HIW 06.30.2013 10Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2013
 
HIGHWOODS PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
 
Maryland
001-13100
56-1871668
 
 
(State or other jurisdiction
of incorporation or organization)
(Commission
File Number)
(I.R.S. Employer
Identification Number)
 
 
HIGHWOODS REALTY LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
 
North Carolina
000-21731
56-1869557
 
 
(State or other jurisdiction
of incorporation or organization)
(Commission
File Number)
(I.R.S. Employer
Identification Number)
 
 
3100 Smoketree Court, Suite 600
Raleigh, NC 27604
(Address of principal executive offices) (Zip Code)
919-872-4924
(Registrants’ telephone number, including area code)
______________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Highwoods Properties, Inc.  Yes  S    No £    Highwoods Realty Limited Partnership  Yes  S    No £
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Highwoods Properties, Inc.  Yes  S    No £    Highwoods Realty Limited Partnership  Yes  S    No £
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of 'large accelerated filer,' 'accelerated filer' and 'smaller reporting company' in Rule 12b-2 of the Securities Exchange Act.
Highwoods Properties, Inc.
Large accelerated filer S    Accelerated filer £      Non-accelerated filer £      Smaller reporting company £
Highwoods Realty Limited Partnership
Large accelerated filer £    Accelerated filer £      Non-accelerated filer S      Smaller reporting company £
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).
Highwoods Properties, Inc.  Yes  £    No S    Highwoods Realty Limited Partnership  Yes  £    No S
 
The Company had 84,483,948 shares of Common Stock outstanding as of July 18, 2013.
 




EXPLANATORY NOTE

We refer to Highwoods Properties, Inc. as the “Company,” Highwoods Realty Limited Partnership as the “Operating Partnership,” the Company’s common stock as “Common Stock” or “Common Shares,” the Company’s preferred stock as “Preferred Stock” or “Preferred Shares,” the Operating Partnership’s common partnership interests as “Common Units,” the Operating Partnership’s preferred partnership interests as “Preferred Units” and in-service properties (excluding for-sale residential condominiums) to which the Company and/or the Operating Partnership have title and 100.0% ownership rights as the “Wholly Owned Properties.” References to “we” and “our” mean the Company and the Operating Partnership, collectively, unless the context indicates otherwise.

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

Certain information contained herein is presented as of July 18, 2013, the latest practicable date for financial information prior to the filing of this Quarterly Report.

This report combines the Quarterly Reports on Form 10-Q for the period ended June 30, 2013 of the Company and the Operating Partnership. We believe combining the quarterly reports into this single report results in the following benefits:

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

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

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

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

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

Consolidated Financial Statements;

the following Notes to Consolidated Financial Statements:

Note 4 - Investments in and Advances to Affiliates;

Note 8 - Noncontrolling Interests; and

Note 13 - Earnings Per Share and Per Unit;

Item 4 - Controls and Procedures; and

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





HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP

QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 2013

TABLE OF CONTENTS

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



3

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HIGHWOODS PROPERTIES, INC.
Consolidated Balance Sheets
(Unaudited and in thousands, except share and per share data)
 
June 30,
2013
 
December 31,
2012
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
389,431

 
$
365,762

Buildings and tenant improvements
3,482,057

 
3,253,805

Development in process
37,559

 
21,198

Land held for development
120,580

 
115,416

 
4,029,627

 
3,756,181

Less-accumulated depreciation
(978,777
)
 
(929,598
)
Net real estate assets
3,050,850

 
2,826,583

Real estate and other assets, net, held for sale

 
47,508

Cash and cash equivalents
10,122

 
13,783

Restricted cash
15,987

 
19,702

Accounts receivable, net of allowance of $1,465 and $2,848, respectively
25,266

 
23,073

Mortgages and notes receivable, net of allowance of $376 and $182, respectively
25,583

 
25,472

Accrued straight-line rents receivable, net of allowance of $853 and $857, respectively
122,742

 
115,030

Investments in and advances to unconsolidated affiliates
65,272

 
66,800

Deferred financing and leasing costs, net of accumulated amortization of $85,548 and $76,840, respectively
181,802

 
168,019

Prepaid expenses and other assets, net of accumulated amortization of $12,561 and $12,318,
respectively
41,959

 
44,458

Total Assets
$
3,539,583

 
$
3,350,428

Liabilities, Noncontrolling Interests in the Operating Partnership and Equity:
 
 
 
