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EX-32.4 - EXHIBIT 32.4 - HIGHWOODS PROPERTIES INChiw09302016ex324.htm
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EX-32.2 - EXHIBIT 32.2 - HIGHWOODS PROPERTIES INChiw09302016ex322.htm
EX-32.1 - EXHIBIT 32.1 - HIGHWOODS PROPERTIES INChiw09302016ex321.htm
EX-31.4 - EXHIBIT 31.4 - HIGHWOODS PROPERTIES INChiw09302016ex314.htm
EX-31.3 - EXHIBIT 31.3 - HIGHWOODS PROPERTIES INChiw09302016ex313.htm
EX-31.2 - EXHIBIT 31.2 - HIGHWOODS PROPERTIES INChiw09302016ex312.htm
EX-31.1 - EXHIBIT 31.1 - HIGHWOODS PROPERTIES INChiw09302016ex311.htm
EX-12.2 - EXHIBIT 12.2 - HIGHWOODS PROPERTIES INChiw09302016ex122.htm
EX-12.1 - EXHIBIT 12.1 - HIGHWOODS PROPERTIES INChiw09302016ex121.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 September 30, 2016
 
logotree093016.jpg
HIGHWOODS PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
 
Maryland
001-13100
56-1871668
 
 
(State or other jurisdiction
of incorporation or organization)
(Commission
File Number)
(I.R.S. Employer
Identification Number)
 
 
HIGHWOODS REALTY LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
 
North Carolina
000-21731
56-1869557
 
 
(State or other jurisdiction
of incorporation or organization)
(Commission
File Number)
(I.R.S. Employer
Identification Number)
 
 
3100 Smoketree Court, Suite 600
Raleigh, NC 27604
(Address of principal executive offices) (Zip Code)
919-872-4924
(Registrants’ telephone number, including area code)
______________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Highwoods Properties, Inc.  Yes  x    No ¨    Highwoods Realty Limited Partnership  Yes  x    No ¨
 
Indicate by check mark whether the registrant has submitted electronically 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 100,204,106 shares of Common Stock outstanding as of October 17, 2016.
 




EXPLANATORY NOTE

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

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

Certain information contained herein is presented as of October 17, 2016, the latest practicable date for financial information prior to the filing of this Quarterly Report.

This report combines the Quarterly Reports on Form 10-Q for the period ended September 30, 2016 of the Company and the Operating Partnership. We believe combining the quarterly reports into this single report results in the following benefits:

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

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

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

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

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

Consolidated Financial Statements;

Note 13 to Consolidated Financial Statements - Earnings Per Share and Per Unit;

Item 4 - Controls and Procedures; and

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





HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP

QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 2016

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)
 
September 30,
2016
 
December 31,
2015
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
474,375

 
$
443,705

Buildings and tenant improvements
4,278,303

 
4,063,328

Development in-process
227,573

 
194,050

Land held for development
79,603

 
68,244

 
5,059,854

 
4,769,327

Less-accumulated depreciation
(1,098,492
)
 
(1,007,104
)
Net real estate assets
3,961,362

 
3,762,223

Real estate and other assets, net, held for sale
260

 
240,948

Cash and cash equivalents
6,387

 
5,036

Restricted cash
37,763

 
16,769

Accounts receivable, net of allowance of $791 and $928, respectively
26,756

 
29,077

Mortgages and notes receivable, net of allowance of $0 and $287, respectively
9,525

 
2,096

Accrued straight-line rents receivable, net of allowance of $703 and $257, respectively
167,503

 
150,392

Investments in and advances to unconsolidated affiliates
18,697

 
20,676

Deferred leasing costs, net of accumulated amortization of $136,292 and $115,172, respectively
218,976

 
231,765

Prepaid expenses and other assets, net of accumulated amortization of $20,008 and $17,830,
respectively
28,581

 
26,649

Total Assets
$
4,475,810

 
$
4,485,631

Liabilities, Noncontrolling Interests in the Operating Partnership and Equity:
 
 
 
Mortgages and notes payable, net
$
1,901,066

 
$
2,491,813

Accounts payable, accrued expenses and other liabilities
258,638

 
233,988

Liabilities held for sale

 
14,119

Total Liabilities
2,159,704

 
2,739,920

Commitments and contingencies

 

Noncontrolling interests in the Operating Partnership
148,005

 
126,429

Equity:
 
 
 
Preferred Stock, $.01 par value, 50,000,000 authorized shares;
 
 
 
8.625% Series A Cumulative Redeemable Preferred Shares (liquidation preference $1,000 per share), 28,920 and 29,050 shares issued and outstanding, respectively
28,920

 
29,050

Common Stock, $.01 par value, 200,000,000 authorized shares;
 
 
 
100,204,106 and 96,091,932 shares issued and outstanding, respectively
1,002

 
961

Additional paid-in capital
2,780,443

 
2,598,242

Distributions in excess of net income available for common stockholders
(650,954
)
 
