2016
ANNUAL REPORT
Dear Fellow Shareholders:
Thanks to the collective, enthusiastic and determined efforts of our entire team, and strong support from
you, our shareholders, 2016 was another successful year for Highwoods. We improved the quality of our
portfolio with $892 million of total capital recycling and investment activity, significantly de-levered our
balance sheet and returned capital to our shareholders, all while delivering solid net income and FFO per
share growth. This volume of work will benefit our Company in the years to come.
2016 – A Year In Review
In 2016, we achieved a 23.2% total shareholder return, delivered a solid 6.5% growth in FFO per share,
reduced year-over-year leverage by 1000 basis points, lowered debt-to-EBITDA by 1.3 turns and declared
an $0.80 per share special dividend – the first in our Company’s history. We achieved a robust 5.2%
same property cash NOI growth, bolstered by maintaining a portfolio-wide average occupancy of 92.8%,
pushing rents, keeping a lid on operating expenses and delivering best-in-class customer service. We also
made material strides to further improve our portfolio by:
Charter Square
Raleigh
delivering $122 million of development, including Laser
Spine Institute in Tampa, Seven Springs West in Nashville
and Enterprise V in Greensboro;
announcing $70 million of new development, including
5000 CentreGreen in Raleigh and Virginia Urology in
Richmond;
acquiring $117 million of BBD-located assets, including
Charter Square in Raleigh and land parcels in Nashville,
Pittsburgh and Raleigh; and
selling $705 million of assets, including our retail-centric
Country Club Plaza assets in Kansas City.
Bottom line, we delivered strong operating and investment
metrics atop the best balance sheet Highwoods has ever had.
We ended the year with leverage of 34.7% (based on gross
book assets and including preferred stock), a debt-to-EBITDA
ratio of 4.78x, nothing drawn on our $475 million credit
facility and $49 million of cash on hand. And, based on our strengthening cash flows, which will be further
enhanced as our highly pre-leased $645 million development pipeline delivers, we increased our quarterly
cash dividend to $0.44 per share on February 7th of 2017. This equates to an annualized dividend of $1.76
per share, a 3.5% increase.
Strategic Plan – Our Vision For Delivering
Long-Term Value To Our Shareholders
The core tenets of our Strategic Plan launched in 2005… people, portfolio, communications and balance
sheet … continue to drive our Company. Our ability to execute and sustain these principles has resulted
in meaningful total returns for shareholders. Over the past 12 years, our compounded annual return to
shareholders has averaged 10.8%. While certain years have yielded higher returns than others, we have
improved the Company each year. With that in mind, below I share additional details about our people,
portfolio, growth drivers, capital recycling strategy and balance sheet as well as our outlook for 2017.
First, let’s start with our people. We firmly believe our people give us a competitive edge. In my opinion,
our property management, maintenance and customer service teams are second to none, and their
professionalism has driven high customer satisfaction and strong retention. The coordination between our
in-house leasing and property management teams often enables us to identify needed improvements or
adjustments before the condition becomes a problem for our customers. Also, our corporate marketing
department has done a superior job with their creativity and heavily-involved efforts in our leasing
activities and build-to-suit proposals. As I’ve said before, back when we launched our Strategic Plan in
2005, attracting, retaining and empowering great people is, and always will be, critical to our success.
The senior leadership team and I know our consistent and solid performance relies on the talented
individuals throughout our Company.
We manage our business the way that we operate our Company – with close coordination and collaboration
among all divisions and all departments. Our decision making methodology is not autocratic, top-down.
Rather, our senior leadership team takes a consensus-building approach. We are a group with varied
specialties and backgrounds, and we learn well from each other. We believe our approach to strategic
decisions and problem-solving leverages valuable perspectives across our Company and enables us to
make more informed and better decisions. Akin to a parent balancing a child’s independence vs. a child’s
safety (i.e. at what age do you let your kid go to the concert without parental supervision….and be the
driver?), we routinely pit risk and entrepreneurialism vs. conservatism. We are certainly not perfect. But,
we study and measure the outcomes of past decisions and come to work each day determined to make
our Company better than the day before.
MONARCH
PLAZA
TWO ALLIANCE
CENTER
MONARCH
TOWER
ONE ALLIANCE
CENTER
Buckhead, Atlanta
Next is our portfolio and market strategy.
The demographic trends across our
footprint are attractive. Our markets:
have population growth roughly
double the national average;
experience high-performing job
growth, driven by the business-
friendly environment in our right-to-
work states; and
enjoy a highly desirable quality of life,
with below average cost of living.
We are often asked whether we prefer urban or suburban properties in our markets. We believe there are
benefits to each, but it differs by submarket. We focus our portfolio in the BBDs (best business districts)
in each of our markets. BBDs can be urban submarkets, such as the central business districts (CBDs) of
Pittsburgh, Raleigh, Orlando and Tampa and the vibrant Buckhead submarket of Atlanta. They can also be
suburban submarkets such as Innsbrook in Richmond, the airport in Greensboro, Cool Springs in Nashville,
the Poplar Corridor in Memphis and Weston in Raleigh. The common theme among BBD submarkets is
they each have a mosaic of unique aspects that makes it a compelling place where businesses want to be
and grow. Or, said another way, BBDs are usually the last submarkets to de-lease in bad times and the first
to re-lease in improving times. We’ve disposed of a lot of assets in non-BBD locations since the launching
of our Strategic Plan and heavily focus our attention on developing and acquiring assets in BBDs. Today,
almost 90% of the portfolio is concentrated in BBDs.
As I start my 35th year with Highwoods, I can easily say that I’ve never been associated with a piece of
real estate as unique as Country Club Plaza in Kansas City. However, we believe the decision to sell these
assets when we did was right for our Company. During our history of ownership, we grew NOI at Country
Club Plaza to its all-time high, and cap rates for retail properties were at or near all-time lows. In addition
to monetizing our Country Club Plaza assets at an office/retail-blended 4.7% cash cap rate, exiting Kansas
City enabled us to further enhance our BBD office focus, lower our leverage, simplify our business model
and garner G&A savings. It was a difficult decision, but we don’t believe any single asset in our portfolio
is sacred.
We deployed approximately $460 million of the $660 million of proceeds from the Plaza sales into BBD-
located office properties and land at prices that offer attractive investment returns, significant future
upside and landmark real estate positions. Staying true to our goal of being disciplined allocators of
capital, we did not use the remainder to acquire any additional buildings, predominantly because we
found pricing to be out of sync with our view of the risk/reward profile of the opportunities available
during the narrow 1031 tax gain-deferral window. Instead, we used those proceeds to bolster our future dry
powder by further reducing our leverage and declared the first special dividend in our Company’s history.
SunTrust Financial Centre
Tampa
We acquired three BBD-located land parcels in 2016. Two went
towards replenishing our development land inventory and
the other was fee simple title under EQT Plaza in Pittsburgh,
which was previously on a ground lease. Land isn’t a large
portion of our overall asset base at just around $110 million, or
about 1.5% of our enterprise value, but it has been and always
will be an important driver of our development pipeline. As
we monetize land for new development projects, we expect
to continue to replenish our core land inventory. One of the
development parcels we acquired in 2016 is the last sizable
development site in the Maryland Farms submarket in the
Nashville area. It will support over 200,000 square feet of
office space in a submarket that has less than 5% vacancy. The
other development site we acquired is in downtown Raleigh,
directly adjacent to our PNC Plaza and can accommodate a
300,000+ square foot office tower.
The single building acquisition we closed in 2016 was Charter Square in downtown Raleigh. This property
is a strategic complement to our existing downtown Raleigh portfolio and further strengthens our position
as the dominant landlord in that submarket. We continue to look for additional properties that enhance
our existing operations, but given the stout pricing for high-quality assets, finding meaningful acquisitions
has become increasingly challenging.
We delivered $122 million of development in 2016. As I write this, we now have a healthy development
pipeline of $645 million that will deliver and is projected to stabilize over the next three years. Our
development pipeline has been a strong FFO driver and cash flow strengthener over the past 12 years, and
we are actively pursuing additional development projects. We have a core land bank of 224 acres that
can support over $1 billion of additional development. We pay careful attention to the amount of risk our
development pipeline has, but given our high preleasing rate (currently over 80% on a dollar-weighted
basis), open book cost structure on many projects and solid credit across our preleased customers, we
believe we have been very prudent investing our shareholders’ capital.
Property fundamentals across our portfolio remain healthy. In addition to the overall attractiveness of our
markets, there has been a limited supply of new office properties during this cycle. At the end of 2016,
there was only 1.1% of existing office stock under construction across our nine markets -- this is well below
the prior peak of 3.2% and under the 1.3% average since 2006. If demand keeps pace, then we don’t
anticipate increased risk of softer fundamentals across our markets.
We’ve never had a stronger balance sheet than what we now have and, candidly, we are very proud of it.
Given our current debt metrics, we’re often asked about our leverage comfort zone going forward. The
sweet spot for us is to continue to operate in the range of 35-40% in terms of leverage and 4.5 to 5.5 turns
in terms of debt-to-EBITDA. Together with having 92.6% of our NOI unencumbered, we have significant
flexibility to fund our development pipeline and capitalize on growth opportunities while maintaining a
sound and steady risk profile.
Bridgestone Americas Headquarters
Nashville
2017 – Our Outlook
While cognizant of the challenges that lie ahead, we enter
2017 upbeat about the health of our business and the building
blocks for sustained growth that we’ve put in-place over
the past several years. A few items should drive increased
earnings and continue strengthening our cash flows. Our $645
million development pipeline is 81% preleased on a dollar
weighted basis and will provide NOI as the 11 projects stabilize.
We expect $303 million of development stabilizations in 2017,
$67 million in 2018 and $252 million in 2019. In 2017, our $200
million, 100% pre-leased Bridgestone Americas headquarters
tower in Nashville will deliver in September. We also just
replaced a $380 million bond maturity with a $300 million,
10-year bond with a stated coupon of 3.875% -- about 200
basis points below the expiring rate. We have a $200 million
bond maturity in 2018 that has a 7.5% coupon rate and we’re hopeful about garnering another meaningful
interest rate reduction. We acquired $511 million of value add properties over the last 18 months that were,
on average, 77% occupied with known move-outs -- we remain upbeat about stabilizing these properties
and growing our NOI.
Our challenges include replenishing our well pre-leased development pipeline, identifying properly
priced, institutional-quality acquisition opportunities and, of course, leasing vacant space while capturing
renewals.
We continue a strict adherence to our Strategic Plan. We stay vigilant to being good stewards of our
shareholders’ capital through focused and driven efforts to continuously:
improve the quality of our portfolio;
maintain and further bolster a strong balance sheet;
be transparent and candid with our shareholders; and
empower and challenge our team of highly-seasoned real estate professionals to
always look ahead for new challenges and new opportunities.
This is our plan once again in 2017.
On behalf of all of us at Highwoods, I am sincerely appreciative of the support we’ve earned from you.
Thank you!
Respectfully,
Edward J. Fritsch
President and Chief Executive Officer
March 31, 2017
HIGHWOODS PROPERTIES, INC.
TABLE OF CONTENTS
Item No.
PART I
1. BUSINESS
1A. RISK FACTORS
1B. UNRESOLVED STAFF COMMENTS
2. PROPERTIES
3. LEGAL PROCEEDINGS
X. EXECUTIVE OFFICERS OF THE REGISTRANT
PART II
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
6. SELECTED FINANCIAL DATA
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
9A. CONTROLS AND PROCEDURES
9B. OTHER INFORMATION
PART III
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
11. EXECUTIVE COMPENSATION
12. SECURITY OWNERSIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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1
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 January 27, 2017, the latest practicable date for financial information
prior to the filing of this Annual Report.
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PART I
ITEM 1. BUSINESS
General
Highwoods Properties, Inc., headquartered in Raleigh, is a publicly-traded real estate investment trust ("REIT"). The Company
is a fully integrated office REIT that owns, develops, acquires, leases and manages properties primarily in the best business districts
(BBDs) of Atlanta, Greensboro, Memphis, Nashville, Orlando, Pittsburgh, Raleigh, Richmond and Tampa. Our Common Stock
is traded on the New York Stock Exchange ("NYSE") under the symbol "HIW."
At December 31, 2016, the Company owned all of the Preferred Units and 101.3 million, or 97.3%, of the Common Units.
Limited partners owned the remaining 2.8 million Common Units. Generally, the Operating Partnership is obligated to redeem
each Common Unit at the request of the holder thereof for cash equal to the value of one share of Common Stock based on the
average of the market price for the 10 trading days immediately preceding the notice date of such redemption, provided that the
Company, at its option, may elect to acquire any such Common Units presented for redemption for cash or one share of Common
Stock. The Common Units owned by the Company are not redeemable.
The Company was incorporated in Maryland in 1994. The Operating Partnership was formed in North Carolina in 1994. Our
executive offices are located at 3100 Smoketree Court, Suite 600, Raleigh, NC 27604, and our telephone number is (919) 872-4924.
Our primary business is the operation, acquisition and development of office properties, which accounted for more than 97%
of our annualized cash rental revenues as of December 31, 2016. There are no material inter-segment transactions. See Note 19
to our Consolidated Financial Statements for a summary of the rental and other revenues, net operating income and assets for each
reportable segment.
Our website is www.highwoods.com. In addition to this Annual Report, all quarterly and current reports, proxy statements,
interactive data and other information are made available, without charge, on our website as soon as reasonably practicable after
they are filed or furnished with the Securities and Exchange Commission ("SEC"). The information on our website does not
constitute part of this Annual Report. Reports filed or furnished with the SEC may also be viewed at www.sec.gov or obtained at
the SEC's public reference facilities. Please call the SEC at (800) 732-0330 for further information about the public reference
facilities.
During 2016, the Company filed unqualified Section 303A certifications with the NYSE. The Company and the Operating
Partnership have also filed the CEO and CFO certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.
Business and Operating Strategy
Our Strategic Plan focuses on:
•
•
•
•
owning high-quality, differentiated office buildings in the BBDs of our core markets;
improving the operating results of our properties through concentrated leasing, asset management, cost control and
customer service efforts;
developing and acquiring office buildings in BBDs that improve the overall quality of our portfolio and generate attractive
returns over the long term for our stockholders;
disposing of properties no longer considered to be core assets primarily due to location, age, quality and/or overall strategic
fit; and
• maintaining a conservative and flexible balance sheet with ample liquidity to meet our funding needs and growth prospects.
Local Market Leadership. We focus our real estate activities in markets where we have extensive local knowledge and own
a significant amount of assets. In each of our core markets, we maintain offices that are led by division officers with significant
real estate experience. Our real estate professionals are seasoned and cycle-tested. Our senior leadership team has significant
experience and maintains important relationships with market participants in each of our core markets.
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Customer Service-Oriented Organization. We provide a complete line of real estate services to our customers. We believe
that our in-house leasing and asset management, development, acquisition and construction management services generally allow
us to respond to the many demands of our existing and potential customer base. We provide our customers with cost-effective
services such as build-to-suit construction and space modification, including tenant improvements and expansions. In addition,
the breadth of our capabilities and resources provides us with market information not generally available. We believe that operating
efficiencies achieved through our fully integrated organization and the strength of our balance sheet also provide a competitive
advantage in retaining existing customers and attracting new customers as well as setting our lease rates and pricing other services.
In addition, our relationships with our customers may lead to development projects when these customers seek new space.
Geographic Diversification. Our core portfolio consists primarily of office properties in Raleigh, Atlanta, Tampa, Nashville,
Memphis, Pittsburgh, Richmond and Orlando and office and industrial properties in Greensboro. We do not believe that our
operations are significantly dependent upon any particular geographic market.
Conservative and Flexible Balance Sheet. We are committed to maintaining a conservative and flexible balance sheet that
allows us to capitalize on favorable development and acquisition opportunities as they arise. Our balance sheet also allows us to
proactively assure our existing and prospective customers that we are able to fund tenant improvements and maintain our properties
in good condition.
Competition
Our properties compete for customers with similar properties located in our markets primarily on the basis of location, rent,
services provided and the design, quality and condition of the facilities. We also compete with other domestic and foreign REITs,
financial institutions, pension funds, partnerships, individual investors and others when attempting to acquire, develop and operate
properties.
Employees
At December 31, 2016, we had 438 full-time employees.
ITEM 1A. RISK FACTORS
An investment in our securities involves various risks. Investors should carefully consider the following risk factors in
conjunction with the other information contained in this Annual Report before trading in our securities. If any of these risks actually
occur, our business, results of operations, prospects and financial condition could be adversely affected.
Adverse economic conditions in our markets that negatively impact the demand for office space, such as high
unemployment, may result in lower occupancy and rental rates for our portfolio, which would adversely affect our results
of operations. Our operating results depend heavily on successfully leasing and operating the office space in our portfolio.
Economic growth and employment levels in our core markets are and will continue to be important factors in predicting our future
operating results.
Key components affecting our rental and other revenues include average occupancy, rental rates, cost recovery income, new
developments placed in service, acquisitions and dispositions. Average occupancy generally increases during times of improving
economic growth, as our ability to lease space outpaces vacancies that occur upon the expirations of existing leases. Average
occupancy generally declines during times of slower economic growth and decreasing office employment because new vacancies
tend to outpace our ability to lease space. In addition, the timing of changes in occupancy levels tends to lag the timing of changes
in overall economic activity and employment levels. For additional information regarding our average occupancy and rental rate
trends over the past five years, see “Item 2. Properties.” Lower rental revenues that result from lower average occupancy or lower
rental rates with respect to our same property portfolio will adversely affect our results of operations unless offset by the impact
of any newly acquired or developed properties or lower variable operating expenses, general and administrative expenses and/or
interest expense.
We face considerable competition in the leasing market and may be unable to renew existing leases or re-let space on
terms similar to the existing leases, or we may spend significant capital in our efforts to renew and re-let space, which may
adversely affect our results of operations. In addition to seeking to increase our average occupancy by leasing current vacant
space, we also concentrate our leasing efforts on renewing existing leases. Because we compete with a number of other developers,
owners and operators of office and office-oriented, mixed-use properties, we may be unable to renew leases with our existing
customers and, if our current customers do not renew their leases, we may be unable to re-let the space to new customers. To the
4
extent that we are able to renew existing leases or re-let such space to new customers, heightened competition resulting from
adverse market conditions may require us to utilize rent concessions and tenant improvements to a greater extent than we anticipate
or have historically. Further, changes in space utilization by our customers due to technology, economic conditions and business
culture also affect the occupancy of our properties. As a result, customers may seek to downsize by leasing less space from us
upon any renewal.
If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our
customers, we may lose existing and potential customers, and we may be pressured to reduce our rental rates below those we
currently charge in order to retain customers upon expiration of their existing leases. Even if our customers renew their leases or
we are able to re-let the space, the terms and other costs of renewal or re-letting, including the cost of required renovations,
increased tenant improvement allowances, leasing commissions, reduced rental rates and other potential concessions, may be less
favorable than the terms of our current leases and could require significant capital expenditures. From time to time, we may also
agree to modify the terms of existing leases to incentivize customers to renew their leases. If we are unable to renew leases or re-
let space in a reasonable time, or if our rental rates decline or our tenant improvement costs, leasing commissions or other costs
increase, our financial condition and results of operations would be adversely affected.
Difficulties or delays in renewing leases with large customers or re-leasing space vacated by large customers could
materially impact our results of operations. Our 20 largest customers account for a significant portion of our revenues. See
“Item 2. Properties - Customers” and “Item 2. Properties - Lease Expirations.” There are no assurances that these customers, or
any of our other large customers, will renew all or any of their space upon expiration of their current leases.
Some of our leases provide customers with the right to terminate their leases early, which could have an adverse effect
on our financial condition and results of operations. Certain of our leases permit our customers to terminate their leases as to
all or a portion of the leased premises prior to their stated lease expiration dates under certain circumstances, such as providing
notice by a certain date and, in many cases, paying a termination fee. To the extent that our customers exercise early termination
rights, our results of operations will be adversely affected, and we can provide no assurances that we will be able to generate an
equivalent amount of net effective rent by leasing the vacated space to others.
Our results of operations and financial condition could be adversely affected by financial difficulties experienced by
a major customer, or by a number of smaller customers, including bankruptcies, insolvencies or general downturns in
business. Our operations depend on the financial stability of our customers. A default by a significant customer on its lease
payments would cause us to lose the revenue associated with such lease. In the event of a customer default or bankruptcy, we may
experience delays in enforcing our rights as landlord and may incur substantial costs re-leasing the property. We cannot evict a
customer solely because of its bankruptcy. On the other hand, a court might authorize the customer to reject and terminate its lease.
In such case, our claim against the bankrupt customer for unpaid, future rent would be subject to a statutory cap that might be
substantially less than the remaining rent actually owed under the lease. As a result, our claim for unpaid rent would likely not be
paid in full and we may be required to write off deferred leasing costs and accrued straight-line rents receivable. These events
could adversely impact our financial condition and results of operations.
An oversupply of space in our markets often cause rental rates and occupancies to decline, making it more difficult
for us to lease space at attractive rental rates, if at all. Undeveloped land in many of the markets in which we operate is generally
more readily available and less expensive than in higher barrier-to-entry markets such as New York and San Francisco. As a result,
even during times of positive economic growth, we and/or our competitors could construct new buildings that would compete
with our existing properties. Any such oversupply could result in lower occupancy and rental rates in our portfolio, which would
have a negative impact on our results of operations.
In order to maintain and/or increase the quality of our properties and successfully compete against other properties,
we regularly must spend money to maintain, repair, renovate and improve our properties, which could negatively impact
our financial condition and results of operations. If our properties are not as attractive to customers due to physical condition
as properties owned by our competitors, we could lose customers or suffer lower rental rates. As a result, we may from time to
time make significant capital expenditures to maintain or enhance the competitiveness of our properties. There can be no assurances
that any such expenditures would result in higher occupancy or higher rental rates or deter existing customers from relocating to
properties owned by our competitors.
Costs of complying with governmental laws and regulations may adversely affect our results of operations. All real
property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to
environmental protection and human health and safety. Some of these laws and regulations may impose joint and several liability
on customers, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether
5
the acts causing the contamination were legal. In addition, the presence of hazardous substances, or the failure to properly remediate
these substances, may hinder our ability to sell, rent or pledge such property as collateral for future borrowings.
Compliance with new laws or regulations or stricter interpretation of existing laws may require us to incur significant
expenditures. Future laws or regulations may impose significant environmental liability. Additionally, our customers' operations,
operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third
parties may affect our properties. In addition, there are various local, state and federal fire, health, life-safety and similar regulations
with which we may be required to comply and that may subject us to liability in the form of fines or damages for noncompliance.
Any expenditures, fines or damages we must pay would adversely affect our results of operations. Proposed legislation to address
climate change could increase utility and other costs of operating our properties.
Discovery of previously undetected environmentally hazardous conditions may adversely affect our financial condition and
results of operations. Under various federal, state and local environmental laws and regulations, a current or previous property
owner or operator may be liable for the cost to remove or remediate hazardous or toxic substances on such property. These costs
could be significant. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which property
may be used or businesses may be operated, and these restrictions may require significant expenditures or prevent us from entering
into leases with prospective customers that may be impacted by such laws. Environmental laws provide for sanctions for
noncompliance and may be enforced by governmental agencies or private parties. Certain environmental laws and common law
principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing
materials. Third parties may seek recovery from real property owners or operators for personal injury or property damage associated
with exposure to released hazardous substances. The cost of defending against claims of liability, of complying with environmental
regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could adversely affect our
financial condition and results of operations.
Our same property results of operations would suffer if costs of operating our properties, such as real estate taxes,
utilities, insurance, maintenance and other costs, rise faster than our ability to increase rental revenues and/or cost recovery
income. While we receive additional rent from our customers that is based on recovering a portion of operating expenses, increased
operating expenses will negatively impact our results of operations. Our revenues, including cost recovery income, are subject to
longer-term leases and may not be quickly increased sufficient to recover an increase in operating costs and expenses. Furthermore,
the costs associated with owning and operating a property are not necessarily reduced when circumstances such as market factors
and competition cause a reduction in rental revenues from the property. Increases in same property operating expenses would
adversely affect our results of operations unless offset by higher rental rates, higher cost recovery income, the impact of any newly
acquired or developed properties, lower general and administrative expenses and/or lower interest expense.
Recent and future acquisitions and development properties may fail to perform in accordance with our expectations
and may require renovation and development costs exceeding our estimates. In the normal course of business, we typically
evaluate potential acquisitions, enter into non-binding letters of intent, and may, at any time, enter into contracts to acquire additional
properties. Acquired properties may fail to perform in accordance with our expectations due to lease-up risk, renovation cost risks
and other factors. In addition, the renovation and improvement costs we incur in bringing an acquired property up to our standards
may exceed our original estimates. We may not have the financial resources to make suitable acquisitions or renovations on
favorable terms or at all.
Further, we face significant competition for attractive investment opportunities from an indeterminate number of other real
estate investors, including investors with significantly greater capital resources and access to capital than we have, such as domestic
and foreign corporations and financial institutions, publicly-traded and privately-held REITs, private institutional investment funds,
investment banking firms, life insurance companies and pension funds. Moreover, owners of office properties may be reluctant
to sell, resulting in fewer acquisition opportunities. As a result of such increased competition and limited opportunities, we may
be unable to acquire additional properties or the purchase price of such properties may be significantly elevated, which would
reduce our expected return from making any such acquisitions.
In addition to acquisitions, we periodically consider developing or re-developing properties. Risks associated with development
and re-development activities include:
•
•
•
the unavailability of favorable financing;
construction costs exceeding original estimates;
construction and lease-up delays resulting in increased debt service expense and construction costs; and
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•
lower than anticipated occupancy rates and rents causing a property to be unprofitable or less profitable than originally
estimated.
Development and re-development activities are also subject to risks relating to our ability to obtain, or delays in obtaining,
any necessary zoning, land-use, building, occupancy and other required governmental and utility company authorizations.
Illiquidity of real estate investments and the tax effect of dispositions could significantly impede our ability to sell assets
or respond to favorable or adverse changes in the performance of our properties. Because real estate investments are relatively
illiquid, our ability to promptly sell one or more properties in our portfolio in response to changing economic, financial and
investment conditions is limited. We intend to continue to sell some of our properties in the future as part of our investment strategy
and activities. However, we cannot predict whether we will be able to sell any property for the price or on the terms set by us, or
whether the price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length
of time needed to find a willing purchaser and close the sale of a property.
Certain of our properties have low tax bases relative to their estimated current market values, and accordingly, the sale of
such assets would generate significant taxable gains unless we sold such properties in a tax-deferred exchange under Section 1031
of the Internal Revenue Code or another tax-free or tax-deferred transaction. For an exchange to qualify for tax-deferred treatment
under Section 1031, the net proceeds from the sale of a property must be held by an escrow agent until applied toward the purchase
of real estate qualifying for gain deferral. Given the competition for properties meeting our investment criteria, there could be a
delay in reinvesting such proceeds or we may be unable to reinvest such proceeds at all. Any delay or limitation in using the
reinvestment proceeds to acquire additional income producing assets could adversely affect our near-term results of operations.
Additionally, in connection with tax-deferred 1031 transactions, our restricted cash balances may be commingled with other funds
being held by any such escrow agent, which subjects our balance to the credit risk of the institution. If we sell properties outright
in taxable transactions, we may elect to distribute some or all of the taxable gain to our stockholders under the requirements of
the Internal Revenue Code for REITs, which in turn could negatively affect our future results of operations and may increase our
leverage.
Because holders of Common Units, including one of our directors, may suffer adverse tax consequences upon the sale
of some of our properties, they may seek to influence us not to sell certain properties even if such a sale would otherwise
be in our best interest. Holders of Common Units may suffer adverse tax consequences upon the sale of certain properties.
Therefore, holders of Common Units, including one of our directors, may have different objectives than our stockholders regarding
the appropriate pricing and timing of a property's sale. Although the Company is the sole general partner of the Operating Partnership
and has the exclusive authority to sell any of our properties, those who hold Common Units may seek to influence us not to sell
certain properties even if such sale might be financially advantageous to us or influence us to enter into tax deferred exchanges
with the proceeds of such sales when such a reinvestment might not otherwise be in our best interest.
Our use of joint ventures may limit our flexibility with jointly owned investments. In appropriate circumstances, we own,
develop and acquire properties in joint ventures with other persons or entities when circumstances warrant the use of these structures.
Types of joint venture investments include noncontrolling ownership interests in entities such as partnerships and limited liability
companies and tenant-in-common interests in which we own less than 100% of the undivided interests in a real estate asset. Our
participation in joint ventures is subject to the risks that:
• we could become engaged in a dispute with any of our joint venture partners that might affect our ability to develop or
operate a property;
•
•
•
•
our joint ventures are subject to debt and the refinancing of such debt may require equity capital calls;
our joint venture partners may default on their obligations necessitating that we fulfill their obligation ourselves;
our joint venture partners may have different objectives than we have regarding the appropriate timing and terms of any
renovation, sale or refinancing of properties;
our joint venture partners may be structured differently than us for tax purposes and this could create conflicts of interest;
and
•
our joint venture partners may have competing interests in our markets that could create conflicts of interest.
7
Our insurance coverage on our properties may be inadequate. We carry insurance on all of our properties, including
insurance for liability, fire, windstorms, floods, earthquakes, environmental concerns and business interruption. Insurance
companies, however, limit or exclude coverage against certain types of losses, such as losses due to terrorist acts, named windstorms,
earthquakes and toxic mold. Thus, we may not have insurance coverage, or sufficient insurance coverage, against certain types
of losses and/or there may be decreases in the insurance coverage available. Should an uninsured loss or a loss in excess of our
insured limits occur, we could lose all or a portion of the capital we have invested in a property or properties, as well as the
anticipated future operating income from the property or properties. If any of our properties were to experience a catastrophic
loss, it could disrupt our operations, delay revenue and result in large expenses to repair or rebuild the property. Further, if any of
our insurance carriers were to become insolvent, we would be forced to replace the existing insurance coverage with another
suitable carrier, and any outstanding claims would be at risk for collection. In such an event, we cannot be certain that we would
be able to replace the coverage at similar or otherwise favorable terms. Such events could adversely affect our results of operations
and financial condition.
We have obtained title insurance policies for each of our properties, typically in an amount equal to its original purchase price.
