HIW 06.30.2014 10Q

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2014
 
HIGHWOODS PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
 
Maryland
001-13100
56-1871668
 
 
(State or other jurisdiction
of incorporation or organization)
(Commission
File Number)
(I.R.S. Employer
Identification Number)
 
 
HIGHWOODS REALTY LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
 
North Carolina
000-21731
56-1869557
 
 
(State or other jurisdiction
of incorporation or organization)
(Commission
File Number)
(I.R.S. Employer
Identification Number)
 
 
3100 Smoketree Court, Suite 600
Raleigh, NC 27604
(Address of principal executive offices) (Zip Code)
919-872-4924
(Registrants’ telephone number, including area code)
______________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Highwoods Properties, Inc.  Yes  x    No ¨    Highwoods Realty Limited Partnership  Yes  x    No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Highwoods Properties, Inc.  Yes  x    No ¨    Highwoods Realty Limited Partnership  Yes  x    No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of 'large accelerated filer,' 'accelerated filer' and 'smaller reporting company' in Rule 12b-2 of the Securities Exchange Act.
Highwoods Properties, Inc.
Large accelerated filer x    Accelerated filer ¨      Non-accelerated filer ¨      Smaller reporting company ¨
Highwoods Realty Limited Partnership
Large accelerated filer ¨    Accelerated filer ¨      Non-accelerated filer x      Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).
Highwoods Properties, Inc.  Yes  ¨    No x    Highwoods Realty Limited Partnership  Yes  ¨    No x
 
The Company had 90,361,707 shares of Common Stock outstanding as of July 21, 2014.
 




EXPLANATORY NOTE

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

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

Certain information contained herein is presented as of July 21, 2014, the latest practicable date for financial information prior to the filing of this Quarterly Report.

This report combines the Quarterly Reports on Form 10-Q for the period ended June 30, 2014 of the Company and the Operating Partnership. We believe combining the quarterly reports into this single report results in the following benefits:

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

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

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

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

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

Consolidated Financial Statements;

the following Notes to Consolidated Financial Statements:

Note 8 - Noncontrolling Interests; and

Note 13 - Earnings Per Share and Per Unit;

Item 4 - Controls and Procedures; and

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


HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP

QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 2014

TABLE OF CONTENTS

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


PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HIGHWOODS PROPERTIES, INC.
Consolidated Balance Sheets
(Unaudited and in thousands, except share and per share data)
 
June 30,
2014
 
December 31,
2013
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
382,575

 
$
393,602

Buildings and tenant improvements
3,724,554

 
3,748,869

Development in process
114,790

 
44,621

Land held for development
104,873

 
110,374

 
4,326,792

 
4,297,466

Less-accumulated depreciation
(1,011,477
)
 
(985,244
)
Net real estate assets
3,315,315

 
3,312,222

Real estate and other assets, net, held for sale
68,159

 

Cash and cash equivalents
18,699

 
10,184

Restricted cash
10,602

 
14,169

Accounts receivable, net of allowance of $1,390 and $1,648, respectively
27,972

 
26,430

Mortgages and notes receivable, net of allowance of $275 and $302, respectively
10,140

 
26,409

Accrued straight-line rents receivable, net of allowance of $798 and $1,063, respectively
132,051

 
126,014

Investments in unconsolidated affiliates
30,387

 
29,901

Deferred financing and leasing costs, net of accumulated amortization of $102,430 and $92,220, respectively
218,022

 
222,211

Prepaid expenses and other assets, net of accumulated amortization of $13,466 and $12,905,
respectively
45,453

 
39,561

Total Assets
$
3,876,800

 
$
3,807,101

Liabilities, Noncontrolling Interests in the Operating Partnership and Equity:
 
 
 
Mortgages and notes payable
$
2,058,972

 
$
1,956,299

Accounts payable, accrued expenses and other liabilities
219,296

 
218,962

Financing obligations
24,672

 
26,664

Total Liabilities
2,302,940

 
2,201,925

Commitments and contingencies

 

Noncontrolling interests in the Operating Partnership
123,205

 
106,480

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

 
29,077

Common Stock, $.01 par value, 200,000,000 authorized shares;
 
 
 
90,361,707 and 89,920,915 shares issued and outstanding, respectively
904

 
899

Additional paid-in capital
2,366,281

 
2,370,368

Distributions in excess of net income available for common stockholders
(962,205
)
 
(920,433
)
Accumulated other comprehensive loss
(4,719
)
 
(2,611
)
Total Stockholders’ Equity
1,429,338

 
1,477,300

Noncontrolling interests in consolidated affiliates
21,317

 
21,396

Total Equity
1,450,655

 
1,498,696

Total Liabilities, Noncontrolling Interests in the Operating Partnership and Equity
$
3,876,800

 
$
3,807,101


See accompanying notes to consolidated financial statements.


Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Income
(Unaudited and in thousands, except per share amounts)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Rental and other revenues
$
152,722

 
$
132,618

 
$
301,175

 
$
262,995

Operating expenses:
 
 
 
 
 
 
 
Rental property and other expenses
55,275

 
47,317

 
111,665

 
93,911

Depreciation and amortization
50,443

 
40,624

 
98,608

 
80,712

Impairments of real estate assets
588

 

 
588

 

General and administrative
8,733

 
8,397

 
19,447

 
18,979

Total operating expenses
115,039

 
96,338

 
230,308

 
193,602

Interest expense:
 
 
 
 
 
 
 
Contractual
20,640

 
22,398

 
41,390

 
45,196

Amortization of deferred financing costs
799

 
948

 
1,451

 
1,897

Financing obligations
(226
)
 
(60
)
 
(266
)
 
61

 
21,213

 
23,286

 
42,575

 
47,154

Other income:
 
 
 
 
 
 
 
Interest and other income
1,410

 
1,617

 
2,809

 
3,400

Gains/(losses) on debt extinguishment
18

 

 
18

 
(164
)
 
1,428

 
1,617


2,827


3,236

Income from continuing operations before disposition of investment properties and activity in unconsolidated affiliates
17,898

 
14,611

 
31,119

 
25,475

Gains/(losses) on disposition of property
5,947

 
(37
)
 
5,947

 
(37
)
Equity in earnings of unconsolidated affiliates
667

 
913

 
638

 
1,349

Income from continuing operations
24,512

 
15,487

 
37,704

 
26,787

Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations

 
1,995

 

 
4,339

Impairments of real estate assets

 
(1,066
)
 

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

 
13,163

 
384

 
14,407

 

 
14,092

 
384

 
16,552

Net income
24,512

 
29,579

 
38,088

 
43,339

Net (income) attributable to noncontrolling interests in the Operating Partnership
(742
)
 
(1,243
)
 
(1,140
)
 
(1,824
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(438
)
 
(187
)
 
(861
)
 
(390
)
Dividends on Preferred Stock
(627
)
 
(627
)
 
(1,254
)
 
(1,254
)
Net income available for common stockholders
$
22,705

 
$
27,522


$
34,833


$
39,871

Earnings per Common Share – basic:
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
0.25

 
$
0.17

 
$
0.38

 
$
0.30

Income from discontinued operations available for common stockholders

 
0.16

 
0.01

 
0.19

Net income available for common stockholders
$
0.25

 
$
0.33

 
$
0.39

 
$
0.49

Weighted average Common Shares outstanding – basic
90,254

 
82,811

 
90,111

 
81,925

Earnings per Common Share – diluted:
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
0.25

 
$
0.17

 
$
0.38

 
$
0.30

Income from discontinued operations available for common stockholders

 
0.16

 
0.01

 
0.19

Net income available for common stockholders
$
0.25

 
$
0.33

 
$
0.39

 
$
0.49

Weighted average Common Shares outstanding – diluted
93,312

 
86,631

 
93,172

 
85,752

Dividends declared per Common Share
$
0.425

 
$
0.425

 
$
0.850

 
$
0.850

Net income available for common stockholders:
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
22,705

 
$
14,033

 
$
34,461

 
$
24,031

Income from discontinued operations available for common stockholders

 
13,489

 
372

 
15,840

Net income available for common stockholders
$
22,705

 
$
27,522

 
$
34,833

 
$
39,871

See accompanying notes to consolidated financial statements.

3

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Comprehensive Income
(Unaudited and in thousands)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
24,512

 
$
29,579

 
$
38,088

 
$
43,339

Other comprehensive income/(loss):
 
 
 
 
 
 
 
Unrealized gains/(losses) on tax increment financing bond
105

 
(91
)
 
270

 
299

Unrealized gains/(losses) on cash flow hedges
(2,846
)
 
6,319

 
(4,250
)
 
6,599

Amortization of cash flow hedges
944

 
800

 
1,872

 
1,588

Total other comprehensive income/(loss)
(1,797
)
 
7,028

 
(2,108
)
 
8,486

Total comprehensive income
22,715

 
36,607

 
35,980

 
51,825

Less-comprehensive (income) attributable to noncontrolling interests
(1,180
)
 
(1,430
)
 
(2,001
)
 
(2,214
)
Comprehensive income attributable to common stockholders
$
21,535

 
$
35,177

 
$
33,979

 
$
49,611


See accompanying notes to consolidated financial statements.