(1,023,135
)
Accumulated other comprehensive loss
(9,260
)
 
(3,811
)
Total Stockholders’ Equity
2,150,151

 
1,601,307

Noncontrolling interests in consolidated affiliates
17,950

 
17,975

Total Equity
2,168,101

 
1,619,282

Total Liabilities, Noncontrolling Interests in the Operating Partnership and Equity
$
4,475,810

 
$
4,485,631

 
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
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Rental and other revenues
$
166,269

 
$
150,766

 
$
497,988

 
$
444,545

Operating expenses:
 
 
 
 
 
 
 
Rental property and other expenses
58,620

 
54,430

 
173,715

 
159,314

Depreciation and amortization
52,923

 
50,963

 
161,734

 
145,758

General and administrative
9,863

 
8,990

 
29,327

 
28,898

Total operating expenses
121,406

 
114,383

 
364,776

 
333,970

Interest expense:
 
 
 
 
 
 
 
Contractual
17,722

 
20,484

 
56,111

 
61,783

Amortization of debt issuance costs
844

 
873

 
2,645

 
2,501

Financing obligation

 

 

 
162

 
18,566

 
21,357

 
58,756

 
64,446

Other income:
 
 
 
 
 
 
 
Interest and other income
833

 
379

 
1,884

 
1,481

Losses on debt extinguishment

 

 

 
(220
)
 
833

 
379


1,884


1,261

Income from continuing operations before disposition of investment properties and activity in unconsolidated affiliates
27,130

 
15,405

 
76,340

 
47,390

Gains on disposition of property
3,902

 
7,012

 
14,160

 
10,581

Gain on disposition of investment in unconsolidated affiliate

 
4,155

 

 
4,155

Equity in earnings of unconsolidated affiliates
2,808

 
780

 
5,010

 
4,367

Income from continuing operations
33,840

 
27,352

 
95,510

 
66,493

Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations

 
4,265

 
4,097

 
12,850

Net gains on disposition of discontinued operations

 

 
414,496

 

 

 
4,265

 
418,593

 
12,850

Net income
33,840

 
31,617

 
514,103

 
79,343

Net (income) attributable to noncontrolling interests in the Operating Partnership
(926
)
 
(918
)
 
(14,876
)
 
(2,296
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(319
)
 
(324
)
 
(941
)
 
(948
)
Dividends on Preferred Stock
(624
)
 
(626
)
 
(1,877
)
 
(1,879
)
Net income available for common stockholders
$
31,971

 
$
29,749


$
496,409


$
74,220

Earnings per Common Share – basic:
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
0.32

 
$
0.27

 
$
0.92

 
$
0.66

Income from discontinued operations available for common stockholders

 
0.04

 
4.16

 
0.13

Net income available for common stockholders
$
0.32

 
$
0.31

 
$
5.08

 
$
0.79

Weighted average Common Shares outstanding – basic
98,973

 
94,693

 
97,669

 
93,996

Earnings per Common Share – diluted:
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
0.32

 
$
0.27

 
$
0.92

 
$
0.66

Income from discontinued operations available for common stockholders

 
0.04

 
4.16

 
0.13

Net income available for common stockholders
$
0.32

 
$
0.31

 
$
5.08

 
$
0.79

Weighted average Common Shares outstanding – diluted
101,939

 
97,661

 
100,645

 
97,003

Dividends declared per Common Share
$
0.425

 
$
0.425

 
$
1.275

 
$
1.275

Net income available for common stockholders:
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
31,971

 
$
25,612

 
$
90,081

 
$
61,759

Income from discontinued operations available for common stockholders

 
4,137

 
406,328

 
12,461

Net income available for common stockholders
$
31,971

 
$
29,749

 
$
496,409

 
$
74,220

See accompanying notes to consolidated financial statements.

4


HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Comprehensive Income
(Unaudited and in thousands)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
33,840

 
$
31,617

 
$
514,103

 
$
79,343

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

 
(7
)
 

 
187

Unrealized gains/(losses) on cash flow hedges
1,610

 
(3,021
)
 
(7,785
)
 
(5,666
)
Amortization of cash flow hedges
758

 
932

 
2,336

 
2,781

Total other comprehensive income/(loss)
2,368

 
(2,096
)
 
(5,449
)
 
(2,698
)
Total comprehensive income
36,208

 
29,521

 
508,654

 
76,645

Less-comprehensive (income) attributable to noncontrolling interests
(1,245
)
 
(1,242
)
 
(15,817
)
 
(3,244
)
Comprehensive income attributable to common stockholders
$
34,963

 
$
28,279

 
$
492,837

 
$
73,401


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, 2015
96,091,932

 
$
961

 
$
29,050

 
$
2,598,242

 
$
(3,811
)
 
$
17,975

 
$
(1,023,135
)
 
