HIW 09.30.2013 10Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2013
 
HIGHWOODS PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
 
Maryland
001-13100
56-1871668
 
 
(State or other jurisdiction
of incorporation or organization)
(Commission
File Number)
(I.R.S. Employer
Identification Number)
 
 
HIGHWOODS REALTY LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
 
North Carolina
000-21731
56-1869557
 
 
(State or other jurisdiction
of incorporation or organization)
(Commission
File Number)
(I.R.S. Employer
Identification Number)
 
 
3100 Smoketree Court, Suite 600
Raleigh, NC 27604
(Address of principal executive offices) (Zip Code)
919-872-4924
(Registrants’ telephone number, including area code)
______________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Highwoods Properties, Inc.  Yes  S    No £    Highwoods Realty Limited Partnership  Yes  S    No £
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Highwoods Properties, Inc.  Yes  S    No £    Highwoods Realty Limited Partnership  Yes  S    No £
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of 'large accelerated filer,' 'accelerated filer' and 'smaller reporting company' in Rule 12b-2 of the Securities Exchange Act.
Highwoods Properties, Inc.
Large accelerated filer S    Accelerated filer £      Non-accelerated filer £      Smaller reporting company £
Highwoods Realty Limited Partnership
Large accelerated filer £    Accelerated filer £      Non-accelerated filer S      Smaller reporting company £
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).
Highwoods Properties, Inc.  Yes  £    No S    Highwoods Realty Limited Partnership  Yes  £    No S
 
The Company had 89,910,944 shares of Common Stock outstanding as of October 21, 2013.
 




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 virtually all of 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 21, 2013, 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, 2013 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 4 - Investments in and Advances to Affiliates;

Note 8 - Noncontrolling Interests; and

Note 13 - Earnings Per Share and Per Unit;

Item 4 - Controls and Procedures; and

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





HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP

QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 2013

TABLE OF CONTENTS

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



3

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HIGHWOODS PROPERTIES, INC.
Consolidated Balance Sheets
(Unaudited and in thousands, except share and per share data)
 
September 30,
2013
 
December 31,
2012
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
403,556

 
$
345,614

Buildings and tenant improvements
3,756,552

 
3,172,107

Development in process
56,495

 
21,198

Land held for development
112,079

 
115,416

 
4,328,682

 
3,654,335

Less-accumulated depreciation
(981,602
)
 
(903,837
)
Net real estate assets
3,347,080

 
2,750,498

Real estate and other assets, net, held for sale
16,316

 
129,400

Cash and cash equivalents
31,689

 
13,783

Restricted cash
15,246

 
19,702

Accounts receivable, net of allowance of $1,532 and $2,848, respectively
30,839

 
23,073

Mortgages and notes receivable, net of allowance of $340 and $182, respectively
26,291

 
25,472

Accrued straight-line rents receivable, net of allowance of $1,177 and $813, respectively
123,047

 
111,233

Investments in and advances to unconsolidated affiliates
35,856

 
66,800

Deferred financing and leasing costs, net of accumulated amortization of $90,241 and $75,863, respectively
227,826

 
166,009

Prepaid expenses and other assets, net of accumulated amortization of $12,835 and $12,318,
respectively
42,675

 
44,458

Total Assets
$
3,896,865

 
$
3,350,428

Liabilities, Noncontrolling Interests in the Operating Partnership and Equity:
 
 
 
Mortgages and notes payable
$
2,050,061

 
$
1,859,162

Accounts payable, accrued expenses and other liabilities
208,536

 
172,146

Financing obligations
28,192

 
29,358

Total Liabilities
2,286,789

 
2,060,666

Commitments and contingencies

 

Noncontrolling interests in the Operating Partnership
103,948

 
124,869

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

 
29,077

Common Stock, $.01 par value, 200,000,000 authorized shares;
 
 
 
89,910,944 and 80,311,437 shares issued and outstanding, respectively
899

 
803

Additional paid-in capital
2,371,925

 
2,040,306

Distributions in excess of net income available for common stockholders
(911,948
)
 
(897,418
)
Accumulated other comprehensive loss
(5,003
)
 
(12,628
)
Total Stockholders’ Equity
1,484,950

 
1,160,140

Noncontrolling interests in consolidated affiliates
21,178

 
4,753

Total Equity
1,506,128

 
1,164,893

Total Liabilities, Noncontrolling Interests in the Operating Partnership and Equity
$
3,896,865

 
$
3,350,428


See accompanying notes to consolidated financial statements.

