of preferred unit redemption/repurchase cost over carrying value
   
(1,895
)
 
   
(1,895
)
 
 
Net income available for common unitholders                                                                               
 
$
10,739
 
$
38,140
 
$
21,390
 
$
48,337
 
Earnings per Common Unit - basic:
                         
Income from continuing operations available for common unitholders
 
$
0.14
 
$
0.51
 
$
0.27
 
$
0.64
 
Income from discontinued operations available for common unitholders
   
   
   
0.01
   
0.01
 
Net income available for common unitholders
 
$
0.14
 
$
0.51
 
$
0.28
 
$
0.65
 
Weighted average Common Units outstanding - basic
   
75,586
   
74,989
   
75,393
   
74,907
 
Earnings per Common Unit - diluted:
                         
Income from continuing operations available for common unitholders
 
$
0.14
 
$
0.51
 
$
0.27
 
$
0.64
 
Income from discontinued operations available for common unitholders
   
   
   
0.01
   
 
Net income available for common unitholders
 
$
0.14
 
$
0.51
 
$
0.28
 
$
0.64
 
Weighted average Common Units outstanding - diluted
   
75,788
   
75,198
   
75,578
   
75,095
 
Distributions declared per Common Unit
 
$
0.425
 
$
0.425
 
$
0.850
 
$
0.850
 
Net income available for common unitholders:
                         
Income from continuing operations available for common unitholders
 
$
10,448
 
$
37,902
 
$
20,762
 
$
47,462
 
Income from discontinued operations available for common unitholders
   
291
   
238
   
628
   
875
 
Net income available for common unitholders
 
$
10,739
 
$
38,140
 
$
21,390
 
$
48,337
 

See accompanying notes to consolidated financial statements.

 
25

 


HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Consolidated Statements of Equity
 
Six Months Ended June 30, 2011 and 2010
 
(Unaudited and in thousands)

   
Common Units
               
   
General
Partner
 
Limited
Partner
 
Accumulated
Other
Comprehensive
Loss
 
Noncontrolling
Interests in
Consolidated
Affiliates
 
Total
 
Balance at December 31, 2010
 
$
10,044
 
$
994,610
 
$
(3,648
)
$
4,460
 
$
1,005,466
 
Issuance of Common Units, net
   
170
   
16,814
   
   
   
16,984
 
Distributions on Common Units
   
(640
)
 
(63,296
)
 
   
   
(63,936
)
Distributions on Preferred Units
   
(33
)
 
(3,266
)
 
   
   
(3,299
)
Share-based compensation expense
   
35
   
3,418
   
   
   
3,453
 
Distribution to noncontrolling interests in consolidated affiliates
   
   
   
   
(319
)
 
(319
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
   
(48
)
 
(4,769
)
 
   
   
(4,817
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
   
(3
)
 
(302
)
 
   
305
   
 
Comprehensive income:
                               
Net income
   
269
   
26,620
   
   
   
26,889
 
Other comprehensive loss
   
   
   
(529
)
 
   
(529
)
Total comprehensive income
                           
26,360
 
Balance at June 30, 2011
 
$
9,794
 
$
969,829
 
$
(4,177
)
$
4,446
 
$
979,892
 


   
Common Units
               
   
General
Partner
 
Limited
Partner
 
Accumulated
Other
Comprehensive
Loss
 
Noncontrolling
Interests in
Consolidated
Affiliates
 
Total
Capital
 
Balance at December 31, 2009
 
$
10,485
 
$
1,038,328
 
$
(3,811
)
$
5,183
 
$
1,050,185
 
Issuance of Common Units, net
   
11
   
1,051
   
   
   
1,062
 
Distributions on Common Units
   
(637
)
 
(63,011
)
 
   
   
(63,648
)
Distributions on Preferred Units
   
(34
)
 
(3,320
)
 
   
   
(3,354
)
Share-based compensation expense
   
35
   
3,462
   
   
   
3,497
 
Distribution to noncontrolling interests in consolidated affiliates
   
   
   
   
(324
)
 
(324
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
   
243
   
24,039
   
   
   
24,282
 
Net (income) attributable to noncontrolling interests in consolidated affiliates
   
(4
)
 
(425
)
 
   
429
   
 
Comprehensive income:
                               
Net income
   
521
   
51,599
   
   
   
52,120
 
Other comprehensive income
   
   
   
536
   
   
536
 
Total comprehensive income
                           
52,656
 
Balance at June 30, 2010
 
$
10,620
 
$
1,051,723
 
$
(3,275
)
$
5,288
 
$
1,064,356
 

See accompanying notes to consolidated financial statements.

 
26

 


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

   
Six Months Ended
June 30,
 
   
2011
 
2010
 
Operating activities:
             
Net income
 
$
26,889
 
$
52,120
 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Depreciation and amortization
   
67,274
   
66,447
 
Amortization of lease incentives and acquisition-related intangible assets and liabilities
   
968
   
537
 
Share-based compensation expense
   
3,453
   
3,497
 
Allowance for losses on accounts and accrued straight-line rents receivable
   
1,029
   
2,636
 
Amortization of deferred financing costs
   
1,642
   
1,670
 
Amortization of settled cash-flow hedges
   
(58
)
 
287
 
Loss on debt extinguishment
   
24
   
 
Net (gains)/losses on disposition of property
   
(200
)
 
50
 
Gains on disposition of for-sale residential condominiums
   
(154
)
 
(353
)
Gains on disposition of investment in unconsolidated affiliates
   
   
(25,330
)
Equity in earnings of unconsolidated affiliates
   
(2,832
)
 
(1,672
)
Changes in financing obligations
   
(245
)
 
81
 
Distributions of earnings from unconsolidated affiliates
   
2,150
   
1,704
 
Changes in operating assets and liabilities:
             
Accounts receivable
   
(1,821
)
 
(1,616
)
Prepaid expenses and other assets
   
(544
)
 
1,769
 
Accrued straight-line rents receivable
   
(6,098
)
 
(5,296
)
Accounts payable, accrued expenses and other liabilities
   
(3,794
)
 
3,352
 
Net cash provided by operating activities
   
87,683
   
99,883
 
Investing activities:
             
Additions to real estate assets and deferred leasing costs
   
(44,447
)
 
(38,292
)
Net proceeds from disposition of real estate assets
   
2,063
   
6,801
 
Net proceeds from disposition of for-sale residential condominiums
   
2,401
   
3,186
 
Proceeds from disposition of investment in unconsolidated affiliates
   
   
15,000
 
Distributions of capital from unconsolidated affiliates
   
632
   
1,106
 
Repayments of mortgages and notes receivable
   
235
   
29
 
Investment in and advances to unconsolidated affiliates
   
(39,402
)
 
(303
)
Changes in restricted cash and other investing activities
   
(395
)
 
(3,178
)
Net cash used in investing activities
   
(78,913
)
 
(15,651
)
Financing activities:
             
Distributions on Common Units
   
(63,936
)
 
(63,648
)
Redemptions/repurchases of Preferred Units
   
(52,505
)
 
 
Distributions on Preferred Units
   
(3,299
)
 
(3,354
)
Distributions to noncontrolling interests in consolidated affiliates
   
(319
)
 
(324
)
Net proceeds from the issuance of Common Units
   
16,984
   
1,062
 
Borrowings on revolving credit facility
   
124,700
   
4,000
 
Repayments of revolving credit facility
   
(79,300
)
 
(4,000
)
Borrowings on mortgages and notes payable
   
200,000
   
 
Repayments of mortgages and notes payable
   
(153,522
)
 
(5,452
)
Additions to deferred financing costs and other financing activities
   
(2,684
)
 
(290
)
Net cash used in financing activities
   
(13,881
)
 
(72,006
)
Net increase/(decrease) in cash and cash equivalents
   
(5,111
)
 
12,226
 
Cash and cash equivalents at beginning of the period
   
14,198
   
23,519
 
Cash and cash equivalents at end of the period
 
$
9,087
 
$
35,745
 

See accompanying notes to consolidated financial statements.

 
27

 


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

Supplemental disclosure of cash flow information:


   
Six Months Ended
June 30,
 
   
2011
 
2010
 
Cash paid for interest, net of amounts capitalized
 
$
44,948
 
$
43,204
 

Supplemental disclosure of non-cash investing and financing activities:

   
Six Months Ended
June 30,
 
   
2011
 
2010
 
Change in accrued capital expenditures                                                                                                         
 
$
1,525
 
$
(2,294
)
Write-off of fully depreciated real estate assets                                                                                                         
 
$
23,352
 
$
24,273
 
Write-off of fully amortized deferred financing and leasing costs                                                                                                         
 
$
8,247
 
$
7,963
 
Unrealized gains on marketable securities of non-qualified deferred compensation plan
 
$
210
 
$
174
 
Settlement of financing obligation
 
$
 
$
4,184
 
Adjustment of Redeemable Common Units to fair value                                                                                                         
 
$
4,237
 
$
(24,360
)
Unrealized gain/(loss) on tax increment financing bond                                                                                                         
 
$
(471
)
$
146
 
Mortgages receivable from seller financing                                                                                                         
 
$
 
$
17,030
 

See accompanying notes to consolidated financial statements.


 
28

 


HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements
 
June 30, 2011
 
(tabular dollar amounts in thousands, except per unit data)
 
(Unaudited)

1.      Description of Business and Significant Accounting Policies

Description of Business

The Company is a fully-integrated, self-administered and self-managed equity real estate investment trust (“REIT”) that operates in the Southeastern and Midwestern United States. The Company conducts virtually all of its activities through the Operating Partnership. At June 30, 2011, the Company and/or the Operating Partnership wholly owned: 296 in-service office, industrial and retail properties, comprising 27.3 million square feet; 96 rental residential units; 19 for-sale residential condominiums; 603 acres of undeveloped land suitable for future development, of which 523 acres are considered core holdings; and an additional office property that is considered completed but not yet stabilized.

The Company is the sole general partner of the Operating Partnership. At June 30, 2011, the Company owned all of the Preferred Units and 72.0 million, or 95.0%, of the Common Units. Limited partners (including one officer and two directors of the Company) own the remaining 3.8 million Common Units. Generally, the Operating Partnership is obligated to redeem each Common Unit at the request of the holder thereof for cash equal to the value of one share of Common Stock, $.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, 2011, the Company redeemed 18,737 Common Units for a like number of shares of Common Stock.

Common Stock Offering

In the second quarter of 2011, we entered into equity sales agreements with various financial institutions to offer and sell, from time to time, shares of our Common Stock having an aggregate offering price of up to $150.0 million. During the second quarter of 2011, we issued 236,000 shares of Common Stock under these agreements at an average price of $35.62 per share raising net proceeds, after sales commissions and expenses, of $8.3 million.

Preferred Stock Retirements

In the second quarter of 2011, we redeemed the remaining 2.1 million outstanding 8.0% Series B Cumulative Redeemable Preferred Shares for an aggregate redemption price of $52.5 million, excluding accrued dividends. In connection with this redemption, the $1.9 million excess of the redemption cost over the net carrying amount of the redeemed shares was recorded as a reduction to net income available for common stockholders in the second quarter of 2011.

Basis of Presentation

Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). Our Consolidated Balance Sheet at December 31, 2010 was revised from previously reported amounts to reflect those properties which required held for sale presentation. Our Consolidated Statements of Income for the three and six months ended June 30, 2010 were revised from previously reported amounts to reflect those properties sold or held for sale which required discontinued operations presentation.

Our Consolidated Financial Statements include wholly owned subsidiaries and those entities in which we have the controlling financial interest. All significant intercompany transactions and accounts have been eliminated. At June 30, 2011 and December 31, 2010, we were not involved with any entities that were determined to be variable interest entities.