Mortgages and notes payable
$
1,931,655

 
$
1,859,162

Accounts payable, accrued expenses and other liabilities
185,087

 
172,146

Financing obligations
28,392

 
29,358

Total Liabilities
2,145,134

 
2,060,666

Commitments and contingencies

 

Noncontrolling interests in the Operating Partnership
130,351

 
124,869

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

 
29,077

Common Stock, $.01 par value, 200,000,000 authorized shares;
 
 
 
83,968,412 and 80,311,437 shares issued and outstanding, respectively
840

 
803

Additional paid-in capital
2,160,698

 
2,040,306

Distributions in excess of net income available for common stockholders
(927,110
)
 
(897,418
)
Accumulated other comprehensive loss
(4,142
)
 
(12,628
)
Total Stockholders’ Equity
1,259,363

 
1,160,140

Noncontrolling interests in consolidated affiliates
4,735

 
4,753

Total Equity
1,264,098

 
1,164,893

Total Liabilities, Noncontrolling Interests in the Operating Partnership and Equity
$
3,539,583

 
$
3,350,428


See accompanying notes to consolidated financial statements.

4

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Income
(Unaudited and in thousands, except per share amounts)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Rental and other revenues
$
138,515

 
$
126,728

 
$
274,631

 
$
250,762

Operating expenses:
 
 
 
 
 
 
 
Rental property and other expenses
49,633

 
45,884

 
98,372

 
90,066

Depreciation and amortization
42,394

 
38,991

 
84,208

 
75,687

Impairments of real estate assets
1,066

 

 
1,066

 

General and administrative
8,397

 
8,900

 
18,979

 
18,573

Total operating expenses
101,490

 
93,775

 
202,625

 
184,326

Interest expense:
 
 
 
 
 
 
 
Contractual
22,398

 
23,548

 
45,196

 
47,399

Amortization of deferred financing costs
948

 
900

 
1,897

 
1,802

Financing obligations
(60
)
 
(76
)
 
61

 
(152
)
 
23,286

 
24,372

 
47,154

 
49,049

Other income:
 
 
 
 
 
 
 
Interest and other income
1,617

 
1,737

 
3,400

 
3,967

Losses on debt extinguishment

 
(973
)
 
(164
)
 
(973
)
 
1,617

 
764


3,236


2,994

Income from continuing operations before disposition of property and condominiums
and equity in earnings of unconsolidated affiliates
15,356

 
9,345

 
28,088

 
20,381

Losses on disposition of property
(37
)
 

 
(37
)
 

Gains on for-sale residential condominiums

 
110

 

 
175

Equity in earnings of unconsolidated affiliates
913

 
1,508

 
1,349

 
1,346

Income from continuing operations
16,232

 
10,963

 
29,400

 
21,902

Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations
184

 
2,150

 
245

 
4,409

Net gains on disposition of discontinued operations
13,163

 
1,385

 
13,694

 
6,519

 
13,347

 
3,535

 
13,939

 
10,928

Net income
29,579

 
14,498

 
43,339

 
32,830

Net (income) attributable to noncontrolling interests in the Operating Partnership
(1,243
)
 
(686
)
 
(1,824
)
 
(1,513
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(187
)
 
(223
)
 
(390
)
 
(407
)
Dividends on Preferred Stock
(627
)
 
(627
)
 
(1,254
)
 
(1,254
)
Net income available for common stockholders
$
27,522

 
$
12,962


$
39,871


$
29,656

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

 
$
0.13

 
$
0.33

 
$
0.26

Income from discontinued operations available for common stockholders
0.15

 
0.04

 
0.16

 
0.14

Net income available for common stockholders
$
0.33

 
$
0.17

 
$
0.49

 
$
0.40

Weighted average Common Shares outstanding – basic
82,811

 
74,662

 
81,925

 
73,749

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

 
$
0.13

 
$
0.33

 
$
0.26

Income from discontinued operations available for common stockholders
0.15

 
0.04

 
0.16

 
0.14

Net income available for common stockholders
$
0.33

 
$
0.17

 
$
0.49

 
$
0.40

Weighted average Common Shares outstanding – diluted
86,631

 
78,521

 
85,752

 
77,601

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
$
14,746

 
$
9,596

 
$
26,529

 
$
19,259

Income from discontinued operations available for common stockholders
12,776

 
3,366

 
13,342

 
10,397

Net income available for common stockholders
$
27,522

 
$
12,962

 
$
39,871

 
$
29,656


See accompanying notes to consolidated financial statements.

