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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2015
 
HIGHWOODS PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
 
Maryland
001-13100
56-1871668
 
 
(State or other jurisdiction
of incorporation or organization)
(Commission
File Number)
(I.R.S. Employer
Identification Number)
 
 
HIGHWOODS REALTY LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
 
North Carolina
000-21731
56-1869557
 
 
(State or other jurisdiction
of incorporation or organization)
(Commission
File Number)
(I.R.S. Employer
Identification Number)
 
 
3100 Smoketree Court, Suite 600
Raleigh, NC 27604
(Address of principal executive offices) (Zip Code)
919-872-4924
(Registrants’ telephone number, including area code)
______________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Highwoods Properties, Inc.  Yes  x    No ¨    Highwoods Realty Limited Partnership  Yes  x    No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Highwoods Properties, Inc.  Yes  x    No ¨    Highwoods Realty Limited Partnership  Yes  x    No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of 'large accelerated filer,' 'accelerated filer' and 'smaller reporting company' in Rule 12b-2 of the Securities Exchange Act.
Highwoods Properties, Inc.
Large accelerated filer x    Accelerated filer ¨      Non-accelerated filer ¨      Smaller reporting company ¨
Highwoods Realty Limited Partnership
Large accelerated filer ¨    Accelerated filer ¨      Non-accelerated filer x      Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).
Highwoods Properties, Inc.  Yes  ¨    No x    Highwoods Realty Limited Partnership  Yes  ¨    No x
 
The Company had 94,052,036 shares of Common Stock outstanding as of April 20, 2015.
 




EXPLANATORY NOTE

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

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

Certain information contained herein is presented as of April 20, 2015, the latest practicable date for financial information prior to the filing of this Quarterly Report.

This report combines the Quarterly Reports on Form 10-Q for the period ended March 31, 2015 of the Company and the Operating Partnership. We believe combining the quarterly reports into this single report results in the following benefits:

combined reports better reflect how management and investors view the business as a single operating unit;

combined reports enhance investors' understanding of the Company and the Operating Partnership by enabling them to view the business as a whole and in the same manner as management;

combined reports are more efficient for the Company and the Operating Partnership and result in savings in time, effort and expense; and

combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review.

To help investors understand the significant differences between the Company and the Operating Partnership, this report presents the following separate sections for each of the Company and the Operating Partnership:

Consolidated Financial Statements;

the following Notes to Consolidated Financial Statements:

Note 8 - Noncontrolling Interests; and

Note 13 - Earnings Per Share and Per Unit;

Item 4 - Controls and Procedures; and

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





HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP

QUARTERLY REPORT FOR THE PERIOD ENDED MARCH 31, 2015

TABLE OF CONTENTS

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



2


PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HIGHWOODS PROPERTIES, INC.
Consolidated Balance Sheets
(Unaudited and in thousands, except share and per share data)
 
March 31,
2015
 
December 31,
2014
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
400,850

 
$
388,807

Buildings and tenant improvements
3,941,463

 
3,840,379

Development in process
133,688

 
205,971

Land held for development
75,888

 
79,355

 
4,551,889

 
4,514,512

Less-accumulated depreciation
(1,056,028
)
 
(1,033,106
)
Net real estate assets
3,495,861

 
3,481,406

Real estate and other assets, net, held for sale
2,980

 
1,038

Cash and cash equivalents
11,381

 
8,832

Restricted cash
11,852

 
14,595

Accounts receivable, net of allowance of $1,647 and $1,314, respectively
28,385

 
48,557

Mortgages and notes receivable, net of allowance of $468 and $275, respectively
14,137

 
13,116

Accrued straight-line rents receivable, net of allowance of $530 and $600, respectively
147,597

 
142,037

Investments in and advances to unconsolidated affiliates
27,056

 
27,071

Deferred financing and leasing costs, net of accumulated amortization of $115,342 and $112,804, respectively
224,270

 
228,768

Prepaid expenses and other assets, net of accumulated amortization of $14,770 and $14,259,
respectively
46,297

 
39,489

Total Assets
$
4,009,816

 
$
4,004,909

Liabilities, Noncontrolling Interests in the Operating Partnership and Equity:
 
 
 
Mortgages and notes payable
$
2,089,226

 
$
2,071,389

Accounts payable, accrued expenses and other liabilities
203,001

 
237,633

Financing obligations
23,519

 
23,519

Total Liabilities
2,315,746

 
2,332,541

Commitments and contingencies

 

Noncontrolling interests in the Operating Partnership
133,226

 
130,048

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), 29,050 and 29,060 shares issued and outstanding, respectively
29,050

 
29,060

Common Stock, $.01 par value, 200,000,000 authorized shares;
 
 
 
94,047,118 and 92,907,310 shares issued and outstanding, respectively
940

 
929

Additional paid-in capital
2,504,867

 
2,464,275

Distributions in excess of net income available for common stockholders
(986,388
)
 
(966,141
)
Accumulated other comprehensive loss
(5,709
)
 
(3,912
)
Total Stockholders’ Equity
1,542,760

 
1,524,211

Noncontrolling interests in consolidated affiliates
18,084

 
18,109

Total Equity
1,560,844

 
1,542,320

Total Liabilities, Noncontrolling Interests in the Operating Partnership and Equity
$
4,009,816

 
$
4,004,909


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
March 31,
 
2015
 
2014
Rental and other revenues
$
157,310

 
$
148,453

Operating expenses:
 
 
 