4

Table of Contents

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

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

 
$
899

 
$
29,077

 
$
2,370,368

 
$
(2,611
)
 
$
21,396

 
$
(920,433
)
 
$
1,498,696

Issuances of Common Stock, net of shares redeemed for tax withholdings
281,992

 
3

 

 
8,709

 

 

 

 
8,712

Conversions of Common Units to Common Stock
4,417

 

 

 
162

 

 

 

 
162

Dividends on Common Stock


 

 

 

 

 

 
(76,605
)
 
(76,605
)
Dividends on Preferred Stock


 

 

 

 

 

 
(1,254
)
 
(1,254
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value


 

 

 
(18,337
)
 

 

 

 
(18,337
)
Distributions to noncontrolling interests in consolidated affiliates


 

 

 

 

 
(940
)
 

 
(940
)
Issuances of restricted stock
154,383

 

 

 

 

 

 

 

Share-based compensation expense, net of forfeitures


 
2

 

 
5,379

 

 

 

 
5,381

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


 

 

 

 

 

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


 

 

 

 

 
861

 
(861
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income


 

 

 

 

 

 
38,088

 
38,088

Other comprehensive loss


 

 

 

 
(2,108
)
 

 

 
(2,108
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
35,980

Balance at June 30, 2014
90,361,707

 
$
904

 
$
29,077

 
$
2,366,281

 
$
(4,719
)
 
$
21,317

 
$
(962,205
)
 
$
1,450,655



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

 
$
803

 
$
29,077

 
$
2,040,306

 
$
(12,628
)
 
$
4,753

 
$
(897,418
)
 
$
1,164,893

Issuances of Common Stock, net of shares redeemed for tax withholdings
3,434,687

 
34

 

 
122,456

 

 

 

 
122,490

Conversions of Common Units to Common Stock
72,471

 

 

 
2,851

 

 

 

 
2,851

Dividends on Common Stock

 

 

 

 

 

 
(69,563
)
 
(69,563
)
Dividends on Preferred Stock

 

 

 

 

 

 
(1,254
)
 
(1,254
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value

 

 

 
(9,649
)
 

 

 

 
(9,649
)
Distributions to noncontrolling interests in consolidated affiliates

 

 

 

 

 
(408
)
 

 
(408
)
Issuances of restricted stock
151,630

 

 

 

 

 

 

 

Share-based compensation expense, net of forfeitures
(1,813
)
 
3

 

 
4,734

 

 

 

 
4,737

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

 

 

 

 

 

 
(1,824
)
 
(1,824
)
Net (income) attributable to noncontrolling interests in consolidated affiliates

 

 

 

 

 
390

 
(390
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 

 
43,339

 
43,339

Other comprehensive income

 

 

 

 
8,486

 

 

 
8,486

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
51,825

Balance at June 30, 2013
83,968,412

 
$
840

 
$
29,077

 
$
2,160,698

 
$
(4,142
)
 
$
4,735

 
$
(927,110
)
 
$
1,264,098


See accompanying notes to consolidated financial statements.

5

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
 
Six Months Ended
June 30,
 
2014
 
2013
Operating activities:
 
 
 
Net income
$
38,088

 
$
43,339

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
98,608

 
84,767

Amortization of lease incentives and acquisition-related intangible assets and liabilities
234

 
(198
)
Share-based compensation expense
5,381

 
4,737

Allowance for losses on accounts and accrued straight-line rents receivable
1,278

 
380

Accrued interest on mortgages and notes receivable
(232
)
 

Amortization of deferred financing costs
1,451

 
1,897

Amortization of cash flow hedges
1,872

 
1,588

Amortization of mortgages and notes payable fair value adjustments
(902
)
 

Impairments of real estate assets
588

 
2,194

(Gains)/losses on debt extinguishment
(18
)
 
164

Net gains on disposition of property
(6,331
)
 
(14,370
)
Equity in earnings of unconsolidated affiliates
(638
)
 
(1,349
)
Changes in financing obligations
(628
)
 
(391
)
Distributions of earnings from unconsolidated affiliates
1,216

 
2,827

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
1,491

 
2,295

Prepaid expenses and other assets
(4,962
)
 
(2,284
)
Accrued straight-line rents receivable
(10,365
)
 
(8,009
)
Accounts payable, accrued expenses and other liabilities
(11,597
)
 
(661
)
Net cash provided by operating activities
114,534

 
116,926

Investing activities:
 
 
 
Investments in acquired real estate and related intangible assets, net of cash acquired

 
(228,461
)
Investments in development in process
(69,928
)
 