4

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Income
(Unaudited and in thousands, except per share amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Rental and other revenues
$
147,294

 
$
123,418

 
$
415,961

 
$
368,029

Operating expenses:
 
 
 
 
 
 
 
Rental property and other expenses
55,365

 
45,904

 
151,802

 
134,102

Depreciation and amortization
48,124

 
37,041

 
130,390

 
110,656

General and administrative
8,969

 
9,725

 
27,948

 
28,298

Total operating expenses
112,458

 
92,670

 
310,140

 
273,056

Interest expense:
 
 
 
 
 
 
 
Contractual
22,683

 
22,910

 
67,879

 
70,309

Amortization of deferred financing costs
963

 
907

 
2,860

 
2,709

Financing obligations
26

 
(205
)
 
87

 
(357
)
 
23,672

 
23,612

 
70,826

 
72,661

Other income:
 
 
 
 
 
 
 
Interest and other income
1,582

 
1,916

 
4,982

 
5,883

Losses on debt extinguishment
(32
)
 

 
(196
)
 
(973
)
 
1,550

 
1,916


4,786


4,910

Income from continuing operations before disposition of property and condominiums and acquisition of controlling interest in and equity in earnings/(losses) of unconsolidated affiliates
12,714

 
9,052

 
39,781

 
27,222

Gains/(losses) on disposition of property
34

 

 
(3
)
 

Gains on for-sale residential condominiums

 
80

 

 
255

Gain on acquisition of controlling interest in unconsolidated affiliate
7,451

 

 
7,451

 

Equity in earnings/(losses) of unconsolidated affiliates
(3,173
)
 
1,324

 
(1,824
)
 
2,670

Income from continuing operations
17,026

 
10,456

 
45,405

 
30,147

Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations
1,096

 
2,404

 
3,843

 
9,024

Impairments of real estate assets

 

 
(2,194
)
 

Net gains on disposition of discontinued operations
37,946

 
22,936

 
52,353

 
29,455

 
39,042

 
25,340

 
54,002

 
38,479

Net income
56,068

 
35,796

 
99,407

 
68,626

Net (income) attributable to noncontrolling interests in the Operating Partnership
(1,889
)
 
(1,653
)
 
(3,713
)
 
(3,166
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(203
)
 
(159
)
 
(593
)
 
(566
)
Dividends on Preferred Stock
(627
)
 
(627
)
 
(1,881
)
 
(1,881
)
Net income available for common stockholders
$
53,349

 
$
33,357


$
93,220


$
63,013

Earnings per Common Share – basic:
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
0.18

 
$
0.12

 
$
0.49

 
$
0.35

Income from discontinued operations available for common stockholders
0.43

 
0.32

 
0.62

 
0.49

Net income available for common stockholders
$
0.61

 
$
0.44

 
$
1.11

 
$
0.84

Weighted average Common Shares outstanding – basic
87,467

 
76,590

 
83,793

 
74,703

Earnings per Common Share – diluted:
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
0.18

 
$
0.12

 
$
0.49

 
$
0.35

Income from discontinued operations available for common stockholders
0.43

 
0.31

 
0.62

 
0.49

Net income available for common stockholders
$
0.61

 
$
0.43

 
$
1.11

 
$
0.84

Weighted average Common Shares outstanding – diluted
90,769

 
80,495

 
87,443

 
78,568

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
$
15,693

 
$
9,211

 
$
41,247

 
$
26,365

Income from discontinued operations available for common stockholders
37,656

 
24,146

 
51,973

 
36,648

Net income available for common stockholders
$
53,349

 
$
33,357

 
$
93,220

 
$
63,013

See accompanying notes to consolidated financial statements.

5

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Comprehensive Income
(Unaudited and in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
56,068

 
$
35,796

 
$
99,407

 
$
68,626

Other comprehensive income:
 
 
 
 
 
 
 
Unrealized gains/(losses) on tax increment financing bond
97

 
(101
)
 
396

 
482

Unrealized gains/(losses) on cash flow hedges
(1,798
)
 
(3,337
)
 
4,801

 
(10,424
)
Amortization of cash flow hedges
840

 
791

 
2,428

 
2,250

Total other comprehensive income/(loss)
(861
)
 
(2,647
)
 
7,625

 
(7,692
)
Total comprehensive income
55,207

 
33,149

 
107,032

 
60,934

Less-comprehensive (income) attributable to noncontrolling interests
(2,092
)
 
(1,812
)
 
(4,306
)
 
(3,732
)
Comprehensive income attributable to common stockholders
$
53,115

 
$
31,337

 
$
102,726

 
$
57,202


See accompanying notes to consolidated financial statements.