Rental property and other expenses
57,513

 
56,390

Depreciation and amortization
50,308

 
48,165

General and administrative
11,437

 
10,714

Total operating expenses
119,258

 
115,269

Interest expense:
 
 
 
Contractual
20,442

 
20,750

Amortization of deferred financing costs
800

 
652

Financing obligations
181

 
(40
)
 
21,423

 
21,362

Other income:
 
 
 
Interest and other income
1,238

 
1,399

 
1,238


1,399

Income from continuing operations before disposition of investment properties and activity in
unconsolidated affiliates
17,867

 
13,221

Gains on disposition of property
1,157

 

Equity in earnings/(losses) of unconsolidated affiliates
1,811

 
(29
)
Income from continuing operations
20,835

 
13,192

Discontinued operations:
 
 
 
Net gains on disposition of discontinued operations

 
384

 

 
384

Net income
20,835

 
13,576

Net (income) attributable to noncontrolling interests in the Operating Partnership
(596
)
 
(398
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(296
)
 
(423
)
Dividends on Preferred Stock
(627
)
 
(627
)
Net income available for common stockholders
$
19,316


$
12,128

Earnings per Common Share – basic:
 
 
 
Income from continuing operations available for common stockholders
$
0.21

 
$
0.13

Income from discontinued operations available for common stockholders

 

Net income available for common stockholders
$
0.21

 
$
0.13

Weighted average Common Shares outstanding – basic
93,222

 
89,966

Earnings per Common Share – diluted:
 
 
 
Income from continuing operations available for common stockholders
$
0.21

 
$
0.13

Income from discontinued operations available for common stockholders

 

Net income available for common stockholders
$
0.21

 
$
0.13

Weighted average Common Shares outstanding – diluted
96,279

 
93,030

Dividends declared per Common Share
$
0.425

 
$
0.425

Net income available for common stockholders:
 
 
 
Income from continuing operations available for common stockholders
$
19,316

 
$
11,756

Income from discontinued operations available for common stockholders

 
372

Net income available for common stockholders
$
19,316

 
$
12,128

See accompanying notes to consolidated financial statements.

4


HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Comprehensive Income
(Unaudited and in thousands)
 
Three Months Ended
March 31,
 
2015
 
2014
Comprehensive income:
 
 
 
Net income
$
20,835

 
$
13,576

Other comprehensive loss:
 
 
 
Unrealized gains on tax increment financing bond
193

 
165

Unrealized losses on cash flow hedges
(2,914
)
 
(1,404
)
Amortization of cash flow hedges
924

 
928

Total other comprehensive loss
(1,797
)
 
(311
)
Total comprehensive income
19,038

 
13,265

Less-comprehensive (income) attributable to noncontrolling interests
(892
)
 
(821
)
Comprehensive income attributable to common stockholders
$
18,146

 
$
12,444


See accompanying notes to consolidated financial statements.



5


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

 
Number of Common Shares
 
Common Stock
 
Series A Cumulative Redeemable Preferred Shares
 
Additional Paid-In Capital
 
Accumulated Other Compre-hensive Loss
 
Non-controlling Interests in Consolidated Affiliates
 
Distributions in Excess of Net Income Available for Common Stockholders
 
Total
Balance at December 31, 2014
92,907,310

 
$
929

 
$
29,060

 
$
2,464,275

 
$
(3,912
)
 
$
18,109

 
$
(966,141
)
 
$
1,542,320

Issuances of Common Stock, net of issuance costs and tax withholdings
989,417

 
10

 

 
40,557

 

 

 

 
40,567

Conversions of Common Units to Common Stock
26,820

 

 

 
1,206

 

 

 

 
1,206

Dividends on Common Stock


 

 

 

 

 

 
(39,563
)
 
(39,563
)
Dividends on Preferred Stock


 

 

 

 

 

 
(627
)
 
(627
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value


 

 

 
(5,036
)
 

 

 

 
(5,036
)
Distributions to noncontrolling interests in consolidated affiliates


 

 

 

 

 
(321
)
 

 
(321
)
Issuances of restricted stock
123,571

 

 

 

 

 

 

 

Redemptions/repurchases of Preferred Stock
 
 

 
(10
)
 

 

 

 

 
(10
)
Share-based compensation expense, net of forfeitures


 
1

 

 
3,865

 

 

 

 
3,866

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


 

 

 

 

 

 
(596
)
 
(596
)
Net (income) attributable to noncontrolling interests in consolidated affiliates


 

 

 

 

 
296

 
(296
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income


 

 

 

 

 

 
20,835

 
20,835

Other comprehensive loss


 

 

 

 
(1,797
)
 

 

 
(1,797
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
19,038

Balance at March 31, 2015
94,047,118

 
$
940

 
$
29,050

 
$
2,504,867

 
$
(5,709
)
 
$
18,084

 
$
(986,388
)
 
$
1,560,844



 
Number of Common Shares
 
Common Stock
 
Series A Cumulative Redeemable Preferred Shares
 
Additional Paid-In Capital
 
Accumulated Other Compre-hensive Loss
 
Non-controlling Interests in Consolidated Affiliates
 
Distributions in Excess of Net Income Available for Common Stockholders
 
Total
Balance at December 31, 2013
89,920,915

 
$
899

 
$
29,077

 
$
2,370,368

 
$
(2,611
)
 
$
21,396

 
$
(920,433
)
 
$
1,498,696

Issuances of Common Stock, net of issuance costs and tax withholdings
(8,427
)
 