(11,499
)
Investments in tenant improvements and deferred leasing costs
(54,794
)
 
(42,343
)
Investments in building improvements
(28,877
)
 
(26,466
)
Net proceeds from disposition of real estate assets
8,975

 
60,381

Distributions of capital from unconsolidated affiliates
468

 
435

Investments in mortgages and notes receivable
(234
)
 
(432
)
Repayments of mortgages and notes receivable
16,817

 
276

Investments in unconsolidated affiliates
(6,225
)
 
(429
)
Changes in restricted cash and other investing activities
686

 
7,853

Net cash (used in) investing activities
(133,112
)
 
(240,685
)
Financing activities:
 
 
 
Dividends on Common Stock
(76,605
)
 
(69,563
)
Redemptions of Common Units
(93
)
 

Dividends on Preferred Stock
(1,254
)
 
(1,254
)
Distributions to noncontrolling interests in the Operating Partnership
(2,497
)
 
(3,140
)
Distributions to noncontrolling interests in consolidated affiliates
(940
)
 
(408
)
Proceeds from the issuance of Common Stock
11,404

 
126,738

Costs paid for the issuance of Common Stock
(42
)
 
(1,711
)
Repurchase of shares related to tax withholdings
(2,650
)
 
(2,537
)
Borrowings on revolving credit facility
302,100

 
346,300

Repayments of revolving credit facility
(360,800
)
 
(233,900
)
Borrowings on mortgages and notes payable
296,949

 

Repayments of mortgages and notes payable
(134,648
)
 
(39,610
)
Payments on financing obligations
(1,364
)
 
(575
)
Additions to deferred financing costs and other financing activities
(2,467
)
 
(242
)
Net cash provided by financing activities
27,093

 
120,098

Net increase/(decrease) in cash and cash equivalents
$
8,515

 
$
(3,661
)
See accompanying notes to consolidated financial statements.

6

Table of Contents


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

 
Six Months Ended
June 30,
 
2014
 
2013
Net increase/(decrease) in cash and cash equivalents
$
8,515

 
$
(3,661
)
Cash and cash equivalents at beginning of the period
10,184

 
13,783

Cash and cash equivalents at end of the period
$
18,699

 
$
10,122


Supplemental disclosure of cash flow information:
 
 
Six Months Ended
June 30,
 
2014
 
2013
Cash paid for interest, net of amounts capitalized
$
41,468

 
$
40,480


Supplemental disclosure of non-cash investing and financing activities:
 
 
Six Months Ended
June 30,
 
2014
 
2013
Unrealized gains/(losses) on cash flow hedges
$
(4,250
)
 
$
6,599

Conversions of Common Units to Common Stock
162

 
2,851

Changes in accrued capital expenditures
10,726

 
12,618

Write-off of fully depreciated real estate assets
16,994

 
17,732

Write-off of fully amortized deferred financing and leasing costs
13,273

 
11,363

Unrealized gains on marketable securities of non-qualified deferred compensation plan
210

 
312

Adjustment of noncontrolling interests in the Operating Partnership to fair value
18,337

 
9,649

Unrealized gains on tax increment financing bond
270

 
299

Receivable related to redemption of investment in unconsolidated affiliate
4,660

 


See accompanying notes to consolidated financial statements.

7

Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Balance Sheets
(Unaudited and in thousands, except unit and per unit data)
 
June 30,
2014
 
December 31,
2013
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
382,575

 
$
393,602

Buildings and tenant improvements
3,724,554

 
3,748,869

Development in process
114,790

 
44,621

Land held for development
104,873

 
110,374

 
4,326,792

 
4,297,466

Less-accumulated depreciation
(1,011,477
)
 
(985,244
)
Net real estate assets
3,315,315

 
3,312,222

Real estate and other assets, net, held for sale
68,159

 

Cash and cash equivalents
18,793

 
10,281

Restricted cash
10,602

 
14,169

Accounts receivable, net of allowance of $1,390 and $1,648, respectively
27,972

 
26,430

Mortgages and notes receivable, net of allowance of $275 and $302, respectively
10,140

 
26,409

Accrued straight-line rents receivable, net of allowance of $798 and $1,063, respectively
132,051

 
126,014

Investments in unconsolidated affiliates
30,387

 
29,901

Deferred financing and leasing costs, net of accumulated amortization of $102,430 and $92,220, respectively
218,022

 
222,211

Prepaid expenses and other assets, net of accumulated amortization of $13,466 and $12,905,
respectively
45,383

 
39,561

Total Assets
$
3,876,824

 
$
3,807,198

Liabilities, Redeemable Operating Partnership Units and Equity:
 
 
 