5

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Comprehensive Income
(Unaudited and in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
29,579

 
$
14,498

 
$
43,339

 
$
32,830

Other comprehensive income:
 
 
 
 
 
 
 
Unrealized gains/(losses) on tax increment financing bond
(91
)
 
296

 
299

 
583

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

 
(7,481
)
 
6,599

 
(7,087
)
Amortization of cash flow hedges
800

 
782

 
1,588

 
1,459

Total other comprehensive income/(loss)
7,028

 
(6,403
)
 
8,486

 
(5,045
)
Total comprehensive income
36,607

 
8,095

 
51,825

 
27,785

Less-comprehensive (income) attributable to noncontrolling interests
(1,430
)
 
(909
)
 
(2,214
)
 
(1,920
)
Comprehensive income attributable to common stockholders
$
35,177

 
$
7,186

 
$
49,611

 
$
25,865


See accompanying notes to consolidated financial statements.



6

Table of Contents

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

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

 
$
803

 
$
29,077

 
$
2,040,306

 
$
(12,628
)
 
$
4,753

 
$
(897,418
)
 
$
1,164,893

Issuances of Common Stock, net of tax withholdings
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



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

 
$
726

 
$
29,077

 
$
1,803,997

 
$
(5,734
)
 
$
4,646

 
$
(845,853
)
 
$
986,859

Issuances of Common Stock, net of tax withholdings
2,794,340

 
28

 

 
91,808

 

 

 

 
91,836

Conversions of Common Units to Common Stock
18,366

 

 

 
631

 

 

 

 
631

Dividends on Common Stock

 

 

 

 

 

 
(62,787
)
 
(62,787
)
Dividends on Preferred Stock

 

 

 

 

 

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

 

 

 
(16,501
)
 

 

 

 
(16,501
)
Distributions to noncontrolling interests in consolidated affiliates

 

 

 

 

 
(460
)
 

 
(460
)
Issuances of restricted stock
158,885

 

 

 

 

 

 

 

Share-based compensation expense, net of forfeitures

 
2

 

 
4,457

 

 

 

 
4,459

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

 

 

 

 

 

 
(1,513
)
 
(1,513
)
Net (income) attributable to noncontrolling interests in consolidated affiliates

 

 

 

 

 
407

 
(407
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 

 
32,830

 
32,830

Other comprehensive loss

 

 

 

 
(5,045
)
 

 

 
(5,045
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
27,785

Balance at June 30, 2012
75,619,288

 
$
756

 
$
29,077

 
$
1,884,392

 
$
(10,779
)
 
$
4,593

 
$
(878,984
)
 
$
1,029,055


See accompanying notes to consolidated financial statements.

7

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
 
Six Months Ended June 30,
 
2013
 
2012
Operating activities:
 
 
 
Net income
$
43,339

 
$
32,830

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
84,767

 
79,113

Amortization of lease incentives and acquisition-related intangible assets and liabilities
(198
)
 
180

Share-based compensation expense
4,737

 
4,459

Allowance for losses on accounts and accrued straight-line rents receivable
380

 
538

Amortization of deferred financing costs
1,897

 
1,802

Amortization of cash flow hedges
1,588

 
1,459

Impairments of real estate assets
1,481

 

Losses on debt extinguishment
164

 
973

Net gains on disposition of property
(13,657
)
 
(6,519
)
Gains on for-sale residential condominiums

 
(175
)
Equity in earnings of unconsolidated affiliates
(1,349
)
 
(1,346
)
Changes in financing obligations
(391
)
 
(584
)
Distributions of earnings from unconsolidated affiliates
2,827

 
2,225

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
2,295

 
7,298

Prepaid expenses and other assets
(2,284
)
 
(3,158
)
Accrued straight-line rents receivable
(8,009
)
 
(9,415
)
Accounts payable, accrued expenses and other liabilities
(661
)
 
(16,352
)
Net cash provided by operating activities
116,926

 
93,328

Investing activities:
 
 
 
Investments in acquired real estate and related intangible assets, net of cash acquired
(228,461
)
 

Investments in development in process
(11,499
)
 
(1,531
)
Investments in tenant improvements and deferred leasing costs
(42,343
)
 
(43,851
)
Investments in building improvements
(26,466
)
 
(19,758
)
Net proceeds from disposition of real estate assets
60,381

 
19,898

Net proceeds from disposition of for-sale residential condominiums

 
2,492

Distributions of capital from unconsolidated affiliates
435

 
901

Investments in and repayments of mortgages and notes receivable
(156
)
 