6

Table of Contents

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

 
Number of Common Shares
 
Common Stock
 
Series A Cumulative Redeemable Preferred Shares
 
Additional Paid-In Capital
 
Accumulated Other Compre-hensive Loss
 
Non-controlling Interests in Consolidated Affiliates
 
Distributions in Excess of Net Income Available for Common Stockholders
 
Total
Balance at December 31, 2012
80,311,437

 
$
803

 
$
29,077

 
$
2,040,306

 
$
(12,628
)
 
$
4,753

 
$
(897,418
)
 
$
1,164,893

Issuances of Common Stock, net of tax withholdings
8,660,546

 
87

 

 
305,514

 

 

 

 
305,601

Conversions of Common Units to Common Stock
789,144

 

 

 
28,788

 

 

 

 
28,788

Dividends on Common Stock


 

 

 

 

 

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


 

 

 

 

 

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


 

 

 
(8,570
)
 

 

 

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


 

 

 

 

 
(408
)
 

 
(408
)
Contributions from noncontrolling interests in consolidated affiliates


 

 

 

 

 
16,240

 

 
16,240

Issuances of restricted stock
151,630

 

 

 

 

 

 

 

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

 

 
5,887

 

 

 

 
5,896

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


 

 

 

 

 

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


 

 

 

 

 
593

 
(593
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income


 

 

 

 

 

 
99,407

 
99,407

Other comprehensive income


 

 

 

 
7,625

 

 

 
7,625

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
107,032

Balance at September 30, 2013
89,910,944

 
$
899

 
$
29,077

 
$
2,371,925

 
$
(5,003
)
 
$
21,178

 
$
(911,948
)
 
$
1,506,128



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

 
$
726

 
$
29,077

 
$
1,803,997

 
$
(5,734
)
 
$
4,646

 
$
(845,853
)
 
$
986,859

Issuances of Common Stock, net of tax withholdings
5,701,974

 
57

 

 
186,617

 

 

 

 
186,674

Conversions of Common Units to Common Stock
21,366

 

 

 
731

 

 

 

 
731

Dividends on Common Stock

 

 

 

 

 

 
(95,122
)
 
(95,122
)
Dividends on Preferred Stock

 

 

 

 

 

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

 

 

 
(12,485
)
 

 

 

 
(12,485
)
Distributions to noncontrolling interests in consolidated affiliates

 

 

 

 

 
(663
)
 

 
(663
)
Issuances of restricted stock
158,885

 

 

 

 

 

 

 

Share-based compensation expense, net of forfeitures

 
2

 

 
6,462

 

 

 

 
6,464

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

 

 

 

 

 

 
(3,166
)
 
(3,166
)
Net (income) attributable to noncontrolling interests in consolidated affiliates

 

 

 

 

 
566

 
(566
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 

 
68,626

 
68,626

Other comprehensive loss

 

 

 

 
(7,692
)
 

 

 
(7,692
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
60,934

Balance at September 30, 2012
78,529,922

 
$
785

 
$
29,077

 
$
1,985,322

 
$
(13,426
)
 
$
4,549

 
$
(877,962
)
 
$
1,128,345


See accompanying notes to consolidated financial statements.

7

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
 
Nine Months Ended September 30,
 
2013
 
2012
Operating activities:
 
 
 
Net income
$
99,407

 
$
68,626

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
133,556

 
117,764

Amortization of lease incentives and acquisition-related intangible assets and liabilities
258

 
358

Share-based compensation expense
5,896

 
6,464

Allowance for losses on accounts and accrued straight-line rents receivable
1,029

 
1,235

Amortization of deferred financing costs
2,860

 
2,709

Amortization of cash flow hedges
2,428

 
2,250

Amortization of mortgages and notes payable fair value adjustments
(1,015
)
 

Impairments of real estate assets
2,194

 

Losses on debt extinguishment
196

 
973

Net gains on disposition of property
(52,350
)
 
(29,455
)
Gains on for-sale residential condominiums

 
(255
)
Gain on acquisition of controlling interest in unconsolidated affiliate
(7,451
)
 

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

 
(2,670
)
Changes in financing obligations
(591
)
 
(1,010
)
Distributions of earnings from unconsolidated affiliates
3,129

 
3,249

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(508
)
 
5,310

Prepaid expenses and other assets
(2,188
)
 
(3,258
)
Accrued straight-line rents receivable
(12,368
)
 
(13,609
)
Accounts payable, accrued expenses and other liabilities
10,206

 
(20,663
)
Net cash provided by operating activities
186,512

 
138,018

Investing activities:
 
 
 
Investments in acquired real estate and related intangible assets, net of cash acquired
(418,796
)
 
(158,200
)
Investment in acquired controlling interest in unconsolidated affiliate
(32,818
)
 

Investments in development in process
(16,634
)
 
(5,392
)
Investments in tenant improvements and deferred leasing costs
(77,456
)
 
(61,821
)
Investments in building improvements
(38,702
)
 