However, these policies may be for amounts less than the current or future values of our properties, particularly for land parcels
on which we subsequently construct a building. In such event, if there is a title defect relating to any of our properties, we could
lose some of the capital invested in and anticipated profits from such property.
Our use of debt to finance a portion of our operations could have a material adverse effect on our financial condition
and results of operations. We are subject to risks associated with debt financing, such as the sufficiency of cash flow to meet
required payment obligations, ability to comply with financial ratios and other covenants and the availability of capital to refinance
existing indebtedness or fund important business initiatives. If we breach covenants in our debt agreements, the lenders can declare
a default and, if the debt is secured, can take possession of the property securing the defaulted loan. In addition, certain of our
unsecured debt agreements contain cross-default provisions giving the unsecured lenders the right to declare a default if we are
in default under more than $25.0 million with respect to other loans in some circumstances. Unwaived defaults under our debt
agreements could materially and adversely affect our financial condition and results of operations.
Further, we obtain credit ratings from Moody's Investors Service and Standard and Poor's Rating Services based on their
evaluation of our creditworthiness. These agencies' ratings are based on a number of factors, some of which are not within our
control. In addition to factors specific to our financial strength and performance, the rating agencies also consider conditions
affecting REITs generally. We cannot assure you that our credit ratings will not be downgraded. If our credit ratings are downgraded
or other negative action is taken, we could be required, among other things, to pay additional interest and fees on outstanding
borrowings under our revolving credit facility and bank term loans.
We generally do not intend to reserve funds to retire existing debt upon maturity, which includes $379.7 million principal
amount of unsecured notes due March 15, 2017 and a $109.1 million secured loan due November 1, 2017. We may not be able to
repay, refinance or extend any or all of our debt at maturity or upon any acceleration. If any refinancing is done at higher interest
rates, the increased interest expense could adversely affect our financial condition and results of operations. Any such refinancing
could also impose tighter financial ratios and other covenants that restrict our ability to take actions that could otherwise be in our
best interest, such as funding new development activity, making opportunistic acquisitions, repurchasing our securities or paying
distributions. While we do not currently have significant amounts of mortgage debt, we may in the future mortgage additional
properties, which could also restrict our ability to sell any such underlying assets. If we do not meet any such mortgage financing
obligations, any properties securing such indebtedness could be foreclosed on.
We depend on our revolving credit facility for working capital purposes and for the short-term funding of our development
and acquisition activity and, in certain instances, the repayment of other debt upon maturity. Our ability to borrow under the
revolving credit facility also allows us to quickly capitalize on opportunities at short-term interest rates. If our lenders default
under their obligations under the revolving credit facility or we become unable to borrow additional funds under the facility for
any reason, we would be required to seek alternative equity or debt capital, which could be more costly and adversely impact our
financial condition. If such alternative capital were unavailable, we may not be able to make new investments and could have
difficulty repaying other debt.
Increases in interest rates would increase our interest expense. At December 31, 2016, we had $475.0 million of variable
rate debt outstanding not protected by interest rate hedge contracts. We may incur additional variable rate debt in the future. If
interest rates increase, then so would the interest expense on our unhedged variable rate debt, which could adversely affect our
financial condition and results of operations. From time to time, we manage our exposure to interest rate risk with interest rate
hedge contracts that effectively fix or cap a portion of our variable rate debt. In addition, we utilize fixed rate debt at market rates.
If interest rates decrease, the fair market value of any existing interest rate hedge contracts or outstanding fixed-rate debt would
decline.
8
Our efforts to manage these exposures may not be successful. Our use of interest rate hedge contracts to manage risk associated
with interest rate volatility may expose us to additional risks, including a risk that a counterparty to a hedge contract may fail to
honor its obligations. Developing an effective interest rate risk strategy is complex and no strategy can completely insulate us
from risks associated with interest rate fluctuations. There can be no assurance that our hedging activities will have the desired
beneficial impact on our results of operations or financial condition. Termination of interest rate hedge contracts typically involves
costs, such as transaction fees or breakage costs.
Failure to comply with Federal government contractor requirements could result in substantial costs and loss of
substantial revenue. We are subject to compliance with a wide variety of complex legal requirements because we are a Federal
government contractor. These laws regulate how we conduct business, require us to administer various compliance programs and
require us to impose compliance responsibilities on some of our contractors. Our failure to comply with these laws could subject
us to fines and penalties, cause us to be in default of our leases and other contracts with the Federal government and bar us from
entering into future leases and other contracts with the Federal government.
We face risks associated with security breaches through cyber attacks, cyber intrusions or otherwise, as well as other
significant disruptions of our information technology (IT) networks and related systems. We face risks associated with
security breaches, whether through cyber attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to
e-mails, persons inside our organization or persons with access to systems inside our organization, and other significant disruptions
of our IT networks and related systems. The risk of a security breach or disruption, particularly through cyber attack or cyber
intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity
and sophistication of attempted attacks and intrusions from around the world have increased. Our IT networks and related systems
are essential to the operation of our business and our ability to perform day-to-day operations (including managing our building
systems) and, in some cases, may be critical to the operations of certain of our customers. Although we make efforts to maintain
the security and integrity of these types of IT networks and related systems, and we have implemented various measures to manage
the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that
attempted security breaches or disruptions would not be successful or damaging. Even the most well protected information,
networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted security breaches
evolve and generally are not recognized until launched against a target, and in some cases are designed not be detected and, in
fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers
or other preventative measures, and thus it is impossible for us to entirely mitigate this risk.
A security breach or other significant disruption involving our IT networks and related systems could:
•
•
•
•
•
•
•
•
disrupt the proper functioning of our networks and systems and therefore our operations and/or those of certain of our
customers;
result in misstated financial reports, violations of loan covenants, missed reporting deadlines and/or missed permitting
deadlines;
result in our inability to properly monitor our compliance with the rules and regulations regarding our qualification as a
REIT;
result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of, proprietary, confidential,
sensitive or otherwise valuable information of ours or others, which others could use to compete against us or which
could expose us to damage claims by third-parties for disruptive, destructive or otherwise harmful purposes and outcomes;
result in our inability to maintain the building systems relied upon by our customers for the efficient use of their leased
space;
require significant management attention and resources to remedy any damages that result;
subject us to claims for breach of contract, damages, credits, penalties or termination of leases or other agreements; or
damage our reputation among our customers and investors generally.
Any or all of the foregoing could have a material adverse effect on our results of operations, financial condition and cash flows.
9
The Company may be subject to taxation as a regular corporation if it fails to maintain its REIT status, which could
have a material adverse effect on the Company's stockholders and on the Operating Partnership. We may be subject to
adverse consequences if the Company fails to continue to qualify as a REIT for federal income tax purposes. While we intend to
operate in a manner that will allow the Company to continue to qualify as a REIT, we cannot provide any assurances that the
Company will remain qualified as such in the future, which could have particularly adverse consequences to the Company's
stockholders. Many of the requirements for taxation as a REIT are highly technical and complex and depend upon various factual
matters and circumstances that may not be entirely within our control. The fact that the Company holds its assets through the
Operating Partnership and its subsidiaries further complicates the application of the REIT requirements. Even a technical or
inadvertent mistake could jeopardize our REIT status. Furthermore, Congress and the Internal Revenue Service might change the
tax laws and regulations and the courts might issue new rulings that make it more difficult, or impossible, for the Company to
remain qualified as a REIT. If the Company fails to qualify as a REIT, it would (a) not be allowed a deduction for dividends paid
to stockholders in computing its taxable income, (b) be subject to federal income tax at regular corporate rates (and potentially
the alternative minimum tax and increased state and local taxes) and (c) unless entitled to relief under the tax laws, not be able to
re-elect REIT status until the fifth calendar year after it failed to qualify as a REIT. Additionally, the Company would no longer
be required to make distributions. As a result of these factors, the Company's failure to qualify as a REIT could impair our ability
to expand our business and adversely affect the price of our Common Stock.
Even if we remain qualified as a REIT, we may face other tax liabilities that adversely affect our financial condition
and results of operations. Even if we remain qualified for taxation as a REIT, we may be subject to certain federal, state and
local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted
as a result of a foreclosure, and state or local income, property and transfer taxes. In addition, our taxable REIT subsidiary is
subject to regular corporate federal, state and local taxes. Any of these taxes would adversely affect our financial condition and
results of operations.
Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise
attractive investments. To remain qualified as a REIT for federal income tax purposes, we must continually satisfy tests concerning,
among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our
stockholders and the ownership of our capital stock. In order to meet these tests, we may be required to forego investments we
might otherwise make. Thus, compliance with the REIT requirements may hinder our performance.
In particular, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash,
cash items, government securities and qualified real estate assets. The remainder of our investment in securities (other than
government securities, securities of taxable REIT subsidiaries and qualified real estate assets) generally cannot include more than
10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any
one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities, securities of
taxable REIT subsidiaries and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25%
of the value of our total assets can be represented by the securities of one or more taxable REIT subsidiaries. If we fail to comply
with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar
quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax
consequences. As a result, we may be required to liquidate otherwise attractive investments, which could adversely affect our
financial condition and results of operations.
The prohibited transactions tax may limit our ability to sell properties. A REIT's net income from prohibited transactions
is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property held primarily for sale to
customers in the ordinary course of business. We may be subject to the prohibited transaction tax equal to 100% of net gain upon
a disposition of real property. Although a safe harbor to the characterization of the sale of real property by a REIT as a prohibited
transaction is available, we cannot assure you that we can in all cases comply with the safe harbor or that we will avoid owning
property that may be characterized as held primarily for sale to customers in the ordinary course of business. Consequently, we
may choose not to engage in certain sales of our properties or may conduct such sales through our taxable REIT subsidiary, which
would be subject to federal and state income taxation.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends. The maximum tax
rate applicable to “qualified dividend income” payable to U.S. stockholders that are taxed at individual rates is 20%. Dividends
payable by REITs, however, generally are not eligible for the reduced rates on qualified dividend income. The more favorable
rates applicable to regular corporate qualified dividends could cause investors who are taxed at individual rates to perceive
investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends,
which could adversely affect the value of the shares of REITs, including our stock.
10
We face possible state and local tax audits. Because we are organized and qualify as a REIT, we are generally not subject
to federal income taxes, but we are subject to certain state and local taxes. In the normal course of business, certain entities through
which we own real estate have undergone tax audits. Collectively, tax deficiency notices received to date from the jurisdictions
conducting previous audits have not been material. However, there can be no assurance that future audits will not occur with
increased frequency or that the ultimate result of such audits will not have a material adverse effect on our results of operations.
The price of our Common Stock is volatile and may decline. A number of factors may adversely influence the public market
price of our Common Stock. These factors include:
•
•
•
•
•
•
•
•
•
the level of institutional interest in us;
the perceived attractiveness of investment in us, in comparison to other REITs;
the attractiveness of securities of REITs in comparison to other asset classes;
our financial condition and performance;
the market's perception of our growth potential and potential future cash dividends;
government action or regulation, including changes in tax laws;
increases in market interest rates, which may lead investors to expect a higher annual yield from our distributions in
relation to the price of our Common Stock;
changes in our credit ratings;
the issuance of additional shares of Common Stock, or the perception that such issuances might occur, including under
our equity distribution agreements; and
•
any negative change in the level or stability of our dividend.
Tax elections regarding distributions may impact the future liquidity of the Company or our stockholders. Under certain
circumstances, we may consider making a tax election to treat future distributions to stockholders as distributions in the current
year. This election, which is provided for in the Internal Revenue Code, may allow us to avoid increasing our dividends or paying
additional income taxes in the current year. However, this could result in a constraint on our ability to decrease our dividends in
future years without creating risk of either violating the REIT distribution requirements or generating additional income tax liability.
We may face risks in connection with Section 1031 exchanges. If a transaction's gain that is intended to qualify as a Section
1031 deferral is later determined to be taxable, we may face adverse consequences, and if the laws applicable to such transactions
are amended or repealed, we may not be able to dispose of properties on a tax-deferred basis.
Tax legislative or regulatory action could adversely affect us or our stockholders. In recent years, numerous legislative,
judicial and administrative changes have been made to the U.S. federal income tax laws applicable to investments similar to an
investment in our Common Stock. Additional changes to tax laws are likely to continue in the future, and we cannot assure you
that any such changes will not adversely affect the taxation of us or our stockholders. Any such changes could have an adverse
effect on an investment in our Common Stock or on the market value of our properties.
We cannot assure you that we will continue to pay dividends at historical rates. We generally expect to use cash flows
from operating activities to fund dividends. The following factors will affect such cash flows and, accordingly, influence the
decisions of the Company's board of directors regarding dividends:
•
•
projections with respect to the future REIT taxable income expected to be generated by the Company;
debt service requirements after taking into account debt covenants and the repayment and restructuring of certain
indebtedness and the availability of alternative sources of debt and equity capital and their impact on our ability to
refinance existing debt and grow our business;
•
scheduled increases in base rents of existing leases;
11
•
•
•
•
•
•
changes in rents attributable to the renewal of existing leases or replacement leases;
changes in occupancy rates at existing properties and execution of leases for newly acquired or developed properties;
changes in operating expenses;
anticipated leasing capital expenditures attributable to the renewal of existing leases or replacement leases;
anticipated building improvements; and
expected cash flows from financing and investing activities, including from the sales of assets generating taxable gains
to the extent such assets are not sold in a tax-deferred exchange under Section 1031 of the Internal Revenue Code or
another tax-free or tax-deferred transaction.
The decision to declare and pay dividends on our Common Stock in the future, as well as the timing, amount and composition
of any such future dividends, will be at the sole discretion of the Company's board of directors. Changes in our future dividend
payout level could have a material effect on the market price of our Common Stock.
Cash distributions reduce the amount of cash that would otherwise be available for other business purposes, including
funding debt maturities, reducing debt or future growth initiatives. For the Company to maintain its qualification as a REIT,
it must annually distribute to its stockholders at least 90% of REIT taxable income, excluding net capital gains. In addition, although
capital gains are not required to be distributed to maintain REIT status, taxable capital gains, if any, that are generated as part of
our capital recycling program are subject to federal and state income tax unless such gains are distributed to our stockholders.
Cash distributions made to stockholders to maintain REIT status or to distribute otherwise taxable capital gains limit our ability
to accumulate capital for other business purposes, including funding debt maturities, reducing debt or growth initiatives.
Further issuances of equity securities may adversely affect the market price of our Common Stock and may be dilutive
to current stockholders. The sales of a substantial number of Common Shares, or the perception that such sales could occur,
could adversely affect the market price of our Common Stock. The Company’s board of directors may authorize the issuance of
additional authorized but unissued Common Shares or other authorized but unissued securities at any time. We have filed a
registration statement with the SEC allowing us to offer, from time to time, an indefinite amount of equity securities (including
Common Stock and Preferred Stock) on an as-needed basis and subject to our ability to effect offerings on satisfactory terms based
on prevailing conditions. In addition, the Company’s board of directors has, from time to time, authorized the Company to issue
shares of Common Stock pursuant to the Company’s equity sales agreements. The interests of our existing stockholders could be
diluted if additional equity securities are issued to finance future developments and acquisitions or repay indebtedness. Our ability
to execute our business strategy depends on our access to an appropriate blend of debt financing, including unsecured lines of
credit and other forms of secured and unsecured debt, and equity financing, including common equity.
We may change our policies without obtaining the approval of our stockholders. Our operating and financial policies,
including our policies with respect to acquisitions of real estate, growth, operations, indebtedness, capitalization and dividends,
are exclusively determined by the Company’s Board of Directors. Accordingly, our stockholders do not control these policies.
Limits on changes in control may discourage takeover attempts beneficial to stockholders. Provisions in the Company's
charter and bylaws as well as Maryland general corporation law may have anti-takeover effects that delay, defer or prevent a
takeover attempt. For example, these provisions may defer or prevent tender offers for our Common Stock or purchases of large
blocks of our Common Stock, thus limiting the opportunities for the Company's stockholders to receive a premium for their shares
of Common Stock over then-prevailing market prices. These provisions include the following:
• Ownership limit. The Company's charter prohibits direct, indirect or constructive ownership by any person or entity of
more than 9.8% of the Company's outstanding capital stock. Any attempt to own or transfer shares of capital stock in
excess of the ownership limit without the consent of the Company's board of directors will be void.
• Preferred Stock. The Company's charter authorizes the board of directors to issue preferred stock in one or more classes
and establish the preferences and rights of any class of preferred stock issued. These actions can be taken without
stockholder approval. The issuance of preferred stock could have the effect of delaying or preventing someone from
taking control of the Company, even if a change in control were in our best interest.
• Business combinations. Pursuant to the Company's charter and Maryland law, the Company cannot merge into or
consolidate with another corporation or enter into a statutory share exchange transaction in which the Company is not
12
the surviving entity or sell all or substantially all of its assets unless the board of directors adopts a resolution declaring
the proposed transaction advisable and a majority of the stockholders voting together as a single class approve the
transaction. Maryland law prohibits stockholders from taking action by written consent unless all stockholders consent
in writing. The practical effect of this limitation is that any action required or permitted to be taken by the Company's
stockholders may only be taken if it is properly brought before an annual or special meeting of stockholders. The Company's
bylaws further provide that in order for a stockholder to properly bring any matter before a meeting, the stockholder must
comply with requirements regarding advance notice. The foregoing provisions could have the effect of delaying until the
next annual meeting stockholder actions that the holders of a majority of the Company's outstanding voting securities
favor. These provisions may also discourage another person from making a tender offer for the Company's common stock,
because such person or entity, even if it acquired a majority of the Company's outstanding voting securities, would likely
be able to take action as a stockholder, such as electing new directors or approving a merger, only at a duly called
stockholders meeting. Maryland law also establishes special requirements with respect to business combinations between
Maryland corporations and interested stockholders unless exemptions apply. Among other things, the law prohibits for
five years a merger and other similar transactions between a corporation and an interested stockholder and requires a
supermajority vote for such transactions after the end of the five-year period. The Company's charter contains a provision
exempting the Company from the Maryland business combination statute. However, we cannot assure you that this charter
provision will not be amended or repealed at any point in the future.
• Control share acquisitions. Maryland general corporation law also provides that control shares of a Maryland corporation
acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the
votes entitled to be cast on the matter, excluding shares owned by the acquirer or by officers or employee directors. The
control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange if the
corporation is a party to the transaction, or to acquisitions approved or exempted by the corporation's charter or bylaws.
The Company's bylaws contain a provision exempting from the control share acquisition statute any stock acquired by
any person. However, we cannot assure you that this bylaw provision will not be amended or repealed at any point in the
future.
• Maryland unsolicited takeover statute. Under Maryland law, the Company's board of directors could adopt various
anti-takeover provisions without the consent of stockholders. The adoption of such measures could discourage offers for
the Company or make an acquisition of the Company more difficult, even when an acquisition would be in the best
interest of the Company's stockholders.
•
protections of operating partnership agreement. Upon a change in control of the Company, the
partnership agreement of the Operating Partnership requires certain acquirers to maintain an umbrella partnership real
estate investment trust structure with terms at least as favorable to the limited partners as are currently in place. For
instance, the acquirer would be required to preserve the limited partner's right to continue to hold tax-deferred partnership
interests that are redeemable for capital stock of the acquirer. Exceptions would require the approval of two-thirds of the
limited partners of our Operating Partnership (other than the Company). These provisions may make a change of control
transaction involving the Company more complicated and therefore might decrease the likelihood of such a transaction
occurring, even if such a transaction would be in the best interest of the Company's stockholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
13
Our core portfolio consists primarily of office properties in Raleigh, Atlanta, Tampa, Nashville, Memphis, Pittsburgh,
Richmond and Orlando and office and industrial properties in Greensboro.
ITEM 2. PROPERTIES
Properties
The following table sets forth information about in-service office properties that we wholly own by geographic location at
December 31, 2016:
Market
Atlanta
Raleigh
Nashville
Tampa
Pittsburgh
Memphis
Orlando
Richmond
Greensboro
Kansas City
Total
__________
Rentable
Square Feet
Occupancy
Percentage of
Annualized
Cash Rental
Revenue (1)
5,239,000
5,096,000
3,338,000
3,822,000
2,162,000
2,208,000
1,977,000
1,942,000
1,151,000
67,000
92.1 %
19.7 %
92.7
99.6
90.9
93.8
89.8
88.2
94.6
93.2
95.6
18.0
14.6
13.7
8.9
7.9
7.6
5.9
3.5
0.2
27,002,000
92.9%
100.0%
(1) Annualized Cash Rental Revenue is cash rental revenue (base rent plus cost recovery income, excluding straight-line rent) from our office
properties for the month of December 2016 multiplied by 12.
The following table sets forth the net changes in rentable square footage of in-service properties that we wholly own:
Acquisitions
Developments Placed In-Service
Redevelopment/Other
Dispositions
Net Change in Rentable Square Footage
Year Ended December 31,
2016
2015
2014
(rentable square feet in thousands)
243
176
(46)
(1,429)
(1,056)
1,592
503
14
(175)
1,934
686
282
(19)
(1,645)
(696)
The following table sets forth operating information about in-service properties that we wholly own:
2012
2013
2014
2015
2016
__________
Average
Occupancy
90.3%
90.0%
90.4%
92.3%
92.8%
$
$
$
$
$
Annualized
GAAP Rent
Per Square
Foot (1)
Annualized
Cash Rent
Per Square
Foot (2)
17.90
21.42
22.13
23.30
23.24
$
$
$
$
$
18.42
20.48
21.29
22.55
22.55
(1) Annualized GAAP Rent Per Square Foot is rental revenue (base rent plus cost recovery income, including straight-line rent) for the month
of December of the respective year multiplied by 12, divided by total occupied rentable square footage.
(2) Annualized Cash Rent Per Square Foot is cash rental revenue (base rent plus cost recovery income, excluding straight-line rent) for the
month of December of the respective year multiplied by 12, divided by total occupied rentable square footage.
14
Customers
The following table sets forth information concerning the 20 largest customers of properties that we wholly own at
December 31, 2016:
Customer
Rentable
Square
Feet
Annualized
Cash Rental
Revenue (1)
(in thousands)
Percent of
Total
Annualized
Cash Rental
Revenue (1)
Weighted
Average
Remaining
Lease Term in
Years
Federal Government
Metropolitan Life Insurance
PPG Industries
HCA Corporation
EQT Corporation
Healthways
International Paper
Bass, Berry & Sims
State of Georgia
Willis Towers Watson
Novelis
Marsh USA
Aon
PNC Bank
Vanderbilt University
Syniverse Technologies
Lifepoint Corporate Services
Morgan Stanley
AT&T
SunTrust
Total
__________
1,418,042
$
661,060
356,215
297,909
319,269
263,598
278,444
195,846
318,506
239,506
168,949
175,390
190,683
187,076
209,989
218,678
202,991
144,616
197,826
141,735
34,369
16,369
9,721
8,064
7,512
6,903
6,457
6,356
6,222
6,172
5,577
5,474
5,408
5,364
5,216
4,906
4,691
4,642
4,571
4,345
5.52 %
2.63
1.56
1.29
1.21
1.11
1.04
1.02
1.00
0.99
0.89
0.88
0.87
0.86
0.84
0.79
0.75
0.74
0.73
0.70
6,186,328
$
158,339
25.42%
4.4
10.2
14.3
0.3
7.8
6.2
11.9
8.1
4.0
5.1
7.7
5.2
2.9
9.9
3.8
9.8
12.3
2.8
2.6
3.3
6.6
(1) Annualized Cash Rental Revenue is cash rental revenue (base rent plus cost recovery income, excluding straight-line rent) for the month
of December 2016 multiplied by 12.
15
Lease Expirations
The following tables set forth scheduled lease expirations for existing leases at office properties that we wholly owned at
December 31, 2016:
Rentable
Square Feet
Subject to
Expiring
Leases
Percentage of
Leased Square
Footage
Represented
by Expiring
Leases
Annualized
Cash Rental
Revenue
Under
Expiring
Leases (2)
Average
Annual Cash
Rental Rate
Per Square
Foot for
Expirations
Number of
Leases
Expiring
Percent of
Annualized
Cash Rental
Revenue
Represented
by Expiring
Leases (2)
Lease Expiring (1)
2017 (3)
2018
2019
2020
2021
2022
2023
2024
2025
2026
Thereafter
__________
2,319,501
2,735,958
3,535,333
2,754,909
2,767,479
1,710,029
1,614,168
1,769,755
947,576
1,245,338
3,673,904
($ in thousands)
9.3 % $
59,525
$
10.9
14.0
11.0
11.0
6.8
6.4
7.1
3.8
5.0
14.7
66,598
85,950
73,892
64,430
39,457
37,364
43,016
26,392
28,625
79,502
25,073,950
100.0% $
604,751
$
435
399
364
295
253
143
81
66
44
66
168
2,314
25.66
24.34
24.31
26.82
23.28
23.07
23.15
24.31
27.85
22.99
21.64
24.12
9.8 %
11.0
14.3
12.2
10.7
6.5
6.2
7.1
4.4
4.7
13.1
100.0%
(1) Expirations that have been renewed are reflected above based on the renewal expiration date. Expirations include leases related to completed
not stabilized development properties but exclude leases related to developments in-process.
(2) Annualized Cash Rental Revenue is cash rental revenue (base rent plus cost recovery income, excluding straight-line rent) for the month
of December 2016 multiplied by 12.
(3) Includes 62,000 rentable square feet of leases that are on a month-to-month basis, which represent 0.3% of total annualized cash rental
revenue.
In-Process Development
As of December 31, 2016, we were developing 1.2 million rentable square feet of office properties. The following table
summarizes these announced and in-process office developments:
Property
Market
Rentable
Square Feet
Anticipated
Total
Investment (1)
Investment
As Of
December 31,
2016 (1)
($ in thousands)
Pre -
Leased %
Estimated
Completion
Estimated
Stabilization
Bridgestone Americas
Riverwood 200
Seven Springs II
5000 CentreGreen
Virginia Urology (2)
__________
Nashville
Atlanta
Nashville
Raleigh
Richmond
514,000
$
200,000
$
135,856
100.0 %
299,000
131,000
166,500
87,000
107,000
38,100
40,850
29,140
76,583
25,288
15,365
72.7
52.3
—
1,479
100.0
3Q17
2Q17
2Q17
3Q17
3Q18
3Q17
2Q19
3Q18
3Q19
3Q18
1,197,500
$
415,090
$
254,571
74.1%
(1) Includes deferred lease commissions which are classified in deferred leasing costs on our Consolidated Balance Sheets.
(2) Recorded on our Consolidated Balance Sheets in land held for development, not development in-process.
16
Land Held for Development
We wholly owned 431 acres of development land at December 31, 2016. We estimate that we can develop approximately 4.6
million and 0.4 million rentable square feet of office and industrial space, respectively, on the 235 acres that we consider core
assets for our future development needs. Our core development land is zoned and available for development, and nearly all of the
land has utility infrastructure in place. We believe that our commercially zoned and unencumbered land gives us a development
advantage over other commercial real estate development companies in many of our markets.
Joint Venture Investments
The following table sets forth information about our joint venture investments by geographic location at December 31, 2016:
Market
Kansas City (3)
Raleigh
Richmond (4)
Orlando
Total
__________
Rentable
Square Feet
292,000
635,000
345,000
306,000
Weighted
Average
Ownership
Interest (1)
Percentage of
Annualized
Cash Rental
Revenue (2)
Occupancy
50.0%
99.5%
39.3%
25.0
50.0
28.0
93.5
100.0
100.0
29.8
21.1
9.8
1,578,000
35.7%
97.3%
100.0%
(1) Weighted Average Ownership Interest is calculated using Rentable Square Feet.
(2) Annualized Cash Rental Revenue is cash rental revenue (base rent plus cost recovery income, excluding straight-line rent) for the month
of December 2016 multiplied by 12.
(3) Excluding our 26.5% ownership interest in a real estate brokerage services company.
(4) This joint venture is consolidated.
ITEM 3. LEGAL PROCEEDINGS
We are from time to time a party to a variety of legal proceedings, claims and assessments arising in the ordinary course of
our business. We regularly assess the liabilities and contingencies in connection with these matters based on the latest information
available. For those matters where it is probable that we have incurred or will incur a loss and the loss or range of loss can be
reasonably estimated, the estimated loss is accrued and charged to income in our Consolidated Financial Statements. In other
instances, because of the uncertainties related to both the probable outcome and amount or range of loss, a reasonable estimate of
liability, if any, cannot be made. Based on the current expected outcome of such matters, none of these proceedings, claims or
assessments is expected to have a material adverse effect on our business, financial condition, results of operations or cash flows.
17
ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT
The Company is the sole general partner of the Operating Partnership. The following table sets forth information with respect
to the Company’s executive officers:
Name
Edward J. Fritsch
Age
58
Theodore J. Klinck
51
Mark F. Mulhern
57
Jeffrey D. Miller
46
Position and Background
Director, President and Chief Executive Officer.
Mr. Fritsch has been a director since January 2001. Mr. Fritsch became our chief
executive officer and chair of the investment committee of our board of directors
on July 1, 2004 and our president in December 2003. Prior to that, Mr. Fritsch was
our chief operating officer from January 1998 to July 2004 and was a vice president
and secretary from June 1994 to January 1998. Mr. Fritsch joined our predecessor
in 1982 and was a partner of that entity at the time of our initial public offering in
June 1994. Mr. Fritsch currently serves as a director and member of the audit and
compensation committees of National Retail Properties, Inc., a publicly-traded
REIT (NYSE:NNN). Mr. Fritsch is immediate past chair of the National Association
of Real Estate Investment Trusts ("NAREIT") and currently serves on its executive
board and chairs its governance committee. Mr. Fritsch is also a member of Wells
Fargo's central region advisory board, a member of the University of North Carolina
at Chapel Hill Foundation board, a director of the University of North Carolina at
Chapel Hill Real Estate Holdings and a member of the Dix Park Conservancy board.
Executive Vice President and Chief Operating and Investment Officer.
Mr. Klinck became executive vice president and chief operating and investment
officer in September 2015. Prior to that, Mr. Klinck was our senior vice president
and chief investment officer since March 2012. Before joining us, Mr. Klinck served
as principal and chief investment officer with Goddard Investment Group, a
privately owned real estate investment firm. Previously, Mr. Klinck had been a
managing director at Morgan Stanley Real Estate.
Executive Vice President and Chief Financial Officer.
Mr. Mulhern became chief financial officer in September 2014. Prior to that, Mr.
