HIW 03.31.2014 10Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2014
 
HIGHWOODS PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
 
Maryland
001-13100
56-1871668
 
 
(State or other jurisdiction
of incorporation or organization)
(Commission
File Number)
(I.R.S. Employer
Identification Number)
 
 
HIGHWOODS REALTY LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
 
North Carolina
000-21731
56-1869557
 
 
(State or other jurisdiction
of incorporation or organization)
(Commission
File Number)
(I.R.S. Employer
Identification Number)
 
 
3100 Smoketree Court, Suite 600
Raleigh, NC 27604
(Address of principal executive offices) (Zip Code)
919-872-4924
(Registrants’ telephone number, including area code)
______________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Highwoods Properties, Inc.  Yes  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 90,121,773 shares of Common Stock outstanding as of April 21, 2014.
 




EXPLANATORY NOTE

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

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

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

This report combines the Quarterly Reports on Form 10-Q for the period ended March 31, 2014 of the Company and the Operating Partnership. We believe combining the quarterly reports into this single report results in the following benefits:

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

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

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

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

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

Consolidated Financial Statements;

the following Notes to Consolidated Financial Statements:

Note 7 - Noncontrolling Interests; and

Note 12 - 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 MARCH 31, 2014

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)
 
March 31,
2014
 
December 31,
2013
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
394,233

 
$
393,602

Buildings and tenant improvements
3,782,607

 
3,748,869

Development in process
69,527

 
44,621

Land held for development
111,444

 
110,374

 
4,357,811

 
4,297,466

Less-accumulated depreciation
(1,019,931
)
 
(985,244
)
Net real estate assets
3,337,880

 
3,312,222

Cash and cash equivalents
13,344

 
10,184

Restricted cash
9,140

 
14,169

Accounts receivable, net of allowance of $1,412 and $1,648, respectively
24,661

 
26,430

Mortgages and notes receivable, net of allowance of $300 and $302, respectively
10,028

 
26,409

Accrued straight-line rents receivable, net of allowance of $1,118 and $1,063, respectively
132,038

 
126,014

Investments in unconsolidated affiliates
28,836

 
29,901

Deferred financing and leasing costs, net of accumulated amortization of $100,639 and $92,220, respectively
218,831

 
222,211

Prepaid expenses and other assets, net of accumulated amortization of $13,186 and $12,905,
respectively
45,235

 
39,561

Total Assets
$
3,819,993

 
$
3,807,101

Liabilities, Noncontrolling Interests in the Operating Partnership and Equity:
 
 
 
Mortgages and notes payable
$
2,012,554

 
$
1,956,299

Accounts payable, accrued expenses and other liabilities
198,856

 
218,962

Financing obligations
26,443

 
26,664

Total Liabilities
2,237,853

 
2,201,925

Commitments and contingencies

 

Noncontrolling interests in the Operating Partnership
112,808

 
106,480

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

 
29,077

Common Stock, $.01 par value, 200,000,000 authorized shares;
 
 
 
90,061,731 and 89,920,915 shares issued and outstanding, respectively
901

 
899

Additional paid-in capital
2,367,509

 
2,370,368

Distributions in excess of net income available for common stockholders
(946,530
)
 
(920,433
)
Accumulated other comprehensive loss
(2,922
)
 
(2,611
)
Total Stockholders’ Equity
1,448,035

 
1,477,300

Noncontrolling interests in consolidated affiliates
21,297

 
21,396

Total Equity
1,469,332

 
1,498,696

Total Liabilities, Noncontrolling Interests in the Operating Partnership and Equity
$
3,819,993

 
$
3,807,101


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 March 31,
 
2014
 
2013
Rental and other revenues
$
148,453

 
$
130,377

Operating expenses:
 
 
 
Rental property and other expenses
56,390

 
46,594

Depreciation and amortization
48,165

 
40,088

General and administrative
10,714

 
10,582

Total operating expenses
115,269

 
97,264

Interest expense:
 
 
 
Contractual
20,750

 
22,798

Amortization of deferred financing costs
652

 
949

Financing obligations
(40
)
 
121

 
21,362

 
23,868

Other income:
 
 
 
Interest and other income
1,399

 
1,783

Losses on debt extinguishment

 
(164
)
 
1,399


1,619

Income from continuing operations before activity in unconsolidated affiliates
13,221

 
10,864

Equity in earnings/(losses) of unconsolidated affiliates
(29
)
 
436

Income from continuing operations
13,192

 
11,300

Discontinued operations:
 
 
 
Income from discontinued operations

 
2,344

Impairments of real estate assets

 
(1,128
)
Net gains on disposition of discontinued operations
384

 
1,244

 
384

 
2,460

Net income
13,576

 
13,760

Net (income) attributable to noncontrolling interests in the Operating Partnership
(398
)
 
(581
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(423
)
 
(203
)
Dividends on Preferred Stock
(627
)
 
(627
)
Net income available for common stockholders
$
12,128


$
12,349

Earnings per Common Share – basic:
 
 
 
Income from continuing operations available for common stockholders
$
0.13

 
$
0.12

Income from discontinued operations available for common stockholders

 
0.03

Net income available for common stockholders
$
0.13

 
$
0.15

Weighted average Common Shares outstanding – basic
89,966

 
81,029

Earnings per Common Share – diluted:
 