(27,229
)
Net proceeds from disposition of real estate assets
161,970

 
152,456

Net proceeds from disposition of for-sale residential condominiums

 
3,768

Distributions of capital from unconsolidated affiliates
16,671

 
1,035

Investments in and repayments of mortgages and notes receivable
(864
)
 
1,657

Investments in and advances/repayments to/from unconsolidated affiliates
(429
)
 
(3,928
)
Changes in restricted cash and other investing activities
5,484

 
2,904

Net cash (used in) investing activities
(401,574
)
 
(94,750
)
Financing activities:
 
 
 
Dividends on Common Stock
(107,750
)
 
(95,122
)
Dividends on Preferred Stock
(1,881
)
 
(1,881
)
Distributions to noncontrolling interests in the Operating Partnership
(4,416
)
 
(4,733
)
Distributions to noncontrolling interests in consolidated affiliates
(408
)
 
(663
)
Proceeds from the issuance of Common Stock
315,818

 
191,667

Costs paid for the issuance of Common Stock
(7,678
)
 
(2,745
)
Repurchase of shares related to tax withholdings
(2,539
)
 
(2,248
)
Borrowings on revolving credit facility
695,300

 
219,800

Repayments of revolving credit facility
(511,900
)
 
(492,800
)
Borrowings on mortgages and notes payable

 
225,000

Repayments of mortgages and notes payable
(157,001
)
 
(77,264
)
Payments on financing obligations
(575
)
 
(1,316
)
Contributions from noncontrolling interests in consolidated affiliates
16,240

 

Additions to deferred financing costs and other financing activities
(242
)
 
(3,065
)
Net cash provided by/(used in) financing activities
232,968

 
(45,370
)
Net increase/(decrease) in cash and cash equivalents
$
17,906

 
$
(2,102
)
See accompanying notes to consolidated financial statements.

8

Table of Contents


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

 
Nine Months Ended September 30,
 
2013
 
2012
Net increase/(decrease) in cash and cash equivalents
$
17,906

 
$
(2,102
)
Cash and cash equivalents at beginning of the period
13,783

 
11,188

Cash and cash equivalents at end of the period
$
31,689

 
$
9,086


Supplemental disclosure of cash flow information:
 
 
Nine Months Ended September 30,
 
2013
 
2012
Cash paid for interest, net of amounts capitalized
$
67,786

 
$
72,793


Supplemental disclosure of non-cash investing and financing activities:
 
 
Nine Months Ended September 30,
 
2013
 
2012
Unrealized gains/(losses) on cash flow hedges
$
4,801

 
$
(10,424
)
Conversions of Common Units to Common Stock
28,788

 
731

Changes in accrued capital expenditures
12,778

 
1,829

Write-off of fully depreciated real estate assets
24,498

 
36,918

Write-off of fully amortized deferred financing and leasing costs
17,500

 
14,189

Unrealized gains on marketable securities of non-qualified deferred compensation plan
558

 
310

Adjustment of noncontrolling interests in the Operating Partnership to fair value
8,570

 
12,485

Unrealized gains on tax increment financing bond
396

 
482

Assumption of mortgages and notes payable related to acquisition activities
165,515

 

Reduction of advances to unconsolidated affiliates related to acquisition activities

 
26,000

Issuances of Common Units to acquire real estate assets

 
2,299

Reclass of aggregate differences between historical cost basis and the basis reflected at the joint venture level for assets acquired
8,206

 


See accompanying notes to consolidated financial statements.

9

Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Balance Sheets
(Unaudited and in thousands, except unit and per unit data)
 
September 30,
2013
 
December 31,
2012
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
403,556

 
$
345,614

Buildings and tenant improvements
3,756,552

 
3,172,107

Development in process
56,495

 
21,198

Land held for development
112,079

 
115,416

 
4,328,682

 
3,654,335

Less-accumulated depreciation
(981,602
)
 
(903,837
)
Net real estate assets
3,347,080

 
2,750,498

Real estate and other assets, net, held for sale
16,316

 
129,400

Cash and cash equivalents
31,780

 
13,867

Restricted cash
15,246

 
19,702

Accounts receivable, net of allowance of $1,532 and $2,848, respectively
30,839

 
23,073

Mortgages and notes receivable, net of allowance of $340 and $182, respectively
26,291

 
25,472

Accrued straight-line rents receivable, net of allowance of $1,177 and $813, respectively
123,047

 
111,233

Investments in and advances to unconsolidated affiliates
34,838

 
65,813

Deferred financing and leasing costs, net of accumulated amortization of $90,241 and $75,863, respectively
227,826

 
166,009

Prepaid expenses and other assets, net of accumulated amortization of $12,835 and $12,318,
respectively
42,628

 
44,458

Total Assets
$
3,895,891

 
$
3,349,525

Liabilities, Redeemable Operating Partnership Units and Equity:
 