1,544

Investments in and advances/repayments to/from unconsolidated affiliates
(429
)
 
(2,750
)
Changes in restricted cash and other investing activities
7,853

 
4,031

Net cash used in investing activities
(240,685
)
 
(39,024
)
Financing activities:
 
 
 
Dividends on Common Stock
(69,563
)
 
(62,787
)
Dividends on Preferred Stock
(1,254
)
 
(1,254
)
Distributions to noncontrolling interests in the Operating Partnership
(3,140
)
 
(3,158
)
Distributions to noncontrolling interests in consolidated affiliates
(408
)
 
(460
)
Proceeds from the issuance of Common Stock
126,738

 
95,289

Costs paid for the issuance of Common Stock
(1,711
)
 
(1,316
)
Repurchase of shares related to tax withholdings
(2,537
)
 
(2,137
)
Borrowings on revolving credit facility
346,300

 
106,300

Repayments of revolving credit facility
(233,900
)
 
(392,800
)
Borrowings on mortgages and notes payable

 
225,000

Repayments of mortgages and notes payable
(39,610
)
 
(19,359
)
Payments on financing obligations
(575
)
 
(38
)
Additions to deferred financing costs and other financing activities
(242
)
 
(2,245
)
Net cash provided by/(used in) financing activities
120,098

 
(58,965
)
Net decrease in cash and cash equivalents
$
(3,661
)
 
$
(4,661
)

See accompanying notes to consolidated financial statements.

8

Table of Contents


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

 
Six Months Ended June 30,
 
2013
 
2012
Net decrease in cash and cash equivalents
$
(3,661
)
 
$
(4,661
)
Cash and cash equivalents at beginning of the period
13,783

 
11,188

Cash and cash equivalents at end of the period
$
10,122

 
$
6,527


Supplemental disclosure of cash flow information:
 
 
Six Months Ended June 30,
 
2013
 
2012
Cash paid for interest, net of amounts capitalized
$
40,480

 
$
48,063


Supplemental disclosure of non-cash investing and financing activities:
 
 
Six Months Ended June 30,
 
2013
 
2012
Unrealized gains/(losses) on cash flow hedges
$
6,599

 
$
(7,087
)
Conversions of Common Units to Common Stock
2,851

 
631

Changes in accrued capital expenditures
12,618

 
(2,448
)
Write-off of fully depreciated real estate assets
17,732

 
28,629

Write-off of fully amortized deferred financing and leasing costs
11,363

 
8,765

Unrealized gains on marketable securities of non-qualified deferred compensation plan
312

 
216

Adjustment of noncontrolling interests in the Operating Partnership to fair value
9,649

 
16,501

Unrealized gains on tax increment financing bond
299

 
583

Reduction of advances to unconsolidated affiliates related to acquisition activities

 
26,000


See accompanying notes to consolidated financial statements.

9

Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Balance Sheets
(Unaudited and in thousands, except unit and per unit data)
 
June 30,
2013
 
December 31,
2012
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
389,431

 
$
365,762

Buildings and tenant improvements
3,482,057

 
3,253,805

Development in process
37,559

 
21,198

Land held for development
120,580

 
115,416

 
4,029,627

 
3,756,181

Less-accumulated depreciation
(978,777
)
 
(929,598
)
Net real estate assets
3,050,850

 
2,826,583

Real estate and other assets, net, held for sale

 
47,508

Cash and cash equivalents
10,205

 
13,867

Restricted cash
15,987

 
19,702

Accounts receivable, net of allowance of $1,465 and $2,848, respectively
25,266

 
23,073

Mortgages and notes receivable, net of allowance of $376 and $182, respectively
25,583

 
25,472

Accrued straight-line rents receivable, net of allowance of $853 and $857, respectively
122,742

 
115,030

Investments in and advances to unconsolidated affiliates
64,249

 
65,813

Deferred financing and leasing costs, net of accumulated amortization of $85,548 and $76,840, respectively
181,802

 
168,019

Prepaid expenses and other assets, net of accumulated amortization of $12,561 and $12,318,
respectively
41,864

 
44,458

Total Assets
$
3,538,548

 
$
3,349,525

Liabilities, Redeemable Operating Partnership Units and Equity:
 
 
 
Mortgages and notes payable
$
1,931,655

 
$
1,859,162

Accounts payable, accrued expenses and other liabilities
185,041

 
172,026

Financing obligations
28,392

 
29,358

Total Liabilities
2,145,088

 
2,060,546

Commitments and contingencies

 