 
 
Income from continuing operations available for common stockholders
$
0.13

 
$
0.12

Income from discontinued operations available for common stockholders

 
0.03

Net income available for common stockholders
$
0.13

 
$
0.15

Weighted average Common Shares outstanding – diluted
93,030

 
84,862

Dividends declared per Common Share
$
0.425

 
$
0.425

Net income available for common stockholders:
 
 
 
Income from continuing operations available for common stockholders
$
11,756

 
$
9,998

Income from discontinued operations available for common stockholders
372

 
2,351

Net income available for common stockholders
$
12,128

 
$
12,349

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 March 31,
 
2014
 
2013
Comprehensive income:
 
 
 
Net income
$
13,576

 
$
13,760

Other comprehensive income/(loss):
 
 
 
Unrealized gains on tax increment financing bond
165

 
390

Unrealized gains/(losses) on cash flow hedges
(1,404
)
 
280

Amortization of cash flow hedges
928

 
788

Total other comprehensive income/(loss)
(311
)
 
1,458

Total comprehensive income
13,265

 
15,218

Less-comprehensive (income) attributable to noncontrolling interests
(821
)
 
(784
)
Comprehensive income attributable to common stockholders
$
12,444

 
$
14,434


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, 2013
89,920,915

 
$
899

 
$
29,077

 
$
2,370,368

 
$
(2,611
)
 
$
21,396

 
$
(920,433
)
 
$
1,498,696

Issuances of Common Stock, net of shares redeemed for tax withholdings
(8,427
)
 

 

 
153

 

 

 

 
153

Conversions of Common Units to Common Stock
4,417

 

 

 
162

 

 

 

 
162

Dividends on Common Stock


 

 

 

 

 

 
(38,225
)
 
(38,225
)
Dividends on Preferred Stock


 

 

 

 

 

 
(627
)
 
(627
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value


 

 

 
(7,434
)
 

 

 

 
(7,434
)
Distributions to noncontrolling interests in consolidated affiliates


 

 

 

 

 
(522
)
 

 
(522
)
Issuances of restricted stock
144,826

 

 

 

 

 

 

 

Share-based compensation expense, net of forfeitures

 
2

 

 
4,260

 

 

 

 
4,262

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


 

 

 

 

 

 
(398
)
 
(398
)
Net (income) attributable to noncontrolling interests in consolidated affiliates


 

 

 

 

 
423

 
(423
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income


 

 

 

 

 

 
13,576

 
13,576

Other comprehensive loss


 

 

 

 
(311
)
 

 

 
(311
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
13,265

Balance at March 31, 2014
90,061,731

 
$
901

 
$
29,077

 
$
2,367,509

 
$
(2,922
)
 
$
21,297

 
$
(946,530
)
 
$
1,469,332



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

 
$
803

 
$
29,077

 
$
2,040,306

 
$
(12,628
)
 
$
4,753

 
$
(897,418
)
 
$
1,164,893

Issuances of Common Stock, net of shares redeemed for tax withholdings
1,664,519

 
17

 

 
55,787

 

 

 

 
55,804

Conversions of Common Units to Common Stock
10,071

 

 

 
351

 

 

 

 
351

Dividends on Common Stock

 

 

 

 

 

 
(34,259
)
 
(34,259
)
Dividends on Preferred Stock

 

 

 

 

 

 
(627
)
 
(627
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value

 

 

 
(23,802
)
 

 

 

 
(23,802
)
Distributions to noncontrolling interests in consolidated affiliates

 

 

 

 

 
(265
)
 

 
(265
)
Issuances of restricted stock
144,566

 

 

 

 

 

 

 

Share-based compensation expense, net of forfeitures

 
1

 

 
3,439

 

 

 

 
3,440

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

 

 

 

 

 

 
(581
)
 
(581
)
Net (income) attributable to noncontrolling interests in consolidated affiliates

 

 

 

 

 
203

 
(203
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 

 
13,760

 
13,760

Other comprehensive income

 

 

 

 
1,458

 

 

 
1,458

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
15,218

Balance at March 31, 2013
82,130,593

 
$
821

 
$
29,077

 
$
2,076,081

 
$
(11,170
)
 
$
4,691

 
$
(919,328
)
 
$
1,180,172


See accompanying notes to consolidated financial statements.

