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. INFORMATION ABOUT OUR EXECUTIVE OFFICERS
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 OWNERSHIP 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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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 24, 2020, 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, Charlotte, 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, 2019, the Company owned all of the Preferred Units and 103.3 million, or 97.4%, of the Common Units in
the Operating Partnership. Limited partners owned the remaining 2.7 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, 2019. There are no material inter-segment transactions. See Note 17
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"). Information on our website is not considered
part of this Annual Report.
During 2019, 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:
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•
•
•
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.
Local Market Leadership. We focus our real estate activities in markets where we have extensive local knowledge and own
a significant amount of assets. Our real estate professionals are seasoned and have significant experience managing commercial
real estate through all aspects of multiple economic cycles. Our senior leadership team has significant experience and maintains
important relationships with market participants in each of our core markets.
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
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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 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 rental 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 Atlanta, Charlotte, Nashville,
Orlando, Pittsburgh, Raleigh, Richmond and Tampa. 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 with
access to ample liquidity, multiple sources of debt and equity capital and sufficient availability under our revolving credit facility
to fund our short and long-term liquidity requirements. 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 while retaining
the flexibility to capitalize on favorable development and acquisition opportunities as they arise.
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.
Sustainability
We are firmly committed to our intrinsic and societal responsibility to routinely minimize all environmental impacts resulting
from our development and operation of our properties. We are devoted to creating healthy and productive workspaces for our
customers and communities. More information regarding our sustainability strategy is available under the “Service Not Space/
Sustainability” section of our website. Information on our website is not considered part of this Annual Report.
Employees
At December 31, 2019, we had 431 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 office employment levels in our core markets are important factors, among others, 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 or negative economic growth, when 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
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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
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 meaningful 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 and any other amounts due under 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 recognize credit losses on 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 causes 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.
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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
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.
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In addition to acquisitions, we periodically consider developing or re-developing properties. Risks associated with development
and re-development activities include:
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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
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. Further,
we hold and expect to continue to acquire non-income producing land for future development. See "Item 2. Properties - Land Held
for Development." No assurances can be provided as to when, if ever, we will commence development projects on such land or
if any such development projects would be on favorable terms. The fixed costs of acquiring and owning development land, such
as the ongoing payment of property taxes, adversely affects our results of operations until such land is either placed in service or
sold.
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. 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.
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;
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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;
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•
our joint venture partners may be structured differently than us for tax purposes, which could create conflicts of interest;
and
•
our joint venture partners may have competing interests in our markets that could create conflicts of interest.
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, result in large expenses to repair or rebuild the property and/or damage our
reputation among our customers and investors generally. 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 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 $30.0 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. 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. 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, 2019, we had $471.0 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
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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.
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.
Our revolving credit facility and bank term loans bear interest at a spread above LIBOR. In July 2017, the Financial Conduct
Authority (“FCA”) that regulates LIBOR announced it intends to stop compelling banks to submit rates for the calculation of
LIBOR after 2021. As a result, a committee formed by the Federal Reserve Board and the Federal Reserve Bank of New York
identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative to LIBOR in financial contracts. We are
not able to predict when LIBOR will cease to be available or when there will be sufficient liquidity in the SOFR markets. The
method of transitioning the interest rate under our variable rate debt from LIBOR to SOFR or another alternative rate may be
challenging. If our revolving credit facility and/or any of our bank term loans are not transitioned to a satisfactory alternative rate
and LIBOR is discontinued, the interest rates on our unhedged variable rate debt may be adversely affected. While we expect
LIBOR to be available in substantially its current form until the end of 2021, it is possible that LIBOR will become unavailable
prior to that point. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and
magnified.
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;
9
•
•
•
•
•
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.
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 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.
10
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. Dividends payable
by REITs to U.S. stockholders are taxed at a maximum individual rate of 33.4% (including the 3.8% net investment income tax
and after factoring in a 20% deduction for pass-through 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.
We face possible tax audits. Because we are organized and qualify as a REIT, we are generally not subject to federal income
taxes. We are, however, subject to federal, state and local taxes in certain instances. 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.
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
11
effect on an investment in our Common Stock, on the market value of our properties or the attractiveness of securities of REITs
generally in comparison to other asset classes.
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. For information regarding our dividend payment history as well as a discussion of the
factors that influence the decisions of the Company's Board of Directors regarding dividends and distributions, see “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources -
Dividends and Distributions.” 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. 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
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,
12
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.