Redeemable Operating Partnership Units:
 
 
 
Common Units, 3,660,545 and 3,733,016 outstanding, respectively
130,351

 
124,869

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

 
29,077

Total Redeemable Operating Partnership Units
159,428

 
153,946

Equity:
 
 
 
Common Units:
 
 
 
General partner Common Units, 872,201 and 836,356 outstanding, respectively
12,332

 
11,427

Limited partner Common Units, 82,687,402 and 79,066,272 outstanding, respectively
1,221,107

 
1,131,481

Accumulated other comprehensive loss
(4,142
)
 
(12,628
)
Noncontrolling interests in consolidated affiliates
4,735

 
4,753

Total Equity
1,234,032

 
1,135,033

Total Liabilities, Redeemable Operating Partnership Units and Equity
$
3,538,548

 
$
3,349,525


See accompanying notes to consolidated financial statements.

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Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Income
(Unaudited and in thousands, except per unit amounts)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Rental and other revenues
$
138,515

 
$
126,728

 
$
274,631

 
$
250,762

Operating expenses:
 
 
 
 
 
 
 
Rental property and other expenses
49,611

 
45,825

 
98,376

 
89,945

Depreciation and amortization
42,394

 
38,991

 
84,208

 
75,687

Impairments of real estate assets
1,066

 

 
1,066

 

General and administrative
8,419

 
8,959

 
18,975

 
18,694

Total operating expenses
101,490

 
93,775

 
202,625

 
184,326

Interest expense:
 
 
 
 
 
 
 
Contractual
22,398

 
23,548

 
45,196

 
47,399

Amortization of deferred financing costs
948

 
900

 
1,897

 
1,802

Financing obligations
(60
)
 
(76
)
 
61

 
(152
)
 
23,286

 
24,372

 
47,154

 
49,049

Other income:
 
 
 
 
 
 
 
Interest and other income
1,617

 
1,737

 
3,400

 
3,967

Losses on debt extinguishment

 
(973
)
 
(164
)
 
(973
)
 
1,617

 
764

 
3,236

 
2,994

Income from continuing operations before disposition of property and condominiums
and equity in earnings of unconsolidated affiliates
15,356

 
9,345

 
28,088

 
20,381

Losses on disposition of property
(37
)
 

 
(37
)
 

Gains on for-sale residential condominiums

 
110

 

 
175

Equity in earnings of unconsolidated affiliates
916

 
1,511

 
1,299

 
1,351

Income from continuing operations
16,235

 
10,966

 
29,350

 
21,907

Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations
184

 
2,150

 
245

 
4,409

Net gains on disposition of discontinued operations
13,163

 
1,385

 
13,694

 
6,519

 
13,347

 
3,535

 
13,939

 
10,928

Net income
29,582

 
14,501

 
43,289

 
32,835

Net (income) attributable to noncontrolling interests in consolidated affiliates
(187
)
 
(223
)
 
(390
)
 
(407
)
Distributions on Preferred Units
(627
)
 
(627
)
 
(1,254
)
 
(1,254
)
Net income available for common unitholders
$
28,768

 
$
13,651

 
$
41,645

 
$
31,174

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

 
$
0.13

 
$
0.33

 
$
0.26

Income from discontinued operations available for common unitholders
0.15

 
0.05

 
0.16

 
0.14

Net income available for common unitholders
$
0.33

 
$
0.18

 
$
0.49

 
$
0.40

Weighted average Common Units outstanding – basic
86,090

 
77,971

 
85,223

 
77,063

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

 
$
0.13

 
$
0.33

 
$
0.26

Income from discontinued operations available for common unitholders
0.15

 
0.04

 
0.16

 
0.14

Net income available for common unitholders
$
0.33

 
$
0.17

 
$
0.49

 
$
0.40

Weighted average Common Units outstanding – diluted
86,222

 
78,112

 
85,343

 
77,192

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
$
15,421

 
$
10,116

 
$
27,706

 
$
20,246

Income from discontinued operations available for common unitholders
13,347

 
3,535

 
13,939

 
10,928

Net income available for common unitholders
$
28,768

 
$
13,651

 
$
41,645

 
$
31,174


See accompanying notes to consolidated financial statements.