 
 
Mortgages and notes payable
$
2,050,061

 
$
1,859,162

Accounts payable, accrued expenses and other liabilities
208,467

 
172,026

Financing obligations
28,192

 
29,358

Total Liabilities
2,286,720

 
2,060,546

Commitments and contingencies

 

Redeemable Operating Partnership Units:
 
 
 
Common Units, 2,943,872 and 3,733,016 outstanding, respectively
103,948

 
124,869

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

 
29,077

Total Redeemable Operating Partnership Units
133,025

 
153,946

Equity:
 
 
 
Common Units:
 
 
 
General partner Common Units, 924,460 and 836,356 outstanding, respectively
14,598

 
11,427

Limited partner Common Units, 88,577,675 and 79,066,272 outstanding, respectively
1,445,373

 
1,131,481

Accumulated other comprehensive loss
(5,003
)
 
(12,628
)
Noncontrolling interests in consolidated affiliates
21,178

 
4,753

Total Equity
1,476,146

 
1,135,033

Total Liabilities, Redeemable Operating Partnership Units and Equity
$
3,895,891

 
$
3,349,525


See accompanying notes to consolidated financial statements.

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Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Income
(Unaudited and in thousands, except per unit amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Rental and other revenues
$
147,294

 
$
123,418

 
$
415,961

 
$
368,029

Operating expenses:
 
 
 
 
 
 
 
Rental property and other expenses
55,343

 
45,830

 
151,784

 
133,907

Depreciation and amortization
48,124

 
37,041

 
130,390

 
110,656

General and administrative
8,991

 
9,799

 
27,966

 
28,493

Total operating expenses
112,458

 
92,670

 
310,140

 
273,056

Interest expense:
 
 
 
 
 
 
 
Contractual
22,683

 
22,910

 
67,879

 
70,309

Amortization of deferred financing costs
963

 
907

 
2,860

 
2,709

Financing obligations
26

 
(205
)
 
87

 
(357
)
 
23,672

 
23,612

 
70,826

 
72,661

Other income:
 
 
 
 
 
 
 
Interest and other income
1,582

 
1,916

 
4,982

 
5,883

Losses on debt extinguishment
(32
)
 

 
(196
)
 
(973
)
 
1,550

 
1,916

 
4,786

 
4,910

Income from continuing operations before disposition of property and condominiums and acquisition of controlling interest in and equity in earnings/(losses) of unconsolidated affiliates
12,714

 
9,052

 
39,781

 
27,222

Gains/(losses) on disposition of property
34

 

 
(3
)
 

Gains on for-sale residential condominiums

 
80

 

 
255

Gain on acquisition of controlling interest in unconsolidated affiliate
7,451

 

 
7,451

 

Equity in earnings/(losses) of unconsolidated affiliates
(3,174
)
 
1,328

 
(1,875
)
 
2,679

Income from continuing operations
17,025

 
10,460

 
45,354

 
30,156

Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations
1,096

 
2,404

 
3,843

 
9,024

Impairments of real estate assets

 

 
(2,194
)
 

Net gains on disposition of discontinued operations
37,946

 
22,936

 
52,353

 
29,455

 
39,042

 
25,340

 
54,002

 
38,479

Net income
56,067

 
35,800

 
99,356

 
68,635

Net (income) attributable to noncontrolling interests in consolidated affiliates
(203
)
 
(159
)
 
(593
)
 
(566
)
Distributions on Preferred Units
(627
)
 
(627
)
 
(1,881
)
 
(1,881
)
Net income available for common unitholders
$
55,237

 
$
35,014

 
$
96,882

 
$
66,188

Earnings per Common Unit – basic:
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
0.18

 
$
0.12

 
$
0.49

 
$
0.36

Income from discontinued operations available for common unitholders
0.43

 
0.32

 
0.62

 
0.49

Net income available for common unitholders
$
0.61

 
$
0.44

 
$
1.11

 
$
0.85

Weighted average Common Units outstanding – basic
90,259

 
79,949

 
86,920

 
78,032

Earnings per Common Unit – diluted:
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
0.18

 
$
0.12

 
$
0.49

 
$
0.36

Income from discontinued operations available for common unitholders
0.43

 
0.32

 
0.62

 
0.49

Net income available for common unitholders
$
0.61

 
$
0.44

 
$
1.11

 
$
0.85

Weighted average Common Units outstanding – diluted
90,360

 
80,086

 
87,034

 
78,159

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
$
16,195

 
$
9,674

 
$
42,880

 
$
27,709

Income from discontinued operations available for common unitholders
39,042

 
25,340

 
54,002

 
38,479

Net income available for common unitholders
$
55,237

 
$
35,014

 
$
96,882

 
$
66,188

See accompanying notes to consolidated financial statements.