$
1,619,282

Issuances of Common Stock, net of issuance costs and tax withholdings
3,930,262

 
39

 

 
187,175

 

 

 

 
187,214

Conversions of Common Units to Common Stock
60,048

 

 

 
3,006

 

 

 

 
3,006

Dividends on Common Stock


 

 

 

 

 

 
(124,228
)
 
(124,228
)
Dividends on Preferred Stock


 

 

 

 

 

 
(1,877
)
 
(1,877
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value


 

 

 
(13,390
)
 

 

 

 
(13,390
)
Distributions to noncontrolling interests in consolidated affiliates


 

 

 

 

 
(966
)
 

 
(966
)
Issuances of restricted stock
130,752

 

 

 

 

 

 

 

Redemptions/repurchases of Preferred Stock
 
 

 
(130
)
 

 

 

 

 
(130
)
Share-based compensation expense, net of forfeitures
(8,888
)
 
2

 

 
5,410

 

 

 

 
5,412

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


 

 

 

 

 

 
(14,876
)
 
(14,876
)
Net (income) attributable to noncontrolling interests in consolidated affiliates


 

 

 

 

 
941

 
(941
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income


 

 

 

 

 

 
514,103

 
514,103

Other comprehensive loss


 

 

 

 
(5,449
)
 

 

 
(5,449
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
508,654

Balance at September 30, 2016
100,204,106

 
$
1,002

 
$
28,920

 
$
2,780,443

 
$
(9,260
)
 
$
17,950

 
$
(650,954
)
 
$
2,168,101



 
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

 
$
(957,370
)
 
$
1,551,091

Issuances of Common Stock, net of issuance costs and tax withholdings
2,268,380

 
23

 

 
93,193

 

 

 

 
93,216

Conversions of Common Units to Common Stock
26,820

 

 

 
1,206

 

 

 

 
1,206

Dividends on Common Stock

 

 

 

 

 

 
(119,729
)
 
(119,729
)
Dividends on Preferred Stock

 

 

 

 

 

 
(1,879
)
 
(1,879
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value

 

 

 
14,649

 

 

 

 
14,649

Distributions to noncontrolling interests in consolidated affiliates

 

 

 

 

 
(1,070
)
 

 
(1,070
)
Issuances of restricted stock
128,951

 

 

 

 

 

 

 

Redemptions/repurchases of Preferred Stock

 

 
(10
)
 

 

 

 

 
(10
)
Share-based compensation expense, net of forfeitures
(1,703
)
 
1

 

 
5,995

 

 

 

 
5,996

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

 

 

 

 

 

 
(2,296
)
 
(2,296
)
Net (income) attributable to noncontrolling interests in consolidated affiliates

 

 

 

 

 
948

 
(948
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 

 
79,343

 
79,343

Other comprehensive loss

 

 

 

 
(2,698
)
 

 

 
(2,698
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
76,645

Balance at September 30, 2015
95,329,758

 
$
953

 
$
29,050

 
$
2,579,318

 
$
(6,610
)
 
$
17,987

 
$
(1,002,879
)
 
$
1,617,819


See accompanying notes to consolidated financial statements.

6


HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
 
Nine Months Ended
September 30,
 
2016
 
2015
Operating activities:
 
 
 
Net income
$
514,103

 
$
79,343

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
161,734

 
156,200

Amortization of lease incentives and acquisition-related intangible assets and liabilities
(1,599
)
 
214

Share-based compensation expense
5,412

 
5,996

Allowance for losses on accounts and accrued straight-line rents receivable
1,846

 
1,851

Accrued interest on mortgages and notes receivable
(364
)
 
(313
)
Amortization of debt issuance costs
2,645

 
2,501

Amortization of cash flow hedges
2,336

 
2,781

Amortization of mortgages and notes payable fair value adjustments
(175
)
 
7

Losses on debt extinguishment

 
220

Net gains on disposition of property
(428,656
)
 
(10,581
)
Gain on disposition of investment in unconsolidated affiliate

 
(4,155
)
Equity in earnings of unconsolidated affiliates
(5,010
)
 
(4,367
)
Changes in financing obligation

 
162

Distributions of earnings from unconsolidated affiliates
3,936

 
4,099

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
4,798

 
1,716

Prepaid expenses and other assets
(2,243
)
 
(3,475
)
Accrued straight-line rents receivable
(18,931
)
 
(16,955
)
Accounts payable, accrued expenses and other liabilities
(7,447
)
 
(5,834
)
Net cash provided by operating activities
232,385

 
209,410

Investing activities:
 
 
 
Investments in acquired real estate and related intangible assets, net of cash acquired
(110,249
)
 
(408,634
)
Investments in development in-process
(122,839
)
 
(87,222
)
Investments in tenant improvements and deferred leasing costs
(63,715
)
 
(85,234
)
Investments in building improvements
(51,714
)
 