7

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
 
Three Months Ended March 31,
 
2014
 
2013
Operating activities:
 
 
 
Net income
$
13,576

 
$
13,760

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
48,165

 
42,292

Amortization of lease incentives and acquisition-related intangible assets and liabilities
82

 
(136
)
Share-based compensation expense
4,262

 
3,440

Allowance for losses on accounts and accrued straight-line rents receivable
1,125

 
426

Accrued interest on mortgages and notes receivable
(115
)
 

Amortization of deferred financing costs
652

 
949

Amortization of cash flow hedges
928

 
788

Amortization of mortgages and notes payable fair value adjustments
(809
)
 

Impairments of real estate assets

 
1,128

Losses on debt extinguishment

 
164

Net gains on disposition of property
(384
)
 
(1,244
)
Equity in (earnings)/losses of unconsolidated affiliates
29

 
(436
)
Changes in financing obligations
(221
)
 
(105
)
Distributions of earnings from unconsolidated affiliates
788

 
1,145

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
713

 
(1,479
)
Prepaid expenses and other assets
(5,260
)
 
(2,533
)
Accrued straight-line rents receivable
(6,457
)
 
(5,788
)
Accounts payable, accrued expenses and other liabilities
(25,690
)
 
(10,252
)
Net cash provided by operating activities
31,384

 
42,119

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

 
(88,332
)
Investments in development in process
(27,232
)
 
(4,978
)
Investments in tenant improvements and deferred leasing costs
(24,782
)
 
(18,004
)
Investments in building improvements
(13,007
)
 
(13,107
)
Net proceeds from disposition of real estate assets

 
14,971

Distributions of capital from unconsolidated affiliates
230

 
363

Investments in mortgages and notes receivable
(108
)
 

Repayments of mortgages and notes receivable
16,604

 

Investments in unconsolidated affiliates

 
(429
)
Changes in restricted cash and other investing activities
4,043

 
10,262

Net cash (used in) investing activities
(44,252
)
 
(99,254
)
Financing activities:
 
 
 
Dividends on Common Stock
(38,225
)
 
(34,259
)
Redemptions of Common Units
(93
)
 

Dividends on Preferred Stock
(627
)
 
(627
)
Distributions to noncontrolling interests in the Operating Partnership
(1,249
)
 
(1,584
)
Distributions to noncontrolling interests in consolidated affiliates
(522
)
 
(265
)
Proceeds from the issuance of Common Stock
1,313

 
59,019

Costs paid for the issuance of Common Stock
(14
)
 
(701
)
Repurchase of shares related to tax withholdings
(1,523
)
 
(2,514
)
Borrowings on revolving credit facility
96,100

 
135,900

Repayments of revolving credit facility
(36,800
)
 
(61,400
)
Repayments of mortgages and notes payable
(2,236
)
 
(37,214
)
Additions to deferred financing costs and other financing activities
(96
)
 
(833
)
Net cash provided by financing activities
16,028

 
55,522

Net increase/(decrease) in cash and cash equivalents
$
3,160

 
$
(1,613
)
See accompanying notes to consolidated financial statements.

8

Table of Contents


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

 
Three Months Ended March 31,
 
2014
 
2013
Net increase/(decrease) in cash and cash equivalents
$
3,160

 
$
(1,613
)
Cash and cash equivalents at beginning of the period
10,184

 
13,783

Cash and cash equivalents at end of the period
$
13,344

 
$
12,170


Supplemental disclosure of cash flow information:
 
 
Three Months Ended March 31,
 
2014
 
2013
Cash paid for interest, net of amounts capitalized
$
25,054

 
$
21,887


Supplemental disclosure of non-cash investing and financing activities:
 
 
Three Months Ended March 31,
 
2014
 
2013
Unrealized gains/(losses) on cash flow hedges
$
(1,404
)
 
$
280

Conversions of Common Units to Common Stock
162

 
351

Changes in accrued capital expenditures
5,399

 
5,158

Write-off of fully depreciated real estate assets
3,121

 
6,467

Write-off of fully amortized deferred financing and leasing costs
3,697

 
4,872

Unrealized gains on marketable securities of non-qualified deferred compensation plan
59

 
283

Adjustment of noncontrolling interests in the Operating Partnership to fair value
7,434

 
23,802

Unrealized gains on tax increment financing bond
165

 
390


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)
 
March 31,
2014
 
December 31,
2013
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
394,233

 
$
393,602

Buildings and tenant improvements
3,782,607

 
3,748,869

Development in process
69,527

 
44,621

Land held for development
111,444

 
110,374

 
4,357,811

 
4,297,466

Less-accumulated depreciation
(1,019,931
)
 
(985,244
)
Net real estate assets
3,337,880

 
3,312,222

Cash and cash equivalents
13,430

 
10,281

Restricted cash
9,140

 
14,169

Accounts receivable, net of allowance of $1,412 and $1,648, respectively
24,661

 
26,430

Mortgages and notes receivable, net of allowance of $300 and $302, respectively
10,028

 
26,409

Accrued straight-line rents receivable, net of allowance of $1,118 and $1,063, respectively
132,038

 
126,014

Investments in unconsolidated affiliates
28,836

 
29,901

Deferred financing and leasing costs, net of accumulated amortization of $100,639 and $92,220, respectively
218,831

 
222,211

Prepaid expenses and other assets, net of accumulated amortization of $13,186 and $12,905,
respectively
45,201

 
39,561

Total Assets
$
3,820,045

 
$
3,807,198

Liabilities, Redeemable Operating Partnership Units and Equity:
 
 
 
Mortgages and notes payable
$
2,012,554

 
$
1,956,299

Accounts payable, accrued expenses and other liabilities
198,804

 
218,887

Financing obligations
26,443

 
26,664

Total Liabilities
2,237,801

 
2,201,850

Commitments and contingencies

 

Redeemable Operating Partnership Units:
 