Mulhern was a director of the Company since January 2012. Mr. Mulhern served
as executive vice president and chief financial officer of Exco Resources, Inc.
(NYSE:XCO), an oil and gas exploration and production company, from 2013 until
September 2014. Mr. Mulhern served as senior vice president and chief financial
officer of Progress Energy, Inc. (NYSE:PGN) from 2008 until its merger with Duke
Energy Corporation (NYSE:DUK) in July 2012. Mr. Mulhern first joined Progress
Energy in 1996 and served in a number of financial and strategic roles. He also
spent eight years at Price Waterhouse. Mr. Mulhern currently serves as a director
of Azure Midstream Partners, a publicly-traded energy company (NYSE:AZUR),
McKim and Creed, a private engineering services firm and Triangle Capital
Corporation (NYSE:TCAP), a leading provider of capital to lower middle market
companies. Mr. Mulhern is a certified public accountant, a certified management
accountant and a certified internal auditor.
Executive Vice President, General Counsel and Secretary.
Prior to joining us in March 2007, Mr. Miller was a partner with DLA Piper US,
LLP, where he practiced since 2005. Previously, Mr. Miller had been a partner with
Alston & Bird LLP. Mr. Miller is admitted to practice in North Carolina. Mr. Miller
served as lead independent director of Hatteras Financial Corp., a publicly-traded
mortgage REIT (NYSE:HTS), prior to its merger with Annaly Capital Management,
Inc. (NYSE:NLY) in July 2016.
18
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The following table sets forth high and low stock prices per share reported on the NYSE and dividends declared per share of
Common Stock:
March 31
June 30
September 30
December 31 (1)
__________
Quarter Ended
High
2016
Low
Dividend
High
2015
Low
Dividend
$
$
$
$
48.14
52.86
56.23
52.03
$
$
$
$
38.08
44.93
50.05
45.83
$
$
$
$
0.425
0.425
0.425
1.225
$
$
$
$
48.34
47.10
42.78
44.61
$
$
$
$
43.09
39.72
36.57
38.18
$
$
$
$
0.425
0.425
0.425
0.425
(1) Includes a special cash dividend of $0.80 per share declared in the quarter ended December 31, 2016 and paid January 10, 2017. The
principal purpose of the special dividend was to distribute taxable capital gains associated with the sales of substantially all of our wholly-
owned Country Club Plaza assets in Kansas City (which we refer to as the “Plaza assets”) during the first quarter of 2016.
On December 31, 2016, the last reported stock price of our Common Stock on the NYSE was $51.01 per share and the
Company had 889 common stockholders of record. There is no public trading market for the Common Units. On December 31,
2016, the Operating Partnership had 103 holders of record of Common Units (other than the Company). At December 31, 2016,
there were 101.7 million shares of Common Stock outstanding and 2.8 million Common Units outstanding not owned by the
Company.
Because the Company is a REIT, the partnership agreement requires the Operating Partnership to distribute at least enough
cash for the Company to be able to distribute to its stockholders at least 90.0% of its REIT taxable income, excluding net capital
gains. See “Item 1A. Risk Factors – Cash distributions reduce the amount of cash that would otherwise be available for other
business purposes, including funding debt maturities, reducing debt or future growth initiatives.”
We generally expect to use cash flows from operating activities to fund distributions. The following factors will affect such
cash flows and, accordingly, influence the decisions of the Company’s Board of Directors regarding dividends and distributions:
•
•
•
•
•
•
•
•
•
projections with respect to the future REIT taxable income expected to be generated by the Company;
debt service requirements after taking into account debt covenants and the repayment and restructuring of certain
indebtedness and the availability of alternative sources of debt and equity capital and their impact on our ability to
refinance existing debt and grow our business;
scheduled increases in base rents of existing leases;
changes in rents attributable to the renewal of existing leases or replacement leases;
changes in occupancy rates at existing properties and execution of leases for newly acquired or developed properties;
changes in operating expenses;
anticipated leasing capital expenditures attributable to the renewal of existing leases or replacement leases;
anticipated building improvements; and
expected cash flows from financing and investing activities, including from the sales of assets generating taxable gains
to the extent such assets are not sold in a tax-deferred exchange under Section 1031 of the Internal Revenue Code or
another tax-free or tax-deferred transaction.
19
The following stock price performance graph compares the performance of our Common Stock to the S&P 500 and the FTSE
NAREIT All Equity REITs Index. The stock price performance graph assumes an investment of $100 in our Common Stock and
the two indices on December 31, 2011 and further assumes the reinvestment of all dividends. The FTSE NAREIT All Equity
REITs Index is a free-float adjusted, market capitalization-weighted index of U.S. equity REITs. Constituents of the Index include
all tax-qualified REITs with more than 50% of total assets in qualifying real estate assets other than mortgages secured by real
property. Stock price performance is not necessarily indicative of future results.
Index
Highwoods Properties, Inc.
S&P 500
FTSE NAREIT All Equity REITs Index
For the Period from December 31, 2011 to December 31,
2012
2013
2014
2015
2016
118.74
116.00
118.06
134.49
153.57
120.97
171.71
174.60
157.43
175.84
177.01
162.46
216.68
198.18
176.30
The performance graph above is being furnished as part of this Annual Report solely in accordance with the requirement
under Rule 14a-3(b)(9) to furnish the Company’s stockholders with such information and, therefore, is not deemed to be filed, or
incorporated by reference in any filing, by the Company or the Operating Partnership under the Securities Act of 1933 or the
Securities Exchange Act of 1934.
During 2016, cash dividends declared on Common Stock totaled $2.50 per share, which included a special cash dividend of
$0.80 per share declared in the quarter ended December 31, 2016 and paid January 10, 2017. Of the cash dividends declared in
2016, approximately $1.29 per share represented 2016 capital gains, approximately $1.15 per share represented 2016 ordinary
dividends and approximately $0.06 per share will be recognized as a 2017 distribution for federal income tax purposes. The
minimum dividend per share of Common Stock required for the Company to maintain its REIT status was $0.99 per share in 2016.
During the fourth quarter of 2016, the Company issued an aggregate of 1,000 shares of Common Stock to holders of Common
Units in the Operating Partnership upon the redemption of a like number of Common Units in private offerings exempt from the
registration requirements pursuant to Section 4(2) of the Securities Act. Each of the holders of Common Units was an accredited
investor under Rule 501 of the Securities Act. The resale of such shares was registered by the Company under the Securities Act.
The Company has a Dividend Reinvestment and Stock Purchase Plan (“DRIP”) under which holders of Common Stock may
elect to automatically reinvest their dividends in additional shares of Common Stock and make optional cash payments for additional
20
shares of Common Stock. The Company satisfies its DRIP obligations by instructing the DRIP administrator to purchase Common
Stock in the open market.
The Company has an Employee Stock Purchase Plan ("ESPP") pursuant to which employees may contribute up to 25% of
their cash compensation for the purchase of Common Stock. At the end of each three-month offering period, each participant’s
account balance, which includes accumulated dividends, is applied to acquire shares of Common Stock at a cost that is calculated
at 85% of the average closing price on the NYSE on the five consecutive days preceding the last day of the quarter. The Company
satisfies its ESPP obligations by issuing additional shares of Common Stock.
Information about the Company’s equity compensation plans and other related stockholder matters is incorporated herein by
reference to the Company’s Proxy Statement to be filed in connection with its annual meeting of stockholders to be held on May 10,
2017.
21
ITEM 6. SELECTED FINANCIAL DATA
Operating results for the years ended December 31, 2014, 2013 and 2012 were retrospectively revised from previously reported
amounts to reclassify the operations for those properties classified as discontinued operations. Total assets and mortgages and
notes payable, net as of the years ended December 31, 2015, 2014, 2013 and 2012 were retrospectively revised from previously
reported amounts to reclassify debt issuance costs as a direct deduction from the carrying amount of the debt liability to which
they relate as opposed to being presented as assets.
The information in the following tables should be read in conjunction with the Company’s Consolidated Financial Statements
and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein
($ in thousands, except per share data):
Rental and other revenues
Income from continuing operations
Income from discontinued operations
Income from continuing operations available for common
stockholders
Net income
Net income available for common stockholders
Earnings per Common Share – basic:
Income from continuing operations available for common
stockholders
Net income available for common stockholders
Earnings per Common Share – diluted:
Income from continuing operations available for common
stockholders
Net income available for common stockholders
Dividends declared per Common Share (1)
Year Ended December 31,
2016
665,634
122,546
418,593
115,461
541,139
521,789
1.17
5.30
1.17
5.30
2.50
$
$
$
$
$
$
$
$
$
$
$
2015
604,671
85,521
15,739
79,308
101,260
94,572
0.84
1.00
0.84
1.00
1.70
$
$
$
$
$
$
$
$
$
$
$
2014
555,871
96,987
18,985
90,069
115,972
108,457
1.00
1.20
0.99
1.19
1.70
$
$
$
$
$
$
$
$
$
$
$
2013
505,008
42,641
88,456
37,890
131,097
122,949
0.44
1.44
0.44
1.44
1.70
$
$
$
$
$
$
$
$
$
$
$
2012
434,890
21,578
62,657
17,394
84,235
77,087
0.23
1.02
0.23
1.02
1.70
$
$
$
$
$
$
$
$
$
$
$
2016
2015
2014
2013
2012
December 31,
Total assets
$ 4,561,050
$ 4,485,631
$ 3,990,702
$ 3,793,177
$ 3,334,443
Mortgages and notes payable, net
$ 1,948,047
$ 2,491,813
$ 2,062,968
$ 1,948,161
$ 1,848,963
__________
(1) Includes a special cash dividend of $0.80 per share declared in the quarter ended December 31, 2016 and paid January 10, 2017.
22
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion and analysis in conjunction with the accompanying Consolidated Financial
Statements and related notes contained elsewhere herein.
Disclosure Regarding Forward-Looking Statements
Some of the information in this Annual Report may contain forward-looking statements. Such statements include, in particular,
statements about our plans, strategies and prospects under this section and under the heading “Item 1. Business.” You can identify
forward-looking statements by our use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,”
“continue” or other similar words. Although we believe that our plans, intentions and expectations reflected in or suggested by
such forward-looking statements are reasonable, we cannot assure you that our plans, intentions or expectations will be achieved.
When considering such forward-looking statements, you should keep in mind the following important factors that could cause
our actual results to differ materially from those contained in any forward-looking statement:
•
the financial condition of our customers could deteriorate;
• we may not be able to lease or re-lease second generation space, defined as previously occupied space that becomes
available for lease, quickly or on as favorable terms as old leases;
• we may not be able to lease our newly constructed buildings as quickly or on as favorable terms as originally anticipated;
• we may not be able to complete development, acquisition, reinvestment, disposition or joint venture projects as quickly
or on as favorable terms as anticipated;
•
•
•
•
development activity by our competitors in our existing markets could result in an excessive supply relative to customer
demand;
our markets may suffer declines in economic growth;
unanticipated increases in interest rates could increase our debt service costs;
unanticipated increases in operating expenses could negatively impact our operating results;
• we may not be able to meet our liquidity requirements or obtain capital on favorable terms to fund our working capital
needs and growth initiatives or repay or refinance outstanding debt upon maturity; and
•
the Company could lose key executive officers.
This list of risks and uncertainties, however, is not intended to be exhaustive. You should also review the other cautionary
statements we make in “Item 1A. Business – Risk Factors” set forth in this Annual Report. Given these uncertainties, you should
not place undue reliance on forward-looking statements. We undertake no obligation to publicly release the results of any revisions
to these forward-looking statements to reflect any future events or circumstances or to reflect the occurrence of unanticipated
events.
23
Our Strategic Plan focuses on:
Executive Summary
•
•
•
•
owning high-quality, differentiated office buildings in the BBDs of our core markets;
improving the operating results of our properties through concentrated leasing, asset management, cost control and
customer service efforts;
developing and acquiring office buildings in BBDs that improve the overall quality of our portfolio and generate attractive
returns over the long term for our stockholders;
disposing of properties no longer considered to be core assets primarily due to location, age, quality and/or overall strategic
fit; and
• maintaining a balance sheet with ample liquidity to meet our funding needs and growth prospects.
Revenues
Our operating results depend heavily on successfully leasing and operating the office space in our portfolio. Economic growth
and employment levels in our core markets are and will continue to be important factors in predicting our future operating results.
The key components affecting our rental and other revenues are average occupancy, rental rates, cost recovery income, new
developments placed in service, acquisitions and dispositions. Average occupancy generally increases during times of improving
economic growth, as our ability to lease space outpaces vacancies that occur upon the expirations of existing leases. Average
occupancy generally declines during times of slower economic growth, when new vacancies tend to outpace our ability to lease
space. Asset acquisitions, dispositions and new developments placed in service directly impact our rental revenues and could
impact our average occupancy, depending upon the occupancy rate of the properties that are acquired, sold or placed in service.
A further indicator of the predictability of future revenues is the expected lease expirations of our portfolio. As a result, in addition
to seeking to increase our average occupancy by leasing current vacant space, we also concentrate our leasing efforts on renewing
existing leases prior to expiration. For more information regarding our lease expirations, see “Item 2. Properties - Lease Expirations.”
Occupancy in our office portfolio increased from 92.6% at December 31, 2015 to 92.9% at December 31, 2016 primarily due to
the net impact of our leasing activity in 2016.
Whether or not our rental revenue tracks average occupancy proportionally depends upon whether GAAP rents under signed
new and renewal leases are higher or lower than the GAAP rents under expiring leases. Annualized rental revenues from second
generation leases expiring during any particular year are typically less than 15% of our total annual rental revenues. The following
table sets forth information regarding second generation office leases signed during the fourth quarter of 2016 (we define second
generation office leases as leases with new customers and renewals of existing customers in office space that has been previously
occupied under our ownership and leases with respect to vacant space in acquired buildings):
Leased space (in rentable square feet)
Average term (in years - rentable square foot weighted)
Base rents (per rentable square foot) (1)
Rent concessions (per rentable square foot) (1)
GAAP rents (per rentable square foot) (1)
Tenant improvements (per rentable square foot) (1)
Leasing commissions (per rentable square foot) (1)
__________
New
Renewal
All Office
266,025
460,308
726,333
7.8
5.0
6.0
29.05
$
26.64
$
27.52
(1.02)
28.03
3.71
1.28
$
$
$
(0.30)
26.34
2.42
0.78
$
$
$
(0.56)
26.96
2.89
0.96
$
$
$
$
(1) Weighted average per rentable square foot on an annual basis over the lease term.
Compared to previous leases in the same office spaces, annual combined GAAP rents for new and renewal leases signed in
the fourth quarter were $26.96 per rentable square foot, or 13.9% higher.
24
We strive to maintain a diverse, stable and creditworthy customer base. We have an internal guideline whereby customers
that account for more than 3% of our revenues are periodically reviewed with the Company's Board of Directors. As of December 31,
2016, no customer accounted for more than 3% of our cash revenues other than the Federal Government, which accounted for
less than 6% of our cash revenues on an annualized basis. See “Item 2. Properties - Customers.”
Operating Expenses
Our expenses primarily consist of rental property expenses, depreciation and amortization, general and administrative expenses
and interest expense. From time to time, expenses also include impairments of real estate assets. Rental property expenses are
expenses associated with our ownership and operation of rental properties and include expenses that vary somewhat proportionately
to occupancy levels, such as janitorial services and utilities, and expenses that do not vary based on occupancy, such as property
taxes and insurance. Depreciation and amortization is a non-cash expense associated with the ownership of real property and
generally remains relatively consistent each year, unless we buy, place in service or sell assets, since we depreciate our properties
and related building and tenant improvement assets on a straight-line basis over fixed lives. General and administrative expenses
consist primarily of management and employee salaries and other personnel costs, corporate overhead and short and long-term
incentive compensation.
Net Operating Income
Whether or not we record increasing same property net operating income (“NOI”) depends upon our ability to garner higher
rental revenues, whether from higher average occupancy, higher GAAP rents per rentable square foot or higher cost recovery
income, that exceed any corresponding growth in operating expenses. Same property NOI from continuing operations was $15.0
million, or 4.2%, higher in 2016 as compared to 2015 due to an increase in same property revenues of $15.7 million offset by an
increase of $0.6 million in same property expenses. We expect same property NOI to be higher in 2017 than 2016 as higher rental
revenues, mostly from higher average GAAP rents per rentable square foot and higher cost recovery income, are expected to more
than offset a corresponding increase in same property operating expenses.
In addition to the effect of same property NOI, whether or not NOI from continuing operations increases depends upon whether
the NOI from our acquired properties and development properties placed in service exceeds the NOI from sold properties. NOI
from continuing operations was $45.8 million, or 11.8%, higher in 2016 as compared to 2015 due to the impact of acquisitions
and development properties placed in service, offset by NOI lost from sold properties not classified as discontinued operations.
We expect NOI from continuing operations to be higher in 2017 than 2016 due to the impact of our net investment activity in
2016.
Cash Flows
In calculating net cash related to operating activities, depreciation and amortization, which are non-cash expenses, are added
back to net income. As a result, we have historically generated a positive amount of cash from operating activities. From period
to period, cash flow from operations depends primarily upon changes in our net income, as discussed more fully below under
“Results of Operations,” changes in receivables and payables and net additions or decreases in our overall portfolio.
Net cash related to investing activities generally relates to capitalized costs incurred for leasing and major building
improvements and our acquisition, development, disposition and joint venture activity. During periods of significant net acquisition
and/or development activity, our cash used in such investing activities will generally exceed cash provided by investing activities,
which typically consists of cash received upon the sale of properties and distributions from our joint ventures.
Net cash related to financing activities generally relates to distributions, incurrence and repayment of debt, and issuances,
repurchases or redemptions of Common Stock, Common Units and Preferred Stock. We use a significant amount of our cash to
fund distributions. Whether or not we have increases in the outstanding balances of debt during a period depends generally upon
the net effect of our acquisition, disposition, development and joint venture activity. We generally use our revolving credit facility
for daily working capital purposes, which means that during any given period, in order to minimize interest expense, we may
record significant repayments and borrowings under our revolving credit facility.
Liquidity and Capital Resources
We intend to maintain a conservative and flexible balance sheet with access to multiple sources of debt and equity capital and
sufficient availability under our revolving credit facility that allows us to capitalize on favorable development and acquisition
opportunities as they arise.
25
Rental and other revenues are our principal source of funds to meet our short-term liquidity requirements. Other sources of
funds for short-term liquidity needs include available working capital and borrowings under our revolving credit facility, which
had $426.0 million of availability at January 27, 2017. Our short-term liquidity requirements primarily consist of operating
expenses, interest and principal amortization on our debt, distributions and capital expenditures, including building improvement
costs, tenant improvement costs and lease commissions. Building improvements are capital costs to maintain or enhance existing
buildings not typically related to a specific customer. Tenant improvements are the costs required to customize space for the specific
needs of customers. We anticipate that our available cash and cash equivalents and cash provided by operating activities and
planned financing activities, including borrowings under our revolving credit facility, will be adequate to meet our short-term
liquidity requirements. We use our revolving credit facility for working capital purposes and for the short-term funding of our
development and acquisition activity and, in certain instances, the repayment of other debt. The continued ability to borrow under
the revolving credit facility allows us to quickly capitalize on strategic opportunities at short-term interest rates.
Our long-term liquidity uses generally consist of the retirement or refinancing of debt upon maturity, funding of building
improvements, new building developments and land infrastructure projects and funding acquisitions of buildings and development
land. Additionally, we may, from time to time, retire some or all of our remaining outstanding Preferred Stock and/or unsecured
debt securities through redemptions, open market repurchases, privately negotiated acquisitions or otherwise.
We expect to meet our long-term liquidity needs through a combination of:
•
•
•
•
•
•
cash flow from operating activities;
bank term loans and borrowings under our revolving credit facility;
the issuance of unsecured debt;
the issuance of secured debt;
the issuance of equity securities by the Company or the Operating Partnership; and
the disposition of non-core assets.
We generally expect to grow our company on a leverage-neutral basis. At December 31, 2016, our leverage ratio, as measured
by the ratio of our mortgages and notes payable and outstanding preferred stock to the undepreciated book value of our assets,
was 34.7% and there were 104.6 million diluted shares of Common Stock outstanding.
For a discussion regarding dividends and distributions, see "Liquidity and Capital Resources - Dividends and Distributions."
Investment Activity
As noted above, a key tenet of our strategic plan is to continuously upgrade the quality of our office portfolio through
acquisitions, dispositions and development. We generally seek to acquire and develop office buildings that improve the average
quality of our overall portfolio and deliver consistent and sustainable value for our stockholders over the long-term. Whether or
not an asset acquisition or new development results in higher per share net income or funds from operations ("FFO") in any given
period depends upon a number of factors, including whether the NOI for any such period exceeds the actual cost of capital used
to finance the acquisition or development. Additionally, given the length of construction cycles, development projects are not
placed in service until, in some cases, several years after commencement. Sales of non-core assets could result in lower per share
net income or FFO in any given period in the event the resulting use of proceeds does not exceed the capitalization rate on the
sold properties.
26
Results of Operations
Comparison of 2016 to 2015
Rental and Other Revenues
Rental and other revenues were $61.0 million, or 10.1%, higher in 2016 as compared to 2015 primarily due to acquisitions
and development properties placed in service and higher same property revenues, which increased rental and other revenues by
$35.6 million, $15.5 million and $15.7 million, respectively. Same property rental and other revenues were higher primarily due
to an increase in average occupancy to 93.1% in 2016 from 92.3% in 2015, higher average GAAP rents per rentable square foot
and higher termination fees. These increases were partly offset by lost revenue of $5.1 million from property dispositions. We
expect rental and other revenues to be higher in 2017 as compared to 2016 due to the full year contribution of acquisitions closed
and development properties placed in service in 2016 and higher same property revenues, partly offset by lost revenue from 2016
property dispositions.
Operating Expenses
Rental property and other expenses were $15.1 million, or 7.0%, higher in 2016 as compared to 2015 primarily due to
acquisitions and development properties placed in service and higher same property operating expenses, which increased operating
expenses by $13.7 million, $3.5 million and $0.6 million, respectively. Same property operating expenses were higher primarily
due to higher property taxes and repairs and maintenance, partly offset by lower utilities and property insurance. These increases
were partly offset by a $1.8 million decrease in operating expenses from property dispositions. We expect rental property and
other expenses to be higher in 2017 as compared to 2016 due to the full year contribution of acquisitions closed and development
properties placed in service in 2016 and higher same property operating expenses, partly offset by lower operating expenses due
to 2016 property dispositions.
Depreciation and amortization was $18.2 million, or 9.0%, higher in 2016 as compared to 2015 primarily due to acquisitions
and development properties placed in service, partly offset by property dispositions. We expect 2017 depreciation and amortization
to increase over 2016 for similar reasons.
General and administrative expenses were $0.5 million, or 1.4%, higher in 2016 as compared to 2015 primarily due to higher
company-wide base salaries, partly offset by lower incentive compensation. We expect 2017 general and administrative expenses
to decrease as compared to 2016 primarily due to lower incentive compensation and acquisition costs, partly offset by higher
company-wide base salaries and benefits.
Interest Expense
Interest expense was $9.4 million, or 10.9%, lower in 2016 as compared to 2015 primarily due to lower average interest rates,
lower average debt balances and higher capitalized interest. We expect 2017 interest expense to decrease as compared to 2016 for
similar reasons.
Other Income
Other income was $0.6 million, or 35.5%, higher in 2016 as compared to 2015 primarily due to losses on debt extinguishment
and deferred compensation plan investments in 2015. We expect 2017 other income to decrease as compared to 2016 due to the
repayments of mortgages receivable in 2016.
Gains on Disposition of Property and Net Gains on Disposition of Discontinued Operations
Total gains were $417.9 million higher in 2016 as compared to 2015 due to the sales of the Plaza assets.
Gain on Disposition of Investment in Unconsolidated Affiliate
We recorded a gain on disposition of investment in unconsolidated affiliate of $4.2 million in 2015 due to the sale of our
20.0% interest in SF-HIW Harborview Plaza, LP (“Harborview”) to our partner. We had no such comparable transaction in 2016.
27
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates was $0.7 million, or 14.1%, higher in 2016 as compared to 2015 primarily due
to our share of the net effect of the disposition activity by certain unconsolidated affiliates in such periods and higher leasing
activity in 2016. We expect 2017 equity in earnings of unconsolidated affiliates to decrease as compared to 2016 primarily due to
our share of the net effect of the disposition activity by certain unconsolidated affiliates in 2016 and lower anticipated occupancy
in 2017.
Income From Discontinued Operations
Income from discontinued operations was $11.6 million lower in 2016 as compared to 2015 due to the sales of the Plaza assets
on March 1, 2016.
Earnings Per Common Share - Diluted
Diluted earnings per common share was $4.30 higher in 2016 as compared to 2015 due to gains from the sales of the Plaza
assets and other increases in net income for the reasons discussed above, partly offset by an increase in the weighted average
Common Shares outstanding.
Comparison of 2015 to 2014
Rental and Other Revenues
Rental and other revenues were $48.8 million, or 8.8%, higher in 2015 as compared to 2014 primarily due to recent acquisitions,
higher same property revenues and development properties placed in service, which increased rental and other revenues by $25.5
million, $24.5 million and $17.2 million, respectively. Same property rental and other revenues were higher primarily due to an
increase in average occupancy to 92.3% in 2015 from 90.5% in 2014, higher average GAAP rents per rentable square foot and
higher cost recovery income. These increases were partly offset by lost revenue of $18.0 million from property dispositions.
Operating Expenses
Rental property and other expenses were $10.1 million, or 4.9%, higher in 2015 as compared to 2014 primarily due to recent
acquisitions, higher same property operating expenses and development properties placed in service, which increased operating
expenses by $9.6 million, $5.0 million and $3.4 million, respectively. Same property operating expenses were higher primarily
due to higher property taxes, janitorial and other building-related services and repairs and maintenance, partly offset by lower
property insurance and utilities. These increases were partly offset by a $6.7 million decrease in operating expenses from property
dispositions.
Depreciation and amortization was $21.3 million, or 11.8%, higher in 2015 as compared to 2014 primarily due to recent
acquisitions and development properties placed in service, partly offset by property dispositions.
We recorded an impairment of real estate assets of $0.6 million in 2014 on a building in Greensboro, which resulted from a
change in the assumed timing of future disposition and leasing assumptions. We recorded no such impairment in 2015.
General and administrative expenses were $2.4 million, or 6.8%, higher in 2015 as compared to 2014 primarily due to higher
company-wide base salaries and benefits, incentive compensation and acquisition costs.
Interest Expense
Interest expense was $0.9 million, or 1.1%, higher in 2015 as compared to 2014 primarily due to higher average debt balances
and financing obligation interest expense, partly offset by higher capitalized interest.
Other Income
Other income was $0.7 million, or 29.0%, lower in 2015 as compared to 2014 primarily due to the repayments of mortgages
receivable in 2014 and 2015.
28
Gains on Disposition of Property and Net Gains on Disposition of Discontinued Operations
Total gains were $33.3 million lower in 2015 as compared to 2014 due to the net effect of the disposition activity in such
years.
Gain on Disposition of Investment in Unconsolidated Affiliate
We recorded a gain on disposition of investment in unconsolidated affiliate of $4.2 million in 2015 due to the sale of our
20.0% interest in Harborview to our partner. We had no comparable transaction in 2014.
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates was $3.3 million higher in 2015 as compared to 2014 primarily due to our
share of gains recognized by certain of our unconsolidated affiliates in 2015, lower interest expense in 2015 and a net impairment
of one of our previous investments in 2014. These increases were partly offset by less net operating income in our unconsolidated
affiliates as a result of disposition activity.
Income From Discontinued Operations
Income from discontinued operations was $2.9 million, or 15.4%, lower in 2015 as compared to 2014 primarily due to lower
termination fees in 2015 and severance costs required to be accrued in 2015 due to the closing of our Kansas City division office
upon the sale of the Plaza assets.
Earnings Per Common Share - Diluted
Diluted earnings per common share was $0.19, or 16.0%, lower in 2015 as compared to 2014 due to a decrease in net income
for the reasons discussed above and an increase in the weighted average Common Shares outstanding.
Statements of Cash Flows
Liquidity and Capital Resources
We report and analyze our cash flows based on operating activities, investing activities and financing activities. The following
table sets forth the changes in the Company’s cash flows ($ in thousands):
Year Ended December 31,
2016
2015
2014
2016-2015
Change
2015-2014
Change
Net Cash Provided By Operating Activities
$
305,805
$
288,879
$
266,911
$
16,926
$
21,968
Net Cash Provided By/(Used In) Investing Activities
Net Cash Provided By/(Used In) Financing Activities
203,890
(465,241)
(654,157)
(328,178)
361,482
59,915
858,047
(826,723)
(325,979)
301,567
Total Cash Flows
$
44,454
$
(3,796) $
(1,352) $
48,250
$
(2,444)
Comparison of 2016 to 2015
The increase in net cash provided by operating activities in 2016 as compared to 2015 was primarily due to higher net cash
from the operations of acquisitions, development properties placed in service and same properties, partly offset by the timing of
cash paid for expenses. We expect net cash related to operating activities to be higher in 2017 as compared to 2016 primarily due
to the full year impact of acquisitions closed and development properties placed in service in 2016.
The change in net cash provided by/(used in) investing activities in 2016 as compared to 2015 was primarily due to the net
proceeds from the sales of the Plaza assets and lower acquisition activity in 2016, partly offset by higher investments in development
in-process and building improvements in 2016, the repayment of an advance from an unconsolidated affiliate in 2015 and higher
net investments in mortgages and notes receivable in 2016. We expect uses of cash for investing activities in 2017 to be primarily
driven by whether or not we acquire and commence development of additional office buildings in the BBDs of our markets.
Additionally, as of December 31, 2016, we have $165 million left to fund of our previously-announced development activity. We
expect these uses of cash for investing activities will be partly offset by proceeds from non-core dispositions in 2017.
29
The change in net cash provided by/(used in) financing activities in 2016 as compared to 2015 was primarily due to higher
net debt repayments in 2016, partly offset by higher proceeds from the issuance of Common Stock in 2016. Assuming the net
effect of our acquisition, disposition and development activity in 2017 results in an increase of our assets, we would expect
outstanding debt balances to increase. However, because we plan to continue to maintain a flexible and conservative balance sheet
with mortgages and notes payable and outstanding preferred stock representing below 43% of the undepreciated book value of
our assets, we would also expect higher outstanding balances of Common Stock in such event.