(38,295
)
Net proceeds from disposition of real estate assets
680,994

 
22,781

Net proceeds from disposition of investment in unconsolidated affiliate

 
6,919

Distributions of capital from unconsolidated affiliates
2,639

 
10,227

Investments in mortgages and notes receivable
(7,934
)
 
(1,772
)
Repayments of mortgages and notes receivable
869

 
9,301

Investments in and advances to unconsolidated affiliates
(105
)
 
(384
)
Repayments from unconsolidated affiliates
448

 
20,800

Changes in restricted cash and other investing activities
(23,310
)
 
(12,582
)
Net cash provided by/(used in) investing activities
305,084

 
(564,095
)
Financing activities:
 
 
 
Dividends on Common Stock
(124,228
)
 
(119,729
)
Redemptions/repurchases of Preferred Stock
(130
)
 
(10
)
Dividends on Preferred Stock
(1,877
)
 
(1,879
)
Distributions to noncontrolling interests in the Operating Partnership
(3,684
)
 
(3,721
)
Distributions to noncontrolling interests in consolidated affiliates
(966
)
 
(1,070
)
Proceeds from the issuance of Common Stock
194,518

 
98,485

Costs paid for the issuance of Common Stock
(2,888
)
 
(1,518
)
Repurchase of shares related to tax withholdings
(4,416
)
 
(3,751
)
Borrowings on revolving credit facility
257,800

 
393,900

Repayments of revolving credit facility
(528,800
)
 
(337,900
)
Borrowings on mortgages and notes payable
75,000

 
375,000

Repayments of mortgages and notes payable
(395,455
)
 
(43,076
)
Payments on financing obligation

 
(1,722
)
Changes in debt issuance costs and other financing activities
(992
)
 
(1,972
)
Net cash provided by/(used in) financing activities
(536,118
)
 
351,037

Net increase/(decrease) in cash and cash equivalents
$
1,351

 
$
(3,648
)
See accompanying notes to consolidated financial statements.

7



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

 
Nine Months Ended
September 30,
 
2016
 
2015
Net increase/(decrease) in cash and cash equivalents
$
1,351

 
$
(3,648
)
Cash and cash equivalents at beginning of the period
5,036

 
8,832

Cash and cash equivalents at end of the period
$
6,387

 
$
5,184


Supplemental disclosure of cash flow information:
 
 
Nine Months Ended
September 30,
 
2016
 
2015
Cash paid for interest, net of amounts capitalized
$
58,138

 
$
62,661


Supplemental disclosure of non-cash investing and financing activities:
 
 
Nine Months Ended
September 30,
 
2016
 
2015
Unrealized losses on cash flow hedges
$
(7,785
)
 
$
(5,666
)
Conversions of Common Units to Common Stock
3,006

 
1,206

Changes in accrued capital expenditures
25,037

 
1,759

Write-off of fully depreciated real estate assets
28,783

 
44,742

Write-off of fully amortized debt issuance and leasing costs
16,991

 
27,658

Adjustment of noncontrolling interests in the Operating Partnership to fair value
13,390

 
(14,649
)
Unrealized gains on tax increment financing bond

 
187

Assumption of mortgages and notes payable related to acquisition activities

 
19,277

Contingent consideration in connection with the acquisition of land

 
900


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)
 
September 30,
2016
 
December 31,
2015
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
474,375

 
$
443,705

Buildings and tenant improvements
4,278,303

 
4,063,328

Development in-process
227,573

 
194,050

Land held for development
79,603

 
68,244

 
5,059,854

 
4,769,327

Less-accumulated depreciation
(1,098,492
)
 
(1,007,104
)
Net real estate assets
3,961,362

 
3,762,223

Real estate and other assets, net, held for sale
260

 
240,948

Cash and cash equivalents
6,387

 
5,036

Restricted cash
37,763

 
16,769

Accounts receivable, net of allowance of $791 and $928, respectively
26,756

 
29,077

Mortgages and notes receivable, net of allowance of $0 and $287, respectively
9,525

 
2,096

Accrued straight-line rents receivable, net of allowance of $703 and $257, respectively
167,503

 
150,392

Investments in and advances to unconsolidated affiliates
18,697

 
20,676

Deferred leasing costs, net of accumulated amortization of $136,292 and $115,172, respectively
218,976

 
231,765

Prepaid expenses and other assets, net of accumulated amortization of $20,008 and $17,830,
respectively
28,581

 
26,649

Total Assets
$
4,475,810

 
$
4,485,631

Liabilities, Redeemable Operating Partnership Units and Capital:
 
 
 
Mortgages and notes payable, net
$
1,901,066

 
$
2,491,813

Accounts payable, accrued expenses and other liabilities
258,638

 
233,988

Liabilities held for sale

 
14,119

Total Liabilities
2,159,704

 
2,739,920

Commitments and contingencies

 

Redeemable Operating Partnership Units:
 
 
 