 

 
153

 

 

 

 
153

Conversions of Common Units to Common Stock
4,417

 

 

 
162

 

 

 

 
162

Dividends on Common Stock

 

 

 

 

 

 
(38,225
)
 
(38,225
)
Dividends on Preferred Stock

 

 

 

 

 

 
(627
)
 
(627
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value

 

 

 
(7,434
)
 

 

 

 
(7,434
)
Distributions to noncontrolling interests in consolidated affiliates

 

 

 

 

 
(522
)
 

 
(522
)
Issuances of restricted stock
144,826

 

 

 

 

 

 

 

Share-based compensation expense, net of forfeitures

 
2

 

 
4,260

 

 

 

 
4,262

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

 

 

 

 

 

 
(398
)
 
(398
)
Net (income) attributable to noncontrolling interests in consolidated affiliates

 

 

 

 

 
423

 
(423
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 

 
13,576

 
13,576

Other comprehensive loss

 

 

 

 
(311
)
 

 

 
(311
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
13,265

Balance at March 31, 2014
90,061,731

 
$
901

 
$
29,077

 
$
2,367,509

 
$
(2,922
)
 
$
21,297

 
$
(946,530
)
 
$
1,469,332


See accompanying notes to consolidated financial statements.

6


HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
 
Three Months Ended
March 31,
 
2015
 
2014
Operating activities:
 
 
 
Net income
$
20,835

 
$
13,576

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
50,308

 
48,165

Amortization of lease incentives and acquisition-related intangible assets and liabilities
(67
)
 
82

Share-based compensation expense
3,866

 
4,262

Allowance for losses on accounts and accrued straight-line rents receivable
417

 
1,125

Accrued interest on mortgages and notes receivable
(170
)
 
(115
)
Amortization of deferred financing costs
800

 
652

Amortization of cash flow hedges
924

 
928

Amortization of mortgages and notes payable fair value adjustments
57

 
(809
)
Net gains on disposition of property
(1,157
)
 
(384
)
Equity in (earnings)/losses of unconsolidated affiliates
(1,811
)
 
29

Changes in financing obligations

 
(221
)
Distributions of earnings from unconsolidated affiliates
1,386

 
788

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
3,166

 
713

Prepaid expenses and other assets
(6,769
)
 
(5,260
)
Accrued straight-line rents receivable
(5,591
)
 
(6,457
)
Accounts payable, accrued expenses and other liabilities
(33,088
)
 
(25,690
)
Net cash provided by operating activities
33,106

 
31,384

Investing activities:
 
 
 
Investments in development in process
(11,232
)
 
(27,232
)
Investments in tenant improvements and deferred leasing costs
(30,008
)
 
(24,782
)
Investments in building improvements
(12,081
)
 
(13,007
)
Net proceeds from disposition of real estate assets
5,650

 

Distributions of capital from unconsolidated affiliates
394

 
230

Investments in mortgages and notes receivable
(938
)
 
(108
)
Repayments of mortgages and notes receivable
87

 
16,604

Changes in restricted cash and other investing activities
993

 
4,043

Net cash used in investing activities
(47,135
)
 
(44,252
)
Financing activities:
 
 
 
Dividends on Common Stock
(39,563
)
 
(38,225
)
Redemptions/repurchases of Preferred Stock
(10
)
 

Redemptions of Common Units

 
(93
)
Dividends on Preferred Stock
(627
)
 
(627
)
Distributions to noncontrolling interests in the Operating Partnership
(1,248
)
 
(1,249
)
Distributions to noncontrolling interests in consolidated affiliates
(321
)
 
(522
)
Proceeds from the issuance of Common Stock
44,937

 
1,313

Costs paid for the issuance of Common Stock
(643
)
 
(14
)
Repurchase of shares related to tax withholdings
(3,727
)
 
(1,523
)
Borrowings on revolving credit facility
110,900

 
96,100

Repayments of revolving credit facility
(91,900
)
 
(36,800
)
Repayments of mortgages and notes payable
(1,220
)
 
(2,236
)
Additions to deferred financing costs and other financing activities

 
(96
)
Net cash provided by financing activities
16,578

 
16,028

Net increase in cash and cash equivalents
$
2,549

 
$
3,160

See accompanying notes to consolidated financial statements.

7



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

 
Three Months Ended
March 31,
 
2015
 
2014
Net increase in cash and cash equivalents
$
2,549

 
$
3,160

Cash and cash equivalents at beginning of the period
8,832

 
10,184

Cash and cash equivalents at end of the period
$
11,381

 
$
13,344


Supplemental disclosure of cash flow information:
 
 
Three Months Ended
March 31,
 
2015
 
2014
Cash paid for interest, net of amounts capitalized
$
21,480

 
$
25,054


Supplemental disclosure of non-cash investing and financing activities:
 
 
Three Months Ended
March 31,
 
2015
 
2014
Unrealized losses on cash flow hedges
$
(2,914
)
 
$
(1,404
)
Conversions of Common Units to Common Stock
1,206

 
162

Changes in accrued capital expenditures
(2,697
)
 
5,399

Write-off of fully depreciated real estate assets
15,020

 
3,121

Write-off of fully amortized deferred financing and leasing costs
10,147

 
3,697

Adjustment of noncontrolling interests in the Operating Partnership to fair value
5,036

 
7,434

Unrealized gains on tax increment financing bond
193

 
165


See accompanying notes to consolidated financial statements.