Comparison of 2015 to 2014
The increase in net cash provided by operating activities in 2015 as compared to 2014 was primarily due to higher net cash
from the operations of recent acquisitions and development properties placed in service in 2014 and 2015, partly offset by higher
cash paid for operating expenses in 2015.
The increase in net cash used in investing activities in 2015 as compared to 2014 was primarily due to higher acquisition
activity and lower net proceeds from disposition of real estate assets in 2015, partly offset by lower development activity and the
repayment of an advance from an unconsolidated affiliate in 2015.
The increase in net cash provided by financing activities in 2015 as compared to 2014 was primarily due to higher net debt
borrowings and higher proceeds from the issuance of Common Stock in 2015.
Capitalization
The following table sets forth the Company’s capitalization (in thousands, except per share amounts):
Mortgages and notes payable, net, at recorded book value
Financing obligation (in liabilities held for sale)
Preferred Stock, at liquidation value
Common Stock outstanding
Common Units outstanding (not owned by the Company)
Per share stock price at year end
Market value of Common Stock and Common Units
Total capitalization
December 31,
2016
2015
1,948,047
$
2,491,813
— $
28,920
$
101,666
2,839
51.01
5,330,800
7,307,767
$
$
$
7,402
29,050
96,092
2,900
43.60
4,316,051
6,844,316
$
$
$
$
$
$
At December 31, 2016, our mortgages and notes payable and outstanding preferred stock represented 27.1% of our total
capitalization and 34.7% of the undepreciated book value of our assets. See also "Executive Summary - Liquidity and Capital
Resources."
Our mortgages and notes payable as of December 31, 2016 consisted of $128.2 million of secured indebtedness with a weighted
average interest rate of 4.35% and $1,826.1 million of unsecured indebtedness with a weighted average interest rate of 3.91%.
The secured indebtedness was collateralized by real estate assets with an aggregate undepreciated book value of $251.9 million.
As of December 31, 2016, $475.0 million of our debt does not bear interest at fixed rates or is not protected by interest rate hedge
contracts.
Investment Activity
During the third quarter of 2016, we acquired a building in the central business district of Raleigh, which delivered in 2015
and encompasses 243,000 rentable square feet, for a net purchase price of $76.9 million. We expensed $0.3 million of acquisition
costs (included in general and administrative expenses) related to this acquisition. The assets acquired and liabilities assumed were
recorded at fair value as determined by management, with the assistance of third party specialists, based on information available
at the acquisition date and on current assumptions as to future operations. We have invested or intend to invest an additional $6.6
million of planned near-term building improvements and leasing capital expenditures to bring the property to stabilization. Based
on the total anticipated investment of $83.5 million, the anticipated capitalization rate for the acquisition of this building, which
was 70.0% leased as of the closing date, is 7.2% using projected annual GAAP net operating income upon stabilization, which is
30
projected to occur in 2018. These forward-looking statements are subject to risks and uncertainties. See “Disclosure Regarding
Forward-Looking Statements.”
During the third quarter of 2016, we also acquired:
•
fee simple title to the land underneath one of our buildings in Pittsburgh that was previously subject to a ground lease
for a purchase price of $18.5 million. We expensed $0.5 million of acquisition costs (included in general and administrative
expenses) related to this acquisition; and
•
an acre of development land in Raleigh for a purchase price, including capitalized acquisition costs, of $5.8 million.
During the second quarter of 2016, we acquired 14 acres of development land in Nashville for a purchase price, including
capitalized acquisition costs, of $9.1 million.
In the normal course of business, we regularly evaluate potential acquisitions. As a result, from time to time, we may have
one or more potential acquisitions under consideration that are in varying stages of evaluation, negotiation or due diligence,
including potential acquisitions that are subject to non-binding letters of intent or enforceable contracts. Consummation of any
transaction is subject to a number of contingencies, including the satisfaction of customary closing conditions. No assurances can
be provided that we will acquire any properties in the future. See "Item 1A. Risk Factors - Recent and future acquisitions and
development properties may fail to perform in accordance with our expectations and may require renovation and development
costs exceeding our estimates."
During the fourth quarter of 2016, we sold land for an aggregate sale price of $3.7 million and recorded aggregate gains on
disposition of property of $0.6 million.
During the third quarter of 2016, we sold land for a sale price of $6.8 million and recorded a gain on disposition of property
of $3.9 million. We deferred $0.4 million of gain related to a portion of the sale price that was escrowed for contingent future
infrastructure work.
During the second quarter of 2016, we sold a building for a sale price of $14.2 million and recorded a gain on disposition of
property of $5.9 million.
During the first quarter of 2016, we sold:
•
•
the Plaza assets for a sale price of $660.0 million (before closing credits to buyer of $4.8 million). We recorded gains on
disposition of discontinued operations of $414.5 million and a gain on disposition of property of $1.3 million related to
the land;
a 32,000 square foot building for a sale price of $4.7 million (before closing credits to buyer of $0.1 million) and recorded
a gain on disposition of property of $1.1 million. The buyer, which leased 79% of the building, is a family business
controlled by a director of the Company. The sale price exceeded the value set forth in an appraisal performed by a
reputable independent commercial real estate services firm that has no relationship with the director or any of his affiliates;
and
•
a building for a sale price of $6.4 million (before closing credits to buyer of $0.5 million) and recorded a gain on disposition
of property of $2.0 million.
As of December 31, 2016, we were also developing 1.2 million rentable square feet of office properties. For a table summarizing
our announced and in-process office developments, see "Item 2. Properties - In-Process Development."
Financing Activity
During the first quarter of 2016, we entered into separate equity distribution agreements with each of Jefferies LLC, Robert
W. Baird & Co. Incorporated, BB&T Capital Markets, a division of BB&T Securities, LLC, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Capital One Securities, Inc., Comerica Securities, Inc., Mitsubishi UFJ Securities (USA), Inc., Morgan Stanley
& Co. LLC, Piper Jaffray & Co., RBC Capital Markets, LLC and Wells Fargo Securities, LLC. Under the terms of the equity
distribution agreements, the Company could offer and sell up to $250.0 million in aggregate gross sales price of shares of Common
Stock from time to time through such firms, acting as agents of the Company or as principals. Sales of the shares, if any, may be
made by means of ordinary brokers’ transactions on the New York Stock Exchange or otherwise at market prices prevailing at the
31
time of sale, at prices related to prevailing market prices or at negotiated prices or as otherwise agreed with any of such firms.
During 2016, the Company issued 5,078,940 shares of Common Stock at an average gross sales price of $49.22 per share and
received net proceeds, after sales commissions, of $246.2 million. We paid an aggregate of $3.7 million in sales commissions to
RBC Capital Markets, LLC, Morgan Stanley & Co. LLC, Jefferies LLC, Wells Fargo Securities, LLC, Merrill Lynch, Capital One
Securities, Inc., Piper Jaffray & Co., BB&T Capital Markets, Comerica Securities, Inc., Robert W. Baird & Co. Incorporated and
Mitsubishi UFJ Securities (USA), Inc. during 2016.
During the second quarter of 2016, we prepaid without penalty the remaining $43.6 million balance on a secured mortgage
loan with an effective interest rate of 7.5% that was originally scheduled to mature in August 2016.
During the third and fourth quarters of 2016, we borrowed an aggregate of $150.0 million under an unsecured term loan that
is originally scheduled to mature in January 2022. The interest rate on the term loan at our current credit ratings is LIBOR plus
110 basis points. The interest rate is based on the higher of the publicly announced ratings from Moody's Investors Service or
Standard & Poor's Ratings Services. The financial and other covenants under the term loan are similar to our revolving credit
facility.
During the first quarter of 2016, we prepaid without penalty the $350.0 million balance on our unsecured bridge facility that
was originally scheduled to mature in March 2016.
During the first quarter of 2016, we obtained $150.0 million notional amount of forward-starting swaps that effectively lock
the underlying 10-year treasury rate at 1.90% with respect to a forecasted debt issuance expected to occur prior to March 15, 2017.
The counterparties under the swaps are major financial institutions.
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. The interest rate and facility
fee are based on the higher of the publicly announced ratings from Moody's Investors Service or Standard & Poor's Ratings
Services. There were no amounts outstanding under our revolving credit facility at December 31, 2016 and $48.8 million
outstanding at January 27, 2017. At both December 31, 2016 and January 27, 2017, we had $0.2 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 December 31, 2016 and January 27, 2017 was $474.8 million and $426.0 million, respectively.
We regularly evaluate the financial condition of the financial institutions that participate in our credit facilities and as
counterparties under interest rate swap agreements using publicly available information. Based on this review, we currently expect
these financial institutions to perform their obligations under our existing facilities and swap agreements.
For information regarding our interest hedging activities and other market risks associated with our debt financing activities,
see "Item 7A. Quantitative and Qualitative Disclosures About Market Risk."
Covenant Compliance
We are currently in compliance with financial covenants and other requirements with respect to our consolidated debt. Although
we expect to remain in compliance with these covenants and ratios for at least the next year, depending upon our future operating
performance, property and financing transactions and general economic conditions, we cannot assure you that we will continue
to be in compliance.
Our revolving credit facility and bank term loans require us to comply with customary operating covenants and various
financial requirements. Upon an event of default on the revolving credit facility, the lenders having at least 51.0% of the total
commitments under the revolving credit facility can accelerate all borrowings then outstanding, and we could be prohibited from
borrowing any further amounts under our revolving credit facility, which would adversely affect our ability to fund our operations.
In addition, certain of our unsecured debt agreements contain cross-default provisions giving the unsecured lenders the right to
declare a default if we are in default under more than $25.0 million with respect to other loans in some circumstances.
32
As of December 31, 2016, the Operating Partnership had the following unsecured notes outstanding ($ in thousands):
Notes due March 2017
Notes due April 2018
Notes due June 2021
Notes due January 2023
Face Amount
Carrying
Amount
Stated
Interest Rate
Effective
Interest Rate
$
$
$
$
379,685
200,000
300,000
250,000
$
$
$
$
379,661
200,000
298,072
248,412
5.850%
7.500%
3.200%
3.625%
5.880%
7.500%
3.363%
3.752%
The indenture that governs these outstanding notes requires us to comply with customary operating covenants and various
financial ratios. The trustee or the holders of at least 25.0% in principal amount of any series of notes can accelerate the principal
amount of such series upon written notice of a default that remains uncured after 60 days.
We may not be able to repay, refinance or extend any or all of our debt at maturity or upon any acceleration. If any refinancing
is done at higher interest rates, the increased interest expense could adversely affect our cash flow and ability to pay distributions.
Any such refinancing could also impose tighter financial ratios and other covenants that restrict our ability to take actions that
could otherwise be in our best interest, such as funding new development activity, making opportunistic acquisitions, repurchasing
our securities or paying distributions.
Contractual Obligations
The following table sets forth a summary regarding our known contractual obligations, including required interest payments
for those items that are interest bearing, at December 31, 2016 ($ in thousands):
Mortgages and Notes Payable:
Principal payments (1)
Interest payments
Amounts due during the years ending December 31,
Total
2017
2018
2019
2020
2021
Thereafter
$ 1,957,031
$ 507,031
$ 200,000
$ 200,000
$ 350,000
$ 300,000
$
400,000
176,441
58,186
37,718
29,821
25,006
16,069
9,641
—
Capitalized Lease Obligations
172
110
29
18
15
—
Purchase Obligations:
Lease and contractual commitments and
contingent consideration (2)
Operating Lease Obligations:
263,035
236,127
20,315
1,685
3,405
253
1,250
Operating ground leases
100,938
2,027
2,063
2,100
2,139
2,162
90,447
Total
__________
$ 2,497,617
$ 803,481
$ 260,125
$ 233,624
$ 380,565
$ 318,484
$
501,338
(1) Excludes amortization of premiums, discounts, debt issuance costs and/or purchase accounting adjustments.
(2) Amount represents commitments under signed leases and contracts for operating properties, excluding tenant-funded tenant improvements,
and contracts for development/redevelopment projects. This includes $156.6 million of contractual commitments related to our in-process
development activity, of which $132.3 million is scheduled to be funded in 2017. For a description of our development activity, see "Item
2. Properties - In-Process Development." The timing of these lease and contractual commitments may fluctuate.
The interest payments due on mortgages and notes payable are based on the stated rates for the fixed rate debt and on the
rates in effect at December 31, 2016 for the variable rate debt. The weighted average interest rate on our fixed (including debt
with a variable rate that is effectively fixed by related interest rate swaps) and variable rate debt was 4.63% and 1.77%, respectively,
at December 31, 2016. For additional information about our mortgages and notes payable, see Note 6 to our Consolidated Financial
Statements. For additional information about purchase obligations and operating lease obligations, see Note 9 to our Consolidated
Financial Statements.
Off Balance Sheet Arrangements
We generally account for our joint venture investments using the equity method. As a result, joint venture investments are
not included in our Consolidated Financial Statements, other than as investments in unconsolidated affiliates and equity in earnings
of unconsolidated affiliates.
33
At December 31, 2016, our unconsolidated joint ventures had $199.6 million of total assets and $132.1 million of total
liabilities, of which $122.6 million was outstanding mortgage debt. During 2016, our unconsolidated joint ventures had $31.2
million of aggregate net income. For additional information about our unconsolidated joint venture activity, see Note 4 to our
Consolidated Financial Statements.
During the third quarter of 2016, 4600 Madison Associates, LP ("4600 Madison") (a joint venture in which we owned a 12.5%
interest) sold a building to an unrelated third party for a sale price of $32.7 million and recorded a gain on disposition of property
of $21.3 million. As our cost basis was different from the basis reflected at the joint venture level, we recorded $1.8 million of
gain through equity in earnings of unconsolidated affiliates. Simultaneously with the sale, the joint venture used a portion of the
proceeds to pay off all $6.3 million of its debt.
During the first quarter of 2016, Concourse Center Associates, LLC (a joint venture in which we owned a 50.0% interest)
sold two buildings and land to an unrelated third party for an aggregate sale price of $11.0 million and recorded losses on disposition
of property of $0.1 million. As our cost basis was different from the basis reflected at the joint venture level, we recorded $0.4
million of gains through equity in earnings of unconsolidated affiliates. Simultaneously with the sale, the joint venture repaid all
$6.6 million of its debt.
During the first quarter of 2016, 4600 Madison sold land to an unrelated third party for a sale price of $3.4 million and recorded
a gain on disposition of property of $1.0 million. We recorded $0.1 million as our share of this gain through equity in earnings of
unconsolidated affiliates. Simultaneously with the sale, the joint venture used all of the proceeds to pay down $3.4 million of its
debt.
Dividends and Distributions
To maintain its qualification as a REIT, the Company must pay dividends to stockholders that are at least 90.0% of its annual
REIT taxable income, excluding net capital gains. The partnership agreement requires the Operating Partnership to distribute at
least enough cash for the Company to be able to pay such dividends. The Company's REIT taxable income, as determined by the
federal tax laws, does not equal its net income under accounting principles generally accepted in the United States of America
(“GAAP”). In addition, although capital gains are not required to be distributed to maintain REIT status, capital gains, if any, are
subject to federal and state income tax unless such gains are distributed to stockholders.
Cash dividends and distributions reduce the amount of cash that would otherwise be available for other business purposes,
including funding debt maturities, reducing debt or future growth initiatives. The amount of future distributions that will be made
is at the discretion of the Company's Board of Directors. For a discussion of the factors that will influence decisions of the Board
of Directors regarding dividends and distributions, see “Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.”
During each quarter of 2016, the Company declared and paid a regular cash dividend of $0.425 per share of Common Stock.
In addition, the Company paid a special cash dividend of $0.80 per share of Common Stock on January 10, 2017 to stockholders
of record as of December 27, 2016. The principal purpose of the special dividend was to distribute taxable capital gains associated
with the sales of the Plaza assets earlier in 2016.
On February 7, 2017, the Company declared a regular cash dividend of $0.44 per share of Common Stock, which is payable
on March 7, 2017 to stockholders of record as of February 17, 2017.
Current and Future Cash Needs
We anticipate that our available cash and cash equivalents, cash flows from operating activities and other expected financing
sources, including the issuance of debt securities by the Operating Partnership (some of which debt securities may be hedged to
a fixed interest rate pursuant to the forward-starting swaps discussed below), the issuance of secured debt (including the anticipated
$100.0 million fixed-rate loan discussed below), bank term loans (including the anticipated $50.0 million expansion of an existing
term loan), borrowings under our revolving credit facility, the issuance of equity securities by the Company or the Operating
Partnership and the disposition of non-core assets, will be adequate to meet our short-term liquidity requirements, including $379.7
million principal amount of unsecured notes due March 15, 2017 and the $109.1 million secured loan due November 1, 2017.
We had $49.5 million of cash and cash equivalents as of December 31, 2016. The unused capacity of our revolving credit
facility at December 31, 2016 and January 27, 2017 was $474.8 million and $426.0 million, respectively, excluding an accordion
feature that allows for an additional $75.0 million of borrowing capacity subject to additional lender commitments. Also, we have
recently demonstrated historical experience with our banking partners to obtain additional bank term loans, such as the $350.0
34
million, six-month unsecured bridge facility we obtained in 2015 for the short-term funding of our acquisition activity and $150.0
million unsecured term loan we obtained in 2016 to repay amounts outstanding under our revolving credit facility.
To limit the risks associated with interest rate changes, during 2016, we obtained $150.0 million notional amount of forward-
starting swaps that expire on March 15, 2017 and effectively lock the underlying 10-year treasury rate at 1.90% with respect to a
planned issuance of debt securities by the Operating Partnership.
We expect to obtain an approximate $100.0 million fixed-rate loan secured by The Pinnacle at Symphony Place in Nashville
with a term of at least 10 years. This planned secured loan is expected to close no later than May 1, 2017, which is the date on
which we can prepay without penalty the $109.1 million secured loan that is scheduled to mature on November 1, 2017. The new
secured loan is subject to formal lender commitment, definitive documentation and customary conditions; accordingly, we can
make no assurance that the new secured loan will be procured on the terms, including the amount to be borrowed, described above,
or at all.
We expect to borrow an additional $50.0 million under the unsecured bank term loan we obtained in 2016 that is scheduled
to mature in January 2022. This planned expansion of the term loan, which will bear interest at LIBOR plus 110 basis points based
on our current credit ratings, is expected to close no later than March 31, 2017. The term loan expansion is subject to definitive
documentation and customary conditions; accordingly, we can make no assurance that the term loan expansion will be procured
on the terms, including the amount to be borrowed, described above, or at all.
We have a currently effective automatic shelf registration statement on Form S-3 with the SEC pursuant to which, at any time
and from time to time, in one or more offerings on an as-needed basis, the Company may sell an indefinite amount of common
stock, preferred stock and depositary shares and the Operating Partnership may sell an indefinite amount of debt securities, subject
to our ability to effect offerings on satisfactory terms based on prevailing market conditions.
The Company from time to time enters into equity distribution agreements with a variety of firms pursuant to which the
Company may offer and sell shares of common stock from time to time through such firms, acting as agents of the Company or
as principals. Sales of the shares, if any, may be made by means of ordinary brokers’ transactions on the NYSE or otherwise at
market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices or as otherwise
agreed with any of such firms (which may include block trades).
During 2017, we also expect to sell $50.0 million to $150.0 million of properties no longer considered to be core assets due
to location, age, quality and/or overall strategic fit. We can make no assurance, however, that we will sell any non-core assets or,
if we do, what the timing or terms of any such sale will be.
We generally intend to fund the growth of our company, including the $132.3 million of contractual commitments in 2017
related to our in-process development activity, on a leverage-neutral basis. At December 31, 2016, our leverage ratio was 34.7%
and there were 104.6 million diluted shares of Common Stock outstanding.
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses for the reporting period. Actual results could differ from our estimates.
The policies used in the preparation of our Consolidated Financial Statements are described in Note 1 to our Consolidated
Financial Statements. However, certain of our significant accounting policies contain an increased level of assumptions used or
estimates made in determining their impact in our Consolidated Financial Statements. Management has reviewed and determined
the appropriateness of our critical accounting policies and estimates with the audit committee of the Company's Board of Directors.
We consider our critical accounting estimates to be those used in the determination of the reported amounts and disclosure
related to the following:
• Real estate and related assets;
•
•
Impairments of real estate assets and investments in unconsolidated affiliates;
Sales of real estate;
35
• Rental and other revenues; and
• Allowance for doubtful accounts.
Real Estate and Related Assets
Real estate and related assets are recorded at cost and stated at cost less accumulated depreciation. Renovations, replacements
and other expenditures that improve or extend the life of assets are capitalized and depreciated over their estimated useful lives.
Expenditures for ordinary maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-
line method over the estimated useful life of 40 years for buildings and depreciable land infrastructure costs, 15 years for building
improvements and five to seven years for furniture, fixtures and equipment. Tenant improvements are amortized using the straight-
line method over initial fixed terms of the respective leases, which generally are from three to 10 years.
Expenditures directly related to the development and construction of real estate assets are included in net real estate assets
and are stated at depreciated cost. Development expenditures include pre-construction costs essential to the development of
properties, development and construction costs, interest costs on qualifying assets, real estate taxes, development personnel salaries
and related costs and other costs incurred during the period of development. Interest and other carrying costs are capitalized until
the building is ready for its intended use, but not later than a year from cessation of major construction activity. We consider a
construction project as substantially completed and ready for its intended use upon the completion of tenant improvements. We
cease capitalization on the portion that is substantially completed and occupied or held available for occupancy, and capitalize
only those costs associated with the portion under construction.
Expenditures directly related to the leasing of properties are included in deferred leasing costs and are stated at amortized
cost. Such expenditures are part of the investment necessary to execute leases and, therefore, are classified as investment activities
in the statement of cash flows. All leasing commissions paid to third parties for new leases or lease renewals are capitalized.
Internal leasing costs, which consist primarily of compensation, benefits and other costs, such as legal fees related to leasing
activities, that are incurred in connection with successfully obtaining leases of properties are also capitalized. Capitalized leasing
costs are amortized on a straight-line basis over the initial fixed terms of the respective leases, which generally are from three to
10 years. Estimated costs related to unsuccessful activities are expensed as incurred.
We record liabilities for the performance of asset retirement activities when the obligation to perform such activities is probable
even when uncertainty exists about the timing and/or method of settlement.
Upon the acquisition of real estate assets, we assess the fair value of acquired tangible assets such as land, buildings and tenant
improvements, intangible assets and liabilities such as above and below market leases, acquired in-place leases, customer
relationships and other identifiable intangible assets and assumed liabilities. We assess fair value based on estimated cash flow
projections that utilize discount and/or capitalization rates as well as available market information. The fair value of the tangible
assets of an acquired property considers the value of the property as if it were vacant.
The above and below market rate portions of leases acquired in connection with property acquisitions are recorded in deferred
leasing costs and in accounts payable, accrued expenses and other liabilities, respectively, at fair value and amortized into rental
revenue over the remaining term of the respective leases as described below. Fair value is calculated as the present value of the
difference between (1) the contractual amounts to be paid pursuant to each in-place lease and (2) our estimate of fair market lease
rates for each corresponding in-place lease, using a discount rate that reflects the risks associated with the leases acquired and
measured over a period equal to the remaining initial term of the lease for above-market leases and the remaining initial term plus
the term of any renewal option that the customer would be economically compelled to exercise for below-market leases.
In-place leases acquired are recorded at fair value in deferred leasing costs and are amortized to depreciation and amortization
expense over the remaining term of the respective lease. The value of in-place leases is based on our evaluation of the specific
characteristics of each customer's lease. Factors considered include estimates of carrying costs during hypothetical expected lease-
up periods, current market conditions, the customer's credit quality and costs to execute similar leases. In estimating carrying
costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the
expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, we consider tenant
improvements, leasing commissions and legal and other related expenses.
36
Real estate and other assets are classified as long-lived assets held for use or as long-lived assets held for sale. Real estate is
classified as held for sale when the sale of the asset is probable, has been duly approved by the Company, a legally enforceable
contract has been executed and the buyer's due diligence period, if any, has expired.
Impairments of Real Estate Assets and Investments in Unconsolidated Affiliates
With respect to assets classified as held for use, we perform an impairment analysis if events or changes in circumstances
indicate that the carrying value may be impaired, such as a significant decline in occupancy, identification of materially adverse
legal or environmental factors, change in our designation of an asset from core to non-core, which may impact the anticipated
holding period, or a decline in market value to an amount less than cost. This analysis is generally performed at the property level,
except when an asset is part of an interdependent group such as an office park, and consists of determining whether the asset's
carrying amount will be recovered from its undiscounted estimated future operating and residual cash flows. These cash flows are
estimated based on a number of assumptions that are subject to economic and market uncertainties including, among others,
demand for space, competition for customers, changes in market rental rates, costs to operate each property and expected ownership
periods. For properties under development, the cash flows are based on expected service potential of the asset or asset group when
development is substantially complete.
If the carrying amount of a held for use asset exceeds the sum of its undiscounted future operating and residual cash flows,
an impairment loss is recorded for the difference between estimated fair value of the asset and the carrying amount. We generally
estimate the fair value of assets held for use by using discounted cash flow analyses. In some instances, appraisal information may
be available and is used in addition to a discounted cash flow analysis. As the factors used in generating these cash flows are
difficult to predict and are subject to future events that may alter our assumptions, the discounted and/or undiscounted future
operating and residual cash flows estimated by us in our impairment analyses or those established by appraisal may not be achieved
and we may be required to recognize future impairment losses on properties held for use.
We record assets held for sale at the lower of the carrying amount or estimated fair value. Fair value of assets held for sale is
equal to the estimated or contracted sales price with a potential buyer, less costs to sell. The impairment loss is the amount by
which the carrying amount exceeds the estimated fair value.
We also analyze our investments in unconsolidated affiliates for impairment. This analysis consists of determining whether
an expected loss in market value of an investment is other than temporary by evaluating the length of time and the extent to which
the market value has been less than cost, the financial condition and near-term prospects of the investment, and our intent and
ability to retain our investment for a period of time sufficient to allow for any anticipated recovery in market value. As the factors
used in this analysis are difficult to predict and are subject to future events that may alter our assumptions, we may be required to
recognize future impairment losses on our investments in unconsolidated affiliates.
Sales of Real Estate
For sales transactions meeting the requirements for full profit recognition, the related assets and liabilities are removed from
the balance sheet and the resultant gain or loss is recorded in the period the transaction closes. For sales transactions with continuing
involvement after the sale, if the continuing involvement with the property is limited by the terms of the sales contract, profit is
recognized at the time of sale and is reduced by the maximum exposure to loss related to the nature of the continuing involvement.
Sales to entities in which we have or receive an interest are accounted for using partial sale accounting.
For transactions that do not meet the criteria for a sale, we evaluate the nature of the continuing involvement, including put
and call provisions, if present, and account for the transaction as a financing arrangement, profit-sharing arrangement, leasing
arrangement or other alternate method of accounting, rather than as a sale, based on the nature and extent of the continuing
involvement. Some transactions may have numerous forms of continuing involvement. In those cases, we determine which method
is most appropriate based on the substance of the transaction.
Rental and Other Revenues
Minimum contractual rents from leases are recognized on a straight-line basis over the terms of the respective leases. This
means that, with respect to a particular lease, actual amounts billed in accordance with the lease during any given period may be
higher or lower than the amount of rental revenue recognized for the period. Straight-line rental revenue is commenced when the
customer assumes control of the leased premises. Accrued straight-line rents receivable represents the amount by which straight-
line rental revenue exceeds rents currently billed in accordance with lease agreements. Contingent rental revenue, such as percentage
rent, is accrued when the contingency is removed. Termination fee income is recognized at the later of when the customer has
vacated the space or the lease has expired and a fully executed lease termination agreement has been delivered, the amount of the
37
fee is determinable and collectability of the fee is reasonably assured. Rental revenue reductions related to co-tenancy lease
provisions, if any, are accrued when events have occurred that trigger such provisions.
Cost recovery income is determined on a calendar year and a lease-by-lease basis. The most common types of cost recovery
income in our leases are common area maintenance (“CAM”) and real estate taxes, for which a customer typically pays its pro-
rata share of operating and administrative expenses and real estate taxes in excess of the costs incurred during a contractually
specified base year. The computation of cost recovery income is complex and involves numerous judgments, including the
interpretation of lease provisions. Leases are not uniform in dealing with such cost recovery income and there are many variations
in the computation. Many customers make monthly fixed payments of CAM, real estate taxes and other cost reimbursement items.
We accrue income related to these payments each month. We make quarterly accrual adjustments, positive or negative, to cost
recovery income to adjust the recorded amounts to our best estimate of the final annual amounts to be billed and collected. After
the end of the calendar year, we compute each customer's final cost recovery income and, after considering amounts paid by the
customer during the year, issue a bill or credit for the appropriate amount to the customer. The differences between the amounts
billed less previously received payments and the accrual adjustment are recorded as increases or decreases to cost recovery income
when the final bills are prepared, which occurs during the first half of the subsequent year.
Allowance for Doubtful Accounts
Accounts receivable, accrued straight-line rents receivable and mortgages and notes receivable are reduced by an allowance
for amounts that may become uncollectible in the future. We regularly evaluate the adequacy of our allowance for doubtful accounts.
The evaluation primarily consists of reviewing past due account balances and considering such factors as the credit quality of our
customer, historical trends of the customer and changes in customer payment terms. Additionally, with respect to customers in
bankruptcy, we estimate the probable recovery through bankruptcy claims and adjust the allowance for amounts deemed
uncollectible. If our assumptions regarding the collectability of receivables prove incorrect, we could experience losses in excess
of our allowance for doubtful accounts. The allowance and its related receivable are written-off when we have concluded there is
a low probability of collection and we have discontinued collection efforts.
Non-GAAP Information
The Company believes that FFO, FFO available for common stockholders and FFO available for common stockholders per
share are beneficial to management and investors and are important indicators of the performance of any equity REIT. Because
these FFO calculations exclude such factors as depreciation, amortization and impairments of real estate assets and gains or losses
from sales of operating real estate assets, which can vary among owners of identical assets in similar conditions based on historical
cost accounting and useful life estimates, they facilitate comparisons of operating performance between periods and between other
REITs. Management believes that historical cost accounting for real estate assets in accordance with GAAP implicitly assumes
that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with
market conditions, management believes the use of FFO, FFO available for common stockholders and FFO available for common
stockholders per share, together with the required GAAP presentations, provides a more complete understanding of the Company's
performance relative to its competitors and a more informed and appropriate basis on which to make decisions involving operating,
financing and investing activities.
