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, 2009

______________

 

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 o

Highwoods Realty Limited Partnership Yes x

No o

 

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 o

No o

Highwoods Realty Limited Partnership Yes o

No o

 

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 o

Non-accelerated filer o

Smaller reporting company o

Highwoods Realty Limited Partnership

 

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x

Smaller reporting company o

 

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 o

No x

Highwoods Realty Limited Partnership Yes o

No x

 

The Company had 70,860,922 shares of common stock outstanding as of July 31, 2009.

 

 


HIGHWOODS PROPERTIES, INC.

HIGHWOODS REALTY LIMITED PARTNERSHIP

 

QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 2009

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

2

HIGHWOODS PROPERTIES, INC.:

 

Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008

3

 

Consolidated Statements of Income for the three and six months ended June 30, 2009 and 2008

4

 

Consolidated Statement of Equity for the six months ended June 30, 2009

5

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008

6

 

Notes To Consolidated Financial Statements

8

HIGHWOODS REALTY LIMITED PARTNERSHIP:

 

Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008

25

 

Consolidated Statements of Income for the three and six months ended June 30, 2009 and 2008

26

 

Consolidated Statement of Equity for the six months ended June 30, 2009

27

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008

28

 

Notes To Consolidated Financial Statements

30

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

45

 

Disclosure Regarding Forward-Looking Statements

45

 

Results of Operations

46

 

Liquidity and Capital Resources

50

 

Critical Accounting Estimates

55

 

Funds From Operations

55

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

57

ITEM 4. CONTROLS AND PROCEDURES

57

PART II - OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

58

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

58

ITEM 6. EXHIBITS

58

 

 

1

 

 


 

Table of Contents

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

We refer to Highwoods Properties, Inc. as the “Company,” Highwoods Realty Limited Partnership as the “Operating Partnership,” the Company’s common stock as “Common Stock,” the Company’s preferred stock as “Preferred Stock,” the Operating Partnership’s common partnership interests as “Common Units,” the Operating Partnership’s preferred partnership interests as “Preferred Units” and in-service properties (excluding rental residential units) to which the Company and/or the Operating Partnership have title and 100.0% ownership rights as the “Wholly Owned Properties.” 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.

 

2

 

 


 

Table of Contents

 

HIGHWOODS PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited and in thousands, except share and per share amounts)

 

 

 

June 30,
2009

 

December 31,
2008

 

Assets:

 

 

 

 

 

 

Real estate assets, at cost:

 

 

 

 

 

 

 

Land

 

$

349,386

 

$

352,872

 

Buildings and tenant improvements

 

 

2,808,834

 

 

2,819,844

 

Development in process

 

 

67,563

 

 

61,938

 

Land held for development

 

 

99,232

 

 

98,946

 

 

 

 

3,325,015

 

 

3,333,600

 

Less-accumulated depreciation

 

 

(743,753

)

 

(714,224

)

Net real estate assets

 

 

2,581,262

 

 

2,619,376

 

For-sale residential condominiums

 

 

19,660

 

 

24,284

 

Real estate and other assets, net, held for sale

 

 

1,249

 

 

1,242

 

Cash and cash equivalents

 

 

13,372

 

 

13,757

 

Restricted cash

 

 

14,707

 

 

2,258

 

Accounts receivable, net of allowance of $2,836 and $1,281, respectively

 

 

18,050

 

 

23,687

 

Notes receivable, net of allowance of $418 and $459, respectively

 

 

3,330

 

 

3,602

 

Accrued straight-line rents receivable, net of allowance of $1,903 and $2,082,
respectively

 

 

81,764

 

 

79,979

 

Investment in unconsolidated affiliates

 

 

66,631

 

 

67,723

 

Deferred financing and leasing costs, net of accumulated amortization of $50,752
and $52,586, respectively

 

 

70,055

 

 

73,216

 

Prepaid expenses and other assets

 

 

36,683

 

 

37,046

 

Total Assets

 

$

2,906,763

 

$

2,946,170

 

 

 

 

 

 

 

 

 

Liabilities, Noncontrolling Interests in the Operating Partnership and Equity:

 

 

 

 

 

 

 

Mortgages and notes payable

 

$

1,428,650

 

$

1,604,685

 

Accounts payable, accrued expenses and other liabilities

 

 

134,202

 

 

135,609

 

Financing obligations

 

 

34,758

 

 

34,174

 

Total Liabilities

 

 

1,597,610

 

 

1,774,468

 

Commitments and contingencies

 

 

 

 

 

 

 

Noncontrolling interests in the Operating Partnership

 

 

90,796

 

 

111,278

 

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), 29,092 shares issued and outstanding

 

 

29,092

 

 

29,092

 

8.000% Series B Cumulative Redeemable Preferred Shares (liquidation
preference $25 per share), 2,100,000 shares issued and outstanding

 

 

52,500

 

 

52,500

 

Common stock, $.01 par value, 200,000,000 authorized shares;

 

 

 

 

 

 

 

70,847,962 and 63,571,705 shares issued and outstanding, respectively

 

 

708

 

 

636

 

Additional paid-in capital

 

 

1,783,645

 

 

1,616,093

 

Distributions in excess of net earnings

 

 

(649,326

)

 

(639,281

)

Accumulated other comprehensive loss

 

 

(4,327

)

 

(4,792

)

Total Stockholders' Equity

 

 

1,212,292

 

 

1,054,248

 

Noncontrolling interests in consolidated affiliates

 

 

6,065

 

 

6,176

 

Total Equity

 

 

1,218,357

 

 

1,060,424

 

Total Liabilities, Noncontrolling Interests in the Operating
Partnership and Equity

 

$

2,906,763

 

$

2,946,170

 

 

See accompanying notes to consolidated financial statements.

 

3

 

 


 

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,

 

 

 

2009

 

2008

 

2009

 

2008

 

Rental and other revenues

 

$

113,310

 

$

112,828

 

$

227,123

 

$

224,041

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental property and other expenses

 

 

39,458

 

 

40,501

 

 

80,352

 

 

78,233

 

Depreciation and amortization

 

 

32,931

 

 

30,749

 

 

65,960

 

 

61,096

 

General and administrative

 

 

9,486

 

 

10,766

 

 

17,801

 

 

20,477

 

Total operating expenses

 

 

81,875

 

 

82,016

 

 

164,113

 

 

159,806

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual

 

 

19,945

 

 

23,345

 

 

40,524

 

 

46,808

 

Amortization of deferred financing costs

 

 

689

 

 

686

 

 

1,351

 

 

1,324

 

Financing obligations

 

 

710

 

 

764

 

 

1,445

 

 

1,504

 

 

 

 

21,344

 

 

24,795

 

 

43,320

 

 

49,636

 

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

2,284

 

 

1,597

 

 

3,291

 

 

2,389

 

Gain on debt extinguishment

 

 

630

 

 

 

 

630

 

 

 

 

 

 

2,914

 

 

1,597

 

 

3,921

 

 

2,389

 

Income before disposition of property and condominiums and equity

 

 

 

 

 

 

 

 

 

 

 

 