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Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Comprehensive Income
(Unaudited and in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
56,067

 
$
35,800

 
$
99,356

 
$
68,635

Other comprehensive income:
 
 
 
 
 
 
 
Unrealized gains/(losses) on tax increment financing bond
97

 
(101
)
 
396

 
482

Unrealized gains/(losses) on cash flow hedges
(1,798
)
 
(3,337
)
 
4,801

 
(10,424
)
Amortization of cash flow hedges
840

 
791

 
2,428

 
2,250

Total other comprehensive income/(loss)
(861
)
 
(2,647
)
 
7,625

 
(7,692
)
Total comprehensive income
55,206

 
33,153

 
106,981

 
60,943

Less-comprehensive (income) attributable to noncontrolling interests
(203
)
 
(159
)
 
(593
)
 
(566
)
Comprehensive income attributable to common unitholders
$
55,003


$
32,994

 
$
106,388

 
$
60,377


See accompanying notes to consolidated financial statements.


12

Table of Contents

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

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

 
$
1,131,481

 
$
(12,628
)
 
$
4,753

 
$
1,135,033

Issuances of Common Units, net of tax withholdings
3,056

 
302,545

 

 

 
305,601

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

 

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

 

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

 
5,837

 

 

 
5,896

Distributions to noncontrolling interests in consolidated affiliates

 

 

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

 

 

 
16,240

 
16,240

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

 
20,125

 

 

 
20,329

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

 
593

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
994

 
98,362

 

 

 
99,356

Other comprehensive income

 

 
7,625

 

 
7,625

Total comprehensive income
 
 
 
 
 
 
 
 
106,981

Balance at September 30, 2013
$
14,598

 
$
1,445,373

 
$
(5,003
)
 
$
21,178

 
$
1,476,146



 
Common Units
 
Accumulated
Other
Comprehensive Loss
 
Noncontrolling
Interests in
Consolidated
Affiliates
 
Total Partners’
Capital
 
General
Partners’
Capital
 
Limited
Partners’
Capital
 
Balance at December 31, 2011
$
9,575

 
$
948,187

 
$
(5,734
)
 
$
4,646

 
$
956,674

Issuances of Common Units, net of tax withholdings
1,890

 
187,083

 

 

 
188,973

Distributions paid on Common Units
(994
)
 
(98,340
)
 

 

 
(99,334
)
Distributions paid on Preferred Units
(19
)
 
(1,862
)
 

 

 
(1,881
)
Share-based compensation expense, net of forfeitures
65

 
6,399

 

 

 
6,464

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(663
)
 
(663
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
(128
)
 
(12,686
)
 

 

 
(12,814
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(6
)
 
(560
)
 

 
566

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
686

 
67,949

 

 

 
68,635

Other comprehensive loss

 

 
(7,692
)
 

 
(7,692
)
Total comprehensive income
 
 
 
 
 
 
 
 
60,943

Balance at September 30, 2012
$
11,069

 
$
1,096,170

 
$
(13,426
)
 
$
4,549

 
$
1,098,362


See accompanying notes to consolidated financial statements.

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Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
 
Nine Months Ended September 30,
 
2013
 
2012
Operating activities:
 
 
 
Net income
$
99,356

 
$
68,635

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
133,556

 
117,764

Amortization of lease incentives and acquisition-related intangible assets and liabilities
258

 
358

Share-based compensation expense
5,896

 
6,464

Allowance for losses on accounts and accrued straight-line rents receivable
1,029

 
1,235

Amortization of deferred financing costs
2,860

 
2,709

Amortization of cash flow hedges
2,428

 
2,250

Amortization of mortgages and notes payable fair value adjustments
(1,015
)
 

Impairments of real estate assets
2,194

 

Losses on debt extinguishment
196

 
973

Net gains on disposition of property
(52,350
)
 
(29,455
)
Gains on for-sale residential condominiums

 
(255
)
Gain on acquisition of controlling interest in unconsolidated affiliate
(7,451
)
 

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

 
(2,679
)
Changes in financing obligations
(591
)
 
(1,010
)
Distributions of earnings from unconsolidated affiliates
3,109

 
3,230

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(508
)
 
5,310

Prepaid expenses and other assets
(2,141
)
 
(3,216
)
Accrued straight-line rents receivable
(12,368
)
 
(13,609
)
Accounts payable, accrued expenses and other liabilities
10,257

 
(20,753
)
Net cash provided by operating activities
186,590

 
137,951

Investing activities:
 
 
 
Investments in acquired real estate and related intangible assets, net of cash acquired
(418,796
)
 
(158,200
)
Investment in acquired controlling interest in unconsolidated affiliate
(32,818
)
 

Investments in development in process
(16,634
)
 