FFO, FFO available for common stockholders and FFO available for common stockholders per share are non-GAAP financial
measures and therefore do not represent net income or net income per share as defined by GAAP. Net income and net income per
share as defined by GAAP are the most relevant measures in determining the Company's operating performance because these
FFO measures include adjustments that investors may deem subjective, such as adding back expenses such as depreciation,
amortization and impairments. Furthermore, FFO available for common stockholders per share does not depict the amount that
accrues directly to the stockholders' benefit. Accordingly, FFO, FFO available for common stockholders and FFO available for
common stockholders per share should never be considered as alternatives to net income, net income available for common
stockholders, or net income available for common stockholders per share as indicators of the Company's operating performance.
The Company's presentation of FFO is consistent with FFO as defined by NAREIT, which is calculated as follows:
• Net income/(loss) computed in accordance with GAAP;
• Less net income attributable to noncontrolling interests in consolidated affiliates;
•
Plus depreciation and amortization of depreciable operating properties;
• Less gains, or plus losses, from sales of depreciable operating properties, plus impairments on depreciable operating
properties and excluding items that are classified as extraordinary items under GAAP;
38
•
•
Plus or minus our share of adjustments, including depreciation and amortization of depreciable operating properties, for
unconsolidated joint venture investments (to reflect funds from operations on the same basis); and
Plus or minus adjustments for depreciation and amortization and gains/(losses) on sales of depreciable operating properties,
plus impairments on depreciable operating properties, and noncontrolling interests in consolidated affiliates related to
discontinued operations.
In calculating FFO, the Company includes net income attributable to noncontrolling interests in the Operating Partnership,
which the Company believes is consistent with standard industry practice for REITs that operate through an UPREIT structure.
The Company believes that it is important to present FFO on an as-converted basis since all of the Common Units not owned by
the Company are redeemable on a one-for-one basis for shares of its Common Stock.
The following table sets forth the Company's FFO, FFO available for common stockholders and FFO available for common
stockholders per share ($ in thousands, except per share amounts):
Funds from operations:
Net income
Net (income) attributable to noncontrolling interests in consolidated affiliates
Depreciation and amortization of real estate assets
Impairments of depreciable properties
(Gains) on disposition of depreciable properties
(Gain) on disposition of investment in unconsolidated affiliate
Unconsolidated affiliates:
Depreciation and amortization of real estate assets
Impairment of investment in unconsolidated affiliate
(Gains) on disposition of depreciable properties
Discontinued operations:
Depreciation and amortization of real estate assets
(Gains) on disposition of depreciable properties
Funds from operations
Dividends on Preferred Stock
Funds from operations available for common stockholders
Funds from operations available for common stockholders per share
Weighted average shares outstanding (1)
__________
(1) Includes assumed conversion of all potentially dilutive Common Stock equivalents.
Year Ended December 31,
2016
2015
2014
$
541,139
$
101,260
$
115,972
(1,253)
(1,264)
(1,466)
217,533
199,449
178,041
—
(8,915)
—
2,978
—
(2,173)
—
(9,147)
(4,155)
3,203
—
(946)
—
13,820
(414,496)
—
588
(37,802)
—
3,914
1,353
(1,194)
15,224
(384)
334,813
302,220
274,246
$
$
(2,501)
332,312
3.28
101,398
$
$
(2,506)
299,714
3.08
97,406
$
$
(2,507)
271,739
2.90
93,800
In addition, the Company believes NOI from continuing operations and same property NOI are useful supplemental measures
of the Company’s property operating performance because such metrics provide a performance measure of the revenues and
expenses directly involved in owning real estate assets and a perspective not immediately apparent from net income or FFO. The
Company defines NOI as rental and other revenues from continuing operations, less rental property and other expenses from
continuing operations. The Company defines cash NOI as NOI less lease termination fees, straight-line rent, amortization of lease
incentives and amortization of acquired above and below market leases. Other REITs may use different methodologies to calculate
NOI and same property NOI.
As of December 31, 2016, our same property portfolio consisted of 217 in-service properties encompassing 26.7 million
rentable square feet that were wholly owned during the entirety of the periods presented (from January 1, 2015 to December 31,
2016). As of December 31, 2015, our same property portfolio consisted of 221 in-service properties encompassing 26.2 million
rentable square feet that were wholly owned during the entirety of the periods presented (from January 1, 2014 to December 31,
2015). The change in our same property portfolio was due to the addition of three properties encompassing 0.7 million rentable
square feet acquired during 2014 and one newly developed property encompassing 0.1 million rentable square feet placed in
39
service during 2014. These additions were offset by the removal of three properties encompassing 0.2 million rentable square feet
that were sold during 2016 and five properties encompassing 0.1 million rentable square feet that are expected to be demolished.
Rental and other revenues related to properties not in our same property portfolio were $87.0 million and $41.7 million for
the years ended December 31, 2016 and 2015, respectively. Rental property and other expenses related to properties not in our
same property portfolio were $28.1 million and $13.6 million for the years ended December 31, 2016 and 2015, respectively.
The following table sets forth the Company’s NOI and same property NOI:
Income from continuing operations before disposition of investment properties and activity in
unconsolidated affiliates
Other income
Interest expense
General and administrative expenses
Depreciation and amortization
Net operating income from continuing operations
Less – non same property and other net operating income
Same property net operating income from continuing operations
Same property net operating income from continuing operations
Less – lease termination fees, straight-line rent and other non-cash adjustments
Same property cash net operating income from continuing operations
Year Ended December 31,
2016
2015
$
101,946
$
64,844
(2,338)
76,648
38,153
220,140
434,549
(58,913)
375,636
375,636
(14,098)
361,538
$
$
$
(1,726)
86,052
37,642
201,918
388,730
(28,130)
360,600
360,600
(17,073)
343,527
$
$
$
40
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The effects of potential changes in interest rates are discussed below. Our market risk discussion includes “forward-looking
statements” and represents an estimate of possible changes in fair value or future earnings that would occur assuming hypothetical
future movements in interest rates. Actual future results may differ materially from those presented. See “Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” and the Notes to
Consolidated Financial Statements for a description of our accounting policies and other information related to these financial
instruments.
We borrow funds at a combination of fixed and variable rates. Borrowings under our revolving credit facility and bank term
loans bear interest at variable rates. Our long-term debt, which consists of secured and unsecured long-term financings, typically
bears interest at fixed rates. Our interest rate risk management objectives are to limit generally the impact of interest rate changes
on earnings and cash flows and lower our overall borrowing costs. To achieve these objectives, from time to time we enter into
interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk
with respect to various debt instruments. We generally do not hold or issue these derivative contracts for trading or speculative
purposes.
At December 31, 2016, we had $1,254.3 million principal amount of fixed rate debt outstanding (not including debt with a
variable rate that is effectively fixed by related interest rate hedge contracts). The estimated aggregate fair market value of this
debt was $1,268.6 million. If interest rates had been 100 basis points higher, the aggregate fair market value of our fixed rate debt
would have been $31.5 million lower. If interest rates had been 100 basis points lower, the aggregate fair market value of our fixed
rate debt would have been $33.2 million higher.
At December 31, 2016, we had $475.0 million of variable rate debt outstanding not protected by interest rate hedge contracts.
If the weighted average interest rate on this variable rate debt had been 100 basis points higher, the annual interest expense would
increase $4.8 million. If the weighted average interest rate on this variable rate debt had been 100 basis points lower, the annual
interest expense would decrease $4.8 million.
At December 31, 2016, we had $225.0 million of variable rate debt outstanding with $225.0 million of related floating-to-
fixed interest rate swaps that effectively fix the underlying LIBOR rate at 1.678%. If the underlying LIBOR interest rates increase
or decrease by 100 basis points, the aggregate fair market value of the swaps at December 31, 2016 would increase by $4.4 million
or decrease by $4.3 million, respectively.
During the first quarter of 2016, we obtained $150.0 million notional amount of forward-starting swaps that effectively lock
the underlying 10-year treasury rate at 1.90% with respect to a forecasted debt issuance expected to occur prior to March 15, 2017.
If the underlying treasury rate was to increase or decrease by 100 basis points, the aggregate fair market value of the swaps at
December 31, 2016 would increase by $12.0 million or decrease by $13.3 million, respectively.
We are exposed to certain losses in the event of nonperformance by the counterparties, which are major financial institutions,
under the swaps. We regularly evaluate the financial condition of our counterparties using publicly available information. Based
on this review, we currently expect the counterparties to perform fully under the swaps. However, if a counterparty defaults on its
obligations under a swap, we could be required to pay the full rates on the applicable debt, even if such rates were in excess of
the rate in the contract.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See page 46 for Index to Consolidated Financial Statements of Highwoods Properties, Inc.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
41
ITEM 9A. CONTROLS AND PROCEDURES
General
The purpose of this section is to discuss our controls and procedures. The statements in this section represent the conclusions
of Edward J. Fritsch, the Company's President and Chief Executive Officer (“CEO”), and Mark F. Mulhern, the Company's
Executive Vice President and Chief Financial Officer (“CFO”).
The CEO and CFO evaluations of our controls and procedures include a review of the controls' objectives and design, the
controls' implementation by us and the effect of the controls on the information generated for use in this Annual Report. We seek
to identify data errors, control problems or acts of fraud and confirm that appropriate corrective action, including process
improvements, is undertaken. Our controls and procedures are also evaluated on an ongoing basis by or through the following:
•
•
activities undertaken and reports issued by employees responsible for testing our internal control over financial reporting;
quarterly sub-certifications by representatives from appropriate business and accounting functions to support the CEO's
and CFO's evaluations of our controls and procedures;
•
other personnel in our finance and accounting organization;
• members of our internal disclosure committee; and
• members of the audit committee of the Company's Board of Directors.
We do not expect that our controls and procedures will prevent all errors and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of controls and procedures must reflect the fact that there are resource constraints, and the benefits of controls
must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or
mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people,
or by management override of the control. The design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under
all potential future conditions.
Management's Annual Report on the Company's Internal Control Over Financial Reporting
The Company's management is required to establish and maintain internal control over financial reporting designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect transactions and dispositions
of assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of
management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
assets that could have a material effect on the financial statements.
Under the supervision of the Company's CEO and CFO, we conducted an evaluation of the effectiveness of the Company's
internal control over financial reporting at December 31, 2016 based on the criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have concluded that, at December 31, 2016, the Company's internal control over financial reporting was effective. Deloitte
& Touche LLP, our independent registered public accounting firm, has issued their attestation report, which is included below, on
the effectiveness of the Company's internal control over financial reporting at December 31, 2016.
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Highwoods Properties, Inc.
Raleigh, North Carolina
We have audited the internal control over financial reporting of Highwoods Properties, Inc. and subsidiaries (the “Company”)
as of December 31, 2016, based on criteria established in Internal Control- Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Annual Report on the Company’s Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's
principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board
of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject
to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated financial statements as of and for the year ended December 31, 2016 of the Company and our report dated
February 7, 2017 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding
the Company’s adoption of the accounting standard update for reporting discontinued operations.
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
February 7, 2017
43
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the fourth quarter of 2016 that
materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Disclosure Controls and Procedures
SEC rules also require us to maintain disclosure controls and procedures that are designed to ensure that information required
to be disclosed in our annual and periodic reports filed with the SEC is recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and forms. As defined in Rule 13a-15(e) under the Exchange Act, disclosure controls
and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed
by us is accumulated and communicated to our management, including the Company’s CEO and CFO, to allow for timely decisions
regarding required disclosure. The Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures
were effective at the end of the period covered by this Annual Report.
None.
ITEM 9B. OTHER INFORMATION
44
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information about the Company’s executive officers and directors, the code of ethics that applies to the Company’s chief
executive officer and senior financial officers, which is posted on our website, and certain corporate governance matters is
incorporated herein by reference to the Company’s Proxy Statement to be filed in connection with its annual meeting of stockholders
to be held on May 10, 2017. No changes have been made to the procedures by which stockholders may recommend nominees to
the Company's board of directors since the 2016 annual meeting, which was held on May 11, 2016. See Item X in Part I of this
Annual Report for biographical information regarding the Company’s executive officers. The Company is the sole general partner
of the Operating Partnership.
ITEM 11. EXECUTIVE COMPENSATION
Information about the compensation of the Company’s directors and executive officers is incorporated herein by reference to
the Company’s Proxy Statement to be filed in connection with its annual meeting of stockholders to be held on May 10, 2017.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Information about the beneficial ownership of Common Stock and the Company’s equity compensation plans is incorporated
herein by reference to the Company’s Proxy Statement to be filed in connection with its annual meeting of stockholders to be held
on May 10, 2017.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information about certain relationships and related transactions and the independence of the Company’s directors is
incorporated herein by reference to the Company’s Proxy Statement to be filed in connection with its annual meeting of stockholders
to be held on May 10, 2017.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information about fees paid to and services provided by our independent registered public accounting firm is incorporated
herein by reference to the Company’s Proxy Statement to be filed in connection with its annual meeting of stockholders to be held
on May 10, 2017.
45
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Highwoods Properties, Inc.
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 2016 and 2015
Consolidated Statements of Income for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2016, 2015 and
2014
Consolidated Statements of Equity for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
Page
47
48
49
50
51
53
55
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Highwoods Properties, Inc.
Raleigh, North Carolina
We have audited the accompanying consolidated balance sheets of Highwoods Properties, Inc. and subsidiaries (the
“Company”) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, equity,
and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Highwoods
Properties, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for and
disclosure of discontinued operations beginning April 1, 2014 due to the adoption of the Financial Accounting Standards Board
accounting standard update on reporting discontinued operations and disclosures of disposals of components of an entity.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the Company's internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and
our report dated February 7, 2017 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
February 7, 2017
47
HIGHWOODS PROPERTIES, INC.
Consolidated Balance Sheets
(in thousands, except share and per share data)
Assets:
Real estate assets, at cost:
Land
Buildings and tenant improvements
Development in-process
Land held for development
Less-accumulated depreciation
Net real estate assets
Real estate and other assets, net, held for sale
Cash and cash equivalents
Restricted cash
Accounts receivable, net of allowance of $624 and $928, respectively
Mortgages and notes receivable, net of allowance of $105 and $287, respectively
Accrued straight-line rents receivable, net of allowance of $692 and $257, respectively
Investments in and advances to unconsolidated affiliates
Deferred leasing costs, net of accumulated amortization of $140,081 and $115,172, respectively
Prepaid expenses and other assets, net of accumulated amortization of $19,904 and $17,830,
respectively
Total Assets
Liabilities, Noncontrolling Interests in the Operating Partnership and Equity:
Mortgages and notes payable, net
Accounts payable, accrued expenses and other liabilities
Liabilities held for sale
Total Liabilities
Commitments and contingencies
December 31,
2016
2015
$
474,375
$
443,705
4,313,373
4,063,328
279,602
77,355
194,050
68,244
5,144,705
4,769,327
(1,134,103)
(1,007,104)
4,010,602
3,762,223
—
49,490
29,141
17,372
8,833
172,829
18,846
213,500
240,948
5,036
16,769
29,077
2,096
150,392
20,676
231,765
$
$
40,437
4,561,050
1,948,047
313,885
—
$
$
26,649
4,485,631
2,491,813
233,988
14,119
2,261,932
2,739,920
Noncontrolling interests in the Operating Partnership
144,802
126,429
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), 28,920 and 29,050 shares issued and outstanding, respectively
28,920
29,050
Common Stock, $.01 par value, 200,000,000 authorized shares;
101,665,554 and 96,091,932 shares issued and outstanding, respectively
Additional paid-in capital
Distributions in excess of net income available for common stockholders
Accumulated other comprehensive income/(loss)
Total Stockholders’ Equity
Noncontrolling interests in consolidated affiliates
Total Equity
1,017
961
2,850,881
2,598,242
(749,412)
(1,023,135)
4,949
(3,811)
2,136,355
1,601,307
17,961
17,975
2,154,316
1,619,282
Total Liabilities, Noncontrolling Interests in the Operating Partnership and Equity
$
4,561,050
$
4,485,631
See accompanying notes to consolidated financial statements.
48
HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Income
(in thousands, except per share amounts)
Rental and other revenues
Operating expenses:
Rental property and other expenses
Depreciation and amortization
Impairments of real estate assets
General and administrative
Total operating expenses
Interest expense:
Contractual
Amortization of debt issuance costs
Financing obligation
Other income:
Interest and other income
Losses on debt extinguishment
Income from continuing operations before disposition of investment properties and activity in
unconsolidated affiliates
Gains on disposition of property
Gain on disposition of investment in unconsolidated affiliate
Equity in earnings of unconsolidated affiliates
Income from continuing operations
Discontinued operations:
Income from discontinued operations
Net gains on disposition of discontinued operations
Net income
Net (income) attributable to noncontrolling interests in the Operating Partnership
Net (income) attributable to noncontrolling interests in consolidated affiliates
Dividends on Preferred Stock
Net income available for common stockholders
Earnings per Common Share – basic:
Income from continuing operations available for common stockholders
Income from discontinued operations available for common stockholders
Net income available for common stockholders
Weighted average Common Shares outstanding – basic
Earnings per Common Share – diluted:
Income from continuing operations available for common stockholders
Income from discontinued operations available for common stockholders
Net income available for common stockholders
Weighted average Common Shares outstanding – diluted
Net income available for common stockholders:
Income from continuing operations available for common stockholders
Income from discontinued operations available for common stockholders
Net income available for common stockholders
Year Ended December 31,
2016
2015
2014
$
665,634
$
604,671
$
555,871
231,085
220,140
—
38,153
489,378
73,142
3,506
—
76,648
2,338
—
2,338
101,946
14,807
—
5,793
122,546
4,097
414,496
418,593
541,139
(15,596)
(1,253)
(2,501)
521,789
1.17
4.13
5.30
98,439
1.17
4.13
5.30
101,398
115,461
406,328
521,789
$
$
$
$
$
$
$
215,941
201,918
—
37,642
455,501
82,245
3,645
162
86,052
1,969
(243)
1,726
64,844
11,444
4,155
5,078
85,521
15,739
—
15,739
101,260
(2,918)
(1,264)
(2,506)
94,572
0.84
0.16
1.00
94,404
0.84
0.16
1.00
97,406
79,308
15,264
94,572
$
$
$
$
$
$
$
205,884
180,637
588
35,258
422,367
82,287
3,082
(242)
85,127
2,739
(308)
2,431
50,808
44,352
—
1,827
96,987
18,601
384
18,985
115,972
(3,542)
(1,466)
(2,507)
108,457
1.00
0.20
1.20
90,743
0.99
0.20
1.19
93,800
90,069
18,388
108,457
$
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
49
HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Comprehensive Income
(in thousands)
Comprehensive income:
Net income
Other comprehensive income/(loss):
Unrealized gains on tax increment financing bond
Unrealized gains/(losses) on cash flow hedges
Amortization of cash flow hedges
Total other comprehensive income/(loss)
Total comprehensive income
Less-comprehensive (income) attributable to noncontrolling interests
Comprehensive income attributable to common stockholders
$
Year Ended December 31,
2015
2014
2016
$
541,139
$
101,260
$
115,972
—
5,703
3,057
8,760
549,899
(16,849)
533,050
$
445
(4,040)
3,696
101
101,361
(4,182)
97,179
$
584
(5,662)
3,777
(1,301)
114,671
(5,008)
109,663
See accompanying notes to consolidated financial statements.
50
HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Equity
(in thousands, except share amounts)
Balance at December 31, 2013
89,920,915
$
899
$
29,077
$ 2,370,368
$
(2,611)
$
21,396
$
(911,662)
$ 1,507,467
Number of
Common
Shares
Common
Stock
Series A
Cumulative
Redeemable
Preferred
Shares
Additional
Paid-In
Capital
Accumulated
Other
Compre-
hensive
Income/
(Loss)
Non-
controlling
Interests in
Consolidated
Affiliates
Distributions
in Excess of
Net Income
Available for
Common
Stockholders
Total
Issuances of Common Stock, net of issuance costs and
tax withholdings
Conversions of Common Units to Common Stock
2,812,477
4,417
Dividends on Common Stock
Dividends on Preferred Stock
Adjustment of noncontrolling interests in the Operating
Partnership to fair value
Acquisition of noncontrolling interest in consolidated
affiliate
Distributions to noncontrolling interests in consolidated
affiliates
—
—
—
—
—
Issuances of restricted stock
169,501
Issuances of Common Stock, net of issuance costs and
tax withholdings
Conversions of Common Units to Common Stock
3,023,710
37,203
Redemptions/repurchases of Preferred Stock
Share-based compensation expense, net of forfeitures
Net (income) attributable to noncontrolling interests in
the Operating Partnership
Net (income) attributable to noncontrolling interests in
consolidated affiliates
Comprehensive income:
Net income
Other comprehensive loss
Total comprehensive income
Balance at December 31, 2014
Dividends on Common Stock
Dividends on Preferred Stock
Adjustment of noncontrolling interests in the Operating
Partnership to fair value
Distributions to noncontrolling interests in consolidated
affiliates
Issuances of restricted stock
Redemptions/repurchases of Preferred Stock
Share-based compensation expense, net of forfeitures
Net (income) attributable to noncontrolling interests in
the Operating Partnership
Net (income) attributable to noncontrolling interests in
consolidated affiliates
Comprehensive income:
Net income
Other comprehensive income
Total comprehensive income
Balance at December 31, 2015
—
—
—
—
—
—
—
—
—
—
128,951
—
(5,242)
—
—
—
—
28
—
—
—
—
—
—
—
—
2
—
—
—
—
—
—
—
—
—
—
—
—
(17)
—
—
—
—
—
112,596
162
—
—
(25,275)
(513)
—
—
—
6,937
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,301)
—
—
—
—
—
(3,613)
(1,140)
—
—
—
—
—
—
112,624
162
(154,165)
(154,165)
(2,507)
(2,507)
—
—
—
—
—
—
(25,275)
(4,126)
(1,140)
—
(17)
6,939
(3,542)
(3,542)
1,466
(1,466)
—
—
—
115,972
115,972
—
(1,301)
114,671
30
—
—
—
—
—
—
—
2
—
—
—
—
—
—
—
—
—
—
—
(10)
—
—
—
—
—
125,507
1,645
—
—
(67)
—
—
—
6,882
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,398)
—
—
—
—
—
—
125,537
1,645
(160,337)
(160,337)
(2,506)
(2,506)
—
—
—
—
—
(67)
(1,398)
—
(10)
6,884
(2,918)
(2,918)
1,264
(1,264)
—
—
101
—
—
101,260
101,260
—
101
101,361
92,907,310
929
29,060
2,464,275
(3,912)
18,109
(957,370)
1,551,091
96,091,932
$
961
$
29,050
$ 2,598,242
$
(3,811)
$
17,975
$ (1,023,135)
$ 1,619,282
51
HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Equity - Continued
(in thousands, except share amounts)
Balance at December 31, 2015
96,091,932
$
961
$
29,050
$ 2,598,242
$
(3,811)
$
17,975
$ (1,023,135)
$ 1,619,282
Number of
Common
Shares
Common
Stock
Series A
Cumulative
Redeemable
Preferred
Shares
Additional
Paid-In
Capital
Accumulated
Other
Compre-
hensive
Income/
(Loss)
Non-
controlling
Interests in
Consolidated
Affiliates
Distributions
in Excess of
Net Income
Available for
Common
Stockholders
Total
Issuances of Common Stock, net of issuance costs and
tax withholdings
Conversions of Common Units to Common Stock
5,390,710
61,048
Dividends on Common Stock
Special dividend on Common Stock
Dividends on Preferred Stock
Adjustment of noncontrolling interests in the Operating
Partnership to fair value
Distributions to noncontrolling interests in consolidated
affiliates
Issuances of restricted stock
Redemptions/repurchases of Preferred Stock
Share-based compensation expense, net of forfeitures
Net (income) attributable to noncontrolling interests in
the Operating Partnership
Net (income) attributable to noncontrolling interests in
consolidated affiliates
Comprehensive income:
Net income
Other comprehensive income
Total comprehensive income
Balance at December 31, 2016
—
—
—
—
—
130,752
—
(8,888)
—
—
—
—
54
—
—
—
—
—
—
—
—
2
—
—
—
—
—
—
—
—
—
—
—
—
(130)
—
—
—
—
—
256,326
3,057
—
—
—
(12,993)
—
—
—
6,249
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
8,760
—
—
—
—
—
—
(1,267)
—
—
—
—
—
—
256,380
3,057
(166,861)
(166,861)
(81,205)
(2,501)
—
—
—
—
—
(81,205)
(2,501)
(12,993)
(1,267)
—
(130)
6,251
(15,596)
(15,596)
1,253
(1,253)
—
—
—
541,139
—
541,139
8,760
549,899
101,665,554
$
1,017
$
28,920
$ 2,850,881
$
4,949
$
17,961
$
(749,412)
$ 2,154,316
See accompanying notes to consolidated financial statements.
52
HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Cash Flows
(in thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Year Ended December 31,
2016
2015
2014
$
541,139
$
101,260
$
115,972
Depreciation and amortization
220,140
215,957
196,023
Amortization of lease incentives and acquisition-related intangible assets and
liabilities
Share-based compensation expense
Allowance for losses on accounts and accrued straight-line rents receivable
Accrued interest on mortgages and notes receivable
Amortization of debt issuance costs
Amortization of cash flow hedges
Amortization of mortgages and notes payable fair value adjustments
Impairments of real estate assets
Losses on debt extinguishment
Net gains on disposition of property
Gain on disposition of investment in unconsolidated affiliate
Equity in earnings of unconsolidated affiliates
Changes in financing obligation
Distributions of earnings from unconsolidated affiliates
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses and other assets
Accrued straight-line rents receivable
Accounts payable, accrued expenses and other liabilities
Net cash provided by operating activities
Investing activities:
Investments in acquired real estate and related intangible assets, net of cash acquired
Investments in development in-process
Investments in tenant improvements and deferred leasing costs
Investments in building improvements
Investment in acquired noncontrolling interest in consolidated affiliate
Net proceeds from disposition of real estate assets
Net proceeds from disposition of investment in unconsolidated affiliate
Distributions of capital from unconsolidated affiliates
Investments in mortgages and notes receivable
Repayments of mortgages and notes receivable
Investments in and advances to unconsolidated affiliates
Repayments from unconsolidated affiliates
Redemption of investment in unconsolidated affiliate
Changes in restricted cash and other investing activities
Net cash provided by/(used in) investing activities
$
(1,996)
6,251
2,001
(502)
3,506
3,057
(234)
—
—
(429,303)
—
(5,793)
—
4,424
3,401
(4,423)
(24,245)
(11,618)
305,805
(110,249)
(177,875)
(91,423)
(80,672)
—
684,371
—
2,766
(7,934)
1,699
(105)
448
—
(17,136)
203,890
86
6,884
2,103
(357)
3,645
3,696
(58)
—
243
(11,444)
(4,155)
(5,078)
162
4,901
1,415
1,266
(22,756)
(8,891)
288,879
(408,634)
(136,664)
(115,503)
(55,881)
—
26,748
6,919
10,401
(1,772)
9,381
(659)
20,800
—
(9,293)
(654,157) $
$
442
6,939
2,182
(477)
3,082
3,777
(788)
588
308
(44,736)
—
(1,827)
(241)
2,687
(3,114)
(615)
(21,685)
8,394
266,911
(163,641)
(183,873)
(113,747)
(50,033)
(4,126)
172,442
—
3,806
(864)
17,239
(6,489)
—
4,660
(3,552)
(328,178)
53
HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Cash Flows – Continued
(in thousands)
Financing activities:
Dividends on Common Stock
Redemptions/repurchases of Preferred Stock
Redemptions of Common Units
Dividends on Preferred Stock
Distributions to noncontrolling interests in the Operating Partnership
Distributions to noncontrolling interests in consolidated affiliates
Proceeds from the issuance of Common Stock
Costs paid for the issuance of Common Stock
Repurchase of shares related to tax withholdings
Borrowings on revolving credit facility
Repayments of revolving credit facility
Borrowings on mortgages and notes payable
Repayments of mortgages and notes payable
Payments on financing obligation
Payments of debt extinguishment costs
Changes in debt issuance costs and other financing activities
Net cash provided by/(used in) financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the period
Cash and cash equivalents at end of the period
Supplemental disclosure of cash flow information:
Year Ended December 31,
2016
2015
2014
(166,861) $
(130)
—
(2,501)
(4,888)
(1,267)
264,769
(3,973)
(4,416)
287,600
(586,600)
150,000
(395,993)
—
—
(981)
(465,241)
44,454
5,036
49,490
$
(160,337) $
(10)
—
(2,506)
(4,959)
(1,398)
131,341
(2,040)
(3,764)
476,300
(386,300)
475,000
(156,120)
(1,722)
—
(2,003)
361,482
(3,796)
8,832
5,036
$
(154,165)
(17)
(93)
(2,507)
(4,994)
(1,140)
117,716
(1,586)
(3,506)
506,900
(513,600)
296,949
(174,302)
(2,904)
(369)
(2,467)
59,915
(1,352)
10,184
8,832
$
$
Year Ended December 31,
2016
2015
2014
Cash paid for interest, net of amounts capitalized
$
72,847
$
82,242
$
83,086
Supplemental disclosure of non-cash investing and financing activities:
Year Ended December 31,
2016
2015
2014
$
Unrealized gains/(losses) on cash flow hedges
Conversions of Common Units to Common Stock
Changes in accrued capital expenditures
Write-off of fully depreciated real estate assets
Write-off of fully amortized debt issuance and leasing costs
Adjustment of noncontrolling interests in the Operating Partnership to fair value
Unrealized gains on tax increment financing bond
Assumption of mortgages and notes payable related to acquisition activities
Contingent consideration in connection with the acquisition of land
Special dividend on Common Stock declared
Special distribution to noncontrolling interests in the Operating Partnership declared
$
5,703
3,057
8,580
39,262
26,533
12,993
—
—
—
(81,205)
(2,271)
(4,040) $
1,645
2,547
48,698
38,264
67
445
19,277
900
—
—
(5,662)
162
5,283
42,633
25,286
25,275
584
—
3,300
—
—
See accompanying notes to consolidated financial statements.