 

in earnings of unconsolidated affiliates

 

 

13,005

 

 

7,614

 

 

23,611

 

 

16,988

 

Gains on disposition of property

 

 

194

 

 

107

 

 

213

 

 

107

 

Gains on for-sale residential condominiums

 

 

289

 

 

 

 

636

 

 

 

Equity in earnings of unconsolidated affiliates

 

 

1,862

 

 

1,520

 

 

3,162

 

 

3,509

 

Income from continuing operations

 

 

15,350

 

 

9,241

 

 

27,622

 

 

20,604

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

 

781

 

 

1,745

 

 

1,636

 

 

3,390

 

Gains on disposition of discontinued operations

 

 

20,943

 

 

5,027

 

 

21,016

 

 

8,753

 

 

 

 

21,724

 

 

6,772

 

 

22,652

 

 

12,143

 

Net income

 

 

37,074

 

 

16,013

 

 

50,274

 

 

32,747

 

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

 

 

(2,054

)

 

(839

)

 

(2,748

)

 

(1,732

)

Net (income) attributable to noncontrolling interests in consolidated
affiliates

 

 

(116

)

 

(191

)

 

(134

)

 

(389

)

Dividends on preferred stock

 

 

(1,677

)

 

(2,838

)

 

(3,354

)

 

(5,676

)

Net income available for common stockholders

 

$

33,227

 

$

12,145

 

$

44,038

 

$

24,950

 

Earnings per common share - basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations available for common stockholders

 

$

0.19

 

$

0.10

 

$

0.35

 

$

0.24

 

Income from discontinued operations available for common stockholders

 

 

0.31

 

 

0.11

 

 

0.33

 

 

0.20

 

Net income available for common stockholders

 

$

0.50

 

$

0.21

 

$

0.68

 

$

0.44

 

Weighted average common shares outstanding - basic

 

 

66,122

 

 

57,456

 

 

64,883

 

 

57,337

 

Earnings per common share - diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations available for common stockholders

 

$

0.19

 

$

0.10

 

$

0.35

 

$

0.23

 

Income from discontinued operations available for common stockholders

 

 

0.31

 

 

0.11

 

 

0.33

 

 

0.20

 

Net income available for common stockholders

 

$

0.50

 

$

0.21

 

$

0.68

 

$

0.43

 

Weighted average common shares outstanding - diluted

 

 

70,234

 

 

61,822

 

 

68,978

 

 

61,625

 

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

 

$

12,767

 

$

5,811

 

$

22,706

 

$

13,596

 

Income from discontinued operations available for common stockholders

 

 

20,460

 

 

6,334

 

 

21,332

 

 

11,354

 

Net income available for common stockholders

 

$

33,227

 

$

12,145

 

$

44,038

 

$

24,950

 

 

See accompanying notes to consolidated financial statements.

 

4

 

 


 

Table of Contents

 

HIGHWOODS PROPERTIES, INC.

CONSOLIDATED STATEMENT OF EQUITY

Six Months Ended June 30, 2009

(Unaudited and in thousands, except share amounts)

 

 

 

Number of
Common
Shares

 

Common
Stock

 

Series A
Preferred

 

Series B
Preferred

 

Additional
Paid-In
Capital

 

Accum-
ulated
Other
Compre-
hensive
Loss

 

Non-
Control-
ling
Interests
in
Consol-idated
Affiliates

 

Distri-
butions
in Excess
of Net
Earnings

 

Total

 

Balance at
December 31, 2008

 

63,571,705

 

$

636

 

$

29,092

 

$

52,500

 

$

1,616,093

 

$

(4,792

)

$

6,176

 

$

(639,281

)

$

1,060,424

 

Issuances of Common
Stock, net

 

7,027,226

 

 

70

 

 

 

 

 

 

144,194

 

 

 

 

 

 

 

 

144,264

 

Conversion of Common
Units to Common
Stock

 

8,291

 

 

 

 

 

 

 

 

189

 

 

 

 

 

 

 

 

189

 

Dividends on Common
Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(54,083

)

 

(54,083

)

Dividends on Preferred
Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,354

)

 

(3,354

)

Adjustment to
noncontrolling
interests in the
Operating Partnership

 

 

 

 

 

 

 

 

 

19,598

 

 

 

 

 

 

 

 

19,598

 

Distribution to
noncontrolling
interest in consolidated
affiliates

 

 

 

 

 

 

 

 

 

 

 

 

 

(245

)

 

 

 

(245

)

Issuances of restricted
stock, net

 

240,740

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of
restricted stock and
stock options

 

 

 

2

 

 

 

 

 

 

3,571

 

 

 

 

 

 

 

 

3,573

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,748

)

 

(2,748

)

Net (income) attributable to noncontrolling
interests in consolidated
affiliates

 

 

 

 

 

 

 

 

 

 

 

 

 

134

 

 

(134

)

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50,274

 

 

50,274

 

Other comprehensive
income

 

 

 

 

 

 

 

 

 

 

 

465

 

 

 

 

 

 

465

 

Total comprehensive
income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50,739

 

Balance at
June 30, 2009

 

70,847,962

 

$

708

 

$

29,092

 

$

52,500

 

$

1,783,645

 

$

(4,327

)

$

6,065

 

$

(649,326

)

$

1,218,357

 

 

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,

 

 

 

2009

 

2008

 

Operating activities:

 

 

 

 

 

 

 

Net income

 

$

50,274

 

$

32,747

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation

 

 

58,718

 

 

54,878

 

Amortization of lease commissions

 

 

7,792

 

 

7,605

 

Amortization of lease incentives

 

 

548

 

 

486

 

Amortization of restricted stock and stock options

 

 

3,573

 

 

3,940

 

Amortization of deferred financing costs

 

 

1,351

 

 

1,324

 

Amortization of accumulated other comprehensive loss

 

 

(141

)

 

126

 

Gain on extinguishment of debt

 

 

(630

)

 

 

Gains on disposition of properties

 

 

(21,229

)

 

(8,860

)

Gains on disposition of for-sale residential condominiums

 

 

(636

)

 

 

Equity in earnings of unconsolidated affiliates

 

 

(3,162

)

 

(3,509

)

Change in financing obligations

 

 

584

 

 

74

 

Distributions of earnings from unconsolidated affiliates

 

 

2,081

 

 

3,461

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

3,713

 

 

3,282

 

Prepaid expenses and other assets

 

 

(1,296

)

 

(2,575

)

Accrued straight-line rents receivable

 

 

(2,252

)

 

(4,298

)

Accounts payable, accrued expenses and other liabilities

 

 

5,351

 

 

(5,438

)

Net cash provided by operating activities

 

 

104,639

 

 

83,243

 

Investing activities:

 

 

 

 

 

 

 

Additions to real estate assets and deferred leasing costs

 

 

(68,851

)

 

(114,376

)

Proceeds from disposition of real estate assets

 

 

61,556

 

 

29,452

 

Proceeds from disposition of for-sale residential condominiums

 

 

5,215

 

 

 

Distributions of capital from unconsolidated affiliates

 

 

2,879

 

 

1,499

 