Common Units, 2,839,704 and 2,899,752 outstanding, respectively
148,005

 
126,429

Series A Preferred Units (liquidation preference $1,000 per unit), 28,920 and 29,050 units issued and
outstanding, respectively
28,920

 
29,050

Total Redeemable Operating Partnership Units
176,925

 
155,479

Capital:
 
 
 
Common Units:
 
 
 
General partner Common Units, 1,026,350 and 985,829 outstanding, respectively
21,303

 
15,759

Limited partner Common Units, 98,768,947 and 94,697,294 outstanding, respectively
2,109,188

 
1,560,309

Accumulated other comprehensive loss
(9,260
)
 
(3,811
)
Noncontrolling interests in consolidated affiliates
17,950

 
17,975

Total Capital
2,139,181

 
1,590,232

Total Liabilities, Redeemable Operating Partnership Units and Capital
$
4,475,810

 
$
4,485,631


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
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Rental and other revenues
$
166,269

 
$
150,766

 
$
497,988

 
$
444,545

Operating expenses:
 
 
 
 
 
 
 
Rental property and other expenses
58,620

 
54,430

 
173,715

 
159,314

Depreciation and amortization
52,923

 
50,963

 
161,734

 
145,758

General and administrative
9,863

 
8,990

 
29,327

 
28,898

Total operating expenses
121,406

 
114,383

 
364,776

 
333,970

Interest expense:
 
 
 
 
 
 
 
Contractual
17,722

 
20,484

 
56,111

 
61,783

Amortization of debt issuance costs
844

 
873

 
2,645

 
2,501

Financing obligation

 

 

 
162

 
18,566

 
21,357

 
58,756

 
64,446

Other income:
 
 
 
 
 
 
 
Interest and other income
833

 
379

 
1,884

 
1,481

Losses on debt extinguishment

 

 

 
(220
)
 
833

 
379

 
1,884

 
1,261

Income from continuing operations before disposition of investment properties and activity in unconsolidated affiliates
27,130

 
15,405

 
76,340

 
47,390

Gains on disposition of property
3,902

 
7,012

 
14,160

 
10,581

Gain on disposition of investment in unconsolidated affiliate

 
4,155

 

 
4,155

Equity in earnings of unconsolidated affiliates
2,808

 
780

 
5,010

 
4,367

Income from continuing operations
33,840

 
27,352

 
95,510

 
66,493

Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations

 
4,265

 
4,097

 
12,850

Net gains on disposition of discontinued operations

 

 
414,496

 

 

 
4,265

 
418,593

 
12,850

Net income
33,840

 
31,617

 
514,103

 
79,343

Net (income) attributable to noncontrolling interests in consolidated affiliates
(319
)
 
(324
)
 
(941
)
 
(948
)
Distributions on Preferred Units
(624
)
 
(626
)
 
(1,877
)
 
(1,879
)
Net income available for common unitholders
$
32,897

 
$
30,667

 
$
511,285

 
$
76,516

Earnings per Common Unit – basic:
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
0.32

 
$
0.27

 
$
0.93

 
$
0.66

Income from discontinued operations available for common unitholders

 
0.05

 
4.18

 
0.13

Net income available for common unitholders
$
0.32

 
$
0.32

 
$
5.11

 
$
0.79

Weighted average Common Units outstanding – basic
101,422

 
97,194

 
100,142

 
96,505

Earnings per Common Unit – diluted:
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
0.32

 
$
0.27

 
$
0.92

 
$
0.66

Income from discontinued operations available for common unitholders

 
0.05

 
4.18

 
0.13

Net income available for common unitholders
$
0.32

 
$
0.32

 
$
5.10

 
$
0.79

Weighted average Common Units outstanding – diluted
101,530

 
97,252

 
100,236

 
96,594

Distributions declared per Common Unit
$
0.425

 
$
0.425

 
$
1.275

 
$
1.275

Net income available for common unitholders:
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
32,897

 
$
26,402

 
$
92,692

 
$
63,666

Income from discontinued operations available for common unitholders

 
4,265

 
418,593

 
12,850

Net income available for common unitholders
$
32,897

 
$
30,667

 
$
511,285

 
$
76,516

See accompanying notes to consolidated financial statements.