8


HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Balance Sheets
(Unaudited and in thousands, except unit and per unit data)
 
March 31,
2015
 
December 31,
2014
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
400,850

 
$
388,807

Buildings and tenant improvements
3,941,463

 
3,840,379

Development in process
133,688

 
205,971

Land held for development
75,888

 
79,355

 
4,551,889

 
4,514,512

Less-accumulated depreciation
(1,056,028
)
 
(1,033,106
)
Net real estate assets
3,495,861

 
3,481,406

Real estate and other assets, net, held for sale
2,980

 
1,038

Cash and cash equivalents
11,381

 
8,938

Restricted cash
11,852

 
14,595

Accounts receivable, net of allowance of $1,647 and $1,314, respectively
28,385

 
48,557

Mortgages and notes receivable, net of allowance of $468 and $275, respectively
14,137

 
13,116

Accrued straight-line rents receivable, net of allowance of $530 and $600, respectively
147,597

 
142,037

Investments in and advances to unconsolidated affiliates
27,056

 
27,071

Deferred financing and leasing costs, net of accumulated amortization of $115,342 and $112,804, respectively
224,270

 
228,768

Prepaid expenses and other assets, net of accumulated amortization of $14,770 and $14,259,
respectively
46,297

 
39,489

Total Assets
$
4,009,816

 
$
4,005,015

Liabilities, Redeemable Operating Partnership Units and Capital:
 
 
 
Mortgages and notes payable
$
2,089,226

 
$
2,071,389

Accounts payable, accrued expenses and other liabilities
203,001

 
237,547

Financing obligations
23,519

 
23,519

Total Liabilities
2,315,746

 
2,332,455

Commitments and contingencies

 

Redeemable Operating Partnership Units:
 
 
 
Common Units, 2,910,135 and 2,936,955 outstanding, respectively
133,226

 
130,048

Series A Preferred Units (liquidation preference $1,000 per unit), 29,050 and 29,060 units issued and
outstanding, respectively
29,050

 
29,060

Total Redeemable Operating Partnership Units
162,276

 
159,108

Capital:
 
 
 
Common Units:
 
 
 
General partner Common Units, 965,484 and 954,355 outstanding, respectively
15,192

 
14,990

Limited partner Common Units, 92,672,825 and 91,544,146 outstanding, respectively
1,504,227

 
1,484,265

Accumulated other comprehensive loss
(5,709
)
 
(3,912
)
Noncontrolling interests in consolidated affiliates
18,084

 
18,109

Total Capital
1,531,794

 
1,513,452

Total Liabilities, Redeemable Operating Partnership Units and Capital
$
4,009,816

 
$
4,005,015


See accompanying notes to consolidated financial statements.

9


HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Income
(Unaudited and in thousands, except per unit amounts)
 
Three Months Ended
March 31,
 
2015
 
2014
Rental and other revenues
$
157,310

 
$
148,453

Operating expenses:
 
 
 
Rental property and other expenses
57,513

 
56,374

Depreciation and amortization
50,308

 
48,165

General and administrative
11,437

 
10,730

Total operating expenses
119,258

 
115,269

Interest expense:
 
 
 
Contractual
20,442

 
20,750

Amortization of deferred financing costs
800

 
652

Financing obligations
181

 
(40
)
 
21,423

 
21,362

Other income:
 
 
 
Interest and other income
1,238

 
1,399

 
1,238

 
1,399

Income from continuing operations before disposition of investment properties and activity in
unconsolidated affiliates
17,867

 
13,221

Gains on disposition of property
1,157

 

Equity in earnings/(losses) of unconsolidated affiliates
1,811

 
(29
)
Income from continuing operations
20,835

 
13,192

Discontinued operations:
 
 
 
Net gains on disposition of discontinued operations

 
384

 

 
384

Net income
20,835

 
13,576

Net (income) attributable to noncontrolling interests in consolidated affiliates
(296
)
 
(423
)
Distributions on Preferred Units
(627
)
 
(627
)
Net income available for common unitholders
$
19,912

 
$
12,526

Earnings per Common Unit – basic:
 
 
 
Income from continuing operations available for common unitholders
$
0.21

 
$
0.13

Income from discontinued operations available for common unitholders

 
0.01

Net income available for common unitholders
$
0.21

 
$
0.14

Weighted average Common Units outstanding – basic
95,746

 
92,497

Earnings per Common Unit – diluted:
 
 
 
Income from continuing operations available for common unitholders
$
0.21

 
$
0.13

Income from discontinued operations available for common unitholders

 
0.01

Net income available for common unitholders
$
0.21

 
$
0.14

Weighted average Common Units outstanding – diluted
95,870

 
92,621

Distributions declared per Common Unit
$
0.425

 
$
0.425

Net income available for common unitholders:
 
 
 
Income from continuing operations available for common unitholders
$
19,912

 
$
12,142

Income from discontinued operations available for common unitholders

 
384

Net income available for common unitholders
$
19,912

 
$
12,526

See accompanying notes to consolidated financial statements.

10


HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Comprehensive Income
(Unaudited and in thousands)
 
Three Months Ended
March 31,
 
2015
 
2014
Comprehensive income:
 
 
 
Net income
$
20,835

 
$
13,576

Other comprehensive loss:
 
 
 
Unrealized gains on tax increment financing bond
193

 
165

Unrealized losses on cash flow hedges
(2,914
)
 
(1,404
)
Amortization of cash flow hedges
924

 
928

Total other comprehensive loss
(1,797
)
 
(311
)
Total comprehensive income
19,038

 
13,265

Less-comprehensive (income) attributable to noncontrolling interests
(296
)
 
(423
)
Comprehensive income attributable to common unitholders
$
18,742

 
$
12,842


See accompanying notes to consolidated financial statements.