• Anti takeover 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
Properties
ITEM 2. PROPERTIES
The following table sets forth information about in-service office properties that we wholly own by geographic location at
December 31, 2019:
Market
Atlanta
Nashville
Raleigh
Tampa
Pittsburgh
Orlando
Richmond
Memphis
Charlotte
Greensboro
Total
__________
Rentable
Square Feet
Occupancy
Percentage of
Annualized
Cash Rental
Revenue (1)
5,415,000
4,528,000
4,874,000
3,620,000
2,148,000
1,791,000
2,036,000
1,303,000
841,000
1,151,000
89.8 %
19.3 %
94.4
90.1
93.2
95.3
89.4
93.3
90.9
89.5
94.6
18.5
16.9
12.9
8.5
6.3
6.2
4.4
3.7
3.3
27,707,000
91.9%
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 2019 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,
2019
2018
2017
(in thousands)
—
351
(2)
(491)
(142)
841
898
(6)
(557)
1,176
—
1,014
(7)
(1,077)
(70)
The following table sets forth operating information about in-service properties that we wholly own:
2015
2016
2017
2018
2019
__________
Average
Occupancy
92.3%
92.8%
92.5%
91.7%
91.4%
$
$
$
$
$
Annualized
GAAP Rent
Per Square
Foot (1)
Annualized
Cash Rent
Per Square
Foot (2)
23.30
23.24
24.05
24.68
26.46
$
$
$
$
$
22.55
22.55
23.46
24.06
25.06
(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, 2019:
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
Bank of America
Bridgestone Americas
Metropolitan Life Insurance
PPG Industries
Mars Petcare
EQT Corporation
Vanderbilt University
Tivity
Bass, Berry & Sims
American General Life
Novelis
Marsh USA
State of Georgia
Lifepoint Corporate Services
Regus PLC
PNC Bank
Avanos Medical
Willis Towers Watson
Global Payments
Total
__________
1,250,231
$
710,212
506,128
621,190
361,215
223,700
319,269
285,083
263,598
213,951
173,834
168,949
177,382
296,542
202,991
189,186
159,142
193,199
162,849
168,051
32,251
25,990
17,408
16,466
9,836
9,026
8,166
7,690
7,684
6,960
6,199
6,172
6,092
5,954
5,336
4,952
4,933
4,653
4,471
4,440
4.59 %
3.70
2.48
2.34
1.40
1.28
1.16
1.09
1.09
0.99
0.88
0.88
0.87
0.85
0.76
0.70
0.70
0.66
0.64
0.63
6,646,702
$
194,679
27.69%
3.8
14.0
17.7
11.2
11.3
11.4
4.8
6.3
3.2
5.1
7.1
4.7
6.2
2.8
9.3
6.3
8.1
9.2
4.3
13.2
8.8
(1) Annualized Cash Rental Revenue is cash rental revenue (base rent plus cost recovery income, excluding straight-line rent) for the month
of December 2019 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, 2019:
Rentable
Square Feet
Subject to
Expiring
Leases
Percentage of
Leased Square
Footage
Represented
by Expiring
Leases
Number of
Leases
Expiring
Annualized
Cash Rental
Revenue
Under
Expiring
Leases (2)
(in thousands)
Average
Annual Cash
Rental Rate
Per Square
Foot for
Expirations
Percent of
Annualized
Cash Rental
Revenue
Represented
by Expiring
Leases (2)
407
350
358
293
262
154
118
66
68
67
178
2,321
2,512,492
2,246,284
2,579,762
2,381,540
2,699,855
2,314,359
1,806,211
1,453,678
1,428,363
1,071,318
4,980,934
9.9 % $
68,891
$
8.8
10.1
9.3
10.6
9.1
7.1
5.7
5.6
4.2
63,401
67,447
62,774
77,015
63,402
49,550
38,656
37,908
28,710
19.6
129,174
25,474,796
100.0% $
686,928
$
27.42
28.22
26.14
26.36
28.53
27.40
27.43
26.59
26.54
26.80
25.93
26.97
10.0 %
9.2
9.8
9.1
11.2
9.2
7.2
5.6
5.5
4.3
18.9
100.0%
Lease Expiring (1)
2020 (3)
2021
2022
2023
2024
2025
2026
2027
2028
2029
Thereafter
__________
(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 2019 multiplied by 12.
(3) Includes 222,000 rentable square feet of leases that are on a month-to-month basis, which represent 0.8% of total annualized cash rental
revenue.
In-Process Development
As of December 31, 2019, we were developing 0.9 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,
2019 (1)
($ in thousands)
Pre
Leased %
Estimated
Completion
Estimated
Stabilization
GlenLake Seven
Virginia Springs II
Midtown One (2)
Asurion
__________
Raleigh
Nashville
Tampa
Nashville
125,700
$
40,970
$
111,000
150,000
552,800
37,900
71,300
285,000
21,970
11,262
22,380
100.0 %
—
—
103,887
98.3
1Q21
4Q20
2Q21
4Q21
939,500
$
435,170
$
159,499
71.2%
1Q21
3Q22
4Q22
1Q22
(1) Includes deferred lease commissions which are classified in deferred leasing costs on our Consolidated Balance Sheets.