10


HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Comprehensive Income
(Unaudited and in thousands)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
33,840

 
$
31,617

 
$
514,103

 
$
79,343

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

 
(7
)
 

 
187

Unrealized gains/(losses) on cash flow hedges
1,610

 
(3,021
)
 
(7,785
)
 
(5,666
)
Amortization of cash flow hedges
758

 
932

 
2,336

 
2,781

Total other comprehensive income/(loss)
2,368

 
(2,096
)
 
(5,449
)
 
(2,698
)
Total comprehensive income
36,208

 
29,521

 
508,654

 
76,645

Less-comprehensive (income) attributable to noncontrolling interests
(319
)
 
(324
)
 
(941
)
 
(948
)
Comprehensive income attributable to common unitholders
$
35,889


$
29,197

 
$
507,713

 
$
75,697


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, 2015
$
15,759

 
$
1,560,309

 
$
(3,811
)
 
$
17,975

 
$
1,590,232

Issuances of Common Units, net of issuance costs and tax withholdings
1,872

 
185,342

 

 

 
187,214

Distributions paid on Common Units
(1,274
)
 
(126,117
)
 

 

 
(127,391
)
Distributions paid on Preferred Units
(19
)
 
(1,858
)
 

 

 
(1,877
)
Share-based compensation expense, net of forfeitures
54

 
5,358

 

 

 
5,412

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(966
)
 
(966
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
(221
)
 
(21,876
)
 

 

 
(22,097
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(9
)
 
(932
)
 

 
941

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
5,141

 
508,962

 

 

 
514,103

Other comprehensive loss

 

 
(5,449
)
 

 
(5,449
)
Total comprehensive income
 
 
 
 
 
 
 
 
508,654

Balance at September 30, 2016
$
21,303

 
$
2,109,188

 
$
(9,260
)
 
$
17,950

 
$
2,139,181



 
Common Units
 
Accumulated
Other
Comprehensive Loss
 
Noncontrolling
Interests in
Consolidated
Affiliates
 
Total
 
General
Partners’
Capital
 
Limited
Partners’
Capital
 
Balance at December 31, 2014
$
15,078

 
$
1,492,948

 
$
(3,912
)
 
$
18,109

 
$
1,522,223

Issuances of Common Units, net of issuance costs and tax withholdings
932

 
92,284

 

 

 
93,216

Distributions paid on Common Units
(1,230
)
 
(121,699
)
 

 

 
(122,929
)
Distributions paid on Preferred Units
(19
)
 
(1,860
)
 

 

 
(1,879
)
Share-based compensation expense, net of forfeitures
60

 
5,936

 

 

 
5,996

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(1,070
)
 
(1,070
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
166

 
16,401

 

 

 
16,567

Net (income) attributable to noncontrolling interests in consolidated affiliates
(9
)
 
(939
)
 

 
948

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
793

 
78,550

 

 

 
79,343

Other comprehensive loss

 

 
(2,698
)
 

 
(2,698
)
Total comprehensive income
 
 
 
 
 
 
 
 
76,645

Balance at September 30, 2015
$
15,771

 
$
1,561,621

 
$
(6,610
)
 
$
17,987

 
$
1,588,769


See accompanying notes to consolidated financial statements.

12


HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
 
Nine Months Ended
September 30,
 
2016
 
2015
Operating activities:
 
 
 
Net income
$
514,103

 
$
79,343

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
161,734

 
156,200

Amortization of lease incentives and acquisition-related intangible assets and liabilities
(1,599
)
 
214

Share-based compensation expense
5,412

 
5,996

Allowance for losses on accounts and accrued straight-line rents receivable
1,846

 
1,851

Accrued interest on mortgages and notes receivable
(364
)
 
(313
)
Amortization of debt issuance costs
2,645

 
2,501

Amortization of cash flow hedges
2,336

 
2,781

Amortization of mortgages and notes payable fair value adjustments
(175
)
 
7

Losses on debt extinguishment

 
220

Net gains on disposition of property
(428,656
)
 
(10,581
)
Gain on disposition of investment in unconsolidated affiliate

 
(4,155
)
Equity in earnings of unconsolidated affiliates
(5,010
)
 
(4,367
)
Changes in financing obligation

 
162

Distributions of earnings from unconsolidated affiliates
3,523

 
4,099

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
4,798

 
1,716

Prepaid expenses and other assets
(2,243
)
 
(3,475
)
Accrued straight-line rents receivable
(18,931
)
 
(16,955
)
Accounts payable, accrued expenses and other liabilities
(7,447
)
 
(5,748
)
Net cash provided by operating activities
231,972

 
209,496

Investing activities:
 
 
 
Investments in acquired real estate and related intangible assets, net of cash acquired
(110,249
)
 
(408,634
)
Investments in development in-process
(122,839
)
 
(87,222
)
Investments in tenant improvements and deferred leasing costs
(63,715
)
 
(85,234
)
Investments in building improvements
(51,714
)
 
(38,295
)
Net proceeds from disposition of real estate assets
680,994

 
22,781

Net proceeds from disposition of investment in unconsolidated affiliate

 
6,919

Distributions of capital from unconsolidated affiliates
3,052

 
10,227

Investments in mortgages and notes receivable
(7,934
)
 
(1,772
)
Repayments of mortgages and notes receivable
869

 
9,301

Investments in and advances to unconsolidated affiliates
(105
)
 
(384
)
Repayments from unconsolidated affiliates
448

 
20,800

Changes in restricted cash and other investing activities
(23,310
)
 
(12,582
)
Net cash provided by/(used in) investing activities
305,497

 
(564,095
)
Financing activities:
 