54
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular dollar amounts in thousands, except per share data)
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 December 31, 2016, we
owned or had an interest in 31.1 million rentable square feet of in-service properties, 1.1 million rentable square feet of office
properties under development and approximately 400 acres of development land.
The Company is the sole general partner of the Operating Partnership. At December 31, 2016, the Company owned all of
the Preferred Units and 101.3 million, or 97.3%, of the Common Units in the Operating Partnership. Limited partners owned the
remaining 2.8 million Common Units. In the event the Company issues shares of Common Stock, the net proceeds of the issuance
are contributed to the Operating Partnership in exchange for additional Common Units. Generally, the Operating Partnership is
obligated to redeem each Common Unit at the request of the holder thereof for cash equal to the value of one share of Common
Stock based on the average of the market price for the 10 trading days immediately preceding the notice date of such redemption,
provided that the Company, at its option, may elect to acquire any such Common Units presented for redemption for cash or one
share of Common Stock. The Common Units owned by the Company are not redeemable. During 2016, the Company redeemed
61,048 Common Units for a like number of shares of Common Stock. These redemptions, in conjunction with the proceeds from
issuances of Common Stock (see Note 12), increased the percentage of Common Units owned by the Company from 97.1% at
December 31, 2015 to 97.3% at December 31, 2016.
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 year ended December 31, 2014 were retrospectively
revised from previously reported amounts to reclassify 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. We consolidate joint venture investments, such as interests in partnerships
and limited liability companies, when we control the major operating and financial policies of the investment through majority
ownership, in our capacity as a general partner or managing member or through some other contractual right. At December 31,
2016, three properties owned through a joint venture investment were consolidated.
In addition, we consolidate those entities deemed to be variable interest entities in which we are determined to be the primary
beneficiary. During 2015, we acquired three buildings and a land parcel using special purpose entities owned by qualified
intermediaries to facilitate a potential Section 1031 reverse exchange under the Internal Revenue Code. We determined that these
entities were variable interest entities of which we were the primary beneficiary; therefore, we consolidated these entities as of
December 31, 2015. At such time, these variable interest entities had total assets, liabilities and cash flows of $421.3 million, $16.3
million, and $7.1 million, respectively. During 2016, we subsequently acquired such special purpose entities and therefore own
direct title to these buildings.
All intercompany transactions and accounts have been eliminated.
55
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
1. Description of Business and Significant Accounting Policies – Continued
During 2015, as a result of our partner’s irrevocable exercise of a buy-sell provision in our SF-HIW Harborview Plaza, LP
("Harborview") joint venture agreement, our partner’s right to put its 80.0% equity interest back to us became no longer exercisable.
As a result, we recorded the original contribution transaction as a partial sale. Our investment in this joint venture then qualified
for the equity method of accounting, which resulted in the retrospective revision of our Consolidated Balance Sheets and
Consolidated Statements of Equity and Capital for prior periods.
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 our Consolidated Financial Statements and accompanying notes. Actual results could differ
from those estimates.
Real Estate and Related Assets
Real estate and related assets are recorded at cost and stated at cost less accumulated depreciation. Renovations, replacements
and other expenditures that improve or extend the life of assets are capitalized and depreciated over their estimated useful lives.
Expenditures for ordinary maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-
line method over the estimated useful life of 40 years for buildings and depreciable land infrastructure costs, 15 years for building
improvements and five to seven years for furniture, fixtures and equipment. Tenant improvements are amortized using the straight-
line method over initial fixed terms of the respective leases, which generally are from three to 10 years. Depreciation expense for
real estate assets was $173.1 million, $168.7 million and $154.4 million for the years ended December 31, 2016, 2015 and 2014,
respectively.
Expenditures directly related to the development and construction of real estate assets are included in net real estate assets
and are stated at depreciated cost. Development expenditures include pre-construction costs essential to the development of
properties, development and construction costs, interest costs on qualifying assets, real estate taxes, development personnel salaries
and related costs and other costs incurred during the period of development. Interest and other carrying costs are capitalized until
the building is ready for its intended use, but not later than a year from cessation of major construction activity. We consider a
construction project as substantially completed and ready for its intended use upon the completion of tenant improvements. We
cease capitalization on the portion that is substantially completed and occupied or held available for occupancy, and capitalize
only those costs associated with the portion under construction.
Expenditures directly related to the leasing of properties are included in deferred leasing costs and are stated at amortized
cost. Such expenditures are part of the investment necessary to execute leases and, therefore, are classified as investment activities
in the statement of cash flows. All leasing commissions paid to third parties for new leases or lease renewals are capitalized. Internal
leasing costs, which consist primarily of compensation, benefits and other costs, such as legal fees related to leasing activities,
that are incurred in connection with successfully obtaining leases of properties are also capitalized. Capitalized leasing costs are
amortized on a straight-line basis over the initial fixed terms of the respective leases, which generally are from three to 10 years.
Estimated costs related to unsuccessful activities are expensed as incurred.
We record liabilities for the performance of asset retirement activities when the obligation to perform such activities is probable
even when uncertainty exists about the timing and/or method of settlement.
Upon the acquisition of real estate assets, we assess the fair value of acquired tangible assets such as land, buildings and tenant
improvements, intangible assets and liabilities such as above and below market leases, acquired in-place leases, customer
relationships and other identifiable intangible assets and assumed liabilities. We assess fair value based on estimated cash flow
projections that utilize discount and/or capitalization rates as well as available market information. The fair value of the tangible
assets of an acquired property considers the value of the property as if it were vacant.
56
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
1. Description of Business and Significant Accounting Policies – Continued
The above and below market rate portions of leases acquired in connection with property acquisitions are recorded in deferred
leasing costs and in accounts payable, accrued expenses and other liabilities, respectively, at fair value and amortized into rental
revenue over the remaining term of the respective leases as described below. Fair value is calculated as the present value of the
difference between (1) the contractual amounts to be paid pursuant to each in-place lease and (2) our estimate of fair market lease
rates for each corresponding in-place lease, using a discount rate that reflects the risks associated with the leases acquired and
measured over a period equal to the remaining initial term of the lease for above-market leases and the remaining initial term plus
the term of any renewal option that the customer would be economically compelled to exercise for below-market leases.
In-place leases acquired are recorded at fair value in deferred leasing costs and are amortized to depreciation and amortization
expense over the remaining term of the respective lease. The value of in-place leases is based on our evaluation of the specific
characteristics of each customer's lease. Factors considered include estimates of carrying costs during hypothetical expected lease-
up periods, current market conditions, the customer's credit quality and costs to execute similar leases. In estimating carrying costs,
we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected
lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, we consider tenant
improvements, leasing commissions and legal and other related expenses.
Real estate and other assets are classified as long-lived assets held for use or as long-lived assets held for sale. Real estate is
classified as held for sale when the sale of the asset is probable, has been duly approved by the Company, a legally enforceable
contract has been executed and the buyer's due diligence period, if any, has expired.
Impairments of Real Estate Assets and Investments in Unconsolidated Affiliates
With respect to assets classified as held for use, we perform an impairment analysis if events or changes in circumstances
indicate that the carrying value may be impaired, such as a significant decline in occupancy, identification of materially adverse
legal or environmental factors, change in our designation of an asset from core to non-core, which may impact the anticipated
holding period, or a decline in market value to an amount less than cost. This analysis is generally performed at the property level,
except when an asset is part of an interdependent group such as an office park, and consists of determining whether the asset's
carrying amount will be recovered from its undiscounted estimated future operating and residual cash flows. These cash flows are
estimated based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand
for space, competition for customers, changes in market rental rates, costs to operate each property and expected ownership periods.
For properties under development, the cash flows are based on expected service potential of the asset or asset group when
development is substantially complete.
If the carrying amount of a held for use asset exceeds the sum of its undiscounted future operating and residual cash flows,
an impairment loss is recorded for the difference between estimated fair value of the asset and the carrying amount. We generally
estimate the fair value of assets held for use by using discounted cash flow analyses. In some instances, appraisal information may
be available and is used in addition to a discounted cash flow analysis. As the factors used in generating these cash flows are
difficult to predict and are subject to future events that may alter our assumptions, the discounted and/or undiscounted future
operating and residual cash flows estimated by us in our impairment analyses or those established by appraisal may not be achieved
and we may be required to recognize future impairment losses on properties held for use.
We record assets held for sale at the lower of the carrying amount or estimated fair value. Fair value of assets held for sale is
equal to the estimated or contracted sales price with a potential buyer, less costs to sell. The impairment loss is the amount by
which the carrying amount exceeds the estimated fair value.
We also analyze our investments in unconsolidated affiliates for impairment. This analysis consists of determining whether
an expected loss in market value of an investment is other than temporary by evaluating the length of time and the extent to which
the market value has been less than cost, the financial condition and near-term prospects of the investment, and our intent and
ability to retain our investment for a period of time sufficient to allow for any anticipated recovery in market value. As the factors
used in this analysis are difficult to predict and are subject to future events that may alter our assumptions, we may be required to
recognize future impairment losses on our investments in unconsolidated affiliates.
57
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
1. Description of Business and Significant Accounting Policies – Continued
Sales of Real Estate
For sales transactions meeting the requirements for full profit recognition, the related assets and liabilities are removed from
the balance sheet and the resultant gain or loss is recorded in the period the transaction closes. For sales transactions with continuing
involvement after the sale, if the continuing involvement with the property is limited by the terms of the sales contract, profit is
recognized at the time of sale and is reduced by the maximum exposure to loss related to the nature of the continuing involvement.
Sales to entities in which we have or receive an interest are accounted for using partial sale accounting.
For transactions that do not meet the criteria for a sale, we evaluate the nature of the continuing involvement, including put
and call provisions, if present, and account for the transaction as a financing arrangement, profit-sharing arrangement, leasing
arrangement or other alternate method of accounting, rather than as a sale, based on the nature and extent of the continuing
involvement. Some transactions may have numerous forms of continuing involvement. In those cases, we determine which method
is most appropriate based on the substance of the transaction.
Rental and Other Revenues
Minimum contractual rents from leases are recognized on a straight-line basis over the terms of the respective leases. This
means that, with respect to a particular lease, actual amounts billed in accordance with the lease during any given period may be
higher or lower than the amount of rental revenue recognized for the period. Straight-line rental revenue is commenced when the
customer assumes control of the leased premises. Accrued straight-line rents receivable represents the amount by which straight-
line rental revenue exceeds rents currently billed in accordance with lease agreements. Contingent rental revenue, such as percentage
rent, is accrued when the contingency is removed. Termination fee income is recognized at the later of when the customer has
vacated the space or the lease has expired and a fully executed lease termination agreement has been delivered, the amount of the
fee is determinable and collectability of the fee is reasonably assured. Rental revenue reductions related to co-tenancy lease
provisions, if any, are accrued when events have occurred that trigger such provisions.
Cost recovery income is determined on a calendar year and a lease-by-lease basis. The most common types of cost recovery
income in our leases are common area maintenance (“CAM”) and real estate taxes, for which a customer typically pays its pro-
rata share of operating and administrative expenses and real estate taxes in excess of the costs incurred during a contractually
specified base year. The computation of cost recovery income is complex and involves numerous judgments, including the
interpretation of lease provisions. Leases are not uniform in dealing with such cost recovery income and there are many variations
in the computation. Many customers make monthly fixed payments of CAM, real estate taxes and other cost reimbursement items.
We accrue income related to these payments each month. We make quarterly accrual adjustments, positive or negative, to cost
recovery income to adjust the recorded amounts to our best estimate of the final annual amounts to be billed and collected. After
the end of the calendar year, we compute each customer's final cost recovery income and, after considering amounts paid by the
customer during the year, issue a bill or credit for the appropriate amount to the customer. The differences between the amounts
billed less previously received payments and the accrual adjustment are recorded as increases or decreases to cost recovery income
when the final bills are prepared, which occurs during the first half of the subsequent year.
Allowance for Doubtful Accounts
Accounts receivable, accrued straight-line rents receivable and mortgages and notes receivable are reduced by an allowance
for amounts that may become uncollectible in the future. We regularly evaluate the adequacy of our allowance for doubtful accounts.
The evaluation primarily consists of reviewing past due account balances and considering such factors as the credit quality of our
customer, historical trends of the customer and changes in customer payment terms. Additionally, with respect to customers in
bankruptcy, we estimate the probable recovery through bankruptcy claims and adjust the allowance for amounts deemed
uncollectible. If our assumptions regarding the collectability of receivables prove incorrect, we could experience losses in excess
of our allowance for doubtful accounts. The allowance and its related receivable are written-off when we have concluded there is
a low probability of collection and we have discontinued collection efforts.
58
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
1. Description of Business and Significant Accounting Policies – Continued
Discontinued Operations
Properties that are sold or classified as held for sale are classified as discontinued operations provided that the disposal
represents a strategic shift that has (or will have) a major effect on our operations and financial results. Interest expense is included
in discontinued operations if a related loan securing the sold property is to be paid off or assumed by the buyer in connection with
the sale.
Lease Incentives
Lease incentive costs, which are payments made to or on behalf of a customer as an incentive to sign a lease, are capitalized
in deferred leasing costs and amortized on a straight-line basis over the respective lease terms as a reduction of rental revenues.
Investments in Unconsolidated Affiliates
We account for our joint venture investments using the equity method of accounting when our interests represent a general
partnership interest but substantive participating rights or substantive kick out rights have been granted to the limited partners or
when our interests do not represent a general partnership interest and we do not control the major operating and financial policies
of the investment. These investments are initially recorded at cost as investments in unconsolidated affiliates and are subsequently
adjusted for our share of earnings and cash contributions and distributions. To the extent our cost basis at formation of the joint
venture is different than the basis reflected at the joint venture level, the basis difference is amortized over the life of the related
assets and included in our share of equity in earnings of unconsolidated affiliates.
Cash Equivalents
We consider highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Restricted Cash
Restricted cash represents cash deposits that are legally restricted or held by third parties on our behalf, such as construction-
related escrows, property disposition proceeds set aside and designated or intended to fund future tax-deferred exchanges of
qualifying real estate investments, escrows and reserves for debt service, real estate taxes and property insurance established
pursuant to certain mortgage financing arrangements and any deposits made with lenders to unencumber secured properties.
Income Taxes
The Company has elected and expects to continue to qualify as a REIT under Sections 856 through 860 of the Internal Revenue
Code of 1986, as amended (the “Code”). A corporate REIT is a legal entity that holds real estate assets and, through the payment
of dividends to stockholders, is generally permitted to reduce or avoid the payment of federal and state income taxes at the corporate
level. To maintain qualification as a REIT, the Company is required to pay dividends to its stockholders equal to at least 90.0% of
its annual REIT taxable income, excluding net capital gains. The partnership agreement requires the Operating Partnership to pay
economically equivalent distributions on outstanding Common Units at the same time that the Company pays dividends on its
outstanding Common Stock.
59
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
1. Description of Business and Significant Accounting Policies – Continued
We conduct certain business activities through a taxable REIT subsidiary, as permitted under the Code. The taxable REIT
subsidiary is subject to federal, state and local income taxes on its taxable income. We record provisions for income taxes based
on its income recognized for financial statement purposes, including the effects of temporary differences between such income
and the amount recognized for tax purposes.
Concentration of Credit Risk
At December 31, 2016, properties that we wholly own were leased to 1,741 customers. The geographic locations that comprise
greater than 10.0% of our rental and other revenues are Raleigh, Atlanta, Tampa and Nashville. Our customers engage in a wide
variety of businesses. No single customer generated more than 6% of our consolidated revenues during 2016.
We maintain our cash and cash equivalents and our restricted cash at financial or other intermediary institutions. The combined
account balances at each institution may exceed FDIC insurance coverage and, as a result, there is a concentration of credit risk
related to amounts on deposit in excess of FDIC insurance coverage. Additionally, from time to time in connection with tax-
deferred 1031 transactions, our restricted cash balances may be commingled with other funds being held by any such intermediary
institution, which would subject our balance to the credit risk of the institution.
Derivative Financial Instruments
We borrow funds at a combination of fixed and variable rates. Borrowings under our revolving credit facility and bank term
loans bear interest at variable rates. Our long-term debt typically bears interest at fixed rates. Our interest rate risk management
objectives are to limit generally the impact of interest rate changes on earnings and cash flows and lower our overall borrowing
costs. To achieve these objectives, from time to time, we enter into interest rate hedge contracts such as collars, swaps, caps and
treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We generally do not
hold or issue these derivative contracts for trading or speculative purposes. The interest rate on all of our variable rate debt is
generally adjusted at one or three month intervals, subject to settlements under these interest rate hedge contracts.
Interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for making fixed-rate payments
over the life of the agreements without exchange of the underlying notional amount. The effective portion of changes in the fair
value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income/
(loss) and is subsequently reclassified into interest expense in the period that the hedged forecasted transaction affects earnings.
We account for terminated derivative instruments by recognizing the related accumulated comprehensive income/(loss) balance
in current earnings, unless the hedged forecasted transaction continues as originally planned, in which case we continue to amortize
the accumulated comprehensive income/(loss) into earnings over the originally designated hedge period.
Earnings Per Share
Basic earnings per share of the Company is computed by dividing net income available for common stockholders by the
weighted Common Shares outstanding - basic. Diluted earnings per share is computed by dividing net income available to common
stockholders plus noncontrolling interests in the Operating Partnership by the weighted Common Shares outstanding - basic plus
the dilutive effect of options, warrants and convertible securities outstanding, including Common Units, using the treasury stock
method. Weighted Common Shares outstanding - basic includes all unvested restricted stock where dividends received on such
restricted stock are non-forfeitable.
60
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
1. Description of Business and Significant Accounting Policies – Continued
Recently Issued Accounting Standards
The Financial Accounting Standards Board (“FASB”) recently issued an accounting standards update (“ASU”) that amended
consolidation requirements. The amendments significantly change the consolidation analysis required under GAAP and require
companies to reevaluate all previous consolidation conclusions. We adopted the ASU as of January 1, 2016 and there was no
impact to consolidated entities included in our Consolidated Financial Statements.
The FASB recently issued an ASU that requires debt issuance costs to be presented in the balance sheet as a direct deduction
from the carrying amount of the debt liability to which they relate, consistent with debt discounts, as opposed to being presented
as assets. For debt issuance costs related to revolving credit facilities, the FASB allows the presentation of debt issuance costs as
an asset. We adopted the ASU as of January 1, 2016 with retrospective application to our December 31, 2015 Consolidated Balance
Sheets. The effect of the adoption was to reclassify debt issuance costs from deferred financing and leasing costs, net of accumulated
amortization, as follows: $7.8 million to a contra account as a deduction from the related mortgages and notes payable; and $2.1
million to prepaid expenses and other assets. There was no effect on our Consolidated Statements of Income or Consolidated
Statements of Cash Flows.
The FASB recently issued an ASU that requires the use of a new five-step model to recognize revenue from customer contracts.
The five-step model requires that we identify the contract with the customer, identify the performance obligations in the contract,
determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue
when we satisfy the performance obligations. We will also be required to disclose information regarding the nature, amount, timing
and uncertainty of revenue and cash flows arising from contracts with customers. The ASU is required to be adopted in 2018.
Retrospective application is required either to all periods presented or with the cumulative effect of initial adoption recognized in
the period of adoption. Our initial analysis of our non-lease related revenue contracts indicates that the adoption of this ASU will
not have a material effect on our Consolidated Financial Statements; however, we are still in the process of evaluating this ASU.
The FASB recently issued an ASU that adds to and clarifies guidance on the classification of certain cash receipts and payments
in the statement of cash flows. The ASU is required to be adopted in 2018 with retrospective application required. We do not expect
such adoption to have a material effect on our Consolidated Statements of Cash Flows.
The FASB recently issued an ASU which sets out the principles for the recognition, measurement, presentation and disclosure
of leases for both lessees and lessors. The ASU requires lessors to account for leases using an approach that is substantially
equivalent to the existing guidance and is effective for reporting periods beginning in 2019 with early adoption permitted. We are
in the process of evaluating this ASU.
The FASB recently issued an ASU that requires, among other things, the use of a new current expected credit loss ("CECL")
model in determining our allowances for doubtful accounts with respect to accounts receivable, accrued straight-line rents receivable
and mortgages and notes receivable. The CECL model requires that we estimate our lifetime expected credit loss with respect to
these receivables and record allowances that, when deducted from the balance of the receivables, represent the net amounts expected
to be collected. We will also be required to disclose information about how we developed the allowances, including changes in
the factors (e.g., portfolio mix, credit trends, unemployment, gross domestic product, etc.) that influenced our estimate of expected
credit losses and the reasons for those changes. We will apply the ASU’s provisions as a cumulative-effect adjustment to retained
earnings upon adoption in 2020. We are in the process of evaluating this ASU.
The FASB recently issued an ASU that requires management of all entities to evaluate whether there are conditions and events
that raise substantial doubt about the entity's ability to continue as a going concern within one year after the financial statements
are issued. We adopted the ASU as of December 31, 2016. We added additional disclosures in Note 6 as a result of the adoption
of this ASU.
61
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
2. Real Estate Assets
Acquisitions
During 2016, we acquired a building in Raleigh, which encompasses 243,000 rentable square feet, for a net purchase price
of $76.9 million. We expensed $0.3 million of acquisition costs (included in general and administrative expenses) related to this
acquisition. The assets acquired and liabilities assumed were recorded at fair value as determined by management, with the assistance
of third party specialists, based on information available at the acquisition date and on current assumptions as to future operations.
During 2016, we also acquired:
•
•
•
fee simple title to the land underneath one of our buildings in Pittsburgh that was previously subject to a ground lease for
a purchase price of $18.5 million. We expensed $0.5 million of acquisition costs (included in general and administrative
expenses) related to this acquisition;
an acre of development land in Raleigh for a purchase price, including capitalized acquisition costs, of $5.8 million; and
14 acres of development land in Nashville for a purchase price, including capitalized acquisition costs, of $9.1 million.
During 2015, we acquired:
•
•
•
•
a building in Tampa encompassing 528,000 rentable square feet for a net purchase price of $113.5 million and an adjacent
land parcel for a purchase price of $2.2 million;
two buildings in Atlanta encompassing 896,000 rentable square feet for a net purchase price of $290.3 million;
land in Atlanta for a purchase price and related transaction costs of $5.2 million (including contingent consideration of
$0.9 million); and
our Highwoods DLF 98/29, LLC joint venture partner’s 77.2% interest in a building in Orlando encompassing 168,000
rentable square feet in exchange for the assumption of secured debt recorded at fair value of $19.3 million (see Note 6).
We expensed $1.0 million of acquisition costs (included in general and administrative expenses) in 2015 related to these
acquisitions. The assets acquired and liabilities assumed were recorded at fair value as determined by management, with the
assistance of third party specialists, based on information available at the acquisition date and on current assumptions as to future
operations.
The following table sets forth a summary of the fair value of the major assets acquired and liabilities assumed relating to the
above-referenced acquisition of two buildings in Atlanta during 2015:
Real estate assets
Acquisition-related intangible assets (in deferred leasing costs)
Acquisition-related below market lease liabilities (in accounts payable, accrued expenses and other liabilities)
Total allocation
Total
Purchase Price
Allocation
$
$
275,639
23,722
(9,076)
290,285
62
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
2. Real Estate Assets - Continued
The following table sets forth the Company's revenues and net income, adjusted for interest expense, straight-line rental
income, depreciation and amortization related to purchase price allocations and acquisition costs, assuming the above-referenced
acquisition of two buildings in Atlanta during 2015 had been completed as of January 1, 2014:
Pro forma revenues
Pro forma net income
Pro forma net income available for common stockholders
Pro forma earnings per share - basic
Pro forma earnings per share - diluted
Year Ended
December 31,
2015
(unaudited)
$
$
$
$
$
626,067
103,485
96,797
1.03
1.02
The above-referenced acquisition of two buildings in Atlanta during 2015 resulted in revenues of $7.3 million and net loss of
$1.2 million recorded in the Consolidated Statements of Income for the year ended December 31, 2015.
During 2014, we acquired:
•
•
•
a building in Orlando encompassing 246,000 rentable square feet for a purchase price of $67.4 million;
our partner's 50.0% interest in a building owned by our consolidated Highwoods-Markel Associates, LLC joint venture
in Richmond encompassing 66,000 rentable square feet for a purchase price of $4.2 million, which is recorded as acquisition
of noncontrolling interest in consolidated affiliate;
land in Nashville for a purchase price and related transaction costs of $15.8 million (including contingent consideration
of $3.3 million); and
•
a building in Raleigh encompassing 374,000 rentable square feet for a purchase price of $83.8 million.
We expensed $0.5 million of acquisition costs (included in general and administrative expenses) in 2014 related to these
acquisitions. The assets acquired and liabilities assumed were recorded at fair value as determined by management, with the
assistance of third party specialists, based on information available at the acquisition date and on current assumptions as to future
operations.
Dispositions
During 2016, we sold:
•
•
substantially all of our wholly-owned Country Club Plaza assets in Kansas City (which we refer to as the “Plaza assets”)
for a sale price of $660.0 million (before closing credits to buyer of $4.8 million). We recorded gains on disposition of
discontinued operations of $414.5 million and a gain on disposition of property of $1.3 million related to the land; and
a 32,000 square foot building for a sale price of $4.7 million (before closing credits to buyer of $0.1 million) and recorded
a gain on disposition of property of $1.1 million. The buyer, which leased 79% of the building, is a family business
controlled by a director of the Company. The sale price exceeded the value set forth in an appraisal performed by a
reputable independent commercial real estate services firm that has no relationship with the director or any of his affiliates.
During 2016, we also sold two buildings and various land parcels for an aggregate sale price of $31.1 million (before closing
credits to buyer of $0.5 million) and recorded aggregate gains on disposition of property of $12.4 million. We deferred $0.4 million
of gain related to a land sale for a portion of the sale price that was escrowed for contingent future infrastructure work.
63
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
2. Real Estate Assets - Continued
During 2015, we sold a total of three buildings and various land parcels for an aggregate sale price of $27.8 million and
recorded aggregate gains on disposition of property of $9.2 million, net of $0.5 million in taxes payable by our taxable REIT
subsidiary.
During 2014, we sold a total of 33 buildings and various land parcels for an aggregate sale price of $187.3 million (before
closing credits to buyer of $8.6 million for unfunded building and tenant improvements and $2.9 million for free rent) and recorded
aggregate gains on disposition of property of $44.4 million.
Impairments
During 2014, we recorded an impairment of real estate assets of $0.6 million on a building in Greensboro. This impairment
was due to a change in the assumed timing of future disposition and leasing assumptions, which reduced the future expected cash
flows from the impaired property.
3. Mortgages and Notes Receivable
Mortgages and notes receivable were $8.8 million and $2.1 million at December 31, 2016 and 2015, respectively.
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
2014, the $16.5 million of seller financing was fully repaid and the resultant $0.4 million gain on disposition of property was
recorded.
During 2012, we provided $8.6 million of 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. During 2015, $9.9 million of the secured acquisition
financing was repaid, including accrued interest. Previously, we concluded this arrangement to be an interest in a variable interest
entity. However, since we did not have the power to direct matters that most significantly impact the activities of the entity, we
did not qualify as the primary beneficiary. Accordingly, the entity was not consolidated. Our risk of loss with respect to this
arrangement was limited to the carrying value of the mortgage receivable.
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 December 31, 2016, our mortgages and notes receivable were not in default and there were no
other indicators of impairment.
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 the operating and financial policies
of the joint venture investment.
The following table sets forth our ownership in unconsolidated affiliates at December 31, 2016:
Joint Venture
Plaza Colonnade, Tenant-in-Common
Location
Kansas City
Highwoods DLF 97/26 DLF 99/32, LP
Orlando
Kessinger/Hunter & Company, LC
Kansas City
Highwoods DLF Forum, LLC
Highwoods DLF 98/29, LLC
Raleigh
Orlando
64
Ownership
Interest
50.0%
42.9%
26.5%
25.0%
22.8%
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
4.
Investments in and Advances to Affiliates – Continued
The following table sets forth the summarized balance sheets of our unconsolidated affiliates:
Balance Sheets:
Assets:
Real estate assets, net
All other assets, net
Total Assets
Liabilities and Partners’ or Stockholders’ Equity:
Mortgages and notes payable, net
All other liabilities
Partners’ or stockholders’ equity
Total Liabilities and Partners’ or Stockholders’ Equity
Our share of historical partners’ or stockholders’ equity
Advances to unconsolidated affiliates
Difference between cost of investments and the net book value of underlying net assets
Carrying value of investments in and advances to unconsolidated affiliates
December 31,
2016
2015
$
$
$
$
$
$
141,105
$
163,852
58,467
53,511
199,572
$
217,363
122,560
$
141,580
9,512
67,500
199,572
20,032
$
$
—
(1,186)
6,547
69,236
217,363
21,022
448
(794)
18,846
$
20,676
The following table sets forth the summarized income statements of our unconsolidated affiliates:
Income Statements:
Rental and other revenues
Expenses:
Rental property and other expenses
Depreciation and amortization
Interest expense
Total expenses
Income before disposition of property
Gains on disposition of property
Net income
Year Ended December 31,
2016
2015
2014
$
42,344
$
48,118
$
50,514
17,808
10,348
5,191
33,347
8,997
22,247
22,721
12,257
7,196
42,174
5,944
18,181
$
31,244
$
24,125
$
25,159
13,310
8,847
47,316
3,198
2,998
6,196
The following summarizes additional information related to certain of our unconsolidated affiliates:
- Concourse Center Associates, LLC ("Concourse")
During 2016, Concourse (a joint venture in which we owned a 50.0% interest) sold two buildings and land to an unrelated
third party for an aggregate sale price of $11.0 million and recorded losses on disposition of property of $0.1 million. As our cost
basis was different from the basis reflected at the joint venture level, we recorded $0.4 million of gains through equity in earnings
of unconsolidated affiliates. Simultaneously with the sale, the joint venture repaid all $6.6 million of its debt.
65
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
4.
Investments in and Advances to Affiliates – Continued
- Highwoods DLF 97/26 DLF 99/32, LP (“DLF II”)
During 2015, DLF II sold a building to an unrelated third party for a sale price of $7.0 million and recorded a gain on disposition
of property of $2.1 million. We recorded $1.1 million as our share of this gain through equity in earnings of unconsolidated affiliates.