 
 
Common Units, 2,936,955 and 2,943,872 outstanding, respectively
112,808

 
106,480

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

 
29,077

Total Redeemable Operating Partnership Units
141,885

 
135,557

Equity:
 
 
 
Common Units:
 
 
 
General partner Common Units, 925,899 and 924,560 outstanding, respectively
14,219

 
14,508

Limited partner Common Units, 88,727,023 and 88,587,546 outstanding, respectively
1,407,765

 
1,436,498

Accumulated other comprehensive loss
(2,922
)
 
(2,611
)
Noncontrolling interests in consolidated affiliates
21,297

 
21,396

Total Equity
1,440,359

 
1,469,791

Total Liabilities, Redeemable Operating Partnership Units and Equity
$
3,820,045

 
$
3,807,198


See accompanying notes to consolidated financial statements.

10

Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Income
(Unaudited and in thousands, except per unit amounts)
 
Three Months Ended March 31,
 
2014
 
2013
Rental and other revenues
$
148,453

 
$
130,377

Operating expenses:
 
 
 
Rental property and other expenses
56,374

 
46,620

Depreciation and amortization
48,165

 
40,088

General and administrative
10,730

 
10,556

Total operating expenses
115,269

 
97,264

Interest expense:
 
 
 
Contractual
20,750

 
22,798

Amortization of deferred financing costs
652

 
949

Financing obligations
(40
)
 
121

 
21,362

 
23,868

Other income:
 
 
 
Interest and other income
1,399

 
1,783

Losses on debt extinguishment

 
(164
)
 
1,399

 
1,619

Income from continuing operations before activity in unconsolidated affiliates
13,221

 
10,864

Equity in earnings/(losses) of unconsolidated affiliates
(29
)
 
383

Income from continuing operations
13,192

 
11,247

Discontinued operations:
 
 
 
Income from discontinued operations

 
2,344

Impairments of real estate assets

 
(1,128
)
Net gains on disposition of discontinued operations
384

 
1,244

 
384

 
2,460

Net income
13,576

 
13,707

Net (income) attributable to noncontrolling interests in consolidated affiliates
(423
)
 
(203
)
Distributions on Preferred Units
(627
)
 
(627
)
Net income available for common unitholders
$
12,526

 
$
12,877

Earnings per Common Unit – basic:
 
 
 
Income from continuing operations available for common unitholders
$
0.13

 
$
0.12

Income from discontinued operations available for common unitholders
0.01

 
0.03

Net income available for common unitholders
$
0.14

 
$
0.15

Weighted average Common Units outstanding – basic
92,497

 
84,345

Earnings per Common Unit – diluted:
 
 
 
Income from continuing operations available for common unitholders
$
0.13

 
$
0.12

Income from discontinued operations available for common unitholders
0.01

 
0.03

Net income available for common unitholders
$
0.14

 
$
0.15

Weighted average Common Units outstanding – diluted
92,621

 
84,453

Distributions declared per Common Unit
$
0.425

 
$
0.425

Net income available for common unitholders:
 
 
 
Income from continuing operations available for common unitholders
$
12,142

 
$
10,417

Income from discontinued operations available for common unitholders
384

 
2,460

Net income available for common unitholders
$
12,526

 
$
12,877

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 March 31,
 
2014
 
2013
Comprehensive income:
 
 
 
Net income
$
13,576

 
$
13,707

Other comprehensive income/(loss):
 
 
 
Unrealized gains on tax increment financing bond
165

 
390

Unrealized gains/(losses) on cash flow hedges
(1,404
)
 
280

Amortization of cash flow hedges
928

 
788

Total other comprehensive income/(loss)
(311
)
 
1,458

Total comprehensive income
13,265

 
15,165

Less-comprehensive (income) attributable to noncontrolling interests
(423
)
 
(203
)
Comprehensive income attributable to common unitholders
$
12,842

 
$
14,962


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, 2013
$
14,508

 
$
1,436,498

 
$
(2,611
)
 
$
21,396

 
$
1,469,791

Issuances of Common Units, net of units redeemed for tax withholdings
2

 
151

 

 

 
153

Redemptions of Common Units
(1
)
 
(92
)
 

 

 
(93
)
Distributions paid on Common Units
(393
)
 
(38,907
)
 

 

 
(39,300
)
Distributions paid on Preferred Units
(6
)
 
(621
)
 

 

 
(627
)
Share-based compensation expense, net of forfeitures
43

 
4,219

 

 

 
4,262

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(522
)
 
(522
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
(66
)
 
(6,504
)
 

 

 
(6,570
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(4
)
 
(419
)
 

 
423

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
136

 
13,440

 

 

 
13,576

Other comprehensive loss

 

 
(311
)
 

 
(311
)
Total comprehensive income
 
 
 
 
 
 
 
 
13,265

Balance at March 31, 2014
$
14,219

 
$
1,407,765

 
$
(2,922
)
 
$
21,297

 
$
1,440,359



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

 
$
1,131,481

 
$
(12,628
)
 
$
4,753

 
$
1,135,033

Issuances of Common Units, net of units redeemed for tax withholdings
558

 
55,246

 

 