Mortgages and notes payable
$
2,058,972

 
$
1,956,299

Accounts payable, accrued expenses and other liabilities
219,250

 
218,887

Financing obligations
24,672

 
26,664

Total Liabilities
2,302,894

 
2,201,850

Commitments and contingencies

 

Redeemable Operating Partnership Units:
 
 
 
Common Units, 2,936,955 and 2,943,872 outstanding, respectively
123,205

 
106,480

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

 
29,077

Total Redeemable Operating Partnership Units
152,282

 
135,557

Equity:
 
 
 
Common Units:
 
 
 
General partner Common Units, 928,899 and 924,560 outstanding, respectively
14,048

 
14,508

Limited partner Common Units, 89,024,000 and 88,587,546 outstanding, respectively
1,391,002

 
1,436,498

Accumulated other comprehensive loss
(4,719
)
 
(2,611
)
Noncontrolling interests in consolidated affiliates
21,317

 
21,396

Total Equity
1,421,648

 
1,469,791

Total Liabilities, Redeemable Operating Partnership Units and Equity
$
3,876,824

 
$
3,807,198


See accompanying notes to consolidated financial statements.

8

Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Income
(Unaudited and in thousands, except per unit amounts)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Rental and other revenues
$
152,722

 
$
132,618

 
$
301,175

 
$
262,995

Operating expenses:
 
 
 
 
 
 
 
Rental property and other expenses
55,258

 
47,295

 
111,632

 
93,915

Depreciation and amortization
50,443

 
40,624

 
98,608

 
80,712

Impairments of real estate assets
588

 

 
588

 

General and administrative
8,750

 
8,419

 
19,480

 
18,975

Total operating expenses
115,039

 
96,338

 
230,308

 
193,602

Interest expense:
 
 
 
 
 
 
 
Contractual
20,640

 
22,398

 
41,390

 
45,196

Amortization of deferred financing costs
799

 
948

 
1,451

 
1,897

Financing obligations
(226
)
 
(60
)
 
(266
)
 
61

 
21,213

 
23,286

 
42,575

 
47,154

Other income:
 
 
 
 
 
 
 
Interest and other income
1,410

 
1,617

 
2,809

 
3,400

Gains/(losses) on debt extinguishment
18

 

 
18

 
(164
)
 
1,428

 
1,617

 
2,827

 
3,236

Income from continuing operations before disposition of investment properties and activity in unconsolidated affiliates
17,898

 
14,611

 
31,119

 
25,475

Gains/(losses) on disposition of property
5,947

 
(37
)
 
5,947

 
(37
)
Equity in earnings of unconsolidated affiliates
667

 
916

 
638

 
1,299

Income from continuing operations
24,512

 
15,490

 
37,704

 
26,737

Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations

 
1,995

 

 
4,339

Impairments of real estate assets

 
(1,066
)
 

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

 
13,163

 
384

 
14,407

 

 
14,092

 
384

 
16,552

Net income
24,512

 
29,582

 
38,088

 
43,289

Net (income) attributable to noncontrolling interests in consolidated affiliates
(438
)
 
(187
)
 
(861
)
 
(390
)
Distributions on Preferred Units
(627
)
 
(627
)
 
(1,254
)
 
(1,254
)
Net income available for common unitholders
$
23,447

 
$
28,768

 
$
35,973

 
$
41,645

Earnings per Common Unit – basic:
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
0.25

 
$
0.17

 
$
0.38

 
$
0.30

Income from discontinued operations available for common unitholders

 
0.16

 
0.01

 
0.19

Net income available for common unitholders
$
0.25

 
$
0.33

 
$
0.39

 
$
0.49

Weighted average Common Units outstanding – basic
92,782

 
86,090

 
92,640

 
85,223

Earnings per Common Unit – diluted:
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
0.25

 
$
0.17

 
$
0.38

 
$
0.30

Income from discontinued operations available for common unitholders

 
0.16

 
0.01

 
0.19

Net income available for common unitholders
$
0.25

 
$
0.33

 
$
0.39

 
$
0.49

Weighted average Common Units outstanding – diluted
92,903

 
86,222

 
92,763

 
85,343

Distributions declared per Common Unit
$
0.425

 
$
0.425

 
$
0.850

 
$
0.850

Net income available for common unitholders:
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
23,447

 
$
14,676

 
$
35,589

 
$
25,093

Income from discontinued operations available for common unitholders

 
14,092

 
384

 
16,552

Net income available for common unitholders
$
23,447

 
$
28,768

 
$
35,973

 
$
41,645

See accompanying notes to consolidated financial statements.