- Kessinger/Hunter & Company, LC ("Kessinger/Hunter")
Kessinger/Hunter, which is managed by our joint venture partner, provides leasing services, among other things, to certain
buildings that we currently own and/or previously owned in Kansas City in exchange for customary fees from us. Kessinger/Hunter
received $0.4 million, $0.3 million and $0.6 million from us for these services in 2016, 2015 and 2014, respectively.
- Highwoods DLF 98/29, LLC (“DLF I”)
See Note 2 for a description of our acquisition of a building in Orlando from DLF I during 2015. The joint venture recorded
a gain on disposition of property of $13.7 million. Our share of $3.1 million was recorded as a reduction to real estate assets.
During 2014, DLF I sold a building to an unrelated third party for a sale price of $13.7 million (before $0.4 million in closing
credits to buyer for free rent) and recorded a gain on disposition of property of $1.0 million. We recorded $0.2 million as our share
of this gain through equity in earnings of unconsolidated affiliates.
- 4600 Madison Associates, LP ("4600 Madison")
During 2016, 4600 Madison (a joint venture in which we owned a 12.5% interest) sold a building and land in separate
transactions to unrelated third parties for an aggregate sale price of $36.1 million and recorded gains on disposition of property of
$22.3 million. As our cost basis was different from the basis reflected at the joint venture level, we recorded $1.9 million of gains
through equity in earnings of unconsolidated affiliates. Simultaneously with the sales, the joint venture repaid all $9.7 million of
its debt.
- Board of Trade Investment Company ("Board of Trade")
During 2014, Board of Trade (a joint venture in which we owned a 49.0% interest) sold a building to an unrelated third party
for gross proceeds of $8.3 million and recorded a gain of $1.9 million. As our cost basis was 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. Our interest in Board of Trade was redeemed in
exchange for $4.7 million in cash.
- Highwoods KC Glenridge Office, LLC ("KC Glenridge Office") and Highwoods KC Glenridge Land, LLC ("KC
Glenridge Land")
During 2015, KC Glenridge Office (a joint venture in which we owned a 40.0% interest) and KC Glenridge Land (a joint
venture in which we owned a 39.9% interest) collectively sold two buildings and land to an unrelated third party for an aggregate
sale price of $24.5 million (before closing credits to buyer of $0.3 million for unfunded tenant improvements) and recorded gains
on disposition of property of $2.4 million. We recorded $0.9 million as our share of these gains through equity in earnings of
unconsolidated affiliates.
During 2014, KC Glenridge Office paid at maturity the remaining $14.9 million balance on a secured mortgage loan with an
effective interest rate of 4.84%.
66
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
4.
Investments in and Advances to Affiliates – Continued
- Other Activities
We receive development, management and leasing fees for services provided to certain of our joint ventures. These fees are
recognized in income to the extent of our respective joint venture partner's interest. During the years ended December 31, 2016,
2015 and 2014, we recognized $0.8 million, $1.4 million and $1.2 million, respectively, of development/construction, management
and leasing fees from our unconsolidated joint ventures. At both December 31, 2016 and 2015, we had receivables of $0.1 million
related to these fees in accounts receivable.
Consolidated Affiliates
The following summarizes our consolidated affiliates:
- Highwoods-Markel Associates, LLC (“Markel”)
We have a 50.0% ownership interest in Markel. We are the manager and leasing agent for Markel's properties, which are
located in Richmond in exchange for customary management and leasing fees. We consolidate Markel since we are the managing
member and control the major operating and financial policies of the entity. As controlling member, we have an obligation to cause
this property-owning entity to distribute proceeds of liquidation to the noncontrolling interest member in these partially owned
properties only if the net proceeds received by the entity from the sale of any of Markel's assets warrant a distribution as determined
by the agreement governing the joint venture. We estimate the value of such noncontrolling interest distributions would have been
$24.8 million had the entity been liquidated at December 31, 2016. This estimated settlement value is based on the fair value of
the underlying properties which is based on a number of assumptions that are subject to economic and market uncertainties
including, among others, demand for space, competition for customers, changes in market rental rates and costs to operate each
property. If the entity's underlying assets are worth less than the underlying liabilities on the date of such liquidation, we would
have no obligation to remit any consideration to the noncontrolling interest holder.
See Note 2 for a description of our acquisition of the noncontrolling member's 50.0% interest in a building owned by Markel
during 2014.
- Harborview
We had a 20.0% interest in Harborview, which had been accounted for as a financing obligation since our partner had the right
to put its 80.0% equity interest back to us any time prior to September 11, 2015. During 2012, we also provided a three-year $20.8
million interest-only secured loan to Harborview that was scheduled to mature in September 2015.
During the second quarter of 2015, as a result of our partner’s irrevocable exercise of a buy-sell provision in our Harborview
joint venture agreement, our partner’s right to put its 80.0% equity interest back to us became no longer exercisable, which resulted
in recording the original contribution transaction as a partial sale. As a result, we were required to begin accounting for Harborview
using the equity method of accounting. See Note 1.
During the third quarter of 2015, we sold our 20.0% interest in Harborview to our partner for net proceeds of $6.9 million
and recorded a $4.2 million gain on disposition of investment in unconsolidated affiliate. The $20.8 million interest-only secured
loan previously provided by us to Harborview was paid in full upon consummation of the sale.
67
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
5.
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:
Assets:
Deferred leasing costs (including lease incentives and above market lease and in-place lease acquisition-
related intangible assets)
Less accumulated amortization
Liabilities (in accounts payable, accrued expenses and other liabilities):
Acquisition-related below market lease liabilities
Less accumulated amortization
December 31,
2016
2015
$
$
$
$
353,581
(140,081)
213,500
61,221
(23,074)
38,147
$
$
$
$
346,937
(115,172)
231,765
63,830
(17,927)
45,903
The following table sets forth amortization of intangible assets and below market lease liabilities:
Year Ended December 31,
2016
2015
2014
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)
$
$
$
$
$
44,968
1,779
3,851
557
$
$
$
$
43,332
1,493
5,062
557
$
$
$
$
38,144
1,419
4,549
557
(8,183) $
(7,065) $
(6,129)
The following table sets forth scheduled future amortization of intangible assets and below market lease liabilities:
Years Ending December 31,
2017
2018
2019
2020
2021
Thereafter
Weighted average remaining amortization periods as of
December 31, 2016 (in years)
Amortization
of Deferred
Leasing Costs
and
Acquisition-
Related
Intangible
Assets (in
Depreciation
and
Amortization)
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)
Amortization
of Lease
Incentives (in
Rental and
Other
Revenues)
$
42,508
$
1,478
$
2,626
$
34,925
29,332
24,727
20,510
42,030
1,374
1,160
882
678
2,396
1,713
1,322
1,002
681
1,972
$
553
553
553
525
—
—
$
194,032
$
7,968
$
9,316
$
2,184
$
(6,231)
(5,966)
(5,495)
(5,183)
(4,411)
(10,861)
(38,147)
7.8
6.4
4.0
7.3
6.6
68
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
5.
Intangible Assets and Below Market Lease Liabilities - Continued
The following table sets forth the intangible assets acquired and below market lease liabilities assumed as a result of 2016
acquisition activity:
Amount recorded at acquisition
Weighted average remaining amortization periods as of December 31, 2016 (in years)
6. Mortgages and Notes Payable
Our mortgages and notes payable consist of the following:
Secured indebtedness: (1)
7.50% mortgage loan due 2016 (2)
5.10% (4.22% effective rate) mortgage loan due 2017 (3)
6.11% (5.36% effective rate) mortgage loan due 2017 (4)
Unsecured indebtedness:
5.85% (5.88% effective rate) notes due 2017 (5)
7.50% notes due 2018
3.20% (3.363% effective rate) notes due 2021 (6)
3.625% (3.752% effective rate) notes due 2023 (7)
Variable rate term loan due 2019 (8)
Variable rate term loan due 2020 (9)
Variable rate term loan due 2022 (10)
Bridge credit facility due 2016 (2)
Revolving credit facility due 2018 (11)
Less-unamortized debt issuance costs
Total mortgages and notes payable, net
__________
Acquisition-
Related
Intangible
Assets
(amortized in
Rental and
Other
Revenues)
Acquisition-
Related
Intangible
Assets
(amortized in
Depreciation
and
Amortization)
Acquisition-
Related
Below
Market
Lease
Liabilities
(amortized in
Rental and
Other
Revenues)
$
122
9.5
$
5,008
$
9.9
(428)
10.9
December 31,
2016
2015
$
— $
109,138
19,066
128,204
379,661
200,000
298,072
248,412
200,000
350,000
150,000
—
—
43,852
112,230
19,199
175,281
379,544
200,000
297,639
248,150
200,000
350,000
—
350,000
299,000
1,826,145
2,324,333
(6,302)
(7,801)
$
1,948,047
$
2,491,813
(1) Our secured mortgage loans were collateralized by real estate assets with an aggregate undepreciated book value of $251.9 million at
December 31, 2016. Our fixed rate mortgage loans generally are either locked out to prepayment for all or a portion of their term or are
prepayable subject to certain conditions including prepayment penalties.
(2) This debt was repaid in 2016.
(3) Net of unamortized fair market value premium of $0.8 million and $1.7 million as of December 31, 2016 and 2015, respectively.
(4) Net of unamortized fair market value premium of $0.1 million and $0.2 million as of December 31, 2016 and 2015, respectively.
(5) Net of unamortized original issuance discount of less than $0.1 million and $0.1 million as of December 31, 2016 and 2015, respectively.
(6) Net of unamortized original issuance discount of $1.9 million and $2.4 million as of December 31, 2016 and 2015, respectively.
69
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
6. Mortgages and Notes Payable - Continued
(7) Net of unamortized original issuance discount of $1.6 million and $1.9 million as of December 31, 2016 and 2015, respectively.
(8) The interest rate was 1.82% at December 31, 2016.
(9) As more fully described in Note 7, we entered into floating-to-fixed interest rate swaps that effectively fix LIBOR for the original $225.0
million portion of this loan. Accordingly, the equivalent fixed rate of this amount is 2.78%. The interest rate on the remaining $125.0 million
was 1.77% at December 31, 2016.
(10) The interest rate was 1.72% at December 31, 2016.
(11) There were no amounts outstanding on the revolving credit facility at December 31, 2016.
The following table sets forth scheduled future principal payments, including amortization, due on our mortgages and notes
payable at December 31, 2016:
Years Ending December 31,
2017
2018
2019
2020
2021
Thereafter
Less-unamortized debt issuance costs
$
Principal
Amount
507,170
199,305
199,305
349,305
299,538
399,726
(6,302)
$
1,948,047
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 were no amounts outstanding
under our revolving credit facility at December 31, 2016 and $48.8 million outstanding at January 27, 2017. At both December 31,
2016 and January 27, 2017, we had $0.2 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 December 31, 2016 and January 27, 2017 was
$474.8 million and $426.0 million, respectively.
During 2016, we prepaid without penalty the remaining $43.6 million balance on a secured mortgage loan with an effective
interest rate of 7.5% that was originally scheduled to mature in August 2016. Real estate assets having a gross book value of
approximately $73 million became unencumbered in connection with the payoff of this secured loan. We also paid down $2.4
million of secured loan balances through principal amortization during 2016.
During 2016, we borrowed an aggregate of $150.0 million under an unsecured bank term loan that is originally scheduled to
mature in January 2022. The interest rate on the term loan at our current credit ratings is LIBOR plus 110 basis points.
During 2015, we prepaid without penalty a secured mortgage loan with a fair market value of $5.9 million with an effective
interest rate of 7.65% that was originally scheduled to mature in February 2016, the remaining $106.0 million balance on a secured
mortgage loan with an effective interest rate of 6.88% that was originally scheduled to mature in January 2016 and the remaining
$39.4 million balance on a secured mortgage loan with an effective interest rate of 6.43% that was originally scheduled to mature
in November 2015. We recorded aggregate losses on debt extinguishment of $0.2 million related to these prepayments.
During 2015, we obtained a $350.0 million, six-month unsecured bridge facility. The interest rate on the bridge facility at our
current credit ratings was LIBOR plus 110 basis points. There was $350.0 million outstanding under our bridge facility at
December 31, 2015. During 2016, we prepaid without penalty the full balance on this unsecured bridge facility.
70
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
6. Mortgages and Notes Payable - Continued
During 2015, we amended our $225.0 million, seven-year unsecured bank term loan, which was scheduled to mature in January
2019. We increased the borrowed amount to $350.0 million. The amended term loan is now scheduled to mature in June 2020 and
the interest rate, based on our current credit ratings, was reduced from LIBOR plus 175 basis points to LIBOR plus 110 basis
points. We incurred $1.3 million of debt issuance costs in connection with this amendment, which will be amortized along with
existing unamortized debt issuance costs over the remaining term of the new loan.
During 2015, we acquired our joint venture partner’s 77.2% interest in a building in Orlando. Simultaneously with this
acquisition, the joint venture's previously existing mortgage note was restructured into a new $18.0 million first mortgage note
and a $10.2 million subordinated note, both of which are scheduled to mature in July 2017. Assuming no defaults have occurred,
we have an option to extend the maturity for an additional year. The first mortgage note is interest only with an effective interest
rate of 5.36%, payable monthly. The subordinated note has an effective interest rate of 8.6%. Additionally, we deposited $3.0
million into escrow to fund tenant improvements, leasing commissions and building improvements. The first mortgage note and
subordinated note can now be prepaid at any time upon a sale or refinancing of the property. In such event, the subordinated note
and any and all accrued interest thereon would be deemed fully satisfied upon payment of a "waterfall payment," if any. Such
"waterfall payment" would be a cash payment equal to 50.0% of the amount, if any, by which the net sale proceeds or appraised
value in the event of a refinancing exceeds (1) the outstanding principal of the first mortgage note, (2) the funds deposited by us
into escrow to fund tenant improvements, leasing commissions and building improvements and (3) a 10.0% return on such funds
deposited by us into escrow. As of the date of such restructuring, the fair value of the first mortgage note was $18.3 million and
the fair value of the subordinated note equaled the projected waterfall payment of $1.0 million.
During 2014, the Operating Partnership issued $300 million aggregate principal amount of 3.20% Notes due June 15, 2021,
less original issue discount of $3.1 million. These notes were priced at 98.983% for an effective yield of 3.363%. Underwriting
fees and other expenses were incurred that aggregated $2.4 million; these costs were deferred and will be amortized over the term
of the notes.
During 2014, we prepaid the remaining $36.9 million balance on a secured mortgage loan with an effective interest rate of
3.34% that was originally scheduled to mature in April 2015. We recorded $0.3 million of loss on debt extinguishment related to
this prepayment. We also prepaid without penalty the remaining $123.7 million balance on a secured mortgage loan with an
effective interest rate of 3.11% that was originally scheduled to mature in July 2014 and the remaining $7.2 million balance on a
secured mortgage loan with an effective interest rate of 3.32% that was originally scheduled to mature in August 2014. We recorded
less than $0.1 million of gain on debt extinguishment related to this last prepayment.
We are currently in compliance with financial covenants and other requirements with respect to our consolidated debt.
Our revolving credit facility and bank term loans require us to comply with customary operating covenants and various
financial requirements. Upon an event of default on the revolving credit facility, the lenders having at least 51.0% of the total
commitments under the revolving credit facility can accelerate all borrowings then outstanding, and we could be prohibited from
borrowing any further amounts under our revolving credit facility, which would adversely affect our ability to fund our operations.
In addition, certain of our unsecured debt agreements contain cross-default provisions giving the unsecured lenders the right to
declare a default if we are in default under more than $25.0 million with respect to other loans in some circumstances.
The Operating Partnership has $379.7 million carrying amount of 2017 notes outstanding, $200.0 million carrying amount
of 2018 notes outstanding, $298.1 million carrying amount of 2021 notes outstanding and $248.4 million carrying amount of 2023
notes outstanding. The indenture that governs these outstanding notes requires us to comply with customary operating covenants
and various financial ratios. The trustee or the holders of at least 25.0% in principal amount of any series of notes can accelerate
the principal amount of such series upon written notice of a default that remains uncured after 60 days.
71
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
6. Mortgages and Notes Payable - Continued
We have considered our short-term (one year or less) liquidity needs and the adequacy of our estimated cash flows from
operating activities and other expected financing sources to meet these needs. In particular, we have considered our scheduled
debt maturities in 2017, including $379.7 million principal amount of unsecured notes due March 15, 2017 and the $109.1 million
secured loan due November 1, 2017. We expect to meet these short-term liquidity requirements, including the repayment of such
unsecured notes and secured loan, through a combination of the following:
•
•
•
•
•
•
•
•
•
available cash and cash equivalents;
cash flows from operating activities;
issuance of debt securities by the Operating Partnership (some of which debt securities may be hedged to a fixed interest
rate pursuant to the forward-starting swaps discussed below);
issuance of secured debt (including the anticipated $100.0 million fixed-rate loan discussed below);
bank term loans (including the anticipated $50.0 million expansion of an existing term loan);
borrowings under our revolving credit facility;
issuance of other secured debt;
issuance of equity securities by the Company or the Operating Partnership; and
the disposition of non-core assets.
To limit the risks associated with interest rate changes, during 2016, we obtained $150.0 million notional amount of forward-
starting swaps that expire on March 15, 2017 and effectively lock the underlying 10-year treasury rate at 1.90% with respect to a
planned issuance of debt securities by the Operating Partnership.
We expect to obtain an approximate $100.0 million fixed-rate secured loan with a term of at least 10 years. This planned
secured loan is expected to close no later than May 1, 2017, which is the date on which we can prepay without penalty the $109.1
million secured loan that is scheduled to mature on November 1, 2017. The new secured loan is subject to formal lender commitment,
definitive documentation and customary conditions.
We expect to borrow an additional $50.0 million under the unsecured bank term loan we obtained in 2016 that is scheduled
to mature in January 2022. This planned expansion of the term loan, which will bear interest at LIBOR plus 110 basis points based
on our current credit ratings, is expected to close no later than March 31, 2017. The term loan expansion is subject to definitive
documentation and customary conditions.
Capitalized Interest
Total interest capitalized to development and significant building and tenant improvement projects was $8.2 million, $6.9
million and $5.3 million for the years ended December 31, 2016, 2015 and 2014, respectively.
7. Derivative Financial Instruments
During 2016, we obtained $150.0 million notional amount of forward-starting swaps that effectively lock the underlying 10-
year treasury rate at 1.90% with respect to a forecasted debt issuance expected to occur prior to March 15, 2017.
We also have six floating-to-fixed interest rate swaps through January 2019 each with respect to an aggregate of $225.0
million LIBOR-based borrowings. These swaps effectively fix the underlying LIBOR rate at a weighted average of 1.678%. The
swap agreements contain a provision whereby if we default on more than $25.0 million of indebtedness and which default results
in repayment of such indebtedness being, or becoming capable of being, accelerated by the lender, then we could also be declared
in default on our swaps.
72
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
7. Derivative Financial Instruments - Continued
The counterparties under these swaps are major financial institutions. 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/(loss) 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 years ended December 31, 2016 and 2015. We have no collateral requirements related to our interest
rate swaps.
Amounts reported in accumulated other comprehensive income/(loss) related to derivatives will be reclassified to interest
expense as interest payments are made on our variable rate debt. During 2017, we estimate that $2.3 million will be reclassified
to interest expense.
The following table sets forth the gross fair value of our derivatives:
Derivatives:
Derivatives designated as cash flow hedges in prepaid expenses and other assets:
Interest rate swaps
Derivatives designated as cash flow hedges in accounts payable, accrued expenses and other
liabilities:
Interest rate swaps
December 31,
2016
2015
$
$
7,619
$
—
1,870
$
3,073
The following table sets forth the effect of our cash flow hedges on accumulated other comprehensive income/(loss) and
interest expense:
Derivatives Designated as Cash Flow Hedges:
Amount of unrealized gains/(losses) recognized in accumulated other
comprehensive income/(loss) on derivatives (effective portion):
Interest rate swaps
Amount of losses reclassified out of accumulated other comprehensive income/
(loss) into contractual interest expense (effective portion):
Interest rate swaps
8. Financing Arrangement
Year Ended December 31,
2016
2015
2014
$
$
5,703
$
(4,040) $
(5,662)
3,057
$
3,696
$
3,777
In connection with tax increment financing for a parking garage we constructed in 1999, we were obligated to pay fixed special
assessments over a 20-year period ending in 2019. The net present value of these assessments, discounted at the 6.93% interest
rate on the underlying tax increment financing, was recorded as a financing obligation and $7.4 million was classified in liabilities
held for sale on our Consolidated Balance Sheets at December 31, 2015. For additional information about this tax increment
financing bond, see Notes 11 and 16.
73
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
9. Commitments and Contingencies
Operating Ground Leases
Certain of our properties are subject to operating ground leases. Rental payments on these leases are adjusted periodically
based on either the consumer price index or on a pre-determined schedule. Total rental property expense recorded for operating
ground leases was $2.9 million, $3.4 million and $3.4 million for the years ended December 31, 2016, 2015 and 2014, respectively.
The following table sets forth our scheduled obligations for future minimum payments on operating ground leases at
December 31, 2016:
Years Ending December 31,
2017
2018
2019
2020
2021
Thereafter
$
Minimum
Payments
2,027
2,063
2,100
2,139
2,162
90,447
$
100,938
Lease and Contractual Commitments
We have $263.0 million of lease and contractual commitments at December 31, 2016. Lease and contractual commitments
represent commitments under signed leases and contracts for operating properties (excluding tenant-funded tenant improvements)
and contracts for development/redevelopment projects, of which $73.6 million was recorded on our Consolidated Balance Sheets
at December 31, 2016.
Contingent Consideration
In 2015, we acquired development land in Atlanta for a purchase price and related transaction costs of $5.2 million, which
includes contingent consideration estimated to be $0.9 million. The contingent consideration is payable in cash to a third party 30
days subsequent to stabilization, which is projected to be in the second quarter of 2019, if and to the extent the stabilized value of
the building constructed on the development site exceeds the total development cost.
In 2014, we acquired development land in Nashville for a purchase price and related transaction costs of $15.8 million, which
includes contingent consideration estimated to be $3.3 million. The contingent consideration is payable in cash to a third party no
later than the first quarter of 2020 if and to the extent the stabilized value of the building constructed on the development site
exceeds the total development cost.
Environmental Matters
Substantially all of our in-service and development properties have been subjected to Phase I environmental assessments and,
in certain instances, Phase II environmental assessments. Such assessments and/or updates have not revealed, nor are we aware
of, any environmental liability that we believe would have a material adverse effect on our Consolidated Financial Statements.
Litigation, Claims and Assessments
We are from time to time a party to a variety of legal proceedings, claims and assessments arising in the ordinary course of
our business. We regularly assess the liabilities and contingencies in connection with these matters based on the latest information
available. For those matters where it is probable that we have incurred or will incur a loss and the loss or range of loss can be
reasonably estimated, the estimated loss is accrued and charged to income in our Consolidated Financial Statements. In other
instances, because of the uncertainties related to both the probable outcome and amount or range of loss, a reasonable estimate of
liability, if any, cannot be made. Based on the current expected outcome of such matters, none of these proceedings, claims or
assessments is expected to have a material effect on our business, financial condition, results of operations or cash flows.
74
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
10. Noncontrolling Interests
Noncontrolling Interests in Consolidated Affiliates
At December 31, 2016, our noncontrolling interests in consolidated affiliates relate to our joint venture partner's 50.0% interest
in office properties in Richmond. Our joint venture partner is an unrelated third party.
Noncontrolling Interests in the Operating Partnership
Noncontrolling interests in the Operating Partnership relate to the ownership of Redeemable Common Units. Net income
attributable to noncontrolling interests in the Operating Partnership is computed by applying the weighted average percentage of
Redeemable Common Units during the period, as a percent of the total number of outstanding Common Units, to the Operating
Partnership’s net income for the period after deducting distributions on Preferred Units. When a noncontrolling unitholder redeems
a Common Unit for a share of Common Stock or cash, the noncontrolling interests in the Operating Partnership are reduced and
the Company’s share in the Operating Partnership is increased by the fair value of each security at the time of redemption.
The following table sets forth the Company's noncontrolling interests in the Operating Partnership:
Beginning noncontrolling interests in the Operating Partnership
Adjustment of noncontrolling interests in the Operating Partnership to fair value
Conversions of Common Units to Common Stock
Net income attributable to noncontrolling interests in the Operating Partnership
Distributions to noncontrolling interests in the Operating Partnership
Year Ended December 31,
2016
2015
$
126,429
$
130,048
12,993
(3,057)
15,596
(7,159)
67
(1,645)
2,918
(4,959)
Total noncontrolling interests in the Operating Partnership
$
144,802
$
126,429
The following table sets forth net income available for common stockholders and transfers from the Company's noncontrolling
interests in the Operating Partnership:
Net income available for common stockholders
$
521,789
$
94,572
$
108,457
Increase in additional paid in capital from conversions of Common Units to Common
Stock
3,057
1,645
162
Change from net income available for common stockholders and transfers from
noncontrolling interests
$
524,846
$
96,217
$
108,619
Year Ended December 31,
2016
2015
2014
75
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
11. 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 asset is our investment in marketable securities that we use to pay benefits under our non-qualified deferred
compensation plan. 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 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 interest rates (forward curves) derived from observed market interest
rate curves. In addition, credit valuation adjustments are considered 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 asset consisted of our tax increment financing bond, which was not routinely traded but whose fair value was
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.
Our Level 3 liability consisted of the fair value of our financing obligation, which was 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.
76
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
11. 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 or disclosed at fair value within the fair value hierarchy.
Level 1
Level 2
Level 3
Quoted Prices
in Active
Markets for
Identical
Assets or
Liabilities
Total
Significant
Observable
Inputs
Significant
Unobservable
Inputs
Fair Value at December 31, 2016:
Assets:
Mortgages and notes receivable, at fair value (1)
Interest rate swaps (in prepaid expenses and other assets)
Marketable securities of non-qualified deferred compensation plan (in
prepaid expenses and other assets)
Total Assets
Noncontrolling Interests in the Operating Partnership
Liabilities:
Mortgages and notes payable, net, at fair value (1)
Interest rate swaps (in accounts payable, accrued expenses and other
liabilities)
Non-qualified deferred compensation obligation (in accounts payable,
accrued expenses and other liabilities)
$
$
$
$
8,833
$
7,619
— $
8,833
$
—
7,619
2,451
18,903
144,802
1,965,611
$
$
$
2,451
2,451
144,802
$
$
—
16,452
$
— $
— $
1,965,611
$
1,870
2,451
—
1,870
2,451
—
Total Liabilities
$
1,969,932
$
2,451
$
1,967,481
$
Fair Value at December 31, 2015:
Assets:
Mortgages and notes receivable, at fair value (1)
Marketable securities of non-qualified deferred compensation plan (in
prepaid expenses and other assets)
Tax increment financing bond (in real estate and other assets, net, held
for sale) (2)
Total Assets
Noncontrolling Interests in the Operating Partnership
Liabilities:
Mortgages and notes payable, net, at fair value (1)
Interest rate swaps (in accounts payable, accrued expenses and other
liabilities)
Non-qualified deferred compensation obligation (in accounts payable,
accrued expenses and other liabilities)
Financing obligation, at fair value (in liabilities held for sale) (1) (2)
Total Liabilities
__________
$
$
$
$
2,096
$
— $
2,096
$
2,736
11,197
16,029
126,429
2,517,589
$
$
$
2,736
—
2,736
126,429
—
—
$
$
2,096
$
— $
— $
2,517,589
$
3,073
2,736
7,402
—
3,073
2,736
—
—
—
$
2,530,800
$
2,736
$
2,520,662
$
(1) Amounts recorded at historical cost on our Consolidated Balance Sheets at December 31, 2016 and 2015.
(2) Sold during 2016 in conjunction with the sales of the Plaza assets.
—
—
—
—
—
—
—
—
—
—
—
11,197
11,197
—
—
—
—
7,402
7,402
77
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
11. Disclosure About Fair Value of Financial Instruments – Continued
The following table sets forth the changes in our Level 3 asset, which was recorded at fair value on our Consolidated Balance
Sheets:
Asset:
Tax Increment Financing Bond:
Beginning balance
Principal repayment
Assigned to the buyer of the Plaza assets
Unrealized gains (in accumulated other comprehensive loss)
Ending balance
December 31,
2016
2015
$
$
$
11,197
—
(11,197)
—
— $
12,447
(1,695)
—
445
11,197
During 2007, we acquired a tax increment financing bond associated with a parking garage developed by us, which was
assigned in conjunction with the sales of the Plaza assets in 2016. The estimated fair value at the date of sale was equal to the
outstanding principal amount due on the bond. See Note 8.
The following table sets forth quantitative information about the unobservable input of our Level 3 asset, which was recorded
at fair value on our Consolidated Balance Sheets:
Asset:
Tax increment financing bond
12. Equity
Common Stock Issuances
Valuation
Technique
Unobservable
Input
December 31,
2015
Rate as of
Income approach Discount rate
6.93%
During 2016 and 2015, the Company issued 5,078,940 and 2,922,905 shares, respectively, of Common Stock in public offerings
and received net proceeds of $246.2 million and $124.9 million, respectively. At December 31, 2016, the Company had 98.3
million remaining shares of Common Stock authorized to be issued under its charter.
Common Stock Dividends
Dividends of the Company declared per share of Common Stock aggregated $2.50, $1.70 and $1.70 for the years ended
December 31, 2016, 2015 and 2014, respectively. Dividends declared in 2016 included a special cash dividend of $0.80 per share
declared in the quarter ended December 31, 2016 and paid January 10, 2017. The principal purpose of the special dividend was
to distribute taxable capital gains associated with the sales of the Plaza assets earlier in 2016.
78
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
12. Equity - Continued
The following table sets forth the Company's estimated taxability to the common stockholders of dividends per share for
federal income tax purposes:
Ordinary income
Capital gains
Return of capital
Total
__________
Year Ended December 31,
2016 (1)
2015
2014
$
$
$
1.15
1.29
—
2.44
$
1.50
0.13
0.07
1.70
$
$
1.31
0.29
0.10
1.70
(1) During 2016, cash dividends declared on Common Stock totaled $2.50 per share, of which approximately $0.06 will be recognized as a
2017 distribution for federal income tax purposes.
The Company's tax returns have not been examined by the Internal Revenue Service (“IRS”) and, therefore, the taxability of
dividends is subject to change.