11


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

 
Common Units
 
Accumulated
Other
Comprehensive Loss
 
Noncontrolling
Interests in
Consolidated
Affiliates
 
Total
 
General
Partners’
Capital
 
Limited
Partners’
Capital
 
Balance at December 31, 2014
$
14,990

 
$
1,484,265

 
$
(3,912
)
 
$
18,109

 
$
1,513,452

Issuances of Common Units, net of issuance costs and tax withholdings
406

 
40,161

 

 

 
40,567

Distributions paid on Common Units
(406
)
 
(40,231
)
 

 

 
(40,637
)
Distributions paid on Preferred Units
(6
)
 
(621
)
 

 

 
(627
)
Share-based compensation expense, net of forfeitures
39

 
3,827

 

 

 
3,866

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(321
)
 
(321
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
(36
)
 
(3,508
)
 

 

 
(3,544
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(3
)
 
(293
)
 

 
296

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
208

 
20,627

 

 

 
20,835

Other comprehensive loss

 

 
(1,797
)
 

 
(1,797
)
Total comprehensive income
 
 
 
 
 
 
 
 
19,038

Balance at March 31, 2015
$
15,192

 
$
1,504,227

 
$
(5,709
)
 
$
18,084

 
$
1,531,794



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

 
$
1,436,498

 
$
(2,611
)
 
$
21,396

 
$
1,469,791

Issuances of Common Units, net of issuance costs and tax withholdings
2

 
151

 

 

 
153

Redemptions of Common Units
(1
)
 
(92
)
 

 

 
(93
)
Distributions paid on Common Units
(393
)
 
(38,907
)
 

 

 
(39,300
)
Distributions paid on Preferred Units
(6
)
 
(621
)
 

 

 
(627
)
Share-based compensation expense, net of forfeitures
43

 
4,219

 

 

 
4,262

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(522
)
 
(522
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
(66
)
 
(6,504
)
 

 

 
(6,570
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(4
)
 
(419
)
 

 
423

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
136

 
13,440

 

 

 
13,576

Other comprehensive loss

 

 
(311
)
 

 
(311
)
Total comprehensive income
 
 
 
 
 
 
 
 
13,265

Balance at March 31, 2014
$
14,219

 
$
1,407,765

 
$
(2,922
)
 
$
21,297

 
$
1,440,359


See accompanying notes to consolidated financial statements.

12


HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
 
Three Months Ended
March 31,
 
2015
 
2014
Operating activities:
 
 
 
Net income
$
20,835

 
$
13,576

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
50,308

 
48,165

Amortization of lease incentives and acquisition-related intangible assets and liabilities
(67
)
 
82

Share-based compensation expense
3,866

 
4,262

Allowance for losses on accounts and accrued straight-line rents receivable
417

 
1,125

Accrued interest on mortgages and notes receivable
(170
)
 
(115
)
Amortization of deferred financing costs
800

 
652

Amortization of cash flow hedges
924

 
928

Amortization of mortgages and notes payable fair value adjustments
57

 
(809
)
Net gains on disposition of property
(1,157
)
 
(384
)
Equity in (earnings)/losses of unconsolidated affiliates
(1,811
)
 
29

Changes in financing obligations

 
(221
)
Distributions of earnings from unconsolidated affiliates
1,386

 
788

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
3,166

 
713

Prepaid expenses and other assets
(6,769
)
 
(5,226
)
Accrued straight-line rents receivable
(5,591
)
 
(6,457
)
Accounts payable, accrued expenses and other liabilities
(33,002
)
 
(25,667
)
Net cash provided by operating activities
33,192

 
31,441

Investing activities:
 
 
 
Investments in development in process
(11,232
)
 
(27,232
)
Investments in tenant improvements and deferred leasing costs
(30,008
)
 
(24,782
)
Investments in building improvements
(12,081
)
 
(13,007
)
Net proceeds from disposition of real estate assets
5,650

 

Distributions of capital from unconsolidated affiliates
394

 
230

Investments in mortgages and notes receivable
(938
)
 
(108
)
Repayments of mortgages and notes receivable
87

 
16,604

Changes in restricted cash and other investing activities
993

 
4,043

Net cash used in investing activities
(47,135
)
 
(44,252
)
Financing activities:
 
 
 
Distributions on Common Units
(40,637
)
 
(39,300
)
Redemptions/repurchases of Preferred Units
(10
)
 

Redemptions of Common Units

 
(93
)
Distributions on Preferred Units
(627
)
 
(627
)
Distributions to noncontrolling interests in consolidated affiliates
(321
)
 
(522
)
Proceeds from the issuance of Common Units
44,937

 
1,313

Costs paid for the issuance of Common Units
(643
)
 
(14
)
Repurchase of units related to tax withholdings
(3,727
)
 
(1,523
)
Borrowings on revolving credit facility
110,900

 
96,100

Repayments of revolving credit facility
(91,900
)
 
(36,800
)
Repayments of mortgages and notes payable
(1,220
)
 
(2,236
)
Additions to deferred financing costs and other financing activities
(366
)
 
(338
)
Net cash provided by financing activities
16,386

 
15,960

Net increase in cash and cash equivalents
$
2,443

 
$
3,149

See accompanying notes to consolidated financial statements.