Net repayments of notes receivable

 

 

272

 

 

1,476

 

Contributions to unconsolidated affiliates

 

 

(500

)

 

(12,341

)

Changes in restricted cash and other investing activities

 

 

(12,020

)

 

(22,589

)

Net cash used in investing activities

 

 

(11,449

)

 

(116,879

)

Financing activities:

 

 

 

 

 

 

 

Dividends on Common Stock

 

 

(54,083

)

 

(48,653

)

Dividends on Preferred Stock

 

 

(3,354

)

 

(5,676

)

Distributions to noncontrolling interests in the Operating Partnership

 

 

(3,443

)

 

(3,356

)

Distributions to noncontrolling interests in consolidated affiliates

 

 

(245

)

 

(471

)

Net proceeds from the sale of Common Stock

 

 

144,264

 

 

6,122

 

Repurchase of Common Units from noncontrolling interests

 

 

 

 

(3,293

)

Borrowings on revolving credit facility

 

 

122,000

 

 

242,550

 

Repayments of revolving credit facility

 

 

(177,000

)

 

(212,350

)

Borrowings on mortgages and notes payable

 

 

53,424

 

 

164,995

 

Repayments of mortgages and notes payable

 

 

(173,846

)

 

(105,161

)

Contributions from noncontrolling interests in consolidated affiliates

 

 

 

 

625

 

Additions to deferred financing costs

 

 

(1,292

)

 

(803

)

Net cash (used in)/provided by financing activities

 

 

(93,575

)

 

34,529

 

Net (decrease)/increase in cash and cash equivalents

 

 

(385

)

 

893

 

Cash and cash equivalents at beginning of the period

 

 

13,757

 

 

3,140

 

Cash and cash equivalents at end of the period

 

$

13,372

 

$

4,033

 

 

See accompanying notes to consolidated financial statements.

 

6

 

 


 

Table of Contents

 

HIGHWOODS PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued

(Unaudited and in thousands)

 

Supplemental disclosure of cash flow information:

 

 

 

Six Months Ended
June 30,

 

 

 

2009

 

2008

 

Cash paid for interest, net of amounts capitalized (excludes cash distributions to owners of sold properties accounted for
as financings of $272 and $800, respectively)

 

$

43,386

 

$

50,459

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

Six Months Ended
June 30,

 

 

 

2009

 

2008

 

Assets:

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

$

192

 

$

292

 

 

 

$

192

 

$

292

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other liabilities

 

$

(414

)

$

142

 

 

 

$

(414

)

$

142

 

 

 

 

 

 

 

 

 

Noncontrolling Interests in the Operating Partnership and Equity

 

$

606

 

$

150

 

 

See accompanying notes to consolidated financial statements.

 

7

 

 


 

Table of Contents

 

HIGHWOODS PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

(tabular dollar amounts in thousands, except per share data)

(Unaudited)

 

1.

DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

 

Description of Business

 

Highwoods Properties, Inc., together with its consolidated subsidiaries (the "Company"), is a fully-integrated, self-administered and self-managed equity real estate investment trust ("REIT") that operates in the southeastern and midwestern United States. The Company conducts virtually all of its activities through Highwoods Realty Limited Partnership (the “Operating Partnership”). As of June 30, 2009, the Company and/or the Operating Partnership wholly owned: 307 in-service office, industrial and retail properties; 96 rental residential units; 580 acres of undeveloped land suitable for future development, of which 490 acres are considered core holdings; an additional six office and industrial properties under development; and 61 for-sale residential condominiums.

 

The Company is the sole general partner of the Operating Partnership. As of June 30, 2009, the Company owned all of the preferred partnership interests (“Preferred Units”) and 70.4 million, or 94.6%, of the common partnership interests (“Common Units”) in the Operating Partnership. Limited partners (including certain officers and directors of the Company) own the remaining 4.1 million Common Units. Generally, the Operating Partnership is required to redeem each Common Unit at the request of the holder thereof for cash equal to the value of one share of the Company’s Common Stock, $.01 par value (the “Common Stock”), based on the average of the market price for the 10 trading days immediately preceding the notice date of such redemption, provided that the Company at its option may elect to acquire any such Common Units presented for redemption for cash or one share of Common Stock. The Common Units owned by the Company are not redeemable. During the six months ended June 30, 2009, the Company redeemed 8,291 Common Units for a like number of shares of Common Stock.

 

Common Stock Offering

 

On June 1, 2009, the Company issued in a public offering approximately 7.0 million shares of Common Stock for net proceeds of $144.1 million. As required by the terms of the partnership agreement of the Operating Partnership, the net proceeds from the offering were contributed to the Operating Partnership in exchange for additional Common Units. The net impact of the offering and the redemptions discussed above was to increase the percentage of Common Units owned by the Company from 94.0% as of December 31, 2008 to 94.6% as of June 30, 2009. On June 1, 2009, we used a portion of the net proceeds of the offering to retire the remaining $107.2 million principal amount of a secured loan; we incurred no prepayment penalties. The remaining net proceeds from the offering were used to reduce the amount of borrowings outstanding under our revolving credit facility.

 

Basis of Presentation

 

Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). As more fully described in Note 10, the Consolidated Statements of Income for the three and six months ended June 30, 2008 were revised from previously reported amounts to reflect in discontinued operations the operations for those properties sold during 2008 and the first six months of 2009 which qualified for discontinued operations presentation.

 

Effective January 1, 2009, we adopted SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS No. 160”), which defines a noncontrolling interest in a consolidated subsidiary as the portion of the equity in a subsidiary not attributable, directly or indirectly, to the parent and requires noncontrolling interests to be presented as a separate component of equity in the consolidated balance sheet subject to the provisions of EITF D-98, “Classification and Measurement of Redeemable Securities” (“EITF D-98”). SFAS No. 160 also modifies the presentation of net income by requiring earnings and other comprehensive income to be attributable to controlling and noncontrolling interests. SFAS No. 160 requires retroactive treatment for all periods presented. Below are the steps we have taken as a result of the implementation of this standard with respect to previously reported amounts:

 

8

 

 


 

Table of Contents

 

HIGHWOODS PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular dollar amounts in thousands, except per share data)

 

1.

DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - Continued

 

 

We have reclassified the noncontrolling interests in consolidated affiliates from the mezzanine section of our Consolidated Balance Sheet to equity. This reclassification totaled $6.2 million as of December 31, 2008.

 

 

Net income attributable to noncontrolling interests in consolidated affiliates and the Operating Partnership are no longer deducted when determining net income. As a result, net income for the three and six months ended June 30, 2008 increased $1.0 million and $2.1 million from the previously reported amounts, respectively. The adoption of this standard had no effect on our net income available for common stockholders or our earnings per common share.

 

 

As prescribed by EITF D-98, we adjusted noncontrolling interests in the Operating Partnership so that the carrying value equals the greater of historical cost or redemption value and continue to present it in the mezzanine section of our Consolidated Balance Sheets due to its redemption feature, as previously disclosed. As a result, noncontrolling interests in the Operating Partnership as of December 31, 2008 increased $45.6 million from the previously reported amount, with a corresponding decrease to additional paid in capital.