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Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Comprehensive Income
(Unaudited and in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
29,582

 
$
14,501

 
$
43,289

 
$
32,835

Other comprehensive income:
 
 
 
 
 
 
 
Unrealized gains/(losses) on tax increment financing bond
(91
)
 
296

 
299

 
583

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

 
(7,481
)
 
6,599

 
(7,087
)
Amortization of cash flow hedges
800

 
782

 
1,588

 
1,459

Total other comprehensive income/(loss)
7,028

 
(6,403
)
 
8,486

 
(5,045
)
Total comprehensive income
36,610

 
8,098

 
51,775

 
27,790

Less-comprehensive (income) attributable to noncontrolling interests
(187
)
 
(223
)
 
(390
)
 
(407
)
Comprehensive income attributable to common unitholders
$
36,423


$
7,875

 
$
51,385

 
$
27,383


See accompanying notes to consolidated financial statements.


12

Table of Contents

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

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

 
$
1,131,481

 
$
(12,628
)
 
$
4,753

 
$
1,135,033

Issuances of Common Units, net of tax withholdings
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



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

 
$
948,187

 
$
(5,734
)
 
$
4,646

 
$
956,674

Issuances of Common Units, net of tax withholdings
918

 
90,918

 

 

 
91,836

Distributions paid on Common Units
(656
)
 
(64,941
)
 

 

 
(65,597
)
Distributions paid on Preferred Units
(13
)
 
(1,241
)
 

 

 
(1,254
)
Share-based compensation expense, net of forfeitures
45

 
4,414

 

 

 
4,459

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(460
)
 
(460
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
(144
)
 
(14,294
)
 

 

 
(14,438
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(4
)
 
(403
)
 

 
407

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
328

 
32,507

 

 

 
32,835

Other comprehensive loss

 

 
(5,045
)
 

 
(5,045
)
Total comprehensive income
 
 
 
 
 
 
 
 
27,790

Balance at June 30, 2012
$
10,049

 
$
995,147

 
$
(10,779
)
 
$
4,593

 
$
999,010


See accompanying notes to consolidated financial statements.

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Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
 
Six Months Ended June 30,
 
2013
 
2012
Operating activities:
 
 
 
Net income
$
43,289

 
$
32,835

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
84,767

 
79,113

Amortization of lease incentives and acquisition-related intangible assets and liabilities
(198
)
 
180

Share-based compensation expense
4,737

 
4,459

Allowance for losses on accounts and accrued straight-line rents receivable
380

 
538

Amortization of deferred financing costs
1,897

 
1,802

Amortization of cash flow hedges
1,588

 
1,459

Impairments of real estate assets
1,481

 

Losses on debt extinguishment
164

 
973

Net gains on disposition of property
(13,657
)
 
(6,519
)
Gains on for-sale residential condominiums

 
(175
)
Equity in earnings of unconsolidated affiliates
(1,299
)
 
(1,351
)
Changes in financing obligations
(391
)
 
(584
)
Distributions of earnings from unconsolidated affiliates
2,814

 
2,211

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
2,295

 
7,298

Prepaid expenses and other assets
(2,189
)
 
(3,077
)
Accrued straight-line rents receivable
(8,009
)
 
(9,415
)
Accounts payable, accrued expenses and other liabilities
(587
)
 
(16,413
)
Net cash provided by operating activities
117,082

 
93,334

Investing activities:
 
 
 
Investments in acquired real estate and related intangible assets, net of cash acquired
(228,461
)
 

Investments in development in process
(11,499
)
 
(1,531
)
Investments in tenant improvements and deferred leasing costs
(42,343
)
 
(43,851
)
Investments in building improvements
(26,466
)
 
(19,758
)
Net proceeds from disposition of real estate assets
60,381

 
19,898

Net proceeds from disposition of for-sale residential condominiums

 
2,492

Distributions of capital from unconsolidated affiliates
435

 
901

Investments in and repayments of mortgages and notes receivable
(156
)
 
1,544

Investments in and advances/repayments to/from unconsolidated affiliates
(429
)
 
(2,750
)
Changes in restricted cash and other investing activities
7,853

 
4,031

Net cash used in investing activities
(240,685
)
 
(39,024
)
Financing activities:
 
 
 
Distributions on Common Units
(72,355
)
 
(65,597
)
Distributions on Preferred Units
(1,254
)
 
(1,254
)
Distributions to noncontrolling interests in consolidated affiliates
(408
)
 
(460
)
Proceeds from the issuance of Common Units
126,738

 
95,289

Costs paid for the issuance of Common Units
(1,711
)
 
(1,316
)
Repurchase of units related to tax withholdings
(2,537
)
 
(2,137
)
Borrowings on revolving credit facility
346,300

 
106,300

Repayments of revolving credit facility
(233,900
)
 
(392,800
)
Borrowings on mortgages and notes payable

 
225,000

Repayments of mortgages and notes payable
(39,610
)
 
(19,359
)
Payments on financing obligations
(575
)
 
(38
)
Additions to deferred financing costs and other financing activities
(747
)
 
(2,458
)
Net cash provided by/(used in) financing activities
119,941

 
(58,830
)
Net decrease in cash and cash equivalents
$
(3,662
)
 
$
(4,520
)

See accompanying notes to consolidated financial statements.