13



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

 
Three Months Ended
March 31,
 
2015
 
2014
Net increase in cash and cash equivalents
$
2,443

 
$
3,149

Cash and cash equivalents at beginning of the period
8,938

 
10,281

Cash and cash equivalents at end of the period
$
11,381

 
$
13,430


Supplemental disclosure of cash flow information:
 
 
Three Months Ended
March 31,
 
2015
 
2014
Cash paid for interest, net of amounts capitalized
$
21,480

 
$
25,054


Supplemental disclosure of non-cash investing and financing activities:
 
 
Three Months Ended
March 31,
 
2015
 
2014
Unrealized losses on cash flow hedges
$
(2,914
)
 
$
(1,404
)
Changes in accrued capital expenditures
(2,697
)
 
5,399

Write-off of fully depreciated real estate assets
15,020

 
3,121

Write-off of fully amortized deferred financing and leasing costs
10,147

 
3,697

Adjustment of Redeemable Common Units to fair value
3,178

 
6,328

Unrealized gains on tax increment financing bond
193

 
165


See accompanying notes to consolidated financial statements.

14


HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(tabular dollar amounts in thousands, except per share and per unit data)
(Unaudited)

1.    Description of Business and Significant Accounting Policies

Description of Business

Highwoods Properties, Inc. (the “Company”) is a fully integrated real estate investment trust (“REIT”) that provides leasing, management, development, construction and other customer-related services for its properties and for third parties. The Company conducts its activities through Highwoods Realty Limited Partnership (the “Operating Partnership”). At March 31, 2015, we owned or had an interest in 31.3 million rentable square feet of in-service properties, 1.2 million rentable square feet of properties under development and approximately 500 acres of development land.
 
The Company is the sole general partner of the Operating Partnership. At March 31, 2015, the Company owned all of the Preferred Units and 93.6 million, or 97.0%, of the Common Units in the Operating Partnership. Limited partners own the remaining 2.9 million Common Units. During the three months ended March 31, 2015, the Company redeemed 26,820 Common Units for a like number of shares of Common Stock.

Common Stock Offerings
 
During the three months ended March 31, 2015, the Company issued 914,126 shares of Common Stock under its equity sales agreements at an average gross sales price of $45.34 per share and received net proceeds, after sales commissions, of $40.8 million. As a result of this activity and the redemptions discussed above, the percentage of Common Units owned by the Company increased from 96.9% at December 31, 2014 to 97.0% at March 31, 2015.

Basis of Presentation

Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Company's Consolidated Financial Statements include the Operating Partnership, wholly owned subsidiaries and those entities in which the Company has the controlling interest. The Operating Partnership's Consolidated Financial Statements include wholly owned subsidiaries and those entities in which the Operating Partnership has the controlling interest. All intercompany transactions and accounts have been eliminated. At March 31, 2015 and December 31, 2014, we had involvement with, but are not the primary beneficiary in, an entity that we concluded to be a variable interest entity (see Note 3).

The unaudited interim consolidated financial statements and accompanying unaudited consolidated financial information, in the opinion of management, contain all adjustments (including normal recurring accruals) necessary for a fair presentation of our financial position, results of operations and cash flows. We have condensed or omitted certain notes and other information from the interim Consolidated Financial Statements presented in this Quarterly Report as permitted by SEC rules and regulations. These Consolidated Financial Statements should be read in conjunction with our 2014 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.


15

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


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

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

The FASB recently issued an accounting standards update that amends consolidation requirements. The amendments significantly change the consolidation analysis required under GAAP and will require companies to reevaluate all previous consolidation conclusions. The accounting standards update is required to be adopted in 2016. We are in the process of evaluating this accounting standards update.

The FASB recently issued an accounting standards update that requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The accounting standards update is required to be adopted in 2016. Retrospective application is required. We are in the process of evaluating this accounting standards update.

2.    Real Estate Assets

Dispositions
 
During the first quarter of 2015, we sold:

two buildings for an aggregate sale price of $3.5 million and recorded aggregate gains on disposition of property of $0.4 million; and

land for a sale price of $2.5 million and recorded a gain on disposition of property of $0.8 million.


16

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



3.    Mortgages and Notes Receivable

The following table sets forth our mortgages and notes receivable:

 
March 31,
2015
 
December 31,
2014
Mortgages receivable (including accrued interest)
$
11,931

 
$
10,869

Less allowance

 

 
11,931

 
10,869

Promissory notes
2,674

 
2,522

Less allowance
(468
)
 
(275
)
 
2,206

 
2,247

Mortgages and notes receivable, net
$
14,137

 
$
13,116


Mortgages receivable consist of secured financing provided to a third party. We concluded this arrangement to be an interest in a variable interest entity. However, since we do not have the power to direct matters that most significantly impact the activities of the entity, we do not qualify as the primary beneficiary. Accordingly, the entity is not consolidated. Our risk of loss with respect to this arrangement is limited to the carrying value of the mortgage receivable and the future infrastructure development funding commitment.

We evaluate the ability to collect our mortgages and notes receivable by monitoring the leasing statistics and/or market fundamentals of these assets. As of March 31, 2015, our mortgages and notes receivable were not in default and there were no other indicators of impairment.