9

Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Comprehensive Income
(Unaudited and in thousands)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
24,512

 
$
29,582

 
$
38,088

 
$
43,289

Other comprehensive income/(loss):
 
 
 
 
 
 
 
Unrealized gains/(losses) on tax increment financing bond
105

 
(91
)
 
270

 
299

Unrealized gains/(losses) on cash flow hedges
(2,846
)
 
6,319

 
(4,250
)
 
6,599

Amortization of cash flow hedges
944

 
800

 
1,872

 
1,588

Total other comprehensive income/(loss)
(1,797
)
 
7,028

 
(2,108
)
 
8,486

Total comprehensive income
22,715

 
36,610

 
35,980

 
51,775

Less-comprehensive (income) attributable to noncontrolling interests
(438
)
 
(187
)
 
(861
)
 
(390
)
Comprehensive income attributable to common unitholders
$
22,277


$
36,423

 
$
35,119

 
$
51,385


See accompanying notes to consolidated financial statements.


10

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, 2013
$
14,508

 
$
1,436,498

 
$
(2,611
)
 
$
21,396

 
$
1,469,791

Issuances of Common Units, net of units redeemed for tax withholdings
87

 
8,625

 

 

 
8,712

Redemptions of Common Units
(1
)
 
(92
)
 

 

 
(93
)
Distributions paid on Common Units
(788
)
 
(77,966
)
 

 

 
(78,754
)
Distributions paid on Preferred Units
(13
)
 
(1,241
)
 

 

 
(1,254
)
Share-based compensation expense, net of forfeitures
54

 
5,327

 

 

 
5,381

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(940
)
 
(940
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
(171
)
 
(17,004
)
 

 

 
(17,175
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(9
)
 
(852
)
 

 
861

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
381

 
37,707

 

 

 
38,088

Other comprehensive loss

 

 
(2,108
)
 

 
(2,108
)
Total comprehensive income
 
 
 
 
 
 
 
 
35,980

Balance at June 30, 2014
$
14,048

 
$
1,391,002

 
$
(4,719
)
 
$
21,317

 
$
1,421,648



 
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 units redeemed for tax withholdings
1,225

 
121,265

 

 

 
122,490

Distributions paid on Common Units
(724
)
 
(71,631
)
 

 

 
(72,355
)
Distributions paid on Preferred Units
(13
)
 
(1,241
)
 

 

 
(1,254
)
Share-based compensation expense, net of forfeitures
47

 
4,690

 

 

 
4,737

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(408
)
 
(408
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
(59
)
 
(5,927
)
 

 

 
(5,986
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(4
)
 
(386
)
 

 
390

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
433

 
42,856

 

 

 
43,289

Other comprehensive income

 

 
8,486

 

 
8,486

Total comprehensive income
 
 
 
 
 
 
 
 
51,775

Balance at June 30, 2013
$
12,332

 
$
1,221,107

 
$
(4,142
)
 
$
4,735

 
$
1,234,032


See accompanying notes to consolidated financial statements.

11

Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
 
Six Months Ended
June 30,
 
2014
 
2013
Operating activities:
 
 
 
Net income
$
38,088

 
$
43,289

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
98,608

 
84,767

Amortization of lease incentives and acquisition-related intangible assets and liabilities
234

 
(198
)
Share-based compensation expense
5,381

 
4,737

Allowance for losses on accounts and accrued straight-line rents receivable
1,278

 
380

Accrued interest on mortgages and notes receivable
(232
)
 

Amortization of deferred financing costs
1,451

 
1,897

Amortization of cash flow hedges
1,872

 
1,588

Amortization of mortgages and notes payable fair value adjustments
(902
)
 

Impairments of real estate assets
588

 
2,194

(Gains)/losses on debt extinguishment
(18
)
 
164

Net gains on disposition of property
(6,331
)
 
(14,370
)
Equity in earnings of unconsolidated affiliates
(638
)
 
(1,299
)
Changes in financing obligations
(628
)
 
(391
)
Distributions of earnings from unconsolidated affiliates
1,216

 
2,814

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
1,491

 
2,295

Prepaid expenses and other assets
(4,892
)
 
(2,189
)
Accrued straight-line rents receivable
(10,365
)
 
(8,009
)
Accounts payable, accrued expenses and other liabilities
(11,568
)
 
(587
)
Net cash provided by operating activities
114,633

 
117,082

Investing activities:
 
 
 
Investments in acquired real estate and related intangible assets, net of cash acquired

 
(228,461
)
Investments in development in process
(69,928
)
 
(11,499
)
Investments in tenant improvements and deferred leasing costs
(54,794
)
 
(42,343
)
Investments in building improvements
(28,877
)
 