 

Effective January 1, 2009, we adopted FASB Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). As a result, our weighted average common shares outstanding, basic and diluted, for the three and six months ended June 30, 2008 were revised from previously reported amounts to include our total number of restricted common shares outstanding. For the three months ended June 30, 2008, weighted average common shares outstanding, basic and diluted, are 516,076 and 330,166 shares higher than previously reported, respectively. For the six months ended June 30, 2008, weighted average common shares outstanding, basic and diluted, are 504,611 and 335,572 shares higher than previously reported, respectively. Basic earnings per common share for the three and six months ended June 30, 2008 is unchanged from amounts previously reported. Diluted earnings per common share for the three months ended June 30, 2008 is unchanged from the amount previously reported and, for the six months ended June 30, 2008, is $0.01 lower than previously reported.

 

The Consolidated Financial Statements include the Operating Partnership, wholly owned subsidiaries and those subsidiaries in which we own a majority voting interest with the ability to control operations and where no substantive participating rights or substantive kick out rights have been granted to the noncontrolling interest holders. All significant intercompany transactions and accounts have been eliminated.

 

The unaudited interim consolidated financial statements and accompanying unaudited consolidated financial information, in the opinion of management, contain all adjustments (including normal recurring accruals) necessary for a fair presentation of our financial position, results of operations and cash flows. We have omitted certain notes and other information from the interim consolidated financial statements presented in this Quarterly Report on Form 10-Q as permitted by SEC rules and regulations. These consolidated financial statements should be read in conjunction with our 2008 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.

 

9

 

 


 

Table of Contents

 

HIGHWOODS PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular dollar amounts in thousands, except per share data)

 

1.

DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - Continued

 

Income Taxes

 

We have elected and expect to continue to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. A corporate REIT is a legal entity that holds real estate assets and, through the payment of dividends to stockholders, is generally permitted to reduce or avoid the payment of federal and state income taxes. To maintain qualification as a REIT, we are required to pay dividends to our stockholders equal to at least 90.0% of our annual REIT taxable income, excluding capital gains. As a REIT, we will not be subject to federal and state taxes if we distribute at least 100.0% of our taxable income (ordinary income and capital gains, if any) to our stockholders. Under temporary IRS regulations, for 2009, distributions can be paid partially using a REIT’s freely tradable stock so long as stockholders have the option of receiving at least 10% of the total distribution in cash.

 

Noncontrolling Interests

 

We adopted SFAS No. 160 on January 1, 2009, as described previously, which establishes accounting and presentation standards for noncontrolling interests in subsidiaries.

 

Noncontrolling interests in the Operating Partnership in the accompanying Consolidated Financial Statements relates to the ownership by various individuals and entities other than the Company of Common Units in the Operating Partnership. Net income attributable to noncontrolling interests in the Operating Partnership is computed by applying the weighted average percentage of Common Units not owned by the Company during the period (as a percent of the total number of outstanding Common Units) to the Operating Partnership’s net income for the period after deducting distributions on Preferred Units. When a noncontrolling unitholder redeems a Common Unit for a share of Common Stock or cash, the noncontrolling interests in the Operating Partnership are reduced and the Company’s share in the Operating Partnership is increased by the fair value of each redeemed security. The following table sets forth noncontrolling interests in the Operating Partnership:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Beginning noncontrolling interests in the Operating Partnership

 

$

87,119

 

$

122,739

 

$

111,278

 

$

119,195

 

Adjustments to noncontrolling interests in the Operating
Partnership

 

 

3,538

 

 

2,261

 

 

(19,598

)

 

9,884

 

Redemptions/conversions of noncontrolling interest
partnership units

 

 

(189

)

 

(591

)

 

(189

)

 

(3,884

)

Net income attributable to noncontrolling interests in the
Operating Partnership

 

 

2,054

 

 

839

 

 

2,748

 

 

1,732

 

Distributions to noncontrolling interests in the Operating
Partnership

 

 

(1,726

)

 

(1,677

)

 

(3,443

)

 

(3,356

)

Total noncontrolling interests in the Operating Partnership

 

$

90,796

 

$

123,571

 

$

90,796

 

$

123,571

 

 

Noncontrolling interests in consolidated affiliates relates to our respective joint venture partners’ 50.0% interest in Highwoods-Markel Associates, LLC (“Markel”) and estimated 19% economic interest in Plaza Residential, LLC (“Plaza Residential”). Each of our joint venture partners is an unrelated third party. We consolidate Markel since we are the general partner and effectively control the major operating and financial policies of the joint venture. We consolidate Plaza Residential since we own the majority interest in and effectively control the joint venture.

 

10

 

 


 

Table of Contents

 

HIGHWOODS PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular dollar amounts in thousands, except per share data)

 

 

1.

DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - Continued

 

Recently Issued Accounting Standards

 

In June 2009, the FASB issued FASB No. 167, “Amendments to FASB Interpretation No. 46(R)” (“FAS 167”), which requires ongoing assessments to determine whether an entity is a variable entity and requires qualitative analysis to determine whether an enterprise’s variable interest(s) give it a controlling financial interest in a variable interest entity. In addition, FAS 167 requires enhanced disclosures about an enterprise’s involvement in a variable interest entity. FAS 167 is effective for the fiscal year that begins after November 15, 2009. We are currently evaluating the impact FAS 167 may have on our financial position, results of operations and disclosures.

 

2.

INVESTMENTS IN UNCONSOLIDATED AFFILIATES

 

We have equity interests ranging from 12.5% to 50.0% in various joint ventures with unrelated third parties. We account for our unconsolidated joint ventures using the equity method of accounting. As a result, the assets and liabilities of these joint ventures for which we use the equity method of accounting are not included in our Consolidated Balance Sheets.

 

The combined, summarized income statements for our unconsolidated joint ventures were as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Income Statements:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

37,347

 

$

41,199

 

$

76,216

 

$

79,728

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental property and other expenses

 

 

18,065

 

 

20,032

 

 

36,705

 

 

38,463

 

Depreciation and amortization

 

 

8,853

 

 

9,170

 

 

17,725

 

 

16,628

 

Interest expense

 

 

8,866

 

 

9,205

 

 

17,841

 

 

17,692

 

Total expenses

 

 

35,784

 

 

38,407

 

 

72,271

 

 

72,783

 

Income before disposition of property

 

 

1,563

 

 

2,792

 

 

3,945

 

 

6,945

 

Gains on disposition of property

 

 

3,426

 

 

 

 

3,426

 

 

 

Net income

 

$

4,989

 

$

2,792

 

$

7,371

 

$

6,945

 

Our share of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (1)

 

$

1,862

 

$

1,520

 

$

3,162

 

$

3,509

 

Depreciation and amortization of real estate assets

 

$

3,223

 

$

3,395

 

$

6,473

 

$

6,330

 

Interest expense

 

$

3,542

 

$

3,691

 

$

7,120

 

$

7,220

 

Gain on disposition of depreciable properties

 

$

781

 

$

 

$

781

 

$

 

                              

(1)

Our share of net income differs from our weighted average ownership percentage in the joint ventures’ net income due to our purchase accounting and other related adjustments.