 
 
Distributions on Common Units
(127,391
)
 
(122,929
)
Redemptions/repurchases of Preferred Units
(130
)
 
(10
)
Distributions on Preferred Units
(1,877
)
 
(1,879
)
Distributions to noncontrolling interests in consolidated affiliates
(966
)
 
(1,070
)
Proceeds from the issuance of Common Units
194,518

 
98,485

Costs paid for the issuance of Common Units
(2,888
)
 
(1,518
)
Repurchase of units related to tax withholdings
(4,416
)
 
(3,751
)
Borrowings on revolving credit facility
257,800

 
393,900

Repayments of revolving credit facility
(528,800
)
 
(337,900
)
Borrowings on mortgages and notes payable
75,000

 
375,000

Repayments of mortgages and notes payable
(395,455
)
 
(43,076
)
Payments on financing obligation

 
(1,722
)
Changes in debt issuance costs and other financing activities
(1,513
)
 
(2,685
)
Net cash provided by/(used in) financing activities
(536,118
)
 
350,845

Net increase/(decrease) in cash and cash equivalents
$
1,351

 
$
(3,754
)
See accompanying notes to consolidated financial statements.

13



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

 
Nine Months Ended
September 30,
 
2016
 
2015
Net increase/(decrease) in cash and cash equivalents
$
1,351

 
$
(3,754
)
Cash and cash equivalents at beginning of the period
5,036

 
8,938

Cash and cash equivalents at end of the period
$
6,387

 
$
5,184


Supplemental disclosure of cash flow information:
 
 
Nine Months Ended
September 30,
 
2016
 
2015
Cash paid for interest, net of amounts capitalized
$
58,138

 
$
62,661


Supplemental disclosure of non-cash investing and financing activities:
 
 
Nine Months Ended
September 30,
 
2016
 
2015
Unrealized losses on cash flow hedges
$
(7,785
)
 
$
(5,666
)
Changes in accrued capital expenditures
25,037

 
1,759

Write-off of fully depreciated real estate assets
28,783

 
44,742

Write-off of fully amortized debt issuance and leasing costs
16,991

 
27,658

Adjustment of Redeemable Common Units to fair value
21,576

 
(17,280
)
Unrealized gains on tax increment financing bond

 
187

Assumption of mortgages and notes payable related to acquisition activities

 
19,277

Contingent consideration in connection with the acquisition of land

 
900


See accompanying notes to consolidated financial statements.

14


HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(tabular dollar amounts in thousands, except per share and per unit data)
(Unaudited)

1.    Description of Business and Significant Accounting Policies

Description of Business

Highwoods Properties, Inc. (the “Company”) is a fully integrated real estate investment trust (“REIT”) that provides leasing, management, development, construction and other customer-related services for its properties and for third parties. The Company conducts its activities through Highwoods Realty Limited Partnership (the “Operating Partnership”). At September 30, 2016, we owned or had an interest in 31.1 million rentable square feet of in-service properties, 1.1 million rentable square feet of properties under development and approximately 450 acres of development land.
 
The Company is the sole general partner of the Operating Partnership. At September 30, 2016, the Company owned all of the Preferred Units and 99.8 million, or 97.2%, of the Common Units in the Operating Partnership. Limited partners owned the remaining 2.8 million Common Units. During the nine months ended September 30, 2016, the Company redeemed 60,048 Common Units for a like number of shares of Common Stock.

Common Stock Offerings
 
During the three and nine months ended September 30, 2016, the Company issued 1,547,457 and 3,624,528 shares, respectively, of Common Stock under its equity distribution agreements at an average gross sales price of $52.79 and $49.67 per share, respectively, and received net proceeds, after sales commissions, of $80.5 million and $177.3 million, respectively. As a result of this activity and the redemptions discussed above, the percentage of Common Units owned by the Company increased from 97.1% at December 31, 2015 to 97.2% at September 30, 2016.

Basis of Presentation
 
Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Our Consolidated Statements of Income for the three and nine months ended September 30, 2015 were retrospectively revised from previously reported amounts to reclassify the operations for those properties classified as discontinued operations. The Company's Consolidated Financial Statements include the Operating Partnership, wholly owned subsidiaries and those entities in which the Company has the controlling interest. The Operating Partnership's Consolidated Financial Statements include wholly owned subsidiaries and those entities in which the Operating Partnership has the controlling interest. In addition, we consolidate those entities deemed to be variable interest entities in which we are determined to be the primary beneficiary. At September 30, 2016, we had involvement with, but are not the primary beneficiary in, an entity that we concluded to be a variable interest entity. All intercompany transactions and accounts have been eliminated.