(5,392
)
Investments in tenant improvements and deferred leasing costs
(77,456
)
 
(61,821
)
Investments in building improvements
(38,702
)
 
(27,229
)
Net proceeds from disposition of real estate assets
161,970

 
152,456

Net proceeds from disposition of for-sale residential condominiums

 
3,768

Distributions of capital from unconsolidated affiliates
16,671

 
1,035

Investments in and repayments of mortgages and notes receivable
(864
)
 
1,657

Investments in and advances/repayments to/from unconsolidated affiliates
(429
)
 
(3,928
)
Changes in restricted cash and other investing activities
5,484

 
2,904

Net cash (used in) investing activities
(401,574
)
 
(94,750
)
Financing activities:
 
 
 
Distributions on Common Units
(111,645
)
 
(99,334
)
Distributions on Preferred Units
(1,881
)
 
(1,881
)
Distributions to noncontrolling interests in consolidated affiliates
(408
)
 
(663
)
Proceeds from the issuance of Common Units
315,818

 
191,667

Costs paid for the issuance of Common Units
(7,678
)
 
(2,745
)
Repurchase of units related to tax withholdings
(2,539
)
 
(2,248
)
Borrowings on revolving credit facility
695,300

 
219,800

Repayments of revolving credit facility
(511,900
)
 
(492,800
)
Borrowings on mortgages and notes payable

 
225,000

Repayments of mortgages and notes payable
(157,001
)
 
(77,264
)
Payments on financing obligations
(575
)
 
(1,316
)
Contributions from noncontrolling interests in consolidated affiliates
16,240

 

Additions to deferred financing costs and other financing activities
(834
)
 
(3,394
)
Net cash provided by/(used in) financing activities
232,897

 
(45,178
)
Net increase/(decrease) in cash and cash equivalents
$
17,913

 
$
(1,977
)
See accompanying notes to consolidated financial statements.

14

Table of Contents


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

 
Nine Months Ended September 30,
 
2013
 
2012
Net increase/(decrease) in cash and cash equivalents
$
17,913

 
$
(1,977
)
Cash and cash equivalents at beginning of the period
13,867

 
11,151

Cash and cash equivalents at end of the period
$
31,780

 
$
9,174


Supplemental disclosure of cash flow information:
 
 
Nine Months Ended September 30,
 
2013
 
2012
Cash paid for interest, net of amounts capitalized
$
67,786

 
$
72,793


Supplemental disclosure of non-cash investing and financing activities:
 
 
Nine Months Ended September 30,
 
2013
 
2012
Unrealized gains/(losses) on cash flow hedges
$
4,801

 
$
(10,424
)
Changes in accrued capital expenditures
12,778

 
1,829

Write-off of fully depreciated real estate assets
24,498

 
36,918

Write-off of fully amortized deferred financing and leasing costs
17,500

 
14,189

Unrealized gains on marketable securities of non-qualified deferred compensation plan
558

 
310

Adjustment of Redeemable Common Units to fair value
(20,921
)
 
10,187

Unrealized gains on tax increment financing bond
396

 
482

Assumption of mortgages and notes payable related to acquisition activities
165,515

 

Reduction of advances to unconsolidated affiliates related to acquisition activities

 
26,000

Issuances of Common Units to acquire real estate assets

 
2,299

Reclass of aggregate differences between historical cost basis and the basis reflected at the joint venture level for assets acquired
8,206

 


See accompanying notes to consolidated financial statements.

15

Table of Contents

HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(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 equity real estate investment trust (“REIT”) that provides leasing, management, development, construction and other customer-related services for its properties and for third parties. The Company conducts virtually all of its activities through Highwoods Realty Limited Partnership (the “Operating Partnership”). At September 30, 2013, the Company and/or the Operating Partnership wholly owned: 282 in-service office, industrial and retail properties, comprising 30.1 million square feet; 592 acres of undeveloped land suitable for future development, of which 496 acres are considered core assets; and four office development properties. In addition, we owned interests (50.0% or less) in 23 in-service office properties, a rental residential development property and 11 acres of undeveloped land suitable for future development, which includes a 12.5% interest in a 261,000 square foot office property directly owned by the Company (not included in the Operating Partnership’s Consolidated Financial Statements).

The Company is the sole general partner of the Operating Partnership. At September 30, 2013, the Company owned all of the Preferred Units and 89.5 million, or 96.8%, of the Common Units in the Operating Partnership. Limited partners own the remaining 2.9 million Common Units. During the nine months ended September 30, 2013, the Company redeemed 789,144 Common Units for a like number of shares of Common Stock.