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

 
Three Months Ended
March 31,
 
2015
 
2014
Beginning notes receivable allowance
$
275

 
$
302

Recoveries/write-offs/other
193

 
(2
)
Total notes receivable allowance
$
468

 
$
300


17

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



4.    Investments in and Advances to Affiliates

Unconsolidated Affiliates
 
We have equity interests of up to 50.0% in various joint ventures with unrelated third parties that are accounted for using the equity method of accounting because we have the ability to exercise significant influence over their operating and financial policies.
 
The following table sets forth the summarized income statements of our unconsolidated affiliates:
 
 
Three Months Ended
March 31,
 
2015
 
2014
Income Statements:
 
 
 
Rental and other revenues
$
12,231

 
$
12,434

Expenses:
 
 
 
Rental property and other expenses
5,667

 
6,217

Depreciation and amortization
3,115

 
3,489

Interest expense
2,149

 
2,211

Total expenses
10,931

 
11,917

Income before disposition of property
1,300

 
517

Gains on disposition of property
2,127

 
1,949

Net income
$
3,427

 
$
2,466

 
During the first quarter of 2015, Highwoods DLF 97/26 DLF 99/32, LP sold a building to an unrelated third party for a sale price of $7.0 million and recorded a gain on disposition of property of $2.1 million. We recorded $1.1 million as our share of this gain through equity in earnings of unconsolidated affiliates.

5.    Intangible Assets and Below Market Lease Liabilities
 
The following table sets forth total intangible assets and acquisition-related below market lease liabilities, net of accumulated amortization:
 
 
March 31,
2015
 
December 31,
2014
Assets:
 
 
 
Deferred financing costs
$
19,444

 
$
19,478

Less accumulated amortization
(8,697
)
 
(7,953
)
 
10,747

 
11,525

Deferred leasing costs (including lease incentives and above market lease and in-place lease acquisition-related intangible assets)
320,168

 
322,094

Less accumulated amortization
(106,645
)
 
(104,851
)
 
213,523

 
217,243

Deferred financing and leasing costs, net
$
224,270

 
$
228,768

 
 
 
 
Liabilities (in accounts payable, accrued expenses and other liabilities):
 
 
 
Acquisition-related below market lease liabilities
$
55,360

 
$
55,783

Less accumulated amortization
(14,857
)
 
(13,548
)
 
$
40,503

 
$
42,235


18

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


5.    Intangible Assets and Below Market Lease Liabilities - Continued

The following table sets forth amortization of intangible assets and below market lease liabilities:
 
 
Three Months Ended
March 31,
 
2015
 
2014
Amortization of deferred financing costs
$
800

 
$
652

Amortization of deferred leasing costs and acquisition-related intangible assets (in depreciation and amortization)
$
10,293

 
$
9,928

Amortization of lease incentives (in rental and other revenues)
$
362

 
$
351

Amortization of acquisition-related intangible assets (in rental and other revenues)
$
1,166

 
$
1,116

Amortization of acquisition-related intangible assets (in rental property and other expenses)
$
137

 
$
137

Amortization of acquisition-related below market lease liabilities (in rental and other revenues)
$
(1,732
)
 
$
(1,522
)
 
The following table sets forth scheduled future amortization of intangible assets and below market lease liabilities:
 
 
 
Amortization of Deferred Financing Costs
 
Amortization of Deferred Leasing Costs and Acquisition-Related Intangible Assets (in Depreciation and Amortization)
 
Amortization of Lease Incentives (in Rental and Other Revenues)
 
Amortization of Acquisition-Related Intangible Assets (in Rental and Other Revenues)
 
Amortization of Acquisition-Related Intangible Assets (in Rental Property and Other Expenses)
 
Amortization of Acquisition-Related Below Market Lease Liabilities (in Rental and Other Revenues)
April 1 through December 31, 2015
 
$
2,299

 
$
30,616

 
$
887

 
$
3,216

 
$
415

 
$
(4,700
)
2016
 
2,784

 
34,322

 
1,072

 
3,054

 
553

 
(5,570
)
2017
 
2,508

 
29,907

 
1,000

 
2,253

 
553

 
(5,298
)
2018
 
1,379

 
25,334

 
893

 
1,462

 
553

 
(5,135
)
2019
 
653

 
21,021

 
705

 
1,046

 
553

 
(4,804
)
Thereafter
 
1,124

 
48,503

 
2,214

 
2,858

 
533

 
(14,996
)
 
 
$
10,747

 
$
189,703

 
$
6,771

 
$
13,889

 
$
3,160

 
$
(40,503
)
Weighted average remaining amortization periods as of March 31, 2015 (in years)
 
4.2

 
6.9

 
8.0

 
6.2

 
5.7

 
8.0


6.    Mortgages and Notes Payable
 
The following table sets forth our mortgages and notes payable:
 
 
March 31,
2015
 
December 31,
2014
Secured indebtedness
$
311,502

 
$
312,868

Unsecured indebtedness
1,777,724

 
1,758,521

Total mortgages and notes payable
$
2,089,226

 
$
2,071,389

 
At March 31, 2015, our secured mortgage loans were collateralized by real estate assets with an aggregate undepreciated book value of $583.2 million.
 

19

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


6.    Mortgages and Notes Payable - Continued
 
Our $475.0 million unsecured revolving credit facility is scheduled to mature in January 2018 and includes an accordion feature that allows for an additional $75.0 million of borrowing capacity subject to additional lender commitments. Assuming no defaults have occurred, we have an option to extend the maturity for two additional six-month periods. The interest rate at our current credit ratings is LIBOR plus 110 basis points and the annual facility fee is 20 basis points. There was $228.0 million and $239.0 million outstanding under our revolving credit facility at March 31, 2015 and April 20, 2015, respectively. At both March 31, 2015 and April 20, 2015, 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 March 31, 2015 and April 20, 2015 was $246.8 million and $235.8 million, respectively.