 
29

 
HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per unit 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 2010 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

Beginning with our Quarterly Report on Form 10-Q for the three months ended March 31, 2012, we will be required to enhance our disclosure of assets and liabilities measured at fair value. This includes disclosing any significant transfers between Levels 1 and 2 of the fair value hierarchy, additional quantitative and qualitative information regarding fair value measurements categorized as Level 3 of the fair value hierarchy and the hierarchy classification for items whose fair value is not recorded on our Consolidated Balance Sheets but is disclosed in our Notes to Consolidated Financial Statements. Additionally, we will be required to present comprehensive income on the face of our Consolidated Statements of Income, which previously has been disclosed in our Notes to Consolidated Financial Statements.

2.      Real Estate Assets

Acquisitions

During the second quarter of 2011, we acquired a 48,000 square foot medical office property in Raleigh, NC for approximately $9.0 million in cash and incurred $0.1 million of acquisition-related costs.

3.      Mortgages and Notes Receivable

The following table sets forth our mortgages and notes receivable:

   
June 30,
2011
 
December 31,
2010
 
Seller financing (first mortgages)
 
$
17,180
 
$
17,180
 
Less allowance
   
   
 
     
17,180
   
17,180
 
Promissory notes
   
2,246
   
2,732
 
Less allowance
   
(617
)
 
(868
)
     
1,629
   
1,864
 
Mortgages and notes receivable, net
 
$
18,809
 
$
19,044
 


 
30

 
HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per unit data)
 



3.      Mortgages and Notes Receivable - Continued

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,
 
   
2011
 
2010
 
2011
 
2010
 
Beginning notes receivable allowance
 
$
497
 
$
732
 
$
868
 
$
698
 
Bad debt expense
   
162
   
25
   
184
   
88
 
Write-offs
   
   
(5
)
 
(364
)
 
(5
)
Recoveries/other
   
(42
)
 
19
   
(71
)
 
(10
)
Total notes receivable allowance
 
$
617
 
$
771
 
$
617
 
$
771
 

Our mortgages and notes receivable consists primarily of seller financing issued in conjunction with two disposition transactions in the second quarter of 2010. As of June 30, 2011, the interest payments on both mortgages receivable were current and there were no indications of impairment on the receivables.

4.      Investment in and Advances to Unconsolidated Affiliates

We have equity interests ranging from 10.0% to 50.0% in various joint ventures with unrelated third parties and a debt interest in one of these joint ventures, as described below. The following table sets forth the combined, summarized income statements for our unconsolidated joint ventures:

   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2011
 
2010
 
2011
 
2010
 
Income Statements:
                         
Revenues                                                                      
 
$
23,756
 
$
30,697
 
$
47,958
 
$
65,266
 
Expenses:
                         
Rental property and other expenses
   
10,155
   
15,128
   
21,526
   
31,655
 
Depreciation and amortization
   
6,053
   
7,410
   
12,299
   
16,641
 
Interest expense
   
5,683
   
7,037
   
11,508
   
15,404
 
Total expenses
   
21,891
   
29,575
   
45,333
   
63,700
 
Net income
 
$
1,865
 
$
1,122
 
$
2,625
 
$
1,566
 
Our share of:
                         
Depreciation and amortization of real estate assets
 
$
1,995
 
$
2,699
 
$
4,050
 
$
6,001
 
Interest expense
 
$
2,012
 
$
2,730
 
$
4,149
 
$
6,128
 
Net income
 
$
759
 
$
307
 
$
1,694
 
$
535
 
                           
Our share of net income
 
$
759
 
$
307
 
$
1,694
 
$
535
 
Purchase accounting and management, leasing and other fees
adjustments
   
598
   
564
   
1,138
   
1,137
 
Equity in earnings of unconsolidated affiliates
 
$
1,357
 
$
871
 
$
2,832
 
$
1,672
 


 
31

 
HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per unit data)
 



4.      Investment in and Advances to Unconsolidated Affiliates - Continued

In the second quarter of 2011, we provided a one-year $38.3 million interest-only secured loan to an unconsolidated joint venture, which was used to repay a secured loan before maturity to a third party lender. The loan bears interest at LIBOR plus 500 basis points, which may be reduced by up to 50 basis points upon the use of proceeds from the sale of certain assets by the joint venture to repay the loan.

During the second quarter of 2010, we sold our equity interests in a series of unconsolidated joint ventures relating to properties in Des Moines, IA. For information regarding this sale, see Note 3 to the Consolidated Financial Statements in our 2010 Annual Report on Form 10-K.

5.      Intangible Assets and Liabilities

The following table sets forth total intangible assets and liabilities, net of accumulated amortization:

   
June 30,
2011
 
December 31,
2010
 
Assets:
             
Deferred financing costs
 
$
17,295
 
$
16,412
 
Less accumulated amortization
   
(7,996
)
 
(7,054
)
     
9,299
   
9,358
 
Deferred leasing costs (including lease incentives and acquisition-related intangible assets)
   
130,415
   
127,949
 
Less accumulated amortization
   
(54,546
)
 
(52,306
)
     
75,869
   
75,643
 
Deferred financing and leasing costs, net
 
$
85,168
 
$
85,001
 
               
Liabilities (in accounts payable, accrued expenses and other liabilities):
             
Acquisition-related intangible liabilities
 
$
720
 
$
658
 
Less accumulated amortization
   
(226
)
 
(125
)
   
$
494
 
$
533
 

The following table sets forth amortization of intangible assets and liabilities:

   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2011
 
2010
 
2011
 
2010
 
Amortization of deferred financing costs
 
$
821
 
$
835
 
$
1,642
 
$
1,670
 
Amortization of deferred leasing costs and acquisition-related intangible assets (in depreciation and amortization)
 
$
4,401
 
$
3,817
 
$
8,757
 
$
7,583
 
Amortization of lease incentives (in rental and other revenues)
 
$
303
 
$
276
 
$
641
 
$
537
 
Amortization of acquisition-related intangible assets and liabilities (in rental and other revenues)
 
$
166
 
$
36
 
$
327
 
$
76
 


 
32

 
HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per unit data)
 



5.      Intangible Assets and Liabilities - Continued

The following table sets forth scheduled future amortization of intangible assets and 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 and Liabilities (in Rental and Other Revenues)
 
July 1, 2011 through December 31, 2011
 
$
1,724
 
$
8,653
 
$
613
 
$
320
 
2012                                                             
   
3,093
   
15,087
   
1,141
   
561
 
2013                                                             
   
1,486
   
12,106
   
983
   
390
 
2014                                                             
   
1,098
   
9,398
   
819
   
298
 
2015                                                             
   
1,098
   
6,966
   
603
   
188
 
Thereafter                                                             
   
800
   
14,690
   
2,088
   
471
 
   
$
9,299
 
$
66,900
 
$
6,247
 
$
2,228
 

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) and acquisition-related intangible assets and liabilities (in rental and other revenues) were 3.3 years, 6.1 years, 7.9 years and 6.3 years, respectively, as of June 30, 2011.

In connection with the acquisition of a medical office property in Raleigh, NC in the second quarter of 2011, we recorded $0.1 million of above market lease intangible assets and $0.9 million of in-place lease intangible assets with weighted average amortization periods of 3.0 years each at the date of the acquisition.


 
33

 
HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per unit data)
 



6.      Mortgages and Notes Payable

The following table sets forth our consolidated mortgages and notes payable:

   
June 30,
2011
 
December 31,
2010
 
Secured indebtedness                                                                                                      
 
$
748,563
 
$
754,399
 
Unsecured indebtedness                                                                                                      
   
866,505
   
768,546
 
Total mortgages and notes payable
 
$
1,615,068
 
$
1,522,945
 

At June 30, 2011, our secured mortgage loans were secured by real estate assets with an aggregate undepreciated book value of $1.2 billion.

Our $400.0 million unsecured revolving credit facility is scheduled to mature on February 21, 2013 and includes an accordion feature that allows for an additional $50.0 million of borrowing capacity subject to additional lender commitments. Assuming we continue to have three publicly announced ratings from the credit rating agencies, the interest rate and facility fee under our revolving credit facility are based on the lower of the two highest publicly announced ratings. Based on our current credit ratings, the interest rate is LIBOR plus 290 basis points and the annual facility fee is 60 basis points. There was $75.4 million and $77.0 million outstanding under our revolving credit facility at June 30, 2011 and July 20, 2011, respectively. At both June 30, 2011 and July 20, 2011, we had $0.2 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, 2011 and July 20, 2011 was $324.4 million and $322.8 million, respectively.

Our secured construction facility, which has $52.1 million outstanding at June 30, 2011, is scheduled to mature on December 20, 2011. Assuming no defaults have occurred, we have the option to extend the maturity date for an additional one-year period. The interest rate is LIBOR plus 85 basis points. During the second quarter of 2011, we exercised our right to reduce the borrowing capacity of this facility to $52.1 million.

In the second quarter of 2011, we repaid the remaining $10.0 million of a three-year unsecured term loan before maturity. We incurred no penalties related to this repayment.

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

7.      Noncontrolling Interests

Noncontrolling Interests in Consolidated Affiliates

At June 30, 2011, 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.

 
34

 
HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per unit data)
 



8.      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 which 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.

We had no Level 2 assets or liabilities at both June 30, 2011 and December 31, 2010.

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 asset is our tax increment financing bond, which is not routinely traded but whose fair value is determined using an estimate of projected redemption value based on quoted bid/ask prices for similar unrated municipal bonds.

The following tables set forth the assets, noncontrolling interests in the Operating Partnership and liability 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.

   
June 30,
2011
 
Level 1
 
Level 3
 
Assets:
                   
Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)
 
$
3,876
 
$
3,876
 
$
 
Tax increment financing bond (in prepaid expenses and other assets)
   
15,228
   
   
15,228
 
Total Assets
 
$
19,104
 
$
3,876
 
$
15,228
 
                     
Liability:
                   
Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)
 
$
3,876
 
$
3,876
 
$
 


 
35

 
HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per unit data)
 



8.      Disclosure About Fair Value of Financial Instruments – Continued

   
December 31,
2010
 
Level 1
 
Level 3
 
Assets:
                   
Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)
 
$
3,479
 
$
3,479
 
$
 
Tax increment financing bond (in prepaid expenses and other assets)
   
15,699
   
   
15,699
 
Total Assets
 
$
19,178
 
$
3,479
 
$
15,699
 
                     
Liability:
                   
Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)
 
$
4,091
 
$
4,091
 
$
 

The following table sets forth our Level 3 asset:

   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2011
 
2010
 
2011
 
2010
 
Asset:
                         
Tax Increment Financing Bond
                         
Beginning balance
 
$
15,564
 
$
17,090
 
$
15,699
 
$
16,871
 
Unrealized gain/(loss) (in AOCL)
   
(336
)
 
(73
)
 
(471
)
 
146
 
Ending balance
 
$
15,228
 
$
17,017
 
$
15,228
 
$
17,017
 

We own a tax increment financing bond associated with a property developed by us. This bond amortizes to maturity in 2020. The estimated fair value at June 30, 2011 was $3.0 million below the outstanding principal due on the bond. If the yield-to-maturity 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 higher, respectively, as of June 30, 2011. Currently, 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 and, therefore, we have recorded no credit losses related to the bond in the three and six months ended June 30, 2011 and 2010. There is no legal right of offset with the liability, which we report as a financing obligation, related to this tax increment financing bond.