 

We have a 22.81% interest in a joint venture with Schweiz-Deutschland-USA Dreilander Beteiligung Objekt DLF 98/29-Walker Fink-KG. In the second quarter of 2009, this joint venture sold one property for gross proceeds of $14.8 million and recorded a gain of $3.4 million. We recorded $0.8 million as our proportionate share of this gain through equity in earnings of unconsolidated affiliates in the second quarter of 2009.

 

11

 

 


 

Table of Contents

 

HIGHWOODS PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular dollar amounts in thousands, except per share data)

 

 

3.

INVESTMENT ACTIVITIES

 

Dispositions

 

In the second quarter of 2009, we sold three non-core community retail centers aggregating 413,000 square feet in the Kansas City metropolitan area for gross proceeds of $62.1 million. A gain of $20.9 million was recorded in the second quarter of 2009.

 

Development

 

Development in process as of June 30, 2009 consisted primarily of two office properties aggregating 258,000 rentable square feet and 75 acres of vacant land undergoing infrastructure improvements. The aggregate cost, including leasing commissions, of the two properties currently is expected to be $64.1 million when fully leased and completed, of which $58.9 million had been incurred as of June 30, 2009. The dollar weighted average pre-leasing of these development properties was approximately 62% as of June 30, 2009.

 

Additionally, we currently have three office properties and one industrial property recently completed, but not yet stabilized, aggregating 573,000 square feet. The aggregate cost, including leasing commissions, of these properties currently is expected to be $80.1 million when fully leased, of which $70.3 million had been incurred as of June 30, 2009. The dollar weighted average pre-leasing of these properties was approximately 43% as of June 30, 2009. The components of these properties are included in land, building and tenant improvements and deferred financing and leasing costs in our Consolidated Balance Sheet as of June 30, 2009.

 

For-Sale Residential Condominiums

 

We own a majority interest in Plaza Residential, LLC, a joint venture which was formed to develop and sell 139 for-sale residential condominiums constructed above an office tower developed by us in Raleigh, NC. For-sale residential condominiums in our Consolidated Balance Sheets include our completed, but unsold, condominium inventory as of June 30, 2009 and December 31, 2008. For the three and six months ended June 30, 2009, we sold five and 13 condominiums for net sales proceeds of $2.0 million and $5.2 million, respectively, and recorded gains of $0.3 million and $0.6 million, respectively. For the three and six months ended June 30, 2008, there were no corresponding sales or gains. Net sales proceeds include forfeitures of earnest money deposits of $0.2 million and $0.5 million for the three and six months ended June 30, 2009, respectively. We record forfeitures of earnest money deposits as income when entitled to claim the forfeited deposit upon legal default. Our estimate of our partner’s economic ownership, which is impacted by a contractually-based promoted return, decreased from 25% as of December 31, 2008 to 19% as of June 30, 2009.

 

4.

DEFERRED FINANCING AND LEASING COSTS

 

As of June 30, 2009 and December 31, 2008, we had deferred financing costs of $10.7 million and $14.7 million, respectively, with related accumulated amortization of $3.9 million and $7.8 million, respectively. As of June 30, 2009 and December 31, 2008, we had deferred leasing costs of $110.1 million and $111.1 million, respectively, with related accumulated amortization of $46.8 million and $44.8 million, respectively. Aggregate amortization expense (included in depreciation and amortization and amortization of deferred financing costs) for these intangibles for the three months ended June 30, 2009 and 2008 was $4.6 million and $4.5 million, respectively, and for the six months ended June 30, 2009 and 2008 was $9.1 million and $8.9 million, respectively.

 

The estimated aggregate amortization expense for each of the next five succeeding fiscal years is as follows:

 

July 1, 2009 through December 31, 2009

 

$

8,304

 

2010

 

$

13,660

 

2011

 

$

10,894

 

2012

 

$

10,221

 

2013

 

$

6,856

 

2014

 

$

4,486

 

 

 

12

 

 


 

Table of Contents

 

HIGHWOODS PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular dollar amounts in thousands, except per share data)

 

 

5.

MORTGAGES AND NOTES PAYABLE

 

Our consolidated mortgages and notes payable consisted of the following:

 

 

 

June 30,
2009

 

December 31,
2008

 

Secured mortgage loans

 

$

567,293

 

$

655,186

 

Unsecured loans

 

 

861,357

 

 

949,499

 

Total

 

$

1,428,650

 

$

1,604,685

 

 

As of June 30, 2009, our secured mortgage loans were secured by real estate assets with an aggregate undepreciated book value of $908.7 million.

 

Our $450.0 million unsecured revolving credit facility is scheduled to mature on May 1, 2010. The interest rate is LIBOR plus 80 basis points and the annual base facility fee is 20 basis points. The interest rate would increase to LIBOR plus 140 or 155 basis points if our credit rating were to fall below investment grade according to two of three major credit rating agencies. Our revolving credit facility had $338.5 million of availability as of June 30, 2009 and had $355.5 million of availability as of July 31, 2009.

 

Our $70.0 million secured construction facility is initially scheduled to mature on December 20, 2010. Assuming no defaults have occurred, we have options to extend the maturity date for two successive one-year periods. The interest rate is LIBOR plus 85 basis points. Our secured construction facility had $28.3 million of availability as of June 30, 2009 and July 31, 2009.

 

In January 2009, we paid off at maturity $50.0 million of 8.125% unsecured notes using borrowings under our revolving credit facility.

 

In March 2009, we obtained a $20.0 million, three-year unsecured term loan with a bank lender. The interest rate is LIBOR plus 250 basis points, subject to a minimum total interest rate of 3.9%.

 

In June 2009, we retired the remaining $107.2 million principal amount of a secured loan using a portion of the net proceeds of our Common Stock offering on June 1, 2009. We incurred no prepayment penalties.

 

Our revolving credit facility, variable rate term loans and the indenture that governs the Operating Partnership’s outstanding notes require us to comply with customary operating covenants and various financial and operating ratios. We and the Operating Partnership are each currently in compliance with all such requirements.

 

6.

SHARE-BASED PAYMENTS

 

During the six months ended June 30, 2009, we granted under our Amended and Restated 1994 Stock Option Plan 394,044 stock options at an exercise price equal to the closing market price of a share of our common stock on the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, which resulted in a weighted-average grant date fair value per share of $1.80. During the six months ended June 30, 2009, we also granted 128,384 shares of time-based restricted stock and 99,910 shares of total return-based restricted stock with weighted-average grant date fair values per share of $19.33 and $10.13, respectively. We recorded stock-based compensation expense of $1.7 million each during the three months ended June 30, 2009 and 2008, respectively. We recorded stock-based compensation expense of $3.6 million and $3.9 million during the six months ended June 30, 2009 and 2008, respectively. As of June 30, 2009, there was $10.6 million of total unrecognized stock-based compensation costs, which will be recognized over a weighted average remaining contractual term of 1.5 years.

 

13

 

 


 

Table of Contents

 

HIGHWOODS PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular dollar amounts in thousands, except per share data)

 

 

7.