(2) We own an 80.0% interest in this consolidated joint venture.
16
Land Held for Development
We wholly owned 261 acres of development land at December 31, 2019. We estimate that we can develop approximately 4.8
million rentable square feet of office space on the 153 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, 2019:
Market
Kansas City (3)
Richmond (4)
Raleigh
Total
__________
Rentable
Square Feet
292,000
345,000
636,000
1,273,000
Weighted
Average
Ownership
Interest (1)
Percentage of
Annualized
Cash Rental
Revenue (2)
Occupancy
50.0%
50.0
25.0
37.5%
98.8%
99.2
88.8
93.9%
49.1%
26.2
24.7
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 2019 multiplied by 12.
(3) Excluding our 26.5% ownership interest in a real estate brokerage services company.
(4) This joint venture is consolidated.
In addition, we own an 80.0% interest in Midtown One, a consolidated joint venture. See “Item 2. Properties - In-Process
Development.”
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. INFORMATION ABOUT OUR EXECUTIVE OFFICERS
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
Theodore J. Klinck
Age
54
Brian M. Leary
Mark F. Mulhern
45
60
Jeffrey D. Miller
49
Brendan C. Maiorana
44
Position and Background
Director, President and Chief Executive Officer.
Mr. Klinck became a director and our chief executive officer in September 2019.
Prior to that, Mr. Klinck was our president and chief operating officer since
November 2018, our executive vice president and chief operating and investment
officer from September 2015 to November 2018 and was senior vice president and
chief investment officer from March 2012 to August 2015. 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 Operating Officer.
Mr. Leary became chief operating officer in July 2019. Previously, Mr. Leary served
as president of the commercial and mixed-use business unit of Crescent
Communities since 2014. Prior to joining Crescent, Mr. Leary held senior
management positions with Jacoby Development, Inc., Atlanta Beltline, Inc., AIG
Global Real Estate, Atlantic Station, LLC and Central Atlanta Progress.
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 McKim and Creed, a private engineering services firm, and Barings BDC, Inc.
(NYSE:BBDC), a specialty finance company. 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.
Executive Vice President of Finance and Investor Relations.
Mr. Maiorana became executive vice president of finance and investor relations in
July 2019. Prior to that, Mr. Maiorana was our senior vice president of finance and
investor relations since May 2016. Prior to joining Highwoods, Mr. Maiorana spent
11 years in equity research at Wells Fargo Securities, starting as an associate equity
research analyst. Prior to that, Mr. Maiorana worked four years at Ernst & Young
LLP.
18
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our Common Stock is traded on the NYSE under the symbol "HIW." On December 31, 2019, the Company had 804 common
stockholders of record. There is no public trading market for the Common Units. On December 31, 2019, the Operating Partnership
had 100 holders of record of Common Units (other than the Company). At December 31, 2019, there were 103.8 million shares
of Common Stock outstanding and 2.7 million Common Units outstanding not owned by the Company.
For information regarding our dividend payment history as well as a discussion of the factors that influence the decisions of
the Company's Board of Directors regarding dividends and distributions, see “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources - Dividends and Distributions.”
The following stock price performance graph compares the performance of our Common Stock to the S&P 500 Index 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, 2014 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 Index
FTSE NAREIT All Equity REITs Index
For the Period from December 31, 2014 to December 31,
2015
2016
2017
2018
2019
102.40
101.38
102.83
126.19
113.51
111.70
130.40
138.29
121.39
103.22
132.23
116.48
136.04
173.86
149.86
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.
19
During the fourth quarter of 2019, the Company issued an aggregate of 2,000 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
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 quarter, 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. Generally, shares purchased under
the ESPP must be held at least one year. 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 12,
2020.
20
ITEM 6. SELECTED FINANCIAL DATA
Total assets and mortgages and notes payable, net as of the year ended December 31, 2015 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,
2019
2018
2017
2016
735,979
141,683
$
$
720,035
177,630
$
$
702,737
191,663
$
$
665,634
122,546
— $
— $
— $
418,593
134,430
141,683
134,430
1.30
1.30
1.30
1.30
1.90
$
$
$
$
$
$
$
$
169,343
177,630
169,343
1.64
1.64
1.64
1.64
1.85
$
$
$
$
$
$
$
$
182,873
191,663
182,873
1.78
1.78
1.78
1.78
1.76
$
$
$
$
$
$
$
$
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
$
$
$
$
$
$
$
$
$
$
$
2019
2018
2017
2016
2015
December 31,
Total assets
$ 5,138,244
$ 4,675,009
$ 4,623,791
$ 4,561,050
$ 4,485,631
Mortgages and notes payable, net
$ 2,543,710
$ 2,085,831
$ 2,014,333
$ 1,948,047
$ 2,491,813
__________
(1) Includes a special cash dividend of $0.80 per share declared in the quarter ended December 31, 2016 and paid January 10, 2017.