 
55,804

Distributions paid on Common Units
(356
)
 
(35,313
)
 

 

 
(35,669
)
Distributions paid on Preferred Units
(6
)
 
(621
)
 

 

 
(627
)
Share-based compensation expense, net of forfeitures
34

 
3,406

 

 

 
3,440

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(265
)
 
(265
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
(229
)
 
(22,625
)
 

 

 
(22,854
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(2
)
 
(201
)
 

 
203

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
137

 
13,570

 

 

 
13,707

Other comprehensive income

 

 
1,458

 

 
1,458

Total comprehensive income
 
 
 
 
 
 
 
 
15,165

Balance at March 31, 2013
$
11,563

 
$
1,144,943

 
$
(11,170
)
 
$
4,691

 
$
1,150,027


See accompanying notes to consolidated financial statements.

13

Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
 
Three Months Ended March 31,
 
2014
 
2013
Operating activities:
 
 
 
Net income
$
13,576

 
$
13,707

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
48,165

 
42,292

Amortization of lease incentives and acquisition-related intangible assets and liabilities
82

 
(136
)
Share-based compensation expense
4,262

 
3,440

Allowance for losses on accounts and accrued straight-line rents receivable
1,125

 
426

Accrued interest on mortgages and notes receivable
(115
)
 

Amortization of deferred financing costs
652

 
949

Amortization of cash flow hedges
928

 
788

Amortization of mortgages and notes payable fair value adjustments
(809
)
 

Impairments of real estate assets

 
1,128

Losses on debt extinguishment

 
164

Net gains on disposition of property
(384
)
 
(1,244
)
Equity in (earnings)/losses of unconsolidated affiliates
29

 
(383
)
Changes in financing obligations
(221
)
 
(105
)
Distributions of earnings from unconsolidated affiliates
788

 
1,139

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
713

 
(1,479
)
Prepaid expenses and other assets
(5,226
)
 
(2,391
)
Accrued straight-line rents receivable
(6,457
)
 
(5,788
)
Accounts payable, accrued expenses and other liabilities
(25,667
)
 
(10,155
)
Net cash provided by operating activities
31,441

 
42,352

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

 
(88,332
)
Investments in development in process
(27,232
)
 
(4,978
)
Investments in tenant improvements and deferred leasing costs
(24,782
)
 
(18,004
)
Investments in building improvements
(13,007
)
 
(13,107
)
Net proceeds from disposition of real estate assets

 
14,971

Distributions of capital from unconsolidated affiliates
230

 
363

Investments in mortgages and notes receivable
(108
)
 

Repayments of mortgages and notes receivable
16,604

 

Investments in unconsolidated affiliates

 
(429
)
Changes in restricted cash and other investing activities
4,043

 
10,262

Net cash (used in) investing activities
(44,252
)
 
(99,254
)
Financing activities:
 
 
 
Distributions on Common Units
(39,300
)
 
(35,669
)
Redemptions of Common Units
(93
)
 

Distributions on Preferred Units
(627
)
 
(627
)
Distributions to noncontrolling interests in consolidated affiliates
(522
)
 
(265
)
Proceeds from the issuance of Common Units
1,313

 
59,019

Costs paid for the issuance of Common Units
(14
)
 
(701
)
Repurchase of units related to tax withholdings
(1,523
)
 
(2,514
)
Borrowings on revolving credit facility
96,100

 
135,900

Repayments of revolving credit facility
(36,800
)
 
(61,400
)
Repayments of mortgages and notes payable
(2,236
)
 
(37,214
)
Additions to deferred financing costs and other financing activities
(338
)
 
(1,240
)
Net cash provided by financing activities
15,960

 
55,289

Net increase/(decrease) in cash and cash equivalents
$
3,149

 
$
(1,613
)
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)

 
Three Months Ended March 31,
 
2014
 
2013
Net increase/(decrease) in cash and cash equivalents
$
3,149

 
$
(1,613
)
Cash and cash equivalents at beginning of the period
10,281

 
13,867

Cash and cash equivalents at end of the period
$
13,430

 
$
12,254


Supplemental disclosure of cash flow information:
 
 
Three Months Ended March 31,
 
2014
 
2013
Cash paid for interest, net of amounts capitalized
$
25,054

 
$
21,887


Supplemental disclosure of non-cash investing and financing activities:
 
 
Three Months Ended March 31,
 
2014
 
2013
Unrealized gains/(losses) on cash flow hedges
$
(1,404
)
 
$
280

Changes in accrued capital expenditures
5,399

 
5,158

Write-off of fully depreciated real estate assets
3,121

 
6,467

Write-off of fully amortized deferred financing and leasing costs
3,697

 
4,872

Unrealized gains on marketable securities of non-qualified deferred compensation plan
59

 
283

Adjustment of Redeemable Common Units to fair value
6,328

 
22,448

Unrealized gains on tax increment financing bond
165

 
390


See accompanying notes to consolidated financial statements.