DERIVATIVE INSTRUMENTS

 

To meet, in part, our liquidity requirements, we borrow funds at a combination of fixed and variable rates. Borrowings under our revolving credit facility, construction facility and bank term loans bear interest at variable rates. Our long-term debt, which consists of secured and unsecured long-term financings and the issuance of unsecured debt securities, typically bears interest at fixed rates although some loans bear interest at variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not hold or issue these derivative contracts for trading or speculative purposes. The interest rate on all of our variable rate debt is generally adjusted at one or three month intervals, subject to settlements under these interest rate hedge contracts. We also enter into treasury lock agreements from time to time in order to limit our exposure to an increase in interest rates with respect to future debt offerings.

 

In prior periods, we entered into certain interest rate hedging arrangements which were designated and are being accounted for as cash flow hedges. The effective portion of these arrangements, representing deferred interest expense, was $0.9 million as of June 30, 2009 and is included in Accumulated Other Comprehensive Loss (“AOCL”). This deferred expense will be recognized as an addition to interest expense in the same periods during which interest expense on the hedged financings affects net income. We expect approximately $0.2 million will be recognized as a decrease to interest expense within the next 12 months.

 

In January 2008, we entered into two floating-to-fixed interest rate swaps for a one-year period with respect to an aggregate of $50.0 million of borrowings outstanding under our revolving credit facility or other floating rate debt. These swaps fixed the underlying LIBOR rate upon which interest on such borrowings is based at 3.26% for $30.0 million of borrowings and 3.24% for $20.0 million of borrowings. These swaps were designated and accounted for as cash flow hedges and matured in January 2009.

 

In April 2008, we entered into a floating-to-fixed interest rate swap for a two-year period with respect to an aggregate of $50.0 million of borrowings outstanding under our term loan or other floating rate debt. The swap fixes the underlying LIBOR rate upon which interest on such borrowings is based at 2.52%. The counterparty under this swap is Bank of America, N.A. The swap was designated and is being accounted for as a cash flow hedge. The effective portion of the swap representing deferred interest expense was $0.8 million as of June 30, 2009 and is included in AOCL. We expect all of the balance to be recognized as an increase to interest expense within the next ten months.

 

In October 2008, we entered into a floating-to-fixed interest rate swap for a one-year period with respect to an aggregate of $25.0 million of borrowings outstanding under our term loan or other floating rate debt. The swap fixes the underlying LIBOR rate upon which interest on such borrowings is based at 2.35%. The counterparty under this swap is PNC Bank, N.A. The swap was designated and is being accounted for as a cash flow hedge. The effective portion of the swap representing deferred interest expense was $0.2 million as of June 30, 2009 and is included in AOCL. We expect all of the balance to be recognized as an increase to interest expense within the next four months.

 

14

 

 


 

Table of Contents

 

HIGHWOODS PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular dollar amounts in thousands, except per share data)

 

 

8.

OTHER COMPREHENSIVE INCOME/(LOSS)

 

Other comprehensive income/(loss) represents net income plus the changes in certain amounts deferred in accumulated other comprehensive income/(loss) related to hedging and other activities not reflected in the Consolidated Statements of Income. The components of other comprehensive income/(loss) are as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Net income

 

$

37,074

 

$

16,013

 

$

50,274

 

$

32,747

 

Other comprehensive income/(loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain/(loss) on tax increment financing bonds

 

 

226

 

 

187

 

 

192

 

 

(374

)

Unrealized derivative net gains on cash-flow hedges

 

 

217

 

 

933

 

 

414

 

 

524

 

Amortization of past cash flow hedges

 

 

(71

)

 

46

 

 

(141

)

 

126

 

Total other comprehensive income

 

 

372

 

 

1,166

 

 

465

 

 

276

 

Total comprehensive income

 

$

37,446

 

$

17,179

 

$

50,739

 

$

33,023

 

 

9.

FAIR VALUE MEASUREMENTS

 

The following summarizes the three levels of inputs that we use to measure fair value, as well as the assets, mezzanine noncontrolling interests and liabilities that we recognize at fair value using those levels of inputs.

 

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

 

Our Level 1 assets are comprised of investments in marketable securities which we use to pay benefits under our deferred compensation plan. Our Level 1 noncontrolling interests in the Operating Partnership are comprised of Common Units in the Operating Partnership not owned by the Company. Our Level 1 liabilities are our obligations to pay certain deferred compensation plan benefits whereby participants have designated investment options (primarily mutual funds) to serve as the basis for measurement of the notional value of their accounts.

 

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

 

Our Level 2 liabilities are interest rate swaps whose fair value is determined using a pricing model based upon observable market inputs.

 

Level 3. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

Our Level 3 asset is our tax increment financing bond issued by a municipal authority in connection with our construction of a public parking facility that is not routinely traded but whose fair value is determined using an estimate of projected redemption value based on quoted bid/ask prices for similar unrated municipal bonds. This available for-sale security is carried at estimated fair value in prepaid and other assets with unrealized gains or losses reported in accumulated other comprehensive loss. The estimated fair value as of June 30, 2009 was $2.5 million below the outstanding principal due on the bond. We currently intend to hold this bond, which amortizes to maturity in 2020, and do not believe that we will be required to sell this bond before recovery. Payment of the principal and interest for the bond is guaranteed by us and, therefore, we have recorded no credit losses related to the bond’s impairment. Our Level 3 liability is our SF-HIW Harborview Plaza, LP financing obligation that is not traded but whose fair value is determined using an estimate of discounted cash flows dependent on future leasing assumptions for the property.

 

15

 

 


 

Table of Contents

 

HIGHWOODS PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular dollar amounts in thousands, except per share data)

 

 

9.

FAIR VALUE MEASUREMENTS - Continued

 

The following table sets forth the assets and liabilities that we measured at fair value on a recurring basis by level within the fair value hierarchy.

 

 

 

 

 

Level 1

 

Level 2

 

Level 3

 

 

 

Balance at
June 30,
2009

 

Quoted Prices in
Active Markets
for Identical
Assets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities (in prepaid and other
assets) (1)

 

$

5,200

 

$

5,200

 

$

 

$

 

Tax increment financing bond (in prepaid expenses
and other assets)

 

 

17,660

 

 

 

 

 

 

17,660

 

Total Assets

 

$

22,860

 

$

5,200

 

$

 

$

17,660

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling Interests in the Operating
Partnership

 

$

90,796

 

$

90,796

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps (in accounts payable, accrued
expenses and other liabilities)

 

$

962

 

$

 

$

962

 

$

 

Deferred compensation (in accounts payable,
accrued expenses and other liabilities)

 

 

5,808

 

 

5,808

 

 

 

 

 

SF-Harborview Plaza, LP financing obligation

 

 

17,172

 

 

 

 

 

 

17,172

 

Total Liabilities

 

$

23,942

 

$

5,808

 

$

962

 

$

17,172

 

                               

 

(1)

The marketable securities are held through our officer deferred compensation plans.

 

The following table sets forth our Level 3 asset and liability.