14

Table of Contents


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

 
Six Months Ended June 30,
 
2013
 
2012
Net decrease in cash and cash equivalents
$
(3,662
)
 
$
(4,520
)
Cash and cash equivalents at beginning of the period
13,867

 
11,151

Cash and cash equivalents at end of the period
$
10,205

 
$
6,631


Supplemental disclosure of cash flow information:
 
 
Six Months Ended June 30,
 
2013
 
2012
Cash paid for interest, net of amounts capitalized
$
40,480

 
$
48,063


Supplemental disclosure of non-cash investing and financing activities:
 
 
Six Months Ended June 30,
 
2013
 
2012
Unrealized gains/(losses) on cash flow hedges
$
6,599

 
$
(7,087
)
Changes in accrued capital expenditures
12,618

 
(2,448
)
Write-off of fully depreciated real estate assets
17,732

 
28,629

Write-off of fully amortized deferred financing and leasing costs
11,363

 
8,765

Unrealized gains on marketable securities of non-qualified deferred compensation plan
312

 
216

Adjustment of Redeemable Common Units to fair value
5,482

 
14,225

Unrealized gains on tax increment financing bond
299

 
583

Reduction of advances to unconsolidated affiliates related to acquisition activities

 
26,000


See accompanying notes to consolidated financial statements.

15

Table of Contents

HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(tabular dollar amounts in thousands, except per share and per unit data)
(Unaudited)

1.    Description of Business and Significant Accounting Policies

Description of Business

Highwoods Properties, Inc. (the “Company”) is a fully-integrated, self-administered and self-managed equity real estate investment trust (“REIT”) that provides leasing, management, development, construction and other customer-related services for its properties and for third parties. The Company conducts virtually all of its activities through Highwoods Realty Limited Partnership (the “Operating Partnership”). At June 30, 2013, the Company and/or the Operating Partnership wholly owned: 291 in-service office, industrial and retail properties, comprising 29.6 million square feet; 634 acres of undeveloped land suitable for future development, of which 566 acres are considered core assets; and two office development properties. In addition, we owned interests (50.0% or less) in 30 in-service office properties, a rental residential development property and 11 acres of undeveloped land suitable for future development, which includes a 12.5% interest in a 261,000 square foot office property directly owned by the Company (not included in the Operating Partnership’s Consolidated Financial Statements).

The Company is the sole general partner of the Operating Partnership. At June 30, 2013, the Company owned all of the Preferred Units and 83.6 million, or 95.8%, of the Common Units in the Operating Partnership. Limited partners, including two directors of the Company, own the remaining 3.7 million Common Units. During the six months ended June 30, 2013, the Company redeemed 72,471 Common Units for a like number of shares of Common Stock. As a result of this activity, the percentage of Common Units owned by the Company increased from 95.6% at December 31, 2012 to 95.8% at June 30, 2013.

Common Stock Offerings
 
During the three and six months ended June 30, 2013, the Company issued 1,756,590 and 3,056,381 shares of Common Stock, respectively, under its equity sales agreements at an average gross sales price of $38.32 and $37.31 per share, respectively, and received net proceeds, after sales commissions, of $66.3 million and $112.3 million, respectively.

Basis of Presentation

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

The Company's Consolidated Financial Statements include the Operating Partnership, wholly owned subsidiaries and those entities in which the Company has the controlling interest. The Operating Partnership's Consolidated Financial Statements include wholly owned subsidiaries and those entities in which the Operating Partnership has the controlling interest. All intercompany transactions and accounts have been eliminated. At June 30, 2013 and December 31, 2012, we had involvement with, but are not the primary beneficiary in, an entity that we concluded to be a variable interest entity (see Note 3).