15

Table of Contents

HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2014
(tabular dollar amounts in thousands, except per share and per unit data)
(Unaudited)

1.    Description of Business and Significant Accounting Policies

Description of Business

Highwoods Properties, Inc. (the “Company”) is a fully-integrated real estate investment trust (“REIT”) that provides leasing, management, development, construction and other customer-related services for its properties and for third parties. The Company conducts its activities through Highwoods Realty Limited Partnership (the “Operating Partnership”). At March 31, 2014, we owned or had an interest in 32.1 million rentable square feet of in-service office, industrial and retail properties, 0.8 million rentable square feet of office properties under development and approximately 600 acres of development land.

The Company is the sole general partner of the Operating Partnership. At March 31, 2014, the Company owned all of the Preferred Units and 89.7 million, or 96.8%, of the Common Units in the Operating Partnership. Limited partners own the remaining 2.9 million Common Units. During the three months ended March 31, 2014, the Company redeemed 2,500 Common Units for less than $0.1 million in cash and redeemed 4,417 Common Units for a like number of shares of Common Stock.

Common Stock Offerings
 
During the three months ended March 31, 2014, the Company issued 23,584 shares of Common Stock under its equity sales agreements at an average gross sales price of $38.29 per share and received net proceeds, after sales commissions, of $0.9 million.

Basis of Presentation

Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Our Consolidated Statements of Income for the three months ended March 31, 2013 were retrospectively revised from previously reported amounts to reflect in discontinued operations the operations for those properties classified as discontinued operations.

The Company's Consolidated Financial Statements include the Operating Partnership, wholly owned subsidiaries and those entities in which the Company has the controlling interest. The Operating Partnership's Consolidated Financial Statements include wholly owned subsidiaries and those entities in which the Operating Partnership has the controlling interest. All intercompany transactions and accounts have been eliminated. At March 31, 2014 and December 31, 2013, we had involvement with, but are not the primary beneficiary in, an entity that we concluded to be a variable interest entity (see Note 2).
 
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 2013 Annual Report on Form 10-K.

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


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

Recently Issued Accounting Standards

Beginning with our Quarterly Report on Form 10-Q for the three months ended March 31, 2015, we will be required to reflect in discontinued operations for only those real estate asset sales representing a strategic shift in operations (e.g. a disposal of a major geographic area or a major line of business).  Currently, we are required to reflect all real estate asset sales as discontinued operations, which requires reclassification of the earnings of the sold assets from continuing operations for all periods presented.  Early adoption is permitted, but only for real estate asset sales that have not been previously reflected as discontinued operations.

2.    Mortgages and Notes Receivable

The following table sets forth our mortgages and notes receivable:

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

 
$
16,454

Less allowance

 

 

 
16,454

Mortgage receivable
9,658

 
9,435

Less allowance

 

 
9,658

 
9,435

Promissory notes
670

 
822

Less allowance
(300
)
 
(302
)
 
370

 
520

Mortgages and notes receivable, net
$
10,028

 
$
26,409


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

During 2012, we provided secured acquisition financing to a third party. We also agreed to loan such third party $8.4 million on a secured basis to fund future infrastructure development. As of March 31, 2014, $0.4 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 March 31, 2014, our mortgages and notes receivable were not in default and there were no other indicators of impairment.

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

 
Three Months Ended March 31,
 
2014
 
2013
Beginning notes receivable allowance
$
302

 
$
182

Recoveries/write-offs/other
(2
)
 
255

Total notes receivable allowance
$
300

 
$
437


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)



3.    Investments in Affiliates

Unconsolidated Affiliates

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

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

 
Three Months Ended March 31,
 
2014
 
2013
Income Statements:
 
 
 
Rental and other revenues
$
12,434

 
$
23,516

Expenses:
 
 
 
Rental property and other expenses
6,217

 
11,209

Depreciation and amortization
3,489

 
6,146

Impairments of real estate assets

 
4,790

Interest expense
2,211

 
4,739

Total expenses
11,917

 
26,884

Income/(loss) before disposition of properties
517

 
(3,368
)
Gains on disposition of properties
1,949

 
24

Net income/(loss)
$
2,466

 
$
(3,344
)
Our share of:
 
 
 
Depreciation and amortization
$
1,031

 
$
2,015

Impairments of real estate assets
$

 
$
1,020

Interest expense
$
776

 
$
1,752

Gains on disposition of properties
$
955

 
$
421

Net income
$
1,155

 
$
4

 
 
 
 
Our share of net income
$
1,155

 
$
4

Adjustments for management and other fees
169

 
432

Impairment of investment in unconsolidated affiliate
(1,353
)
 

Equity in earnings/(losses) of unconsolidated affiliates
$
(29
)
 
$
436


Board of Trade Investment Company ("Board of Trade")

During the first quarter of 2014, Board of Trade sold an office property to an unrelated third party for gross proceeds of $8.3 million and recorded a gain of $1.9 million. We expect to receive aggregate net distributions of $4.7 million in connection with our investment in this entity. As our cost basis is different from the basis reflected at the entity level, we recorded a net impairment charge on our investment of $0.4 million. This charge represented the other-than-temporary decline in the fair value below the carrying value of our investment.