Preferred Stock
The following table sets forth the Company's Preferred Stock:
Issue Date
Number of
Shares
Outstanding
(in thousands)
Carrying
Value
Liquidation
Preference
Per Share
Optional
Redemption
Date
December 31, 2016
8.625% Series A Cumulative Redeemable
2/12/1997
29
$ 28,920
December 31, 2015
8.625% Series A Cumulative Redeemable
2/12/1997
29
$ 29,050
$
$
1,000
2/12/2027
1,000
2/12/2027
Annual
Dividends
Payable
Per Share
$
$
86.25
86.25
The following table sets forth the Company's estimated taxability to the preferred stockholders of dividends per share for
federal income tax purposes:
8.625% Series A Cumulative Redeemable:
Ordinary income
Capital gains
Total
Year Ended December 31,
2016
2015
2014
$
$
40.65
45.60
86.25
$
$
79.23
7.02
86.25
$
$
70.41
15.84
86.25
The Company's tax returns have not been examined by the IRS and, therefore, the taxability of dividends is subject to change.
Warrants
At December 31, 2016 and 2015, we had 15,000 warrants outstanding with an exercise price of $32.50 per share. Upon exercise
of a warrant, the Company will contribute the exercise price to the Operating Partnership in exchange for Common Units. Therefore,
the Operating Partnership accounts for such warrants as if issued by the Operating Partnership. These warrants have no expiration
date.
79
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
13. Employee Benefit Plans
Officer, Management and Director Compensation Programs
The officers of the Company participate in an annual non-equity incentive program pursuant to which they are eligible to earn
cash payments based on a percentage of their annual base salary in effect for December of the applicable year. Under this component
of our executive compensation program, officers are eligible to earn additional cash compensation to the extent specific
performance-based metrics are achieved during the most recently completed year. The position held by each officer has a target
annual incentive percentage that ranges from 35% to 130% of base salary. The more senior the position, the greater the portion of
compensation that varies with performance.
The percentage amount an officer may earn under the annual non-equity incentive plan is the product of the target annual
incentive percentage times an “actual performance factor,” which can range from zero to 200%. The actual performance factor
depends upon the relationship between actual performance in specific areas at each of our divisions and predetermined goals. For
corporate officers, the actual performance factor is based on the goals and criteria applied to the Company’s performance as a
whole. For officers who oversee our divisions, the actual performance factor is based on the goals and criteria applied partly to
that division’s performance and partly to the Company’s performance overall. Amounts under our annual non-equity incentive
plan are accrued and expensed in the year earned, but are typically paid early in the succeeding year.
Certain other employees participate in a similar annual non-equity incentive program. Incentive eligibility ranges from 6%
to 30% of annual base salary. The actual incentive payment is determined by a mix of the Company's overall performance, the
performance of any applicable division and the individual’s performance during each year. These amounts are also accrued and
expensed in the year earned, but are typically paid early in the succeeding year.
The Company's officers generally receive annual grants of stock options and restricted stock under the Company's long-term
equity incentive plan on or about March 1 of each year. Restricted stock grants are also made annually to directors and certain
other employees. Dividends received on restricted stock are non-forfeitable and are paid at the same rate and on the same date as
on shares of Common Stock, except that, with respect to shares of total return-based restricted stock issued to the Company's chief
executive officer, dividends accumulate and are payable only if and to the extent the shares vest. Dividends paid on subsequently
forfeited shares are expensed. Additional shares of total return-based restricted stock may be issued at the end of the applicable
measurement periods if and to the extent actual performance exceeds certain levels of performance. Such additional shares, if any,
would be fully vested when issued. No expense is recorded for additional shares of total return-based restricted stock that may be
issued at the end of the applicable measurement period since that possibility is reflected in the grant date fair value. The following
table sets forth the number of shares of Common Stock reserved for future issuance under the Company's long-term equity incentive
plans:
Outstanding stock options and warrants
Possible future issuance under equity incentive plans
December 31,
2016
602,115
2,718,296
3,320,411
2015
702,228
3,084,158
3,786,386
Of the possible future issuance under the Company' long-term equity incentive plans at December 31, 2016, no more than an
additional 1.0 million shares can be in the form of restricted stock.
During the years ended December 31, 2016, 2015 and 2014, we recognized $6.3 million, $6.9 million and $6.9 million,
respectively, of share-based compensation expense. Because REITs generally do not pay income taxes, we do not realize tax
benefits on share-based payments. At December 31, 2016, there was $5.1 million of total unrecognized share-based compensation
costs, which will be recognized over a weighted average remaining contractual term of 2.2 years.
80
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
13. Employee Benefit Plans - Continued
- Stock Options
Stock options issued after 2013 vest ratably on an annual basis over four years and expire after 10 years. Stock options issued
from 2010 through 2013 vest ratably on an annual basis over four years and expire after seven years. The value of all options as
of the date of grant is calculated using the Black-Scholes option-pricing model and is amortized over the respective vesting period
or the service period, if shorter, for employees who are or will become eligible under the Company's retirement plan. The weighted
average fair values of options granted during 2016, 2015 and 2014 were $4.61, $6.19 and $6.75, respectively, per option. The fair
values of the options granted were determined at the grant dates using the following assumptions:
Risk free interest rate (1)
Common stock dividend yield (2)
Expected volatility (3)
Average expected option life (years) (4)
__________
2016
2015
2014
1.4%
3.9%
19.7%
5.75
1.7%
3.7%
22.4%
5.75
1.8%
4.5%
30.3%
5.75
(1) Represents the interest rate as of the grant date on US treasury bonds having the same life as the estimated life of the option grants.
(2) The dividend yield is calculated utilizing the dividends paid for the previous one-year period and the per share price of Common Stock on
the date of grant.
(3) Based on the historical volatility of Common Stock over a period relevant to the related stock option grant.
(4) The average expected option life is based on an analysis of the Company's historical data.
The following table sets forth stock option activity:
Balance at December 31, 2013
Options granted
Options canceled
Options exercised
Balance at December 31, 2014
Options granted
Options canceled
Options exercised
Balance at December 31, 2015
Options granted
Options canceled
Options exercised
Balance at December 31, 2016 (1) (2)
__________
Options Outstanding
Number of
Options
Weighted
Average
Exercise Price
874,382
$
190,330
(134,628)
(352,763)
577,321
197,408
(3,829)
(83,672)
687,228
244,664
(14,743)
(330,034)
587,115
$
32.24
37.90
41.93
27.21
34.92
45.61
40.21
34.89
37.97
43.55
42.64
34.26
42.26
(1) The outstanding options at December 31, 2016 had a weighted average remaining life of 7.9 years.
(2) The Company had 74,080 options exercisable at December 31, 2016 with a weighted average exercise price of $40.28, weighted average
remaining life of 6.6 years and intrinsic value of $0.8 million. Of these exercisable options, there were no exercise prices higher than the
market price of our Common Stock at December 31, 2016.
81
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
13. Employee Benefit Plans - Continued
Cash received or receivable from options exercised was $13.4 million, $3.3 million and $11.1 million for the years ended
December 31, 2016, 2015 and 2014, respectively. The total intrinsic value of options exercised during the years ended December 31,
2016, 2015 and 2014 was $4.8 million, $0.9 million and $5.0 million, respectively. The total intrinsic value of options outstanding
at December 31, 2016, 2015 and 2014 was $5.1 million, $4.3 million and $5.4 million, respectively. The Company generally does
not permit the net cash settlement of exercised stock options, but does permit net share settlement so long as the shares received
are held for at least a year. The Company has a practice of issuing new shares to satisfy stock option exercises.
- Time-Based Restricted Stock
Shares of time-based restricted stock vest ratably on an annual basis over four years. The value of grants of time-based restricted
stock is based on the market value of Common Stock as of the date of grant and is amortized to expense over the respective vesting
period or the service period, if shorter, for employees who are or will become eligible under the Company's retirement plan.
The following table sets forth time-based restricted stock activity:
Restricted shares outstanding at December 31, 2013
Awarded and issued (1)
Vested (2)
Restricted shares outstanding at December 31, 2014
Awarded and issued (1)
Vested (2)
Forfeited
Restricted shares outstanding at December 31, 2015
Awarded and issued (1)
Vested (2)
Forfeited
Restricted shares outstanding at December 31, 2016
__________
Number of
Shares
Weighted
Average Grant
Date Fair
Value
212,796
$
94,932
(85,660)
222,068
71,994
(85,809)
(3,533)
204,720
72,698
(84,212)
(4,225)
188,981
$
33.96
37.76
32.87
35.97
45.91
35.14
39.94
39.74
43.59
37.76
41.96
42.06
(1) The weighted average fair value at grant date of time-based restricted stock issued during the years ended December 31, 2016, 2015 and
2014 was $3.2 million, $3.3 million and $3.6 million, respectively.
(2) The vesting date fair value of time-based restricted stock that vested during the years ended December 31, 2016, 2015 and 2014 was $3.7
million, $3.9 million and $3.2 million, respectively. Vested shares include those shares surrendered by employees to satisfy tax withholding
obligations in connection with such vesting.
82
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
13. Employee Benefit Plans - Continued
- Total Return-Based Restricted Stock
Shares of total return-based restricted stock vest to the extent the Company's absolute total returns for certain pre-determined
three-year periods exceed predetermined goals. The amount subject to vesting ranges from zero to 150%. Notwithstanding the
Company’s absolute total return, if the Company’s total return exceeds 100% of the peer group total return index, at least 75% of
total return-based restricted stock issued will vest at the end of the applicable period. The weighted average grant date fair value
of such shares of total return-based restricted stock issued in 2016, 2015 and 2014 was determined to be $41.37, $43.77 and $35.58,
respectively, and is amortized over the respective three-year period or the service period, if shorter, for employees who are or will
become eligible under the Company's retirement plan. The fair values of the total return-based restricted stock granted were
determined at the grant dates using a Monte Carlo simulation model and the following assumptions:
Risk free interest rate (1)
Common stock dividend yield (2)
Expected volatility (3)
__________
2016
2015
2014
0.9%
4.1%
43.1%
1.0%
3.8%
43.0%
0.7%
4.7%
43.4%
(1) Represents the interest rate as of the grant date on US treasury bonds having the same life as the estimated life of the total return-based
restricted stock grants.
(2) The dividend yield is calculated utilizing the dividends paid for the previous one-year period and the average per share price of Common
Stock during the three-month period preceding the date of grant.
(3) Based on the historical volatility of Common Stock over a period relevant to the related total return-based restricted stock grant.
The following table sets forth total return-based restricted stock activity:
Restricted shares outstanding at December 31, 2013
Awarded and issued (1)
Restricted shares outstanding at December 31, 2014
Awarded and issued (1) (3)
Vested (2) (3)
Forfeited
Restricted shares outstanding at December 31, 2015
Awarded and issued (1) (3)
Vested (2) (3)
Forfeited
Restricted shares outstanding at December 31, 2016
__________
Number of
Shares
Weighted
Average Grant
Date Fair
Value
133,388
$
74,569
207,957
118,817
(129,762)
(1,709)
195,303
64,701
(71,617)
(4,663)
183,724
$
35.29
35.58
35.70
37.64
31.97
37.25
36.66
40.87
36.50
39.91
39.82
(1) The fair value at grant date of total return-based restricted stock issued during the years ended December 31, 2016, 2015 and 2014 was $2.4
million, $2.5 million and $2.7 million, respectively, at target.
(2) The vesting date fair value of total return-based restricted stock that vested during the years ended December 31, 2016 and 2015 was $3.1
million and $5.9 million, respectively, based on the performance of the specific plans. Vested shares include those shares surrendered by
employees to satisfy tax withholding obligations in connection with such vesting. There were no vested shares of total return-based restricted
stock during the year ended December 31, 2014.
(3) The 2016 and 2015 amounts include 6,647 and 61,860 additional shares, respectively, from the 2013 and 2012 plans, respectively, since
the plans' payouts were in excess of the initial 100% target.
83
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
13. Employee Benefit Plans - Continued
401(k) Retirement Savings Plan
We have a 401(k) Retirement Savings Plan covering substantially all employees who meet certain age and employment criteria.
We contribute amounts for each participant at a rate of 75% of the employee’s contribution (up to 6% of each employee’s bi-
weekly salary and cash incentives, subject to statutory limits). During the years ended December 31, 2016, 2015 and 2014, we
contributed $1.3 million, $1.3 million and $1.2 million, respectively, to the 401(k) savings plan. The assets of this qualified plan
are not included in our Consolidated Financial Statements since the assets are not owned by us.
Retirement Plan
The Company has a retirement plan for employees with at least 30 years of continuous service or are at least 55 years old with
at least 10 years of continuous service. Subject to advance written notice and a non-compete agreement, eligible retirees would
be entitled to receive a pro rata amount of the annual non-equity incentive compensation earned during the year of retirement and
stock options and time-based restricted stock would be non-forfeitable and vest according to the terms of their original grants.
Eligible retirees would also be entitled to retain any total return-based restricted stock that subsequently vests after the retirement
date according to the terms of their original grants. For employees who meet the age and service eligibility requirements, 100%
of their annual grants are expensed at the grant date as if fully vested. For employees who will meet the age and service eligibility
requirements within the normal vesting periods, the grants are amortized over the shorter service period.
Deferred Compensation
Prior to 2010, officers could elect to defer all or a portion of their cash compensation, which was then invested in unrelated
mutual funds under our non-qualified deferred compensation plan. These investments are recorded at fair value, which aggregated
$2.5 million and $2.7 million at December 31, 2016 and 2015, respectively, and are included in prepaid expenses and other assets,
with an offsetting deferred compensation liability recorded in accounts payable, accrued expenses and other liabilities. Deferred
amounts ultimately payable to the participants are based on the value of the related mutual fund investments. Accordingly, changes
in the value of the unrelated mutual funds are recorded in interest and other income and the corresponding offsetting changes in
the deferred compensation liability are recorded in general and administration expense. As a result, there is no effect on our net
income.
The following table sets forth our deferred compensation liability:
Beginning deferred compensation liability
Mark-to-market adjustment to deferred compensation (in general and administrative
expenses)
Distributions from deferred compensation plans
Total deferred compensation liability
Employee Stock Purchase Plan
Year Ended December 31,
2016
2015
2014
2,736
$
3,635
$
3,996
222
(507)
(32)
(867)
2,451
$
2,736
$
235
(596)
3,635
$
$
The Company has an Employee Stock Purchase Plan ("ESPP") pursuant to which employees may contribute up to 25% of
their cash compensation for the purchase of Common Stock. At the end of each quarterly offering period, each participant's account
balance, which includes any and all accumulated dividends, is applied to acquire shares of Common Stock at a cost that is calculated
at 85% of the average closing price on the New York Stock Exchange on the five consecutive days preceding the last day of the
quarter. In the years ended December 31, 2016, 2015 and 2014, the Company issued 27,773, 29,496 and 28,682 shares, respectively,
of Common Stock under this Plan. The 15% discount on newly issued shares, which is taxable income to the participants and is
recorded by us as additional compensation expense, aggregated $0.2 million in each of the years ended December 31, 2016, 2015
and 2014. As a general rule, shares purchased under the Plan must be held for at least a year. The Company satisfies its ESPP
obligations by issuing additional shares of Common Stock.
84
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
14. Accumulated Other Comprehensive Income/(Loss)
The following table sets forth the components of accumulated other comprehensive income/(loss):
December 31,
2016
2015
$
— $
(445)
—
—
(3,811)
5,703
3,057
4,949
445
—
(3,467)
(4,040)
3,696
(3,811)
(3,811)
Tax increment financing bond:
Beginning balance
Unrealized gains on tax increment financing bond
Ending balance
Cash flow hedges:
Beginning balance
Unrealized gains/(losses) on cash flow hedges
Amortization of cash flow hedges (1)
Ending balance
Total accumulated other comprehensive income/(loss)
$
4,949
$
__________
(1) Amounts reclassified out of accumulated other comprehensive income/(loss) into contractual interest expense.
85
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
15. Rental and Other Revenues; Rental Property and Other Expenses
Our real estate assets are leased to customers under operating leases. The minimum rental amounts under the leases are
generally subject to scheduled fixed increases. Generally, the leases also provide that we receive cost recovery income from
customers for increases in certain costs above the costs incurred during a contractually specified base year. The following table
sets forth our rental and other revenues from continuing operations:
Contractual rents, net
Straight-line rental income, net
Cost recovery income, net
Lease termination fees
Other miscellaneous operating revenues
Year Ended December 31,
2016
2015
2014
$
561,242
$
513,909
$
476,684
23,909
48,730
2,311
29,442
22,054
45,247
990
22,471
21,045
39,112
658
18,372
$
665,634
$
604,671
$
555,871
The following table sets forth our scheduled future minimum base rents to be received from customers for leases in effect at
December 31, 2016 for the properties that we wholly own:
2017
2018
2019
2020
2021
Thereafter
$
590,003
566,742
505,687
427,392
367,053
1,247,247
$
3,704,124
The following table sets forth our rental property and other expenses from continuing operations:
Utilities, insurance and real estate taxes
Maintenance, cleaning and general building
Property management and administrative expenses
Other miscellaneous operating expenses
Year Ended December 31,
2016
2015
2014
$
124,940
$
117,470
$
113,226
86,221
12,588
7,336
79,091
12,446
6,934
74,109
12,093
6,456
$
231,085
$
215,941
$
205,884
86
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
16. Real Estate, Other Assets and Liabilities Held For Sale and Discontinued Operations
The following tables set forth the assets and liabilities related to discontinued operations at December 31, 2016 and 2015 and
the results of operations and cash flows for the years ended December 31, 2016, 2015 and 2014:
December 31,
2016
2015
— $
—
—
—
—
—
—
—
— $
— $
—
— $
16,681
322,811
1,089
(131,274)
209,307
11,730
6,690
13,221
240,948
(6,717)
(7,402)
(14,119)
$
$
$
$
Year Ended December 31,
2016
2015
2014
$
8,484
$
50,935
$
52,597
3,334
—
1,388
4,722
85
420
4,097
414,496
418,593
$
20,805
14,039
2,366
37,210
621
2,635
15,739
—
15,739
$
19,620
15,386
965
35,971
725
2,700
18,601
384
18,985
Year Ended December 31,
2016
2015
2014
2,040
417,097
$
$
27,579
$
(16,445) $
32,485
(8,279)
$
$
$
Assets:
Land
Buildings and tenant improvements
Land held for development
Less-accumulated depreciation
Net real estate assets
Accrued straight-line rents receivable, net
Deferred leasing costs, net
Prepaid expenses and other assets, net
Real estate and other assets, net, held for sale
Liabilities:
Accounts payable, accrued expenses and other liabilities
Financing obligation
Liabilities held for sale
Rental and other revenues
Operating expenses:
Rental property and other expenses
Depreciation and amortization
General and administrative
Total operating expenses
Interest expense
Other income
Income from discontinued operations
Net gains on disposition of discontinued operations
Total income from discontinued operations
Cash flows from operating activities
Cash flows from investing activities
87
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
17. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share of the Company:
Earnings per Common Share - basic:
Numerator:
Income from continuing operations
Net (income) attributable to noncontrolling interests in the Operating Partnership from
continuing operations
Net (income) attributable to noncontrolling interests in consolidated affiliates from continuing
operations
Dividends on Preferred Stock
Income from continuing operations available for common stockholders
Income from discontinued operations
Net (income) attributable to noncontrolling interests in the Operating Partnership from
discontinued operations
Income from discontinued operations available for common stockholders
Year Ended December 31,
2016
2015
2014
$
122,546
$
85,521
$
96,987
(3,331)
(2,443)
(2,945)
(1,253)
(2,501)
115,461
418,593
(12,265)
406,328
(1,264)
(2,506)
79,308
15,739
(475)
15,264
(1,466)
(2,507)
90,069
18,985
(597)
18,388
108,457
Net income available for common stockholders
$
521,789
$
94,572
$
Denominator:
Denominator for basic earnings per Common Share – weighted average shares
98,439
94,404
90,743
Earnings per Common Share - basic:
Income from continuing operations available for common stockholders
Income from discontinued operations available for common stockholders
Net income available for common stockholders
Earnings per Common Share - diluted:
Numerator:
Income from continuing operations
Net (income) attributable to noncontrolling interests in consolidated affiliates from continuing
operations
Dividends on Preferred Stock
Income from continuing operations available for common stockholders before net
(income) attributable to noncontrolling interests in the Operating Partnership
Income from discontinued operations available for common stockholders
$
$
$
1.17
4.13
5.30
$
$
0.84
0.16
1.00
$
$
1.00
0.20
1.20
122,546
$
85,521
$
96,987
(1,253)
(2,501)
118,792
418,593
(1,264)
(2,506)
81,751
15,739
(1,466)
(2,507)
93,014
18,985
Net income available for common stockholders before net (income) attributable to
noncontrolling interests in the Operating Partnership
$
537,385
$
97,490
$
111,999
Denominator:
Denominator for basic earnings per Common Share – weighted average shares
98,439
94,404
90,743
Add:
Stock options using the treasury method
Noncontrolling interests Common Units
Denominator for diluted earnings per Common Share – adjusted weighted average shares and
assumed conversions (1)
Earnings per Common Share - diluted:
87
2,872
87
2,915
119
2,938
101,398
97,406
93,800
Income from continuing operations available for common stockholders
Income from discontinued operations available for common stockholders
Net income available for common stockholders
$
$
1.17
4.13
5.30
$
$
0.84
0.16
1.00
$
$
0.99
0.20
1.19
__________
(1) Includes all unvested restricted stock where dividends on such restricted stock are non-forfeitable.
88
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
18. Income Taxes
Our Consolidated Financial Statements include the operations of the Company's taxable REIT subsidiary, which is not entitled
to the dividends paid deduction and is subject to federal, state and local income taxes on its taxable income. As a REIT, the Company
may also be subject to federal excise taxes if it engages in certain types of transactions.
The minimum dividend per share of Common Stock required for the Company to maintain its REIT status was $0.99, $1.31
and $1.13 per share in 2016, 2015 and 2014, respectively. Continued qualification as a REIT depends on the Company's ability to
satisfy the dividend distribution tests, stock ownership requirements and various other qualification tests. The tax basis of the
Company's assets (net of accumulated tax depreciation and amortization) and liabilities was approximately $4.0 billion and $2.3
billion, respectively, at December 31, 2016 and $4.2 billion and $2.6 billion, respectively, at December 31, 2015.
During the years ended December 31, 2016, 2015 and 2014, the Company qualified as a REIT and incurred no federal income
tax expense; accordingly, the only federal income taxes included in the accompanying Consolidated Financial Statements relate
to activities of the Company's taxable REIT subsidiary.
The following table sets forth the Company's income tax expense/(benefit):
Year Ended December 31,
2016
2015
2014
Current tax expense/(benefit):
Federal
State
Deferred tax expense/(benefit):
Federal
State
Less tax expense netted against gain on disposition of property
$
(38) $
89
51
(160)
87
(73)
—
$
949
351
1,300
(233)
(115)
(348)
(518)
Total income tax expense/(benefit)
$
(22) $
434
$
1,480
161
1,641
(1,628)
(305)
(1,933)
—
(292)
The Company's net deferred tax liability was $0.1 million and $0.2 million as of December 31, 2016 and 2015, respectively.
The net deferred tax liability is comprised primarily of tax versus book differences related to property (depreciation, amortization
and basis differences).
For the years ended December 31, 2016 and 2015, there were no unrecognized tax benefits. The Company is subject to federal,
state and local income tax examinations by taxing authorities for 2013 through 2016. The Company does not expect that the total
amount of unrecognized benefits will materially change within the next year.
89
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
19. Segment Information
Our principal business is the operation, acquisition and development of rental real estate properties. We evaluate our business
by product type and by geographic location. Each product type has different customers and economic characteristics as to rental
rates and terms, cost per rentable square foot of buildings, the purposes for which customers use the space, the degree of maintenance
and customer support required and customer dependency on different economic drivers, among others. The operating results by
geographic grouping are also regularly reviewed by our chief operating decision maker for assessing performance and other
purposes. There are no material inter-segment transactions.
Our accounting policies of the segments are the same as those used in our Consolidated Financial Statements. All operations
are within the United States.
The following tables summarize the rental and other revenues and net operating income, the primary industry property-level
performance metric used by our chief operating decision maker which is defined as rental and other revenues less rental property
and other expenses, for each of our reportable segments. Our segment information for the year ended December 31, 2014 has been
retrospectively revised from previously reported amounts to reflect a change in our reportable segments.
Rental and Other Revenues:
Office:
Atlanta
Greensboro
Memphis
Nashville
Orlando
Pittsburgh
Raleigh
Richmond
Tampa
Total Office Segment
Other
Total Rental and Other Revenues
Year Ended December 31,
2016
2015
2014
$
134,601
$
108,590
$
20,522
48,251
95,912
46,260
58,789
112,958
44,315
89,903
651,511
14,123
21,251
47,137
88,310
44,621
59,392
102,841
42,089
75,715
589,946
14,725
96,075
25,018
41,016
80,722
36,574
56,692
87,428
45,559
69,693
538,777
17,094
$
665,634
$
604,671
$
555,871
90
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
19. Segment Information - Continued
Net Operating Income:
Office:
Atlanta
Greensboro
Memphis
Nashville
Orlando
Pittsburgh
Raleigh
Richmond
Tampa
Total Office Segment
Other
Total Net Operating Income
Reconciliation to income from continuing operations before disposition of investment
properties and activity in unconsolidated affiliates:
Depreciation and amortization
Impairments of real estate assets
General and administrative expenses
Interest expense
Other income
Year Ended December 31,
2016
2015
2014
$
84,733
$
67,094
$
12,781
30,038
68,678
26,525
34,175
80,803
30,505
56,493
424,731
9,818
434,549
13,395
29,534
62,387
25,524
34,348
72,981
27,922
45,447
378,632
10,098
388,730
58,180
15,784
24,376
55,354
21,286
31,505
61,317
30,021
40,875
338,698
11,289
349,987
(220,140)
(201,918)
(180,637)
—
(38,153)
(76,648)
2,338
—
(37,642)
(86,052)
1,726
(588)
(35,258)
(85,127)
2,431
Income from continuing operations before disposition of investment properties and
activity in unconsolidated affiliates
$
101,946
$
64,844
$
50,808
91
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
19. Segment Information - Continued
Total Assets:
Office:
Atlanta
Greensboro
Memphis
Nashville
Orlando
Pittsburgh
Raleigh
Richmond
Tampa
Total Office Segment
Other (1)
Total Assets
__________
December 31,
2016
2015
$
1,039,519
$
1,013,226
127,887
271,115
714,905
307,021
353,816
760,607
212,508
553,068
131,027
277,866
591,111
303,843
339,186
663,617
211,574
548,814
4,340,446
220,604
4,080,264
405,367
$
4,561,050
$
4,485,631
(1) Includes the Plaza assets, which were included in real estate and other assets, net, held for sale on our Consolidated Balance Sheets at
December 31, 2015.
92
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
20. Quarterly Financial Data (Unaudited)
The following tables set forth quarterly financial information of the Company:
Rental and other revenues
$
164,859
$
166,860
$
166,269
$
167,646
$
665,634
Year Ended December 31, 2016
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
Income from continuing operations
Income from discontinued operations (1)
Net income
Net (income) attributable to noncontrolling interests in
the Operating Partnership
Net (income) attributable to noncontrolling interests in
consolidated affiliates
Dividends on Preferred Stock
Net income available for common stockholders
Earnings per Common Share – basic:
Income from continuing operations available for
common stockholders
Income from discontinued operations available for
common stockholders
Net income available for common stockholders
Earnings per Common Share – diluted:
Income from continuing operations available for
common stockholders
Income from discontinued operations available for
common stockholders
Net income available for common stockholders
__________
$
$
$
$
$
28,142
418,593
446,735
(13,011)
(308)
(626)
33,528
—
33,528
(939)
(314)
(627)
33,840
—
33,840
(926)
(319)
(624)
27,036
—
27,036
122,546
418,593
541,139
(720)
(15,596)
(312)
(624)
(1,253)
(2,501)
432,790
$
31,648
$
31,971
$
25,380
$
521,789
0.27
$
0.32
$
0.32
$
0.25
$
4.22
4.49
—
—
—
$
0.32
$
0.32
$
0.25
$
0.27
$
0.32
$
0.32
$
0.25
$
4.22
4.49
—
—
—
$
0.32
$
0.32
$
0.25
$
1.17
4.13
5.30
1.17
4.13
5.30
(1) See Note 2 for a discussion regarding the sales of the Plaza assets.
93
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
20. Quarterly Financial Data (Unaudited) - Continued
Rental and other revenues
$
145,236
$
148,543
$
150,766
$
160,126
$
604,671
Year Ended December 31, 2015
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
Income from continuing operations
Income from discontinued operations
Net income
Net (income) attributable to noncontrolling interests in
the Operating Partnership
Net (income) attributable to noncontrolling interests in
consolidated affiliates
Dividends on Preferred Stock
Net income available for common stockholders
Earnings per Common Share – basic:
Income from continuing operations available for
common stockholders
Income from discontinued operations available for
common stockholders
Net income available for common stockholders
Earnings per Common Share – diluted:
Income from continuing operations available for
common stockholders
Income from discontinued operations available for
common stockholders
Net income available for common stockholders
$
$
$
$
$
16,920
3,915
20,835
(596)
(296)
(627)
22,221
4,670
26,891
(782)
(328)
(626)
27,352
4,265
31,617
(918)
(324)
(626)
19,028
2,889
21,917
(622)
(316)
(627)
85,521
15,739
101,260
(2,918)
(1,264)
(2,506)
19,316
$
25,155
$
29,749
$
20,352
$
94,572
0.17
$
0.22
$
0.27
$
0.18
$
0.04
0.21
$
0.05
0.27
$
0.04
0.31
$
0.03
0.21
$
0.17
$
0.22
$
0.27
$
0.18
$
0.04
0.21
$
0.05
0.27
$
0.04
0.31
$
0.03
0.21
$
0.84
0.16
1.00
0.84
0.16
1.00
94
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(tabular dollar amounts in thousands, except per share data)
21. Subsequent Events
On January 10, 2017, the Company paid a special cash dividend of $0.80 per share to stockholders of record as of December 27,
2016. The principal purpose of the special dividend was to distribute taxable capital gains associated with the sales of the Plaza
assets earlier in 2016.
On February 7, 2017, the Company declared a regular cash dividend of $0.44 per share of Common Stock, which is payable
on March 7, 2017 to stockholders of record as of February 17, 2017.
95