(26,466
)
Net proceeds from disposition of real estate assets
8,975

 
60,381

Distributions of capital from unconsolidated affiliates
468

 
435

Investments in mortgages and notes receivable
(234
)
 
(432
)
Repayments of mortgages and notes receivable
16,817

 
276

Investments in unconsolidated affiliates
(6,225
)
 
(429
)
Changes in restricted cash and other investing activities
686

 
7,853

Net cash (used in) investing activities
(133,112
)
 
(240,685
)
Financing activities:
 
 
 
Distributions on Common Units
(78,754
)
 
(72,355
)
Redemptions of Common Units
(93
)
 

Distributions on Preferred Units
(1,254
)
 
(1,254
)
Distributions to noncontrolling interests in consolidated affiliates
(940
)
 
(408
)
Proceeds from the issuance of Common Units
11,404

 
126,738

Costs paid for the issuance of Common Units
(42
)
 
(1,711
)
Repurchase of units related to tax withholdings
(2,650
)
 
(2,537
)
Borrowings on revolving credit facility
302,100

 
346,300

Repayments of revolving credit facility
(360,800
)
 
(233,900
)
Borrowings on mortgages and notes payable
296,949

 

Repayments of mortgages and notes payable
(134,648
)
 
(39,610
)
Payments on financing obligations
(1,364
)
 
(575
)
Additions to deferred financing costs and other financing activities
(2,917
)
 
(747
)
Net cash provided by financing activities
26,991

 
119,941

Net increase/(decrease) in cash and cash equivalents
$
8,512

 
$
(3,662
)
See accompanying notes to consolidated financial statements.

12

Table of Contents


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

 
Six Months Ended
June 30,
 
2014
 
2013
Net increase/(decrease) in cash and cash equivalents
$
8,512

 
$
(3,662
)
Cash and cash equivalents at beginning of the period
10,281

 
13,867

Cash and cash equivalents at end of the period
$
18,793

 
$
10,205


Supplemental disclosure of cash flow information:
 
 
Six Months Ended
June 30,
 
2014
 
2013
Cash paid for interest, net of amounts capitalized
$
41,468

 
$
40,480


Supplemental disclosure of non-cash investing and financing activities:
 
 
Six Months Ended
June 30,
 
2014
 
2013
Unrealized gains/(losses) on cash flow hedges
$
(4,250
)
 
$
6,599

Changes in accrued capital expenditures
10,726

 
12,618

Write-off of fully depreciated real estate assets
16,994

 
17,732

Write-off of fully amortized deferred financing and leasing costs
13,273

 
11,363

Unrealized gains on marketable securities of non-qualified deferred compensation plan
210

 
312

Adjustment of Redeemable Common Units to fair value
16,725

 
5,482

Unrealized gains on tax increment financing bond
270

 
299

Receivable related to redemption of investment in unconsolidated affiliate
4,660

 


See accompanying notes to consolidated financial statements.

13

Table of Contents

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

1.    Description of Business and Significant Accounting Policies

Description of Business

Highwoods Properties, Inc. (the “Company”) is a fully-integrated real estate investment trust (“REIT”) that provides leasing, management, development, construction and other customer-related services for its properties and for third parties. The Company conducts its activities through Highwoods Realty Limited Partnership (the “Operating Partnership”). At June 30, 2014, we owned or had an interest in 32.1 million rentable square feet of in-service office, industrial and retail properties, 0.9 million rentable square feet of office properties under development and approximately 600 acres of development land.
 
The Company is the sole general partner of the Operating Partnership. At June 30, 2014, the Company owned all of the Preferred Units and 90.0 million, or 96.9%, of the Common Units in the Operating Partnership. Limited partners own the remaining 2.9 million Common Units. During the six months ended June 30, 2014, the Company redeemed 2,500 Common Units for less than $0.1 million in cash and redeemed 4,417 Common Units for a like number of shares of Common Stock.

Common Stock Offerings
 
During the three and six months ended June 30, 2014, the Company issued 50,293 and 73,877 shares of Common Stock, respectively, under its equity sales agreements at an average gross sales price of $38.38 and $38.35 per share, respectively, and received net proceeds, after sales commissions, of $1.9 million and $2.8 million, respectively. As a result of this activity and the redemptions discussed above, the percentage of Common Units owned by the Company increased from 96.8% at December 31, 2013 to 96.9% at June 30, 2014.

Basis of Presentation

Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Our Consolidated Statements of Income for the three and six months ended June 30, 2013 were retrospectively revised from previously reported amounts to reflect in discontinued operations the operations for those properties classified as discontinued operations.