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)



4.    Intangible Assets and Below Market Lease Liabilities
 
The following table sets forth total intangible assets and acquisition-related below market lease liabilities, net of accumulated amortization:
 
 
March 31,
2014
 
December 31,
2013
Assets:
 
 
 
Deferred financing costs
$
17,329

 
$
17,363

Less accumulated amortization
(5,789
)
 
(5,204
)
 
11,540

 
12,159

Deferred leasing costs (including lease incentives and above market lease and in-place lease acquisition-related intangible assets)
302,141

 
297,068

Less accumulated amortization
(94,850
)
 
(87,016
)
 
207,291

 
210,052

Deferred financing and leasing costs, net
$
218,831

 
$
222,211

 
 
 
 
Liabilities (in accounts payable, accrued expenses and other liabilities):
 
 
 
Acquisition-related below market lease liabilities
$
54,996

 
$
55,323

Less accumulated amortization
(9,673
)
 
(8,478
)
 
$
45,323

 
$
46,845


The following table sets forth amortization of intangible assets and below market lease liabilities:
 
 
Three Months Ended March 31,
 
2014
 
2013
Amortization of deferred financing costs
$
652

 
$
949

Amortization of deferred leasing costs and acquisition-related intangible assets (in depreciation and amortization)
$
9,928

 
$
8,075

Amortization of lease incentives (in rental and other revenues)
$
351

 
$
376

Amortization of acquisition-related intangible assets (in rental and other revenues)
$
1,116

 
$
466

Amortization of acquisition-related intangible assets (in rental property and other expenses)
$
137

 
$
137

Amortization of acquisition-related below market lease liabilities (in rental and other revenues)
$
(1,522
)
 
$
(1,122
)


19

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


4.    Intangible Assets and Below Market Lease Liabilities - Continued

The following table sets forth scheduled future amortization of intangible assets and below market lease liabilities:

 
 
Amortization of Deferred Financing Costs
 
Amortization of Deferred Leasing Costs and Acquisition-Related Intangible Assets (in Depreciation and Amortization)
 
Amortization of Lease Incentives (in Rental and Other Revenues)
 
Amortization of Acquisition-Related Intangible Assets (in Rental and Other Revenues)
 
Amortization of Acquisition-Related Intangible Assets (in Rental Property and Other Expenses)
 
Amortization of Acquisition-Related Below Market Lease Liabilities (in Rental and Other Revenues)
April 1 through December 31, 2014
 
$
2,104

 
$
29,555

 
$
983

 
$
3,221

 
$
416

 
$
(4,479
)
2015
 
2,765

 
33,532

 
1,083

 
3,619

 
553

 
(5,718
)
2016
 
2,500

 
27,957

 
910

 
2,810

 
553

 
(5,427
)
2017
 
2,205

 
23,985

 
840

 
2,269

 
553

 
(5,164
)
2018
 
1,080

 
19,729

 
737

 
1,426

 
553

 
(5,016
)
Thereafter
 
886

 
44,666

 
2,487

 
3,768

 
1,086

 
(19,519
)
 
 
$
11,540

 
$
179,424

 
$
7,040

 
$
17,113

 
$
3,714

 
$
(45,323
)
Weighted average remaining amortization periods as of March 31, 2014 (in years)
 
4.5

 
6.7

 
8.3

 
6.6

 
6.7

 
8.9

 
 
 
 
 
 
 

5.    Mortgages and Notes Payable

The following table sets forth our mortgages and notes payable:

 
March 31,
2014
 
December 31,
2013
Secured indebtedness
$
485,525

 
$
488,664

Unsecured indebtedness
1,527,029

 
1,467,635

Total mortgages and notes payable
$
2,012,554

 
$
1,956,299


At March 31, 2014, our secured mortgage loans were collateralized by real estate assets with an aggregate undepreciated book value of $817.9 million.

Our $475.0 million unsecured revolving credit facility is scheduled to mature in January 2018 and includes an accordion feature that allows for an additional $75.0 million of borrowing capacity subject to additional lender commitments. Assuming no defaults have occurred, we have an option to extend the maturity for two additional six-month periods. The interest rate at our current credit ratings is LIBOR plus 110 basis points and the annual facility fee is 20 basis points. There was $275.0 million and $409.0 million outstanding under our revolving credit facility at March 31, 2014 and April 21, 2014, respectively. At both March 31, 2014 and April 21, 2014, we had $0.1 million of outstanding letters of credit, which reduces the availability on our revolving credit facility. As a result, the unused capacity of our revolving credit facility at March 31, 2014 and April 21, 2014 was $199.9 million and $65.9 million, respectively.

We are currently in compliance with financial covenants and other requirements with respect to our consolidated debt.

20

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)



6.
Derivative Financial Instruments
 
Our interest rate swaps have been designated as and are being accounted for as cash flow hedges with changes in fair value recorded in other comprehensive income each reporting period. No gain or loss was recognized related to hedge ineffectiveness or to amounts excluded from effectiveness testing on our cash flow hedges during the three months ended March 31, 2014. We have no collateral requirements related to our interest rate swaps.
 
Amounts reported in accumulated other comprehensive loss ("AOCL") related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the period from April 1, 2014 through March 31, 2015, we estimate that $3.4 million will be reclassified to interest expense.
 