The following table sets forth the carrying amounts and fair values of our financial instruments not disclosed elsewhere in this Quarterly Report on Form 10-Q:

   
Carrying
Amount
 
Fair Value
 
June 30, 2011
             
Mortgages and notes receivable
 
$
18,809
 
$
19,141
 
Mortgages and notes payable
 
$
1,615,068
 
$
1,725,186
 
Financing obligations
 
$
32,869
 
$
20,852
 
               
December 31, 2010
             
Mortgages and notes receivable                                                                                                
 
$
19,044
 
$
19,093
 
Mortgages and notes payable                                                                                                
 
$
1,522,945
 
$
1,581,518
 
Financing obligations                                                                                                
 
$
33,114
 
$
23,880
 


 
36

 
HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per unit data)
 



8.      Disclosure About Fair Value of Financial Instruments – Continued

The fair values of our mortgages and notes receivable, mortgages and notes payable and financing obligations were estimated using the income or market approaches to approximate the price that would be paid in an orderly transaction between market participants on the respective measurement dates. The carrying values of our cash and cash equivalents, restricted cash, accounts receivable, marketable securities of non-qualified deferred compensation plan, tax increment financing bond and non-qualified deferred compensation obligation are equal to or approximate fair value.

9.      Share-Based Payments

During the six months ended June 30, 2011, the Company granted 146,581 stock options with an exercise price equal to the closing market price of a share of its 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 $6.47. During the six months ended June 30, 2011, the Company also granted 76,166 shares of time-based restricted stock and 57,386 shares of total return-based restricted stock with weighted average grant date fair values per share of $33.74 and $41.02, respectively. We recorded stock-based compensation expense of $1.4 million each during the three months ended June 30, 2011 and 2010, and $3.5 million each during the six months ended June 30, 2011 and 2010. At June 30, 2011, there was $7.9 million of total unrecognized stock-based compensation costs, which will be recognized over a weighted average remaining service period of 2.4 years.

10.           Comprehensive Income and Accumulated Other Comprehensive Loss

The following table sets forth the components of comprehensive income:

   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2011
 
2010
 
2011
 
2010
 
Net income                                                                             
 
$
14,438
 
$
40,032
 
$
26,889
 
$
52,120
 
Other comprehensive income/(loss):
                         
Unrealized gain/(loss) on tax increment financing bond
   
(336
)
 
(73
)
 
(471
)
 
146
 
Amortization of settled cash-flow hedges
   
(29
)
 
48
   
(58
)
 
287
 
Sale of cash-flow hedge related to disposition of investment
in unconsolidated affiliate
   
   
103
   
   
103
 
Total other comprehensive income/(loss)
   
(365
)
 
78
   
(529
)
 
536
 
Total comprehensive income
 
$
14,073
 
$
40,110
 
$
26,360
 
$
52,656
 

The following table sets forth the components of AOCL:

   
June 30,
2011
 
December 31,
2010
 
Tax increment financing bond                                                                                                      
 
$
3,013
 
$
2,543
 
Settled cash-flow hedges                                                                                                      
   
1,164
   
1,105
 
Total accumulated other comprehensive loss
 
$
4,177
 
$
3,648
 


 
37

 
HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per unit data)
 



11.      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,
 
   
2011
 
2010
 
2011
 
2010
 
Rental and other revenues                                                                                     
 
$
500
 
$
1,227
 
$
1,113
 
$
2,557
 
Operating expenses:
                         
Rental property and other expenses
   
178
   
455
   
359
   
1,048
 
Depreciation and amortization
   
32
   
275
   
127
   
549
 
Total operating expenses
   
210
   
730
   
486
   
1,597
 
Other income
   
1
   
1
   
1
   
1
 
Income from discontinued operations
   
291
   
498
   
628
   
961
 
Net losses on disposition of discontinued operations
   
   
(260
)
 
   
(86
)
Total discontinued operations                                                                                     
 
$
291
 
$
238
 
$
628
 
$
875
 

The following table sets forth the major classes of assets and liabilities of the properties classified as held for sale:

   
June 30,
2011
 
December 31,
2010
 
Assets:
             
Land
 
$
2,788
 
$
2,788
 
Buildings and tenant improvements                                                                                                 
   
12,663
   
12,707
 
Land held for development                                                                                                 
   
967
   
2,766
 
Total real estate assets                                                                                            
   
16,418
   
18,261
 
Less accumulated depreciation                                                                                                 
   
(5,113
)
 
(5,012
)
Net real estate assets
   
11,305
   
13,249
 
Deferred leasing costs, net
   
55
   
58
 
Accrued straight line rents receivable
   
249
   
257
 
Prepaid expenses and other assets
   
   
43
 
Real estate and other assets, net, held for sale
 
$
11,609
 
$
13,607
 
Tenant security deposits, deferred rents and accrued costs (1)                                                                                                      
 
$
123
 
$
11
 

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


 
38

 
HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per unit data)
 


 

12.      Earnings Per Unit

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

   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2011
 
2010
 
2011
 
2010
 
Earnings per Common Unit - basic:
                         
Numerator:
                         
Income from continuing operations
 
$
14,147
 
$
39,794
 
$
26,261
 
$
51,245
 
Net (income) attributable to noncontrolling interests in consolidated affiliates from continuing operations
   
(182
)
 
(215
)
 
(305
)
 
(429
)
Distributions on Preferred Units
   
(1,622
)
 
(1,677
)
 
(3,299
)
 
(3,354
)
Excess of Preferred Unit redemption/repurchase cost over carrying value
   
(1,895
)
 
   
(1,895
)
 
 
Income from continuing operations available for common unitholders
   
10,448
   
37,902
   
20,762
   
47,462
 
Income from discontinued operations
   
291
   
238
   
628
   
875
 
Net income available for common unitholders
 
$
10,739
 
$
38,140
 
$
21,390
 
$
48,337
 
Denominator:
                         
Denominator for basic earnings per Common Unit – weighted average
units
   
75,586
   
74,989
   
75,393
   
74,907
 
Earnings per Common Unit – basic:
                         
Income from continuing operations available for common unitholders
 
$
0.14
 
$
0.51
 
$
0.27
 
$
0.64
 
Income from discontinued operations available for common unitholders
   
   
   
0.01
   
0.01
 
Net income available for common unitholders
 
$
0.14
 
$
0.51
 
$
0.28
 
$
0.65
 
Earnings per Common Unit - diluted:
                         
Numerator:
                         
Income from continuing operations
 
$
14,147
 
$
39,794
 
$
26,261
 
$
51,245
 
Net (income) attributable to noncontrolling interests in consolidated affiliates from continuing operations
   
(182
)
 
(215
)
 
(305
)
 
(429
)
Distributions on Preferred Units
   
(1,622
)
 
(1,677
)
 
(3,299
)
 
(3,354
)
Excess of Preferred Unit redemption/repurchase cost over carrying value
   
(1,895
)
 
   
(1,895
)
 
 
Income from continuing operations available for common unitholders
   
10,448
   
37,902
   
20,762
   
47,462
 
Income from discontinued operations
   
291
   
238
   
628
   
875
 
Net income available for common unitholders
 
$
10,739
 
$
38,140
 
$
21,390
 
$
48,337
 
Denominator:
                         
Denominator for basic earnings per Common Unit –weighted average
units
   
75,586
   
74,989
   
75,393
   
74,907
 
Add:
                         
Units options using the treasury method
   
202
   
209
   
185
   
188
 
Denominator for diluted earnings per Common Unit – adjusted weighted average units and assumed conversions (1)
   
75,788
   
75,198
   
75,578
   
75,095
 
Earnings per Common Unit – diluted:
                         
Income from continuing operations available for common unitholders
 
$
0.14
   
0.51
   
0.27
   
0.64
 
Income from discontinued operations available for common unitholders
   
   
   
0.01
   
 
Net income available for common unitholders
 
$
0.14
   
0.51
   
0.28
   
0.64
 
__________
 
(1)
There were 0.3 million and 0.6 million options outstanding during the three and six months ended June 30, 2011 and 2010, respectively, that were not included in the computation of diluted earnings per share because the impact of including such options would be anti-dilutive.

 
39

 
HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per unit data)
 



13.      Segment Information

The following table summarizes the rental and other revenues and net operating income, the primary industry property-level performance metric which is defined as rental and other revenues less rental property and other expenses, for each reportable segment:

   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2011
 
2010
 
2011
 
2010
 
Rental and Other Revenues: (1)
                         
Office:
                         
Atlanta, GA
 
$
12,341
 
$
12,065
 
$
24,245
 
$
24,198
 
Greenville, SC
   
3,437
   
3,451
   
6,943
   
7,127
 
Kansas City, MO
   
3,586
   
3,663
   
7,243
   
7,371
 
Memphis, TN
   
10,077
   
7,328
   
20,180
   
15,196
 
Nashville, TN
   
15,362
   
14,851
   
29,977
   
29,964
 
Orlando, FL
   
2,619
   
3,059
   
4,937
   
6,064
 
Piedmont Triad, NC
   
5,273
   
5,367
   
10,637
   
10,764
 
Raleigh, NC
   
20,103
   
18,523
   
39,423
   
37,328
 
Richmond, VA
   
11,668
   
11,483
   
23,047
   
23,276
 
Tampa, FL
   
17,458
   
18,037
   
34,250
   
35,979
 
Total Office Segment
   
101,924
   
97,827
   
200,882
   
197,267
 
Industrial:
                         
Atlanta, GA
   
4,028
   
3,842
   
7,962
   
7,817
 
Piedmont Triad, NC
   
2,825
   
3,044
   
5,803
   
6,065
 
Total Industrial Segment
   
6,853
   
6,886
   
13,765
   
13,882
 
Retail:
                         
Kansas City, MO
   
8,203
   
8,749
   
17,104
   
16,437
 
Total Retail Segment
   
8,203
   
8,749
   
17,104
   
16,437
 
Residential:
                         
Kansas City, MO                                                         
   
77
   
303
   
285
   
682
 
Total Residential Segment
   
77
   
303
   
285
   
682
 
Total Rental and Other Revenues                                                                    
 
$
117,057
 
$
113,765
 
$
232,036
 
$
228,268
 


 
40

 
HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per unit data)
 


13.      Segment Information – Continued

   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2011
 
2010
 
2011
 
2010
 
Net Operating Income: (1)
                         
Office:
                         
Atlanta, GA
 
$
7,980
 
$
7,816
 
$
15,458
 
$
15,484
 
Greenville, SC
   
2,069
   
2,165
   
4,141
   
4,455
 
Kansas City, MO
   
2,115
   
2,324
   
4,226
   
4,546
 
Memphis, TN
   
5,467
   
4,217
   
11,217
   
9,520
 
Nashville, TN
   
10,337
   
10,050
   
19,970
   
19,963
 
Orlando, FL
   
1,286
   
1,720
   
2,450
   
3,341
 
Piedmont Triad, NC
   
3,455
   
3,785
   
7,051
   
7,099
 
Raleigh, NC
   
14,281
   
13,026
   
27,457
   
25,712
 
Richmond, VA
   
8,239
   
8,393
   
16,083
   
16,378
 
Tampa, FL
   
10,811
   
10,976
   
21,179
   
21,842
 
Total Office Segment
   
66,040
   
64,472
   
129,232
   
128,340
 
Industrial:
                         
Atlanta, GA
   
3,003
   
2,789
   
5,838
   
5,571
 
Piedmont Triad, NC
   
2,109
   
2,325
   
4,330
   
4,381
 
Total Industrial Segment
   
5,112
   
5,114
   
10,168
   
9,952
 
Retail:
                         
Kansas City, MO
   
4,836
   
5,738
   
10,116
   
10,112
 
Total Retail Segment
   
4,836
   
5,738
   
10,116
   
10,112
 
Residential:
                         
Kansas City, MO
   
(11
)
 
188
   
93
   
427
 
Total Residential Segment
   
(11
)
 
188
   
93
   
427
 
Total Net Operating Income                                                                    
   
75,977
   
75,512
   
149,609
   
148,831
 
Reconciliation to income from continuing operations before disposition of property, condominiums and investment in unconsolidated affiliates and equity in earnings of unconsolidated affiliates:
                         
Depreciation and amortization
   
(33,430
)
 
(33,260
)
 
(67,147
)
 
(65,898
)
General and administrative expense
   
(8,041
)
 
(6,870
)
 
(15,685
)
 
(15,697
)
Interest expense
   
(23,907
)
 
(22,934
)
 
(47,450
)
 
(46,047
)
Interest and other income
   
1,875
   
965
   
3,748
   
2,665
 
Income from continuing operations before disposition of property, condominiums and investment in unconsolidated affiliates and equity in earnings of unconsolidated affiliates
 
$
12,474
 
$
13,413
 
$
23,075
 
$
23,854
 
__________
 
(1)
Net of discontinued operations.