 

 

 

Three Months
Ended
June 30, 2009

 

Six Months
Ended
June 30, 2009

 

Asset:

 

 

 

 

 

 

 

Tax Increment Financing Bond

 

 

 

 

 

 

 

Beginning balance

 

$

17,434

 

$

17,468

 

Unrealized gain (in AOCL)

 

 

226

 

 

192

 

Ending balance

 

$

17,660

 

$

17,660

 

 

 

 

 

 

 

 

 

Liability:

 

 

 

 

 

 

 

SF-Harborview Plaza, LP Financing Obligation

 

 

 

 

 

 

 

Beginning balance

 

$

16,934

 

$

16,604

 

Payments on financing obligation

 

 

(162

)

 

(272

)

Interest expense on financing obligation

 

 

400

 

 

840

 

Ending balance

 

$

17,172

 

$

17,172

 

 

 

16

 

 


 

Table of Contents

 

HIGHWOODS PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular dollar amounts in thousands, except per share data)

 

 

9.

FAIR VALUE MEASUREMENTS - Continued

 

The following estimated fair values were determined by management using available market information and appropriate valuation methodologies. Considerable judgment is used to interpret market data and develop estimated fair values. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize upon disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair values. The carrying amounts and estimated fair values of our financial instruments were as follows:

 

 

 

Carrying
Amount

 

Fair Value

 

June 30, 2009

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,372

 

$

13,372

 

Restricted cash

 

$

14,707

 

$

14,707

 

Accounts and notes receivable

 

$

21,380

 

$

21,380

 

Marketable securities (in prepaid expenses and other assets)

 

$

5,200

 

$

5,200

 

Tax increment financing bond (in prepaid expenses and other assets)

 

$

17,660

 

$

17,660

 

Mortgages and notes payable

 

$

1,428,650

 

$

1,286,867

 

Financing obligations

 

$

34,758

 

$

32,748

 

Interest rate swaps (in accounts payable, accrued expenses and other liabilities)

 

$

962

 

$

962

 

Deferred compensation (in accounts payable, accrued expenses and other liabilities)

 

$

5,808

 

$

5,808

 

Noncontrolling interests in the Operating Partnership

 

$

90,796

 

$

90,796

 

 

 

 

 

 

 

 

 

December 31, 2008

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,757

 

$

13,757

 

Restricted cash

 

$

2,258

 

$

2,258

 

Accounts and notes receivable

 

$

27,289

 

$

27,289

 

Marketable securities (in prepaid expenses and other assets)

 

$

5,422

 

$

5,422

 

Tax increment financing bond (in prepaid expenses and other assets)

 

$

17,468

 

$

17,468

 

Mortgages and notes payable

 

$

1,604,685

 

$

1,330,899

 

Financing obligations

 

$

34,174

 

$

32,219

 

Interest rate swaps (in accounts payable, accrued expenses and other liabilities)

 

$

1,376

 

$

1,376

 

Deferred compensation (in accounts payable, accrued expenses and other liabilities)

 

$

6,522

 

$

6,522

 

Noncontrolling interests in the Operating Partnership

 

$

111,278

 

$

111,278

 

 

The fair values of our mortgages and notes payable and financing obligations were estimated using discounted cash flow analyses based on estimated market rates on similar borrowing arrangements at June 30, 2009 and December 31, 2008, respectively. The carrying amounts of our cash and cash equivalents, accounts and notes receivable equal or approximate fair value.

 

Disclosures about the fair value of financial instruments are based on relevant information available to us at June 30, 2009. Although management is not aware of any factors that would have a material effect on the fair value amounts reported herein, such amounts have not been revalued since that date and current estimates of fair value may significantly differ from the amounts presented herein.

 

17

 

 


 

Table of Contents

 

HIGHWOODS PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular dollar amounts in thousands, except per share data)

 

 

10.

DISCONTINUED OPERATIONS

 

As part of our business strategy, we from time to time selectively dispose of non-core properties and use the net proceeds for investments, for repayment of debt and/or retirement of Preferred Stock, or other purposes. The table below sets forth the net operating results of those assets classified as discontinued operations in our Consolidated Financial Statements. These assets classified as discontinued operations comprise 1.2 million square feet of office and retail properties and 13 rental residential units sold during 2008 and the six months ended June 30, 2009. The operations of these assets have been reclassified from our ongoing operations to discontinued operations, and we will not have any significant continuing involvement in the operations after the disposal transactions:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Rental and other revenues

 

$

1,384

 

$

3,698

 

$

3,535

 

$

7,773

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental property and other expenses

 

 

448

 

 

1,337

 

 

1,351

 

 

3,016

 

Depreciation and amortization

 

 

155

 

 

624

 

 

550

 

 

1,386

 

Total operating expenses

 

 

603

 

 

1,961

 

 

1,901

 

 

4,402

 

Other income

 

 

 

 

8

 

 

2

 

 

19

 

Income before gains on disposition of discontinued operations

 

 

781

 

 

1,745

 

 

1,636

 

 

3,390

 

Gains on disposition of discontinued operations

 

 

20,943

 

 

5,027

 

 

21,016

 

 

8,753

 

Total discontinued operations

 

$

21,724

 

$

6,772

 

$

22,652

 

$

12,143

 

 

11.

EARNINGS PER SHARE

 

As described in Note 1, effective January 1, 2009, we adopted FSP EITF 03-6-1, which required us to retroactively revise our weighted average common shares outstanding, basic and diluted, to include our total number of restricted common shares outstanding.

 

18

 

 


 

Table of Contents

 

HIGHWOODS PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular dollar amounts in thousands, except per share data)

 

 

11.

EARNINGS PER SHARE - Continued

 

The following table sets forth the computation of basic and diluted earnings per common share:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Earnings per common share - basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

15,350

 

$

9,241

 

$

27,622

 

$

20,604

 

Noncontrolling interests in the Operating Partnership

 

 

(790

)

 

(401

)

 

(1,428

)

 

(943

)

Noncontrolling interests in consolidated affiliates

 

 

(116

)

 

(191

)

 

(134

)

 

(389

)

Dividends on preferred stock

 

 

(1,677

)

 

(2,838

)

 

(3,354

)

 

(5,676

)

Income from continuing operations available for common stockholders

 

 

12,767

 

 

5,811

 

 

22,706

 

 

13,596

 

Income from discontinued operations

 

 

21,724

 

 

6,772

 

 

22,652

 

 

12,143

 

Noncontrolling interests in the Operating Partnership from discontinued operations

 

 

(1,264

)

 

(438

)

 

(1,320

)

 

(789

)

Income from discontinued operations available for common stockholders

 

 

20,460

 

 

6,334

 

 

21,332

 

 

11,354

 

Net income available for common stockholders

 

$

33,227

 

$

12,145

 

$

44,038

 

$

24,950

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per common share – weighted average shares (1)

 

 

66,122

 

 

57,456

 

 

64,883

 

 

57,337

 

Earnings per common share - basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations available for common stockholders

 

$

0.19

 

$

0.10

 

$

0.35

 

$

0.24

 

Income from discontinued operations available for common stockholders

 