Common Stock Offerings
 
During the three and nine months ended September 30, 2013, the Company issued 904,809 and 3,961,190 shares of Common Stock, respectively, under its equity sales agreements at an average gross sales price of $35.81 and $36.97 per share, respectively, and received net proceeds, after sales commissions, of $31.9 million and $144.2 million, respectively. During the third quarter of 2013, the Company issued 4,312,500 shares of Common Stock in a public offering and received net proceeds of $150.9 million. As a result of these Common Stock offerings and the redemptions discussed above, the percentage of Common Units owned by the Company increased from 95.6% at December 31, 2012 to 96.8% at September 30, 2013.

Basis of Presentation

Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Our Consolidated Balance Sheets at December 31, 2012 were retrospectively revised from previously reported amounts to reflect in real estate and other assets, net, held for sale those properties classified as held for sale during the three months ended September 30, 2013. Our Consolidated Statements of Income for the three and nine months ended September 30, 2012 were retrospectively revised from previously reported amounts to reflect in discontinued operations the operations for those properties classified as discontinued operations.

The Company's Consolidated Financial Statements include the Operating Partnership, wholly owned subsidiaries and those entities in which the Company has the controlling interest. The Operating Partnership's Consolidated Financial Statements include wholly owned subsidiaries and those entities in which the Operating Partnership has the controlling interest. All intercompany transactions and accounts have been eliminated. At September 30, 2013 and December 31, 2012, 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).


16

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


1.    Description of Business and Significant Accounting Policies – Continued
 
The unaudited interim consolidated financial statements and accompanying unaudited consolidated financial information, in the opinion of management, contain all adjustments (including normal recurring accruals) necessary for a fair presentation of our financial position, results of operations and cash flows. We have omitted certain notes and other information from the interim Consolidated Financial Statements presented in this Quarterly Report as permitted by SEC rules and regulations. These Consolidated Financial Statements should be read in conjunction with our 2012 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.

2.    Real Estate Assets
 
Acquisitions
 
During the third quarter of 2013, we acquired our joint venture partner's 60.0% interest in the HIW-KC Orlando, LLC joint venture, which owns five office properties in Orlando, FL encompassing 1.3 million square feet, for a net purchase price of $112.8 million. We previously accounted for our 40.0% interest in this joint venture using the equity method of accounting. The assets and liabilities of the joint venture are now wholly owned and are recorded in our Consolidated Financial Statements, including assets recorded at fair value of $188.0 million and secured debt recorded at fair value of $127.9 million, with an effective interest rate of 3.11%. This debt matures in July 2014. As a result of acquiring a controlling interest in this joint venture, our previously held equity interest was remeasured at a fair value of $75.2 million resulting in a gain of $7.5 million, which represents the difference between the fair market value of our previously held equity interest and the cost basis in our investment on the date of acquisition. The fair market value of our previously held equity interest was determined by management based on information available at the acquisition date and on current assumptions as to future operations.
 
During the third quarter of 2013, we also acquired:

an office property in Nashville, TN encompassing 520,000 square feet for a net purchase price of $150.1 million; and

our DLF II joint venture partner's 57.0% interest in two office properties in Atlanta, GA encompassing 505,000 square feet for a net purchase price of $44.5 million, including the assumption of secured debt recorded at fair value of $37.6 million, with an effective interest rate of 3.34%. This debt matures in April 2015.
 
During the second quarter of 2013, we acquired an office property in Atlanta, GA encompassing 553,000 square feet for a purchase price of $140.1 million.

During the first quarter of 2013, we acquired:

two office properties in Tampa, FL encompassing 372,000 square feet for a purchase price of $52.5 million;

two office properties in Greensboro, NC encompassing 195,000 square feet for a purchase price of $30.8 million; and

five acres of development land in Memphis, TN for a purchase price of $4.8 million.
 
During the three and nine months ended September 30, 2013, we expensed $0.8 million and $1.7 million, respectively, of acquisition costs (included in general and administrative expenses) related to these acquisitions. 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.
 

17

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


2.    Real Estate Assets - Continued
 
The following table sets forth a summary of the fair value of the major assets acquired and liabilities assumed relating to the third quarter 2013 acquisitions in Orlando, FL and Nashville, TN and the second quarter 2013 acquisition in Atlanta, GA discussed in the preceding paragraphs:
 
 
Total
Purchase Price Allocation
Real estate assets
$
445,396

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

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

 
The following table sets forth our rental and other revenues and net income, adjusted for interest expense and depreciation and amortization related to purchase price allocations, acquisition costs and equity in earnings of unconsolidated affiliates previously recognized as income assuming the Orlando, FL, Nashville, TN and Atlanta, GA acquisitions discussed in the preceding paragraph had been completed as of January 1, 2012:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Pro forma rental and other revenues
$
152,221

 
$
162,422

 
$
451,317

 
$
410,027

Pro forma net income
$
49,818

 
$
23,952