 
41

 
HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per unit data)
 



14.      Subsequent Events

On July 27, 2011, we obtained a new $475.0 million unsecured revolving credit facility, which replaced our previously existing $400.0 million revolving credit facility. Our new revolving credit facility is originally scheduled to mature on July 27, 2015. Assuming no defaults have occurred, we have an option to extend the maturity for an additional year. The new credit facility includes an accordion feature that allows for an additional $75.0 million of borrowing capacity subject to additional lender commitments. The interest rate on the new facility 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 under the new facility are based on the higher of the publicly announced ratings from Moody’s Investors Service or Standard & Poors. The financial and other covenants under the new facility are substantially the same as our previous credit facility.

 


 
42

 


 
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company is a fully integrated, self-administered and self-managed equity REIT that provides leasing, management, development, construction and other customer-related services for our properties and for third parties. The Company conducts virtually all of its activities through the Operating Partnership and is its sole general partner. At June 30, 2011, we owned or had an interest in 332 in-service office, industrial and retail properties, encompassing approximately 32.7 million square feet, which includes one completed but not yet stabilized office property aggregating 117,000 square feet, one office property under development aggregating 60,000 square feet and a 12.5% interest in a 261,000 square foot office property directly owned by the Company (included in the Company’s Consolidated Financial Statements, but not included in the Operating Partnership’s Consolidated Financial Statements); 19 for-sale residential condominiums and 96 rental residential units. We are based in Raleigh, North Carolina, and our properties and development land are located in Florida, Georgia, Mississippi, Missouri, North Carolina, South Carolina, Tennessee and Virginia. Additional information about us can be found on our website at www.highwoods.com. Information on our website is not part of this Quarterly Report.

You should read the following discussion and analysis in conjunction with the accompanying Consolidated Financial Statements and related notes contained elsewhere in this Quarterly Report.

 
Disclosure Regarding Forward-Looking Statements

Some of the information in this Quarterly Report may contain forward-looking statements. Such statements include, in particular, statements about our plans, strategies and prospects under this section and under the heading “Business.” You can identify forward-looking statements by our use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “continue” or other similar words. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that our plans, intentions or expectations will be achieved. When considering such forward-looking statements, you should keep in mind the following important factors that could cause our actual results to differ materially from those contained in any forward-looking statement:

 
·
the financial condition of our customers could deteriorate;

 
·
we may not be able to lease or release second generation space, defined as previously occupied space that becomes available for lease, quickly or on as favorable terms as old leases;

 
·
we may not be able to lease our newly constructed buildings as quickly or on as favorable terms as originally anticipated;

 
·
we may not be able to complete development, acquisition, reinvestment, disposition or joint venture projects as quickly or on as favorable terms as anticipated;

 
·
development activity by our competitors in our existing markets could result in an excessive supply of office, industrial and retail properties relative to customer demand;

 
·
our markets may suffer declines in economic growth;

 
·
unanticipated increases in interest rates could increase our debt service costs;

 
·
unanticipated increases in operating expenses could negatively impact our operating results;

 
·
we may not be able to meet our liquidity requirements or obtain capital on favorable terms to fund our working capital needs and growth initiatives or to repay or refinance outstanding debt upon maturity; and

 
·
the Company could lose key executive officers.

 
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This list of risks and uncertainties, however, is not intended to be exhaustive. You should also review the other cautionary statements we make in the section entitled “Item 1A.  Risk Factors” set forth in this Quarterly Report on Form 10-Q. Given these uncertainties, you should not place undue reliance on forward-looking statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements to reflect any future events or circumstances or to reflect the occurrence of unanticipated events.

 
Executive Summary

Our Strategic Plan focuses on:
 
 
·
owning high-quality, differentiated real estate assets in the better submarkets in our core markets;

 
·
improving the operating results of our existing properties through concentrated leasing, asset management, cost control and customer service efforts;

 
·
developing and acquiring office properties in in-fill and central business district locations that improve the overall quality of our portfolio and generate attractive returns over the long-term for our stockholders;
 
 
·
selectively disposing of properties no longer considered to be core holdings primarily due to location, age, quality and overall strategic fit; and

 
·
maintaining a conservative, flexible balance sheet with ample liquidity to meet our funding needs and growth prospects.
 
While we own and operate a limited number of industrial, retail and residential properties, our operating results depend heavily on successfully leasing and operating our office properties. Economic growth and employment levels in Florida, Georgia, North Carolina and Tennessee are and will continue to be important determinative factors in predicting our future operating results.

The key components affecting our rental and other revenues are average occupancy, rental rates, new developments placed in service, acquisitions and dispositions. Average occupancy generally increases during times of improving economic growth, as our ability to lease space outpaces vacancies that occur upon the expirations of existing leases. Average occupancy generally declines during times of slower economic growth, when new vacancies tend to outpace our ability to lease space. Asset acquisitions, dispositions and new developments placed in service directly impact our rental revenues and could impact our average occupancy, depending upon the occupancy rate of the properties that are acquired, sold or placed in service. A further indicator of the predictability of future revenues is the expected lease expirations of our portfolio. As a result, in addition to seeking to increase our average occupancy by leasing current vacant space, we also must concentrate our leasing efforts on renewing leases on expiring space.

Whether or not our rental revenue tracks average occupancy proportionally depends upon whether rents under new leases signed are higher or lower than the rents under the previous leases. The annualized rental revenues from second generation leases signed during any particular year is generally less than 15% of our total annual rental revenues. During the second quarter of 2011, we leased 807,380 square feet of second generation office space, defined as space previously occupied under our ownership that becomes available for lease, with a weighted average term of 4.6 years. On average, tenant improvements for such leases were $6.26 per square foot, lease commissions were $2.07 per square foot and rent concessions were $3.17 per square foot. GAAP base rents under such leases were $19.90 per square foot, or 5.5% higher than under previous leases.

We strive to maintain a diverse, stable and creditworthy customer base. We have an internal guideline whereby customers that account for more than 3% of our revenues are periodically reviewed with the Company’s Board of Directors. Currently, no customer accounts for more than 3% of our annualized revenues other than the federal government, which accounts for 9.8% of our annualized revenues, and AT&T, which accounts for 3.6% of our annualized revenues.

 
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Our expenses primarily consist of rental property expenses, depreciation and amortization, general and administrative expenses and interest expense. From time to time, expenses also include impairments of assets held for use. Rental property expenses are expenses associated with our ownership and operation of rental properties and include expenses that vary somewhat proportionately to occupancy levels, such as common area maintenance and utilities, and expenses that do not vary based on occupancy, such as property taxes and insurance. Depreciation and amortization is a non-cash expense associated with the ownership of real property and generally remains relatively consistent each year, unless we buy, place in service or sell assets, since we depreciate our properties and related building and tenant improvement assets on a straight-line basis over a fixed life. General and administrative expenses, net of amounts capitalized, consist primarily of management and employee salaries and other personnel costs, corporate overhead and long-term incentive compensation.

We anticipate commencing up to $200.0 million of new development in the remainder of 2011. Any such projects would not be placed in service until 2012 or beyond. We also anticipate acquiring up to $300.0 million of new properties and selling up to $75.0 million of non-core properties in the remainder of 2011. We intend to maintain a conservative and flexible balance sheet that allows us to capitalize on favorable development and acquisition opportunities as they arise. As of June 30, 2011, our mortgages and notes payable represented 43.0% of the undepreciated book value of our total assets.

 
Results of Operations

Results for the three months ended June 30, 2010 were revised from previously reported amounts to reflect in discontinued operations the operations for those properties sold or held for sale subsequent to that date which required discontinued operations presentation.
 
Three Months Ended June 30, 2011 and 2010
 
Rental and Other Revenues
 
Rental and other revenues from continuing operations were 2.9% higher in the second quarter of 2011 compared to the second quarter of 2010 primarily due to a $2.2 million increase from recent acquisition and development activities and $0.7 million in higher development management fees. Revenues from our same property portfolio (those assets owned from January 1, 2010 to June 30, 2011) remained relatively unchanged due to a slight improvement in same property average occupancy to 90.0% for the second quarter of 2011 from 89.8% for the second quarter of 2010, offset by lower termination fees and operating expense recoveries. We expect rental and other revenues for the remainder of 2011, adjusted for any discontinued operations and additional acquisition activity, to be higher compared to the same period in 2010 primarily due to slightly higher average occupancy and higher termination fees, partly offset by lower operating expense recoveries.
 
Operating Expenses
 
Rental property and other expenses were 7.9% higher in the second quarter of 2011 compared to the second quarter of 2010 primarily due to a $1.6 million increase from recent acquisition and development activities and $1.4 million increase in our same property portfolio operating expenses from higher utilities. Operating margin, defined as rental and other revenues less rental property and other expenses expressed as a percentage of rental and other revenues, was lower at 64.9% in the second quarter of 2011 compared to 66.5% in the second quarter of 2010. We expect rental property and other expenses for the remainder of 2011, adjusted for any discontinued operations and additional acquisition activity, to be slightly higher compared to the same period in 2010 primarily due to higher real estate taxes and maintenance costs.
 
Depreciation and amortization was relatively unchanged in the second quarter of 2011 compared to the second quarter of 2010. We expect depreciation expense for the remainder of 2011, adjusted for any discontinued operations and additional acquisition activity, to be slightly higher compared to the same period in 2010 due to recent acquisition and development activity.
 

 
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General and administrative expenses were 14.3% higher in the second quarter of 2011 compared to the second quarter of 2010 primarily due to higher incentive compensation and higher deferred compensation expense caused by an increased value of the marketable securities held under our deferred compensation plan. We expect general and administrative expenses for the remainder of 2011, adjusted for changes in deferred compensation expense caused by changes in the value of marketable securities held under our deferred compensation plan and additional acquisition activity, to be lower than the same period in 2010 primarily due to lower incentive compensation and management’s continuing efforts to reduce general and administrative expenses. Changes in the value of marketable securities are fully offset in other income and therefore do not impact net income.

Interest Expense
 
Interest expense was 4.2% higher in the second quarter of 2011 compared to the second quarter of 2010 primarily due to higher average debt balances resulting from the assumption of debt with respect to our acquisition activity and our new $200.0 million bank term loan. We expect interest expense for the remainder of 2011, adjusted for any additional acquisition activity, to be lower than the same period in 2010 primarily due to the planned early repayment in the fourth quarter of 2011 of a secured mortgage loan bearing interest at 7.05% that is originally scheduled to mature on January 1, 2012 and lower termination fees at properties accounted for as financing obligations, partly offset by higher average debt balances from our new $200.0 million bank term loan.  
 
Other Income
 
Other income was $0.9 million higher in the second quarter of 2011 as compared to the second quarter of 2010 primarily due to higher interest income on seller financing and advances to unconsolidated affiliates and better performance of marketable securities held under our deferred compensation plan as noted above. We expect other income for the remainder of 2011, adjusted for changes in the value of marketable securities held under our deferred compensation plan, to be higher than the same period in 2010 primarily due to higher interest income on seller financing and advances to unconsolidated affiliates and lower losses on debt extinguishment.    
 