The Company's Consolidated Financial Statements include the Operating Partnership, wholly owned subsidiaries and those entities in which the Company has the controlling interest. The Operating Partnership's Consolidated Financial Statements include wholly owned subsidiaries and those entities in which the Operating Partnership has the controlling interest. All intercompany transactions and accounts have been eliminated. At June 30, 2014 and December 31, 2013, we had involvement with, but are not the primary beneficiary in, an entity that we concluded to be a variable interest entity (see Note 3).

The unaudited interim consolidated financial statements and accompanying unaudited consolidated financial information, in the opinion of management, contain all adjustments (including normal recurring accruals) necessary for a fair presentation of our financial position, results of operations and cash flows. We have condensed or omitted certain notes and other information from the interim Consolidated Financial Statements presented in this Quarterly Report as permitted by SEC rules and regulations. These Consolidated Financial Statements should be read in conjunction with our 2013 Annual Report on Form 10-K.

Use of Estimates
 
The preparation of consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results could differ from those estimates.


14

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


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

The Financial Accounting Standards Board ("FASB") recently issued an accounting standard update that requires only those real estate asset sales representing a strategic shift in operations (e.g., a disposal of a major geographic area or a major line of business) to be reflected in discontinued operations. This accounting standard update is required to be adopted in 2015. Early adoption is permitted, but only for real estate asset sales that have not been previously reflected as discontinued operations. We elected to early adopt the accounting standard update as of April 1, 2014, resulting in the operations of current period dispositions and property classified as held for sale at June 30, 2014 being included in continuing operations on our Consolidated Statements of Income.  Prior to adoption, we were generally required to reflect all real estate asset sales as discontinued operations, which required reclassification of the earnings of the sold assets from continuing operations for all periods presented.

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

2.    Real Estate Assets

Dispositions

During the second quarter of 2014, we sold two land parcels in Atlanta, GA in separate transactions for an aggregate sale price of $9.5 million and recorded aggregate gains on disposition of property of $5.9 million.

Impairments

During the second quarter of 2014, we recorded impairments of real estate assets of $0.6 million on an office property in Greensboro, NC. This impairment was due to a change in the assumed timing of future disposition and leasing assumptions, which reduced the future expected cash flows from the impaired property.

15

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



3.    Mortgages and Notes Receivable

The following table sets forth our mortgages and notes receivable:

 
June 30,
2014
 
December 31,
2013
Seller financing (first mortgages)
$

 
$
16,454

Less allowance

 

 

 
16,454

Mortgage receivable
9,901

 
9,435

Less allowance

 

 
9,901

 
9,435

Promissory notes
514

 
822

Less allowance
(275
)
 
(302
)
 
239

 
520

Mortgages and notes receivable, net
$
10,140

 
$
26,409


During 2010, we provided seller financing in conjunction with two disposition transactions. We accounted for these dispositions using the installment method, whereby a gain on disposition of property was deferred until the seller financing was repaid. During the first quarter of 2014, the $16.5 million of seller financing was fully repaid and we recorded the $0.4 million gain on disposition of property.

During 2012, we provided secured acquisition financing to a third party. We also agreed to loan such third party $8.4 million on a secured basis to fund future infrastructure development. As of June 30, 2014, $0.5 million has been funded to the third party for infrastructure development. We concluded this arrangement to be an interest in a variable interest entity. However, since we do not have the power to direct matters that most significantly impact the activities of the entity, we do not qualify as the primary beneficiary. Accordingly, the entity is not consolidated. Our risk of loss with respect to this arrangement is limited to the carrying value of the mortgage receivable and the future infrastructure development funding commitment.

We evaluate the ability to collect our mortgages and notes receivable by monitoring the leasing statistics and/or market fundamentals of these assets. As of June 30, 2014, our mortgages and notes receivable were not in default and there were no other indicators of impairment.

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

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Beginning notes receivable allowance
$
300

 
$
437

 
$
302

 
$
182

Recoveries/write-offs/other
(25
)
 
(61
)
 
(27
)
 
194

Total notes receivable allowance
$
275

 
$
376

 
$
275

 
$
376



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)



4.    Investments in Affiliates

Unconsolidated Affiliates

We have equity interests of up to 50.0% in various joint ventures with unrelated third parties that are accounted for using the equity method of accounting because we have the ability to exercise significant influence over their operating and financial policies.

The following table sets forth the summarized income statements of our unconsolidated affiliates:

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Income Statements:
 
 
 
 
 
 
 
Rental and other revenues
$
12,845

 
$
23,935

 
$
25,278

 
$
47,451

Expenses:
 
 
 
 
 
 
 
Rental property and other expenses
6,236

 
11,739

 
12,439

 
22,948

Depreciation and amortization
3,328

 
6,227