The unaudited interim consolidated financial statements and accompanying unaudited consolidated financial information, in the opinion of management, contain all adjustments (including normal recurring accruals) necessary for a fair presentation of our financial position, results of operations and cash flows. We have omitted certain notes and other information from the interim Consolidated Financial Statements presented in this Quarterly Report as permitted by SEC rules and regulations. These Consolidated Financial Statements should be read in conjunction with our 2012 Annual Report on Form 10-K.


16

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


1.    Description of Business and Significant Accounting Policies – Continued

Use of Estimates

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

2.    Real Estate Assets
 
Acquisitions
 
During the second quarter of 2013, we acquired an office property in Atlanta, GA encompassing 553,000 square feet for a purchase price of $140.1 million.

During the first quarter of 2013, we acquired:

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

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

five acres of development land in Memphis, TN for a purchase price of $4.8 million.

During the three and six months ended June 30, 2013, we expensed $0.4 million and $0.9 million, respectively, of acquisition costs (included in general and administrative expenses) related to these acquisitions. The assets acquired and liabilities assumed were recorded at fair value as determined by management based on information available at the acquisition date and on current assumptions as to future operations.

Dispositions

During the second quarter of 2013, we sold:

five industrial properties in Atlanta, GA for a sale price of $4.5 million (after $0.1 million in closing credits to buyer for free rent) and recorded a gain on disposition of discontinued operations of less than $0.1 million;

six industrial properties and a land parcel in a single transaction in Atlanta, GA for a sale price of $38.7 million (before $1.8 million in closing credits to buyer for unfunded tenant improvements and after $1.3 million in closing credits to buyer for free rent) and recorded a gain on disposition of discontinued operations of $13.2 million; and

two industrial properties in Atlanta, GA for a sale price of $4.8 million and recorded a loss on disposition of discontinued operations of less than $0.1 million.

During the first quarter of 2013, we sold two office properties in Orlando, FL for a sale price of $14.6 million (before $0.8 million in closing credits to buyer for unfunded tenant improvements) and recorded a loss on disposition of discontinued operations of $0.3 million.

In connection with the disposition of an office property in Jackson, MS in the third quarter of 2012, we had the right to receive additional cash consideration of up to $1.5 million upon the satisfaction of a certain post-closing requirement. The post-closing requirement was satisfied and the cash consideration was received during the first quarter of 2013. Accordingly, we recognized $1.5 million in additional gain on disposition of discontinued operations in the first quarter of 2013.

17

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


2.    Real Estate Assets - Continued

Impairments

During the second quarter of 2013, we recorded impairments of real estate assets of $1.1 million on four properties in a single office park in Winston-Salem, NC. These impairments were due to a change in the assumed timing of future dispositions and leasing assumptions, which reduced the future expected cash flows from the properties.

During the first quarter of 2013, we recorded impairments of real estate assets of $0.4 million on two industrial properties in Atlanta, GA and recorded impairments of real estate assets held for sale of $0.7 million on five industrial properties in Atlanta, GA. These properties were subsequently sold in the second quarter of 2013 and are classified as discontinued operations. These impairments were due to a change in the assumed timing of future dispositions and leasing assumptions, which reduced the future expected cash flows from the properties.

3.    Mortgages and Notes Receivable

The following table sets forth our mortgages and notes receivable:

 
June 30,
2013
 
December 31,
2012
Seller financing (first mortgages)
$
16,113

 
$
15,853

Less allowance

 

 
16,113

 
15,853

Mortgage receivable
8,715

 
8,648

Less allowance

 

 
8,715

 
8,648

Promissory notes
1,131

 
1,153

Less allowance
(376
)
 
(182
)
 
755

 
971

Mortgages and notes receivable, net
$
25,583

 
$
25,472


During 2010, we provided seller financing in conjunction with two disposition transactions. The seller financing is evidenced by first mortgages secured by the assignment of rents and the underlying real estate assets.

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, 2013, $0.1 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, 2013, our mortgages and notes receivable were not in default and there were no other indicators of impairment.


18

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 - Continued

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,
 
2013
 
2012
 
2013
 
2012
Beginning notes receivable allowance
$
437

 
$
122

 
$
182

 
$
61

Recoveries/write-offs/other
(61
)
 
(4
)
 
194

 
57

Total notes receivable allowance
$
376

 
$
118

 
$
376

 
$
118


4.    Investments in and Advances to Affiliates

Unconsolidated Affiliates

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

The following table sets forth combined summarized financial information for the Company's unconsolidated affiliates:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Income Statements:
 
 
 
 
 
 
 
Rental and other revenues
$
23,935

 
$
26,049

 
$
47,451