Gains on Disposition of Investment in Unconsolidated Affiliates
 
Gains on disposition of investment in unconsolidated affiliates were $25.3 million lower in the second quarter of 2011 as compared to the second quarter of 2010 due to the disposition of our equity interests in a series of unconsolidated joint ventures relating to properties in Des Moines, IA in the second quarter of 2010. This caused a corresponding reduction in net income attributable to noncontrolling interests in the Operating Partnership.  
 
Excess of preferred stock redemption/repurchase cost over carrying value
 
Excess of preferred stock redemption/repurchase cost over carrying value was $1.9 million higher in the second quarter of 2011 as compared to the second quarter of 2010 due to the redemption of our then outstanding 8.0% Series B Cumulative Redeemable Preferred Shares in the second quarter of 2011.  
 
Six Months Ended June 30, 2011 and 2010
 
Rental and Other Revenues
 
Rental and other revenues from continuing operations were 1.7% higher in the first six months of 2011 compared to the first six months of 2010 primarily due to a $4.4 million increase from recent acquisition and development activities and $0.7 million higher development management fees, partly offset by a $1.1 million decrease in our same property portfolio revenue. Our same property portfolio revenue decreased due to lower termination fees and operating expense recoveries, partly offset by a modest improvement in same property average occupancy to 90.1% for the six months ended June 30, 2011 from 89.7% for the six months ended June 30, 2010 and lower allowance for losses on accounts and accrued straight-line rents receivable.
 

 
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Operating Expenses
 
Rental property and other expenses were 3.4% higher in the first six months  of 2011 compared to the first six months of 2010 primarily due to a $1.9 million increase from recent acquisition and development activities and $0.8 million increase in our same property portfolio operating expenses from higher real estate taxes and utilities. Operating margin was lower at 64.5% in the first six months of 2011 compared to 65.1% in the first six months of 2010.
 
Depreciation and amortization was 1.9% higher in the first six months of 2011 compared to the first six months of 2010 primarily due to recent acquisition and development activity.
 
General and administrative expenses were 1.8% higher in the first six months of 2011 compared to the first six months of 2010 primarily due to higher incentive compensation and better performance of marketable securities held under our deferred compensation plan.
 
Interest Expense
 
Interest expense was 3.0% higher in the first six months of 2011 compared to the first six months of 2010 primarily due to higher average debt balances from the assumption of debt with respect to our acquisition activity and our new $200.0 million bank term loan.
 
Other Income
 
Other income was $1.1 million higher in the first six months of 2011 as compared to the first six months of 2010 primarily due to higher interest income on seller financing and advances to unconsolidated affiliates and better performance of marketable securities held under our deferred compensation plan.
 
Equity in Earnings of Unconsolidated Affiliates
 
Equity in earnings of unconsolidated affiliates was $1.1 million higher in the first six months of 2011 as compared to the first six months of 2010 due to one-time additional tax increment financing income recorded by one of our joint ventures.
 
Gains on Disposition of Investment in Unconsolidated Affiliates
 
Gains on disposition of investment in unconsolidated affiliates were $25.3 million lower in the first six months of 2011 as compared to the first six months of 2010 due to the disposition of our equity interests in a series of unconsolidated joint ventures relating to properties in Des Moines, IA in the second quarter of 2010. This caused a corresponding reduction in net income attributable to noncontrolling interests in the Operating Partnership.  
 
Excess of preferred stock redemption/repurchase cost over carrying value
 
Excess of preferred stock redemption/repurchase cost over carrying value was $1.9 million higher in the first six months of 2011 as compared to the first six months of 2010 due to the redemption of our then remaining 8.0% Series B Cumulative Redeemable Preferred Shares in the second quarter of 2011.

 
47

 



 
Liquidity and Capital Resources

Overview

Our goal is to maintain a conservative and flexible balance sheet with access to multiple sources of debt and equity capital and sufficient availability under our credit facilities. We generally use rents received from customers to fund our operating expenses, capital expenditures and distributions. To fund property acquisitions, development activity or building renovations and repay debt upon maturity, we may use current cash balances, sell assets, obtain new debt and/or issue equity. Our debt generally consists of mortgage debt, unsecured debt securities and borrowings under our secured and unsecured credit facilities.

Statements of Cash Flows

We report and analyze our cash flows based on operating activities, investing activities and financing activities. The following table sets forth the changes in the Company’s cash flows ($ in thousands):

   
Six Months Ended
June 30,
     
   
2011
 
2010
 
Change
 
Net cash provided by operating activities
 
$
87,595
 
$
100,047
 
$
(12,452
)
Net cash used in investing activities
   
(78,913
)
 
(15,651
)
 
(63,262
)
Net cash used in financing activities
   
(13,649
)
 
(72,252
)
 
58,603
 
Total net cash flows
 
$
(4,967
)
$
12,144
 
$
(17,111
)

In calculating net cash flow provided by operating activities, depreciation and amortization, which are non-cash expenses, are added back to net income. As a result, we have historically generated a positive amount of cash from operating activities. From period to period, cash flow from operations depends primarily upon changes in our net income, as discussed more fully above under “Results of Operations,” changes in receivables and payables, and net additions or decreases in our overall portfolio, which affect the amount of depreciation and amortization expense.

Net cash used in investing activities generally relates to capitalized costs incurred for leasing and major building improvements and our acquisition, development, disposition and joint venture capital activity. During periods of significant net acquisition and/or development activity, our cash used in such investing activities will generally exceed cash provided by investing activities, which typically consists of cash received upon the sale of properties and distributions of capital from our joint ventures.

Net cash used in financing activities generally relates to distributions, incurrence and repayment of debt, and issuances, repurchases or redemptions of Common Stock, Common Units and Preferred Stock. As discussed previously, we use a significant amount of our cash to fund distributions. Whether or not we have increases in the outstanding balances of debt during a period depends generally upon the net effect of our acquisition, disposition, development and joint venture activity. We generally use our revolving credit facility for working capital purposes, which means that during any given period, in order to minimize interest expense, we may record significant repayments and borrowings under our revolving credit facility.

The change in net cash provided by operating activities in the first six months of 2011 compared to the first six months of 2010 was primarily due to lower expense recoveries, termination fees, distributions from unconsolidated affiliates and accounts payable, partly offset by lower payments of incentive compensation and higher base rents.
 
The change in net cash used in investing activities in the first six months of 2011 compared to the first six months of 2010 was primarily due to higher advances to unconsolidated affiliates and lower proceeds from dispositions.
 
The change in net cash used in financing activities in the first six months of 2011 compared to the same period in 2010 was primarily due to higher proceeds from the issuance of Common Stock, additional borrowings on our revolving credit facility and net borrowings from our new $200.0 million bank term loan, partly offset by redemptions of Preferred Stock.

 
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Capitalization

The following table sets forth the Company’s capitalization (in thousands, except per share amounts):

   
June 30,
2011
 
December 31,
2010
 
Mortgages and notes payable, at recorded book value
 
$
1,615,068
 
$
1,522,945
 
Financing obligations
 
$
32,869
 
$
33,114
 
Preferred Stock, at liquidation value
 
$
29,087
 
$
81,592
 
               
Common Stock outstanding
   
72,399
   
71,690
 
Common Units outstanding (not owned by the Company)
   
3,775
   
3,794
 
               
Per share stock price at period end
 
$
33.13
 
$
31.85
 
Market value of Common Stock and Common Units
 
$
2,523,645
 
$
2,404,165
 
Total market capitalization with debt and obligations
 
$
4,200,669
 
$
4,041,816
 

At June 30, 2011, our mortgages and notes payable represented 38.4% of our total market capitalization and were comprised of $748.6 million of secured indebtedness with a weighted average interest rate of 6.14% and $866.5 million of unsecured indebtedness with a weighted average interest rate of 5.20%. Also, our outstanding mortgages and notes payable and financing obligations were secured by real estate assets with an aggregate undepreciated book value of $1.2 billion.

Current and Future Cash Needs

Rental and other revenues are our principal source of funds to meet our short-term liquidity requirements. Other sources of funds for short-term liquidity needs include available working capital and borrowings under our existing revolving credit facility (which had $322.8 million of availability at July 20, 2011). Our short-term liquidity requirements primarily consist of operating expenses, interest and principal amortization on our debt, distributions and capital expenditures, including building improvement costs, tenant improvement costs and lease commissions. Building improvements are capital costs to maintain existing buildings not typically related to a specific customer. Tenant improvements are the costs required to customize space for the specific needs of customers. We anticipate that our available cash and cash equivalents and cash provided by operating activities, together with borrowings under our credit facilities, will be adequate to meet our short-term liquidity requirements.

Our long-term liquidity uses generally consist of the retirement or refinancing of debt upon maturity (including mortgage debt, our revolving and construction credit facilities, term loans and other unsecured debt), funding of existing and new building development or land infrastructure projects and funding acquisitions of buildings and development land. Additionally, we may, from time to time, retire some or all of our remaining outstanding Preferred Stock and/or unsecured debt securities through redemptions, open market repurchases, privately negotiated acquisitions or otherwise.

We expect to meet our liquidity needs through a combination of:
 
 
·
cash flow from operating activities;
 
 
·
borrowings under our credit facilities;
 
 
·
the issuance of unsecured debt;

 
·
the issuance of secured debt;

 
·
the issuance of equity securities by the Company or the Operating Partnership; and

 
·
the disposition of non-core assets.
 
 
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Financing Activity
 
On May 25, 2011, we entered into separate ATM Equity OfferingSM Sales Agreements (the “Sales Agreements”) with each of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Mitsubishi UFJ Securities (USA), Inc., Morgan Keegan & Company, Inc. and RBC Capital Markets, LLC (each, an “Agent” and, together, the “Agents”). Under the terms of the Sales Agreements, the Company may offer and sell up to $150.0 million in aggregate gross sales price of shares of its Common Stock from time to time through the Agents, acting as agents of the Company or as principals. Sales of the Shares, if any, may be made 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 Agents. Subject to the terms and conditions of each Sales Agreement, each Agent will use its commercially reasonable efforts to sell on the Company's behalf any Shares to be offered by the Company under that Sales Agreement.

In the second quarter of 2011, we issued 236,000 shares of Common Stock in at-the-market transactions through Merrill Lynch, Pierce, Fenner & Smith Incorporated at an average price of $35.62 per share raising net proceeds, after sales commissions and expenses, of $8.3 million. We paid $0.1 million in sales commissions to Merrill Lynch, Pierce, Fenner & Smith Incorporated during the second quarter of 2011.

In the second quarter of 2011, we redeemed the remaining 2.1 million outstanding 8.0% Series B Cumulative Redeemable Preferred Shares for an aggregate redemption price of $52.5 million, excluding accrued dividends. In connection with this redemption, the $1.9 million excess of the redemption cost over the net carrying amount of the redeemed shares was recorded as a reduction to net income available for common stockholders in the second quarter of 2011.

In the second quarter of 2011, we repaid the remaining $10.0 million of a three-year unsecured term loan. We incurred no penalties related to this early repayment.

On July 27, 2011, we obtained a new $475.0 million unsecured revolving credit facility, which replaced our previously existing $400.0 million revolving credit facility. Our new revolving credit facility is originally scheduled to mature on July 27, 2015. Assuming no defaults have occurred, we have an option to extend the maturity for an additional year. The new credit facility includes an accordion feature that allows for an additional $75.0 million of borrowing capacity subject to additional lender commitments. The interest rate on the new facility 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 under the new facility are based on the higher of the publicly announced ratings from Moody’s Investors Service or Standard & Poors. The financial and other covenants under the new facility are substantially the same as our previous credit facility. There was $75.4 million and $77.0 million outstanding under our previously existing revolving credit facility at June 30, 2011 and July 20, 2011, respectively. At both June 30, 2011 and July 20, 2011, we had $0.2 million of outstanding letters of credit, which reduces the availability on our revolving credit facility. As a result, the unused capacity of our previously existing revolving credit facility at June 30, 2011 and July 20, 2011 was $324.4 million and $322.8 million, respectively.
 