We are currently in compliance with financial covenants and other requirements with respect to our consolidated debt.

7.
Derivative Financial Instruments
 
Our interest rate swaps have been designated as and are being accounted for as cash flow hedges with changes in fair value recorded in other comprehensive income/(loss) each reporting period. No gain or loss was recognized related to hedge ineffectiveness or to amounts excluded from effectiveness testing on our cash flow hedges during the three months ended March 31, 2015 and 2014. We have no collateral requirements related to our interest rate swaps.
 
Amounts reported in accumulated other comprehensive loss ("AOCL") related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the period from April 1, 2015 through March 31, 2016, we estimate that $3.0 million will be reclassified to interest expense.
 
The following table sets forth the fair value of our derivatives:
 
 
March 31,
2015
 
December 31,
2014
Derivatives:
 
 
 
Derivatives designated as cash flow hedges in accounts payable, accrued expenses and other liabilities:
 
 
 
Interest rate swaps
$
4,480

 
$
2,412


The following table sets forth the effect of our cash flow hedges on AOCL and interest expense:
 
 
Three Months Ended
March 31,
 
2015
 
2014
Derivatives Designated as Cash Flow Hedges:
 
 
 
Amount of unrealized losses recognized in AOCL on derivatives (effective portion):
 
 
 
Interest rate swaps
$
(2,914
)
 
$
(1,404
)
Amount of losses reclassified out of AOCL into contractual interest expense (effective portion):
 
 
 
Interest rate swaps
$
924

 
$
928


20

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



8.
Noncontrolling Interests

Noncontrolling Interests in Consolidated Affiliates
 
At March 31, 2015, our noncontrolling interests in consolidated affiliates relates to our joint venture partner's 50.0% interest in office properties in Richmond, VA. Our joint venture partner is an unrelated third party.

Noncontrolling Interests in the Operating Partnership

The following table sets forth the Company's noncontrolling interests in the Operating Partnership:
 
 
Three Months Ended
March 31,
 
2015
 
2014
Beginning noncontrolling interests in the Operating Partnership
$
130,048

 
$
106,480

Adjustment of noncontrolling interests in the Operating Partnership to fair value
5,036

 
7,434

Conversions of Common Units to Common Stock
(1,206
)
 
(162
)
Redemptions of Common Units

 
(93
)
Net income attributable to noncontrolling interests in the Operating Partnership
596

 
398

Distributions to noncontrolling interests in the Operating Partnership
(1,248
)
 
(1,249
)
Total noncontrolling interests in the Operating Partnership
$
133,226

 
$
112,808


The following table sets forth net income available for common stockholders and transfers from the Company's noncontrolling interests in the Operating Partnership:
 
 
Three Months Ended
March 31,
 
2015
 
2014
Net income available for common stockholders
$
19,316

 
$
12,128

Increase in additional paid in capital from conversions of Common Units
to Common Stock
1,206

 
162

Change from net income available for common stockholders and transfers from noncontrolling interests
$
20,522

 
$
12,290


21

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



9.
Disclosure About Fair Value of Financial Instruments

The following summarizes the three levels of inputs that we use to measure fair value.

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

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

Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.

Our Level 2 asset is the fair value of certain of our mortgages and notes receivable. Our Level 2 liabilities include the fair value of our mortgages and notes payable and interest rate swaps.

The fair value of mortgages and notes receivable and mortgages and notes payable is estimated by the income approach utilizing contractual cash flows and market-based interest rates to approximate the price that would be paid in an orderly transaction between market participants. The fair value of interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments of interest rate swaps are based on the expectation of future LIBOR interest rates (forward curves) derived from observed market LIBOR interest rate curves. In addition, credit valuation adjustments are incorporated in the fair values to account for potential nonperformance risk, but were concluded to not be significant inputs to the calculation for the periods presented.
 
Level 3. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
Our Level 3 assets include (1) certain of our mortgages and notes receivable, which were estimated by the income approach utilizing internal cash flow projections and market interest rates to estimate the price that would be paid in an orderly transaction between market participants, and (2) our tax increment financing bond, which is not routinely traded but whose fair value is determined by the income approach utilizing contractual cash flows and market-based interest rates to estimate the projected redemption value based on quoted bid/ask prices for similar unrated municipal bonds.
 
Our Level 3 liability is the fair value of our financing obligations, which was estimated by the income approach to approximate the price that would be paid in an orderly transaction between market participants, utilizing: (1) contractual cash flows; (2) market-based interest rates; and (3) a number of other assumptions including demand for space, competition for customers, changes in market rental rates, costs of operation and expected ownership periods.


22

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


9.
Disclosure About Fair Value of Financial Instruments - Continued

The following table sets forth our assets and liabilities and the Company's noncontrolling interests in the Operating Partnership that are measured at fair value within the fair value hierarchy.
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
 
Total
 
Quoted Prices
in Active
Markets for Identical Assets or Liabilities
 
Significant Observable Inputs
 
Significant Unobservable Inputs
Fair Value at March 31, 2015:
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Mortgages and notes receivable, at fair value (1)
 
$
14,163

 
$

 
$
2,206

 
$
11,957

Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)
 
3,504

 
3,504