The following table sets forth the gross fair value of our derivatives:
 
 
March 31,
2014
 
December 31,
2013
Derivatives:
 
 
 
Derivatives designated as cash flow hedges in prepaid expenses and other assets:
 
 
 
Interest rate swaps
$

 
$
301

Derivatives designated as cash flow hedges in accounts payable, accrued expenses and other liabilities:
 
 
 
Interest rate swaps
$
763

 
$
510


The following table sets forth the effect of our cash flow hedges on AOCL and interest expense:
 
 
Three Months Ended March 31,
 
2014
 
2013
Derivatives Designated as Cash Flow Hedges:
 
 
 
Amount of unrealized gains/(losses) recognized in AOCL on derivatives (effective portion):
 
 
 
Interest rate swaps
$
(1,404
)
 
$
280

Amount of losses reclassified out of AOCL into contractual interest expense (effective portion):
 
 
 
Interest rate swaps
$
928

 
$
788


21

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)



7.
Noncontrolling Interests

Noncontrolling Interests in Consolidated Affiliates
 
At March 31, 2014, our noncontrolling interests in consolidated affiliates relates to our joint venture partner's 50.0% interest in office properties in Richmond, VA. Our joint venture partner is an unrelated third party.

Noncontrolling Interests in the Operating Partnership

The following table sets forth the Company's noncontrolling interests in the Operating Partnership:
 
 
Three Months Ended March 31,
 
2014
 
2013
Beginning noncontrolling interests in the Operating Partnership
$
106,480

 
$
124,869

Adjustment of noncontrolling interests in the Operating Partnership to fair value
7,434

 
23,802

Conversions of Common Units to Common Stock
(162
)
 
(351
)
Redemptions of Common Units
(93
)
 

Net income attributable to noncontrolling interests in the Operating Partnership
398

 
581

Distributions to noncontrolling interests in the Operating Partnership
(1,249
)
 
(1,584
)
Total noncontrolling interests in the Operating Partnership
$
112,808

 
$
147,317


The following table sets forth net income available for common stockholders and transfers from the Company's noncontrolling interests in the Operating Partnership:
 
 
Three Months Ended March 31,
 
2014
 
2013
Net income available for common stockholders
$
12,128

 
$
12,349

Increase in additional paid in capital from conversions of Common Units to Common Stock
162

 
351

Change from net income available for common stockholders and transfers from noncontrolling interests
$
12,290

 
$
12,700


22

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)



8.
Disclosure About Fair Value of Financial Instruments

The following summarizes the three levels of inputs that we use to measure fair value.

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

Our Level 1 assets include investments in marketable securities that we use to pay benefits under our non-qualified deferred compensation plan and an investment in an unconsolidated affiliate recorded at fair value on a non-recurring basis as a result of our quarterly impairment analysis. The investment is primarily comprised of undistributed cash remaining after the sale of its sole real estate asset. Our Level 1 liability is our non-qualified deferred compensation obligation. The Company's Level 1 noncontrolling interests in the Operating Partnership relate to the ownership of Common Units by various individuals and entities other than the Company.

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 assets include the fair value of certain of our mortgages and notes receivable and certain of our interest rate swaps. Our Level 2 liabilities include the fair value of our mortgages and notes payable and the remainder of our interest rate swaps.

The fair value of mortgages and notes receivable and mortgages and notes payable is estimated by the income approach utilizing contractual cash flows and market-based interest rates to approximate the price that would be paid in an orderly transaction between market participants. The fair value of interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments of interest rate swaps are based on the expectation of future LIBOR interest rates (forward curves) derived from observed market LIBOR interest rate curves. In addition, credit valuation adjustments are incorporated in the fair values to account for potential nonperformance risk, but were concluded to not be significant inputs to the calculation for the periods presented.
 
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 assets include (1) certain of our mortgages and notes receivable, which were estimated by the income approach utilizing internal cash flow projections and market interest rates to estimate the price that would be paid in an orderly transaction between market participants, (2) our tax increment financing bond, which is not routinely traded but whose fair value is determined by the income approach utilizing contractual cash flows and market-based interest rates to estimate the projected redemption value based on quoted bid/ask prices for similar unrated municipal bonds, and (3) any real estate assets recorded at fair value on a non-recurring basis as a result of our quarterly impairment analysis, which were valued using the terms of definitive sales contracts or the sales comparison approach and substantiated with internal cash flow projections.
 
Our Level 3 liabilities include the fair value of our contingent consideration to acquire real estate assets and financing obligations, which were estimated by the income approach to approximate the price that would be paid in an orderly transaction between market participants, utilizing: (1) contractual cash flows; (2) market-based interest rates; and (3) a number of other assumptions including demand for space, competition for customers, changes in market rental rates, costs of operation and expected ownership periods.


23

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)


8.
Disclosure About Fair Value of Financial Instruments - Continued

The following table sets forth our assets and liabilities and the Company's noncontrolling interests in the Operating Partnership that are measured at fair value within the fair value hierarchy.
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
 
Total
 
Quoted Prices
in Active
Markets for Identical Assets or Liabilities
 
Significant Observable Inputs
 
Significant Unobservable Inputs
Fair Value at March 31, 2014:
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
&