The unaudited interim consolidated financial statements and accompanying unaudited consolidated financial information, in the opinion of management, contain all adjustments (including normal recurring accruals) necessary for a fair presentation of our financial position, results of operations and cash flows. We have condensed or omitted certain notes and other information from the interim Consolidated Financial Statements presented in this Quarterly Report as permitted by SEC rules and regulations. These Consolidated Financial Statements should be read in conjunction with our 2015 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 our 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 ("ASU") 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 ASU is required to be adopted in 2018. 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 ASU.
 
The FASB recently issued an ASU that amended consolidation requirements. The amendments significantly change the consolidation analysis required under GAAP and require companies to reevaluate all previous consolidation conclusions. We adopted the ASU as of January 1, 2016 and there was no impact to consolidated entities included in our Consolidated Financial Statements. However, in reevaluating our previous consolidation conclusions upon adoption of the ASU, we determined our 12.5% equity interest in an unconsolidated affiliate to be an interest in a variable interest entity because certain of its limited partners do not have substantive kick-out or participating rights. We do not qualify as the primary beneficiary since our obligation to absorb losses and receive benefits of the variable interest entity is less than that of the other general partner and we do not have the power to direct the activities that most significantly affect the economic performance of the entity. Accordingly, the entity is not consolidated. At September 30, 2016, our maximum exposure to loss with respect to this arrangement is limited to the less than $0.1 million carrying value of our 12.5% investment in the unconsolidated affiliate.
 
The FASB recently issued an ASU that requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability to which they relate, consistent with debt discounts, as opposed to being presented as assets. For debt issuance costs related to revolving credit facilities, the FASB allows the presentation of debt issuance costs as an asset. We adopted the ASU as of January 1, 2016 with retrospective application to our December 31, 2015 Consolidated Balance Sheets. The effect of the adoption was to reclassify debt issuance costs from deferred financing and leasing costs, net of accumulated amortization, as follows: $7.8 million to a contra account as a deduction from the related mortgages and notes payable and $2.1 million to prepaid expenses and other assets. There was no effect on our Consolidated Statements of Income.

The FASB recently issued an ASU which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors.  The ASU requires lessors to account for leases using an approach that is substantially equivalent to the existing guidance and is effective for reporting periods beginning in 2019 with early adoption permitted.  We are in the process of evaluating this ASU.

The FASB recently issued an ASU that requires, among other things, the use of a new current expected credit loss ("CECL") model in determining our allowances for doubtful accounts with respect to accounts receivable, accrued straight-line rents receivable and mortgages and notes receivable. The CECL model requires that we estimate our lifetime expected credit loss with respect to these receivables and record allowances that, when deducted from the balance of the receivables, represent the net amounts expected to be collected. We will also be required to disclose information about how we developed the allowances, including changes in the factors (e.g., portfolio mix, credit trends, unemployment, gross domestic product, etc.) that influenced our estimate of expected credit losses and the reasons for those changes. We will apply the ASU’s provisions as a cumulative-effect adjustment to retained earnings upon adoption in 2020. We are in the process of evaluating this ASU.

The FASB recently issued an ASU that adds to and clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The ASU is required to be adopted in 2018 with retrospective application required. We are in the process of evaluating this ASU.

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)

 
2.    Real Estate Assets
 
Acquisitions
 
During the third quarter of 2016, we acquired a building in Raleigh, NC, which delivered in 2015 and encompasses 243,000 rentable square feet, for a net purchase price of $76.9 million. We expensed $0.3 million of acquisition costs (included in general and administrative expenses) related to this acquisition. The assets acquired and liabilities assumed were recorded at fair value as determined by management based on information available at the acquisition date and on current assumptions as to future operations.

During the third quarter of 2016, we also acquired:

fee simple title to the land underneath one of our buildings in Pittsburgh, PA that was previously subject to a ground lease for a purchase price of $18.5 million. We expensed $0.5 million of acquisition costs (included in general and administrative expenses) related to this acquisition; and

an acre of development land in Raleigh, NC for a purchase price, including capitalized acquisition costs, of $5.8 million.

During the second quarter of 2016, we acquired 14 acres of development land in Nashville, TN for a purchase price, including capitalized acquisition costs, of $9.1 million.
 
Pro Forma Disclosure

The following table sets forth a summary of the fair value of the major assets acquired and liabilities assumed relating to the acquisition of two buildings in Atlanta, GA encompassing 896,000 rentable square feet during the third quarter of 2015:

 
Total
Purchase Price Allocation
Real estate assets
$
275,639

Acquisition-related intangible assets (in deferred leasing costs)
23,722

Acquisition-related below market lease liabilities (in accounts payable, accrued expenses and other liabilities)
(9,076
)
Total allocation
$
290,285

 
The following table sets forth the Company's revenues and net income, adjusted for interest expense, straight-line rental income, depreciation and amortization related to purchase price allocations and acquisition costs, assuming the above-referenced acquisition of two buildings in Atlanta, GA during the third quarter of 2015 had been completed as of January 1, 2014:
 
 
Three Months Ended September 30, 2015
 
Nine