Our secured construction facility, which has $52.1 million outstanding at June 30, 2011, is scheduled to mature on December 20, 2011. Assuming no defaults have occurred, we have the option to extend the maturity date for an additional one-year period. The interest rate is LIBOR plus 85 basis points. During the second quarter of 2011, we exercised our right to reduce the borrowing capacity of this facility to $52.1 million.

We regularly evaluate the financial condition of the lenders that participate in our credit facilities using publicly available information. Based on this review, we currently expect our lenders, which are major financial institutions, to perform their obligations under our existing facilities.

Covenant Compliance

We are currently in compliance with the covenants and other requirements with respect to our outstanding debt. Although we expect to remain in compliance with these covenants and ratios for at least the next year, depending upon our future operating performance, property and financing transactions and general economic conditions, we cannot assure you that we will continue to be in compliance.

 
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Our revolving credit facility and bank term loans require us to comply with customary operating covenants and various financial requirements. Upon an event of default on the revolving credit facility, the lenders having at least 66.7% of the total commitments under the revolving credit facility can accelerate all borrowings then outstanding, and we could be prohibited from borrowing any further amounts under our revolving credit facility, which would adversely affect our ability to fund our operations.

The Operating Partnership has $391.1 million carrying amount of 2017 bonds outstanding and $200.0 million carrying amount of 2018 bonds outstanding. The indenture that governs these outstanding notes requires us to comply with customary operating covenants and various financial ratios. The trustee or the holders of at least 25% in principal amount of either series of bonds can accelerate the principal amount of such series upon written notice of a default that remains uncured after 60 days.

We may not be able to repay, refinance or extend any or all of our debt at maturity or upon any acceleration. If any refinancing is done at higher interest rates, the increased interest expense could adversely affect our cash flow and ability to pay distributions. Any such refinancing could also impose tighter financial ratios and other covenants that restrict our ability to take actions that could otherwise be in our best interest, such as funding new development activity, making opportunistic acquisitions, repurchasing our securities or paying distributions.

Off Balance Sheet Arrangements

There were no significant changes to our off balance sheet arrangements in the three months ended June 30, 2011. For information regarding our off balance sheet arrangements at December 31, 2010, see Note 9 to the Consolidated Financial Statements in our 2010 Annual Report on Form 10-K.

 
Critical Accounting Estimates

There were no changes made by management to the critical accounting policies in the six months ended June 30, 2011. For a description of our critical accounting estimates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates” in our 2010 Annual Report on Form 10-K.

 
Non-GAAP Information

The Company believes that Funds from Operations (“FFO”) and FFO per share are beneficial to management and investors and are important indicators of the performance of any equity REIT. Because FFO and FFO per share calculations exclude such factors as depreciation and amortization of real estate assets and gains or losses from sales of operating real estate assets, which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful life estimates, they facilitate comparisons of operating performance between periods and between other REITs. Management believes that historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient on a stand-alone basis. As a result, management believes that the use of FFO and FFO per share, together with the required GAAP presentations, provide a more complete understanding of the Company’s performance relative to its competitors and a more informed and appropriate basis on which to make decisions involving operating, financing and investing activities.

FFO and FFO per share are non-GAAP financial measures and therefore do not represent net income or net income per share as defined by GAAP. Net income and net income per share as defined by GAAP are the most relevant measures in determining the Company’s operating performance because FFO and FFO per share include adjustments that investors may deem subjective, such as adding back expenses such as depreciation and amortization. Furthermore, FFO per share does not depict the amount that accrues directly to the stockholders’ benefit. Accordingly, FFO and FFO per share should never be considered as alternatives to net income or net income per share as indicators of the Company’s operating performance.

 
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The Company’s presentation of FFO is consistent with FFO as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), which is calculated as follows:

 
·
Net income/(loss) computed in accordance with GAAP;

 
·
Less dividends to holders of Preferred Stock and less excess of Preferred Stock redemption cost over carrying value;

 
·
Less net income attributable to noncontrolling interests in consolidated affiliates;

 
·
Plus depreciation and amortization of real estate assets;

 
·
Less gains, or plus losses, from sales of depreciable operating properties (but excluding impairment losses) and excluding items that are classified as extraordinary items under GAAP;

 
·
Plus or minus adjustments for unconsolidated partnerships and joint ventures (to reflect funds from operations on the same basis); and

 
·
Plus or minus adjustments for depreciation and amortization and gains/(losses) on sales and noncontrolling interests in consolidated affiliates related to discontinued operations.

In calculating FFO, the Company adds back net income attributable to noncontrolling interests in the Operating Partnership, which the Company believes is consistent with standard industry practice for REITs that operate through an UPREIT structure. The Company believes that it is important to present FFO on an as-converted basis since all of the Common Units not owned by the Company are redeemable on a one-for-one basis for shares of its Common Stock.

Other REITs may not define FFO in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently than we do.

 
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The Company’s FFO and FFO per share are summarized in the following table ($ in thousands, except per share amounts):

   
Three Months Ended June 30,
 
Six Months Ended June 30,
 
   
2011
 
2010
 
2011
 
2010
 
   
Amount
 
Per
Share
 
Amount
 
Per
Share
 
Amount
 
Per
Share
 
Amount
 
Per
Share
 
Funds from operations:
                                                 
Net income
 
$
14,434
       
$
40,049
       
$
26,877
       
$
52,131
       
Net (income) attributable to noncontrolling interests in the Operating Partnership
   
(623
)
       
(1,933
)
       
(1,130
)
       
(2,453
)
     
Net (income) attributable to noncontrolling interests in consolidated affiliates
   
(182
)
       
(215
)
       
(305
)
       
(429
)
     
Dividends on Preferred Stock
   
(1,622
)
       
(1,677
)
       
(3,299
)
       
(3,354
)
     
Excess of Preferred Stock redemption/repurchase cost over carrying value
   
(1,895
)
       
         
(1,895
)
       
       
Net income available for common stockholders
   
10,112
 
$
0.14
   
36,224
 
$
0.50
   
20,248
 
$
0.28
   
45,895
 
$
0.64
 
Add/(Deduct):
                                                 
Depreciation and amortization of real estate assets
   
32,971
   
0.43
   
32,833
   
0.44
   
66,254
   
0.87
   
65,051
   
0.85
 
(Gains) on disposition of depreciable properties
   
   
   
(17
)
 
   
   
   
(36
)
 
 
(Gains) on disposition of investment in unconsolidated affiliates
   
   
   
(25,330
)
 
(0.34
)
 
   
   
(25,330
)
 
(0.33
)
Net income attributable to noncontrolling interests in the Operating Partnership
   
623
   
   
1,933
   
   
1,130
   
   
2,453
   
 
Unconsolidated affiliates:
                                                 
Depreciation and amortization of real estate assets
   
2,033
   
0.03
   
2,737
   
0.04
   
4,126
   
0.06
   
6,078
   
0.08
 
Discontinued operations:
                                                 
Depreciation and amortization of real estate assets
   
32
   
   
275
   
   
127
   
   
549
   
0.01
 
(Gains) on disposition of depreciable properties
   
   
   
   
   
   
   
(174
)
 
 
Funds from operations                                                      
 
$
45,771
 
$
0.60
 
$
48,655
 
$
0.64
 
$
91,885
 
$
1.21
 
$
94,486
 
$
1.25
 
                                                   
Weighted average Common Shares outstanding (1)
   
76,197
         
75,607
         
75,987
         
75,504
       
__________
 
(1)
Includes assumed conversion of all potentially dilutive Common Stock equivalents.

In addition, the Company believes net operating income from continuing operations (“NOI”) and same property NOI are beneficial to management and investors and are important indicators of the performance of any equity REIT. Management believes that NOI is a useful supplemental measure of the Company’s property operating performance because it provides a performance measure of the revenues and expenses directly involved in owning real estate assets and provides a perspective not immediately apparent from net income or FFO. The Company defines NOI as rental and other revenues from continuing operations, less rental property and other expenses from continuing operations. The Company defines same property NOI as NOI for the Company’s in-service properties that were wholly-owned during the entirety of the periods presented (from January 1, 2010 to June 30, 2011). Other REITs may use different methodologies to calculate NOI and same property NOI and accordingly the Company’s NOI and same property NOI may not be comparable to other REITs.

 
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The following table sets forth the Company’s NOI and same property NOI:

   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2011
 
2010
 
2011
 
2010
 
Income from continuing operations before disposition of property, condominiums and investment in unconsolidated affiliates and equity in earnings of unconsolidated affiliates
 
$
12,474
 
$
13,413
 
$
23,075
 
$
23,854
 
Other income
   
(1,875
)
 
(965
)
 
(3,748
)
 
(2,665
)
Interest expense
   
23,907
   
22,934
   
47,450
   
46,047
 
General and administrative expense
   
7,978
   
6,980
   
15,771
   
15,487
 
Depreciation and amortization expense
   
33,430
   
33,260
   
67,147
   
65,898
 
Net operating income from continuing operations
   
75,914
   
75,622
   
149,695
   
148,621
 
Less – non same property and other net operating income
   
3,959
   
2,656
   
7,758
   
4,769
 
Total same property net operating income from continuing operations
 
$
71,955
 
$
72,966
 
$
141,937
 
$
143,852
 
                           
Rental and other revenues
 
$
117,057
 
$
113,765
 
$
232,036
 
$
228,268
 
Rental property and other expenses
   
41,143
   
38,143
   
82,341
   
79,647
 
Total net operating income from continuing operations
   
75,914
   
75,622
   
149,695
   
148,621
 
Less – non same property and other net operating income
   
3,959
   
2,656
   
7,758
   
4,769
 
Total same property net operating income from continuing operations
 
$
71,955
 
$
72,966
 
$
141,937
 
$
143,852
 
                           
Total same property net operating income from continuing operations
 
$
71,955
 
$
72,966
 
$
141,937
 
$
143,852
 
Less – straight line rent and lease termination fees
   
2,657
   
4,676
   
6,017
   
6,036
 
Same property cash net operating income from continuing operations
 
$
69,298
 
$
68,290
 
$
135,920
 
$
137,816
 


 
54

 



 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For information about our market risk as of December 31, 2010, see “Quantitative and Qualitative Disclosures About Market Risk” in our 2010 Annual Report on Form 10-K.

 
ITEM 4.  CONTROLS AND PROCEDURES

SEC rules require us to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our annual and periodic reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The Company’s CEO and CFO have concluded that the disclosure controls and procedures of the Company and the Operating Partnership were each effective at the end of the period covered by this Quarterly Report.

SEC rules also require us to establish and maintain internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepting accounting principles. There were no changes in internal control over financial reporting during the three months ended June 30, 2011 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. There were also no changes in internal control over financial reporting during the three months ended June 30, 2011 that materially affected, or are reasonably likely to materially affect, the Operating Partnership’s internal control over financial reporting.


 
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PART II - OTHER INFORMATION

 
ITEM 1A.  RISK FACTORS

An investment in our securities involves various risks. All investors should carefully consider the following risk factors in conjunction with the other information contained in this Quarterly Report and our 2010 Annual Report before trading in our securities. If any of these risks actually occur, our business, operating results, prospects and financial condition could be harmed.

Adverse economic conditions in our markets that negatively impact the demand for office space, such as high unemployment, may result in lower occupancy and rental rates for our portfolio, which would adversely affect our operating results. While we own and operate a limited number of industrial, retail and residential properties, our operating results depend heavily on successfully leasing and operating our office properties. Economic growth and employment levels in Florida, Georgia, North Carolina and Tennessee are and will continue to be important determinative factors in predicting our future operating results.