 

0.31

 

 

0.11

 

 

0.33

 

 

0.20

 

Net income available for common stockholders

 

$

0.50

 

$

0.21

 

$

0.68

 

$

0.44

 

Earnings per common share - diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

15,350

 

$

9,241

 

$

27,622

 

$

20,604

 

Noncontrolling interests in consolidated affiliates

 

 

(116

)

 

(191

)

 

(134

)

 

(389

)

Dividends on preferred stock

 

 

(1,677

)

 

(2,838

)

 

(3,354

)

 

(5,676

)

Income from continuing operations available for common stockholders before noncontrolling interests in the
Operating Partnership

 

 

13,557

 

 

6,212

 

 

24,134

 

 

14,539

 

Income from discontinued operations

 

 

21,724

 

 

6,772

 

 

22,652

 

 

12,143

 

Net income available for common stockholders before noncontrolling interests in the Operating Partnership

 

$

35,281

 

$

12,984

 

$

46,786

 

$

26,682

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per common share –weighted average shares

 

 

66,122

 

 

57,456

 

 

64,883

 

 

57,337

 

Add:

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee and director stock options and warrants

 

 

49

 

 

420

 

 

30

 

 

331

 

Noncontrolling Common Units

 

 

4,063

 

 

3,946

 

 

4,065

 

 

3,957

 

Denominator for diluted earnings per common share – adjusted weighted average shares and assumed conversions (1)

 

 

70,234

 

 

61,822

 

 

68,978

 

 

61,625

 

Earnings per common share - diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations available for common stockholders

 

$

0.19

 

$

0.10

 

$

0.35

 

$

0.23

 

Income from discontinued operations available for common stockholders

 

 

0.31

 

 

0.11

 

 

0.33

 

 

0.20

 

Net income available for common stockholders

 

$

0.50

 

$

0.21

 

$

0.68

 

$

0.43

 

 

 

19

 

 


 

Table of Contents

 

HIGHWOODS PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular dollar amounts in thousands, except per share data)

 

 

11.

EARNINGS PER SHARE - Continued

 

(1)

Options and warrants aggregating 1.2 million and 0.2 million shares were outstanding during the three months ended June 30, 2009 and 2008, respectively, and 1.3 and 0.4 million shares were outstanding during the six months ended June 30, 2009 and 2008, respectively but were not included in the treasury method calculation for diluted earnings per common share because the exercise prices of the options and warrants were higher than the average market price of Common Stock during these periods.

 

20

 

 


 

Table of Contents

 

HIGHWOODS PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular dollar amounts in thousands, except per share data)

 

 

12.

SEGMENT INFORMATION

 

Our principal business is the acquisition, development and operation of rental real estate properties. We evaluate our business by product type and by geographic locations. Each product type has different customers and economic characteristics as to rental rates and terms, cost per square foot of buildings, the purposes for which customers use the space, the degree of maintenance and customer support required and customer dependency on different economic drivers, among others. The operating results by geographic grouping are also regularly reviewed by our chief operating decision maker for assessing performance and other purposes. There are no material inter-segment transactions.

 

The accounting policies of the segments are the same as those described in Note 1 included herein. All operations are within the United States and, as of June 30, 2009, no tenant of the Wholly Owned Properties comprised more than 8.7% of our consolidated revenues.

 

The following table summarizes the rental income and net operating income for each reportable segment:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Rental and Other Revenues: (1) (2) (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

Office:

 

 

 

 

 

 

 

 

 

 

 

 

 

Atlanta, GA

 

$

12,106

 

$

11,733

 

$

23,606

 

$

23,288

 

Greenville, SC

 

 

3,601

 

 

3,498

 

 

7,239

 

 

6,760

 

Kansas City, MO

 

 

3,712

 

 

3,835

 

 

7,459

 

 

7,518

 

Memphis, TN

 

 

7,409

 

 

6,376

 

 

14,441

 

 

12,509

 

Nashville, TN

 

 

15,637

 

 

15,417

 

 

31,041

 

 

30,191

 

Orlando, FL

 

 

2,845

 

 

2,769

 

 

5,795

 

 

5,176

 

Piedmont Triad, NC

 

 

6,565

 

 

6,677

 

 

13,109

 

 

13,294

 

Raleigh, NC

 

 

18,224

 

 

16,487

 

 

36,574

 

 

35,020

 

Richmond, VA

 

 

11,240

 

 

12,834

 

 

22,951

 

 

24,425

 

Tampa, FL

 

 

16,592

 

 

17,030

 

 

33,133

 

 

32,856

 

Total Office Segment

 

 

97,931

 

 

96,656

 

 

195,348

 

 

191,037

 

Industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

Atlanta, GA

 

 

3,931

 

 

3,815

 

 

7,872

 

 

7,901

 

Piedmont Triad, NC

 

 

3,301

 

 

3,577

 

 

7,677

 

 

7,284

 

Total Industrial Segment

 

 

7,232

 

 

7,392

 

 

15,549

 

 

15,185

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

Kansas City, MO

 

 

7,666

 

 

8,337

 

 

15,280

 

 

16,933

 

Piedmont Triad, NC

 

 

149

 

 

144

 

 

292

 

 

284

 

Raleigh, NC

 

 

30

 

 

 

 

60

 

 

 

Total Retail Segment

 

 

7,845

 

 

8,481

 

 

15,632

 

 

17,217

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

Kansas City, MO

 

 

302

 

 

299

 

 

594

 

 

602

 

Total Residential Segment

 

 

302

 

 

299

 

 

594

 

 

602

 

Total Rental and Other Revenues

 

$

113,310

 

$

112,828

 

$

227,123

 

$

224,041

 

 

 

21

 

 


 

Table of Contents

 

HIGHWOODS PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular dollar amounts in thousands, except per share data)

 

 

12.

SEGMENT INFORMATION - Continued

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Net Operating Income: (1) (2) (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

Office:

 

 

 

 

 

 

 

 

 

 

 

 

 

Atlanta, GA

 

$

8,038

 

$

7,471

 

$

15,015

 

$

14,982

 

Greenville, SC

 

 

2,339

 

 

2,192

 

 

4,623

 

 

4,242

 

Kansas City, MO

 

 

2,260

 

 

2,347

 

 

4,504

 

 

4,486

 

Memphis, TN

 

 

4,045

 

 

3,802

 

 

8,063

 

 

7,330

 

Nashville, TN

 

 

10,318

 

 

10,027

 

 

20,160

 

 

19,953

 

Orlando, FL

 

 

1,460

 

 

1,471

 

 

3,032

 

 

2,899

 

Piedmont Triad, NC

 

 

4,389

 

 

4,319

 

 

8,559

 

 

8,628

 

Raleigh, NC

 

 

12,784

 

 

10,469

 

 

25,009

 

 

23,326

 

Richmond, VA

 

 

8,062

 

 

8,476

 

 

16,057

 

 

16,567

 

Tampa, FL

 

 

9,516

 

 

10,302

 

 

19,394

 

 

19,807

 

Other

 

 

(2

)

 

(36

)

 

(4

)