Key components affecting our rental and other revenues include average occupancy and rental rates. Average occupancy generally increases during times of improving economic growth, as our ability to lease space outpaces vacancies that occur upon the expirations of existing leases. Average occupancy generally declines during times of slower or negative economic growth and decreasing office employment because new vacancies tend to outpace our ability to lease space. In addition, the timing of changes in occupancy levels tends to lag the timing of changes in overall economic activity and employment levels. For additional information regarding our average occupancy and rental rate trends over the past five years, please read “Item 2. Properties – Wholly Owned Properties” in our 2010 Annual Report. Lower rental revenues resulting from lower average occupancy or lower rental rates with respect to our same property portfolio will generally reduce our operating results unless offset by the impact of any newly acquired or developed properties or lower variable operating expenses, general and administrative expenses and/or interest expense.

We face considerable competition in the leasing market and may be unable to renew existing leases or re-let space on terms similar to the existing leases, or we may expend significant capital in our efforts to re-let space, which may adversely affect our operating results. Approximately 10-15% of our rental revenues at the beginning of any particular year are subject to leases that expire by the end of that year. Please read “Item 2. Properties – Lease Expirations” in our 2010 Annual Report. As a result, in addition to seeking to increase our average occupancy by leasing current vacant space, we also concentrate our leasing efforts on renewing leases on expiring space.  Because we compete with a number of other developers, owners and operators of office and office-oriented, mixed-use properties, we may be unable to renew leases with our existing customers and, if our current customers do not renew their leases, we may be unable to re-let the space to new customers. To the extent that we are able to renew leases that are scheduled to expire in the short-term or re-let such space to new customers, heightened competition resulting from adverse market conditions may require us to utilize rent concessions and tenant improvements to a greater extent than we historically have. Further, customers may seek to downsize by leasing less space from us upon any renewal.

If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our customers, we may lose potential customers, and we may be pressured to reduce our rental rates below those we currently charge in order to retain customers upon expiration of their existing leases. Even if our customers renew their leases or we are able to re-let the space, the terms and other costs of renewal or re-letting, including the cost of required renovations, increased tenant improvement allowances, leasing commissions, reduced rental rates and other potential concessions, may be less favorable than the terms of our current leases and could require significant capital expenditures. From time to time, we may also agree to modify the terms of existing leases to incentivize customers to renew their leases.  If we are unable to renew leases or re-let space in a reasonable time, or if our rental rates decline or our tenant improvement costs, leasing commissions or other costs increase, our financial condition, cash flows, cash available for distribution, value of our common stock, and ability to satisfy our debt service obligations could be materially adversely affected.

Difficulties or delays in renewing leases with large customers or re-leasing space vacated by large customers could materially impact our operating results. While no customer other than the federal government currently accounts for more than 3.5% of our revenues, the 20 largest customers of our wholly owned properties account for nearly one-third of our revenues. Please read “Item 2. Properties – Customers” in our 2010 Annual Report. Customers that currently account for more than 1.5% of our revenues include the Federal Government, AT&T, PricewaterhouseCoopers, the State of Georgia and Healthways. There are no assurances that these customers, or any of our other large customers, will renew all or any of their space upon expiration of their current leases.

 
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Some of our leases provide customers with the right to terminate their leases early, which could have an adverse effect on our cash flow and results of operations.  Certain of our leases permit our customers to terminate their leases as to all or a portion of the leased premises prior to their stated lease expiration dates under certain circumstances, such as providing notice by a certain date and, in most cases, paying a termination fee. To the extent that our customers exercise early termination rights, our cash flow and earnings will be adversely affected, and we can provide no assurances that we will be able to generate an equivalent amount of net effective rent by leasing the vacated space to new third party customers.

An oversupply of space in our markets would typically cause rental rates and occupancies to decline, making it more difficult for us to lease space at attractive rental rates, if at all. Undeveloped land in many of the markets in which we operate is generally more readily available and less expensive than in higher barrier-to-entry markets such as New York, Chicago, Boston, San Francisco and Los Angeles. As a result, even during times of positive economic growth, our competitors could construct new buildings that would compete with our properties. Any such oversupply could result in lower occupancy and rental rates in our portfolio, which would have a negative impact on our operating results.

In order to maintain the quality of our properties and successfully compete against other properties, we periodically must spend money to maintain, repair and renovate our properties, which reduces our cash flows. If our properties are not as attractive to customers due to physical condition as properties owned by our competitors, we could lose customers or suffer lower rental rates. As a result, we may from time to time be required to make significant capital expenditures to maintain the competitiveness of our properties. There can be no assurances that any such expenditures would result in higher occupancy or higher rental rates or deter existing customers from relocating to properties owned by our competitors.

Our operating results and financial condition could be adversely affected by financial difficulties experienced by a major customer, or by a number of smaller customers, including bankruptcies, insolvencies or general downturns in business. The success of our investments and stability of our operations depend on the financial stability of our customers. A default or termination by a significant customer on its lease payments to us would cause us to lose the revenue associated with such lease. In the event of a customer default or bankruptcy, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-leasing the property. We cannot evict a customer solely because of its bankruptcy.  On the other hand, a court might authorize the customer to reject and terminate its lease.  In such case, our claim against the bankrupt customer for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease.  As a result, our claim for unpaid rent would likely not be paid in full.  If a customer defaults on or terminates a significant lease, we may not be able to recover the full amount of unpaid rent or be able to lease the property for the rent previously received, if at all. In any of these instances, we may also be required to write off deferred leasing costs and accrued straight-line rents receivable. These events would adversely impact our operating results.

Costs of complying with governmental laws and regulations may reduce our operating results. All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. Some of these laws and regulations may impose joint and several liability on customers, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may hinder our ability to sell, rent or pledge such property as collateral for future borrowings.

Compliance with new laws or regulations or stricter interpretation of existing laws may require us to incur significant expenditures. Future laws or regulations may impose significant environmental liability. Additionally, our customers’ operations, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties may affect our properties. In addition, there are various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply and that may subject us to liability in the form of fines or damages for noncompliance. Any expenditures, fines or damages we must pay would reduce our operating results. Proposed legislation to address climate change could increase utility and other costs of operating our properties which, if not offset by rising rental income, would reduce our net income.

 
57

 



Discovery of previously undetected environmentally hazardous conditions may decrease our operating results and limit our ability to make distributions. Under various federal, state and local environmental laws and regulations, a current or previous property owner or operator may be liable for the cost to remove or remediate hazardous or toxic substances on such property. These costs could be significant. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require significant expenditures or prevent us from entering into leases with prospective customers that may be impacted by such laws. Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing materials. Third parties may seek recovery from real property owners or operators for personal injury or property damage associated with exposure to released hazardous substances. The cost of defending against claims of liability, of complying with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could reduce our operating results.

Our operating results may suffer if costs of operating our properties, such as real estate taxes, utilities, insurance, maintenance and other costs, rise faster than our ability to increase rental revenues. While we receive additional rent from our customers that is based on recovering a portion of operating expenses, increased operating expenses will negatively impact our operating results. Our revenues and expense recoveries are subject to longer-term leases and may not be quickly increased sufficient to recover an increase in operating costs and expenses. Furthermore, the costs associated with owning and operating a property are not necessarily reduced when circumstances such as market factors and competition cause a reduction in rental revenues from the property. Increases in same property operating expenses would reduce our operating results unless offset by the impact of any newly acquired or developed properties or lower general and administrative expenses and/or interest expense.

Recent and future acquisitions and development properties may fail to perform in accordance with our expectations and may require renovation and development costs exceeding our estimates. In the normal course of business, we typically evaluate potential acquisitions, enter into non-binding letters of intent, and may, at any time, enter into contracts to acquire additional properties. Acquired properties may fail to perform in accordance with our expectations due to lease-up risk, renovation cost risks and other factors. In addition, the renovation and improvement costs we incur in bringing an acquired property up to market standards may exceed our estimates. We may not have the financial resources to make suitable acquisitions or renovations on favorable terms or at all.

Further, we face significant competition for attractive investment opportunities from an indeterminate number of other real estate investors, including investors with significantly greater capital resources and access to capital than we have, such as domestic and foreign corporations and financial institutions, publicly-traded and privately-held REITs, private institutional investment funds, investment banking firms, life insurance companies and pension funds. Moreover, owners of office properties may be reluctant to sell, resulting in fewer acquisition opportunities. As a result of such increased competition and limited opportunities, we may be unable to acquire additional properties or the purchase price of such properties may be significantly elevated, which may impede our growth and materially and adversely affect us.

In addition to acquisitions, we periodically consider developing and re-developing properties. Risks associated with development and re-development activities include:
 
 
·
the unavailability of favorable construction and/or permanent financing;

 
·
construction costs exceeding original estimates;
 
 
·
construction and lease-up delays resulting in increased debt service expense and construction costs; and

 
·
lower than anticipated occupancy rates and rents causing a property to be unprofitable or less profitable than originally estimated.

 
58

 



Development and re-development activities are also subject to risks relating to our ability to obtain, or delays in obtaining, all necessary zoning, land-use, building, occupancy and other required governmental and utility company authorizations.

Illiquidity of real estate investments and the tax effect of dispositions could significantly impede our ability to sell assets or respond to favorable or adverse changes in the performance of our properties. Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties in our portfolio in response to changing economic, financial and investment conditions is limited. In addition, we have a significant amount of mortgage debt under which we would incur significant prepayment penalties if such loans were paid off in connection with the sale of the underlying real estate assets.

We intend to continue to sell some of our properties in the future as part of our investment strategy and activities. However, we cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether the price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and close the sale of a property.

Certain of our properties have low tax bases relative to their estimated current fair values, and accordingly, the sale of such assets would generate significant taxable gains unless we sold such properties in a tax-deferred exchange under Section 1031 of the Internal Revenue Code or another tax-free or tax-deferred transaction. For an exchange to qualify for tax-deferred treatment under Section 1031, the net proceeds from the sale of a property must be held by an escrow agent until applied toward the purchase of real estate qualifying for gain deferral. Given the competition for properties meeting our investment criteria, there could be a delay in reinvesting such proceeds. Any delay in using the reinvestment proceeds to acquire additional income producing assets would reduce our operating results.

Because holders of Common Units, including one of the Company’s officers and two of the Company’s directors, may suffer adverse tax consequences upon the sale of some of our properties, they may seek to influence us not to sell certain properties even if such a sale would otherwise be in our best interest. Holders of Common Units may suffer adverse tax consequences upon the sale of certain properties. Therefore, holders of Common Units, including one of our officers and two of our directors, may have different objectives than our stockholders regarding the appropriate pricing and timing of a property’s sale. Although the Company is the sole general partner of the Operating Partnership and has the exclusive authority to sell any of our wholly owned properties, officers and directors who hold Common Units may seek to influence us not to sell certain properties even if such sale might be financially advantageous to stockholders, creditors, bondholders or our business as a whole or influence us to enter into tax deferred exchanges with the proceeds of such sales when such a reinvestment might not otherwise be in our best interest.
 
The value of our joint venture investments could be adversely affected if we are unable to work effectively with our partners or our partners become unable to satisfy their financial obligations. Instead of owning properties directly, we have in some cases invested, and may continue to invest, as a partner or a co-venturer with one or more third parties. Under certain circumstances, this type of investment may involve risks not otherwise present, including the possibility that a partner or co-venturer might be unable to fund its obligations or might have business interests or goals inconsistent with ours. Also, such a partner or co-venturer may take action contrary to our requests or contrary to provisions in our joint venture agreements that could harm us. If we want to sell our interests in any of our joint ventures or believe that the properties in the joint venture should be sold, we may not be able to do so in a timely manner or at all, and our partner(s) may not cooperate with our desires, which could harm us.

Our insurance coverage on our properties may be inadequate. We carry insurance on all of our properties, including insurance for liability, fire, windstorms, floods, earthquakes and business interruption. Insurance companies, however, limit coverage against certain types of losses, such as losses due to terrorist acts, named windstorms, earthquakes and toxic mold. Thus, we may not have insurance coverage, or sufficient insurance coverage, against certain types of losses and/or there may be decreases in the insurance coverage available. Should an uninsured loss or a loss in excess of our insured limits occur, we could lose all or a portion of the capital we have invested in a property or properties, as well as the anticipated future revenue from the property or properties. If any of our properties were to experience a catastrophic loss, it could disrupt our operations, delay revenue and result in large expenses to repair or rebuild the property. Further, if any our insurance carriers were to become insolvent, we would be forced to replace the existing insurance coverage with another suitable carrier, and any outstanding claims would be at risk for collection. In such an event, we cannot be certain that we would be able to replace the coverage at similar or otherwise favorable terms. Such events could adversely affect our operating results and financial condition.

 
59

 



Our use of debt to finance our operations could have a material adverse effect on our cash flow and ability to make distributions. We are subject to risks associated with debt financing, such as the sufficiency of cash flow to meet required payment obligations, ability to comply with financial ratios and other covenants and the availability of capital to refinance existing indebtedness or fund important business initiatives. Increases in interest rates on our variable rate debt would increase our interest expense. If we fail to comply with the financial ratios and other covenants under our credit facilities, we would likely not be able to borrow any further amounts under such facilities, which could adversely affect our ability to fund our operations, and our lenders could accelerate outstanding debt. Further, we are currently assigned corporate credit ratings from Moody’s Investors Service and Standard and Poor’s Rating Services based on their evaluation of our creditworthiness. These agencies’ ratings are based on a number of factors, some of which are not within our control. In addition to factors specific to our financial strength and performance, the rating agencies also consider conditions affecting REITs generally. We cannot assure you that our credit rating will not be downgraded. If our credit ratings are downgraded or other negative action is taken, we could be required, among other things, to pay additional interest and fees on outstanding borrowings under our revolving credit facility.

We generally do not intend to reserve funds to retire existing secured or unsecured debt upon maturity. We may not be able to repay, refinance or extend any or all of our debt at maturity or upon any acceleration. If any refinancing is done at higher interest rates, the increased interest expense could adversely affect our cash flow and ability to pay distributions. Any such refinancing could also impose tighter financial ratios and other covenants that restrict our ability to take actions that could otherwise be in our best interest, such as funding new development activity, making opportunistic acquisitions, repurchasing our securities or paying distributions. If we do not meet our mortgage financing obligations, any properties securing such indebtedness could be foreclosed on, which could have a material adverse effect on our cash flow and ability to pay distributions.

From time to time, we depend on 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 upon maturity. Our ability to borrow under the revolving credit facility also allows us to quickly capitalize on accretive opportunities at short-term interest rates. If our lenders default under their obligations under the revolving credit facility or we become unable to borrow additional funds under the facility for any reason, we would be required to seek alternative equity or debt capital, which could be more costly and adversely impact our financial condition. If such alternative capital were unavailable, we may not be able to make new investments and could have difficulty repaying other debt.
 
The Company may be subject to taxation as a regular corporation if it fails to maintain its REIT status, whichcould also have a material adverse effect on the Company’s stockholders and on the Operating Partnership. We may be subject to adverse consequences if the Company fails to continue to qualify as a REIT for federal income tax purposes. While we intend to operate in a manner that will allow the Company to continue to qualify as a REIT, we cannot provide any assurances that the Company will remain qualified as such in the future, which would have particularly adverse consequences to the Company’s stockholders. Many of the requirements for taxation as a REIT are highly technical and complex and depend upon various factual matters and circumstances that may not be entirely within our control. For example, to qualify as a REIT, at least 95.0% of our gross income must come from certain sources that are itemized in the REIT tax laws. The fact that the Company holds virtually all of its assets through the Operating Partnership and its subsidiaries further complicates the application of the REIT requirements. Even a technical or inadvertent mistake could jeopardize our REIT status. Furthermore, Congress and the Internal Revenue Service might change the tax laws and regulations and the courts might issue new rulings that make it more difficult, or impossible, for the Company to remain qualified as a REIT. If the Company fails to qualify as a REIT, it would be subject to federal income tax at regular corporate rates and would, therefore, have less cash available for investments or payment of principal and interest to creditors or bondholders. Such events would likely have a significant adverse effect on our operating results and financial condition.

The market value of the Common Stock can be adversely affected by many factors. As with any public company, a number of factors may adversely influence the public market price of the Common Stock.  These factors include:
 
 
·
the level of institutional interest in us;
 
 
·
the perceived attractiveness of investment in us, in comparison to other REITs;

 
 
60

 

 
 
·
the attractiveness of securities of REITs in comparison to other asset classes taking into account, among other things, that a substantial portion of REITs’ dividends are taxed as ordinary income;
 
 
·
our financial condition and performance;
 
 
·
the market’s perception of our growth potential and potential future cash dividends;
 
 
·
government action or regulation, including changes in tax law;
 
 
·
increases in market interest rates, which may lead investors to expect a higher annual yield from our distributions in relation to the price of the Common Stock;
 
 
·
changes in federal tax laws;
 
 
·
changes in our credit ratings; and
 
 
·
any negative change in the level of our dividend.
 
We cannot assure you that we will continue to pay dividends and distributions at historical rates.  We generally expect to use cash flows from operating activities to fund dividends and distributions. The following factors will affect such cash flows and, accordingly, influence the decisions of the Company’s board of directors regarding dividends:
 
 
·
debt service requirements after taking into account debt covenants and the repayment and restructuring of certain indebtedness and the availability of alternative sources of debt and equity capital and their impact on our ability to refinance existing debt and grow our business;
 
 
·
scheduled increases in base rents of existing leases;
 
 
·
changes in rents attributable to the renewal of existing leases or replacement leases;
 
 
·
changes in occupancy rates at existing properties and execution of leases for newly acquired or developed properties;
 
 
·
operating expenses;
 
 
·
anticipated leasing capital expenditures attributable to the renewal of existing leases or replacement leases;
 
 
·
anticipated building improvements; and
 
 
·
expected cash flows from financing and investing activities.
 
The decision to declare and pay dividends on the Common Stock in the future, as well as the timing, amount and composition of any such future dividends, will be at the sole discretion of the Company’s board of directors Any change in our dividend policy could have a material adverse effect on the market price of the Common Stock.

Cash distributions reduce the amount of cash that would otherwise be available for other business purposes, including funding debt maturities or future growth initiatives. For the Company to maintain its qualification as a REIT, it must annually distribute to its stockholders at least 90% of REIT taxable income, excluding net capital gains. In addition, although capital gains are not required to be distributed to maintain REIT status, capital gains, if any, that are generated as part of our capital recycling program are subject to federal and state income tax unless such gains are distributed to our stockholders. Cash distributions made to stockholders to maintain REIT status or to distribute otherwise taxable capital gains limit our ability to accumulate capital for other business purposes, including funding debt maturities or growth initiatives.

 
61

 
 
Because provisions contained in Maryland law, the Company’s charter and the Company’s bylaws may have an anti-takeover effect, stockholders may be prevented from receiving a “control premium” for the Common Stock. Provisions contained in the Company’s charter and bylaws as well as Maryland general corporation law may have anti-takeover effects that delay, defer or prevent a takeover attempt, and thereby prevent our stockholders from receiving a “control premium” for their shares. For example, these provisions may defer or prevent tender offers for the Common Stock or purchases of large blocks of the Common Stock, thus limiting the opportunities for the Company’s stockholders to receive a premium for their shares of Common Stock over then-prevailing market prices. These provisions include the following:
 
 
·
Ownership limit. The Company's charter prohibits direct, indirect or constructive ownership by any person or entity of more than 9.8% of our outstanding capital stock. Any attempt to own or transfer shares of capital stock in excess of the ownership limit without the consent of the Company's board of directors will be void.
 
 
·
Preferred Stock. The Company’s charter authorizes the board of directors to issue preferred stock in one or more classes and to establish the preferences and rights of any class of preferred stock issued. These actions can be taken without stockholder approval. The issuance of preferred stock could have the effect of delaying or preventing someone from taking control of the Company, even if a change in control were in our best interest.
 
 
·
Maryland unsolicited takeover statute. Under Maryland law, the Company’s board of directors could adopt various anti-takeover provisions without the consent of stockholders. The adoption of such measures could discourage offers for the Company or make an acquisition of the Company more difficult, even when an acquisition would be in the best interest of the Company’s stockholders.
 
 
·
Anti-takeover protections of operating partnership agreement. Upon a change in control of the Company, the partnership agreement of the Operating Partnership requires certain acquirers to maintain an umbrella partnership real estate investment trust structure with terms at least as favorable to the limited partners as are currently in place. For instance, the acquirer would be required to preserve the limited partner’s right to continue to hold tax-deferred partnership interests that are redeemable for capital stock of the acquirer. Exceptions would require the approval of two-thirds of the limited partners of our operating partnership (other than our company). These provisions may make a change of control transaction involving our company more complicated and therefore might decrease the likelihood of such a transaction occurring, even if such a transaction would be in the best interest of the Company’s stockholders.
 
 
 
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ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITES AND USE OF PROCEEDS

During the second quarter of 2011, the Company issued an aggregate of 13,096 shares of Common Stock to holders of Common Units in the Operating Partnership upon the redemption of a like number of Common Units in private offerings exempt from the registration requirements pursuant to Section 4(2) of the Securities Act. Each of the holders of Common Units was an accredited investor under Rule 501 of the Securities Act. The resale of such shares was registered by the Company under the Securities Act.
 
ITEM 5. OTHER EVENTS

 As previously reported, at the Company’s annual meeting of stockholders held on May 12, 2011, a substantial majority of the holders of our common stock cast advisory votes supporting the recommendation of the Company’s Board of Directors that stockholders be provided the opportunity to cast advisory votes on our executive compensation programs every year.  An advisory vote on executive compensation is referred to as a “say-on-pay vote.”   In light of the Board’s recommendation and the preference of our stockholders as expressed at the annual meeting, the Company has decided to hold say-on-pay votes at its annual meeting every year.
 
ITEM 6.  EXHIBITS

Exhibit
Number
Description
   
10.1
Third Amended and Restated Credit Agreement, dated as of July 27, 2011, by and among the Company, the Operating Partnership and the Subsidiaries named therein and the Lenders named therein
   
10.2
Amendment No. 1, dated as of July 27, 2011, to Credit Agreement, dated as of February 2, 2011, by and among the Company, the Operating Partnership and the Subsidiaries named therein and the Lenders named therein
   
12.1
Statement re: Computation of Ratios of the Company
   
12.2
Statement re: Computation of Ratios of the Operating Partnership
   
31.1
Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act for the Company
   
31.2
Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act for the Company
   
31.3
Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act for the Operating Partnership
   
31.4
Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act for the Operating Partnership
   
32.1
Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act for the Company
   
32.2
Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act for the Company
   
32.3
Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act for the Operating Partnership
   
32.4
Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act for the Operating Partnership
   
101.INS
XBRL Instance Document*
   
101.SCH
XBRL Taxonomy Extension Schema Document*
   
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document*
   
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document*
   
101.LAB
XBRL Extension Labels Linkbase*
   
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document*

__________
 
* To be filed by amendment as permitted by the 30-day grace period set forth in SEC Release 33-9002.

 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, each of the registrants has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


   
Highwoods Properties, Inc.
 
   
By: 
 
/s/ Terry L. Stevens
     
Terry L. Stevens
     
Senior Vice President and Chief Financial Officer
       



   
Highwoods Realty Limited Partnership
 
   
By: Highwoods Properties, Inc., its sole general partner
 
   
By: 
 
/s/ Terry L. Stevens
     
Terry L. Stevens
     
Senior Vice President and Chief Financial Officer
       


Date: July 29, 2011


 
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