21
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:
•
•
•
buyers may not be available and pricing may not be adequate with respect to the planned dispositions of non-core assets;
comparable sales data on which we based our expectations with respect to the sales price of the non-core assets may not
reflect current market trends;
anticipated general and administrative expense savings related to the closure of our Greensboro and Memphis offices
may not be realized;
•
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 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 in our existing markets could result in an excessive supply relative to customer demand;
our markets may suffer declines in economic and/or office employment 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.
22
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 office employment levels in our core markets are important factors, among others, 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 or negative 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 91.6% at December 31, 2018 to 91.9% at December 31,
2019.
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 2019 (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
397,703
805,197
1,202,900
7.7
5.2
6.0
33.52
$
32.26
$
32.68
(0.65)
32.87
3.89
1.17
$
$
$
(0.49)
31.77
2.86
1.01
$
$
$
(0.54)
32.14
3.20
1.06
$
$
$
$
(1) Weighted average per rentable square foot on an annual basis over the lease term.
Annual combined GAAP rents for new and renewal leases signed in the fourth quarter were $32.14 per rentable square foot,
19.8% higher compared to previous leases in the same office spaces.
23
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,
2019, no customer accounted for more than 3% of our cash revenues other than the Federal Government and Bank of America,
which accounted for 4.6% and 3.7%, respectively, of our cash revenues on an annualized basis. Upon stabilization of the MetLife
III development project in Raleigh, it is expected that MetLife would account for approximately 3.2% of our revenues based on
annualized cash revenues for December 2019. See “Item 2. Properties - Customers.”
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 our properties and related
building and tenant improvement assets are depreciated on a straight-line basis over fixed lives. General and administrative expenses
consist primarily of management and employee salaries and benefits, corporate overhead and short and long-term incentive
compensation.
Net Operating Income
Whether or not we record increasing net operating income (“NOI”) in our same property portfolio 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 was $0.3 million, or 0.1%,
lower in 2019 as compared to 2018 due to an increase in same property expenses of $4.3 million offset by an increase of $4.0
million in same property revenues. Same property revenues were lower primarily due to $8.0 million in credit losses on operating
lease receivables and write-offs of lease incentives associated with Laser Spine Institute on March 1, 2019, partly offset by higher
average GAAP rents per rentable square foot and higher parking income. See “Results of Operations - Comparison of 2019 to
2018 - Laser Spine Institute.” We expect same property NOI to be higher in 2020 as compared to 2019 as higher rental revenues,
mostly from higher average GAAP rents per rentable square foot, no credit losses and write-offs associated with Laser Spine
Institute and higher cost recovery income, are expected to more than offset an anticipated increase in same property operating
expenses.
In addition to the effect of same property NOI, whether or not NOI increases depends upon whether the NOI from our acquired
properties and development properties placed in service exceeds the NOI from property dispositions. NOI was $9.8 million, or
2.1%, higher in 2019 as compared to 2018 due to the impact of development properties placed in service and acquisitions, partly
offset by Laser Spine Institute credit losses and write-offs noted above, NOI lost from property dispositions and lower restoration
fees. We expect NOI to be higher in 2020 as compared to 2019 due to the impact of our net investment activity and no credit losses
and write-offs associated with Laser Spine Institute.
Cash Flows
In calculating net cash related to operating activities, depreciation and amortization, which are non-cash expenses, are added
back to net income. 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.
24
For a discussion regarding dividends and distributions, see "Liquidity and Capital Resources - Dividends and Distributions."
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.
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 $374.9 million of availability at January 24, 2020. 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. 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. Our expected future capital expenditures for started and/or committed new development projects were approximately $277
million at December 31, 2019. Additionally, we may, from time to time, retire outstanding equity and/or 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.
At December 31, 2019, 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 39.3% and there were 106.5 million diluted shares of Common
Stock outstanding.
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.
25
Market Rotation Plan
During the third quarter of 2019, we announced a series of planned investment activities. First, during the fourth quarter of
2019, we acquired Bank of America Tower at Legacy Union in Charlotte’s uptown CBD submarket for a total investment of $436
million. Bank of America Tower at Legacy Union is a trophy, LEED gold-registered office building encompassing 841,000 square
feet with structured parking that delivered in 2019. Second, we have a two-phased plan to exit the Greensboro and Memphis
markets. The first phase consists of selling a select portfolio of assets in Greensboro and Memphis by mid-2020 with a total sales
price that approximates the $436 million total investment for Bank of America Tower at Legacy Union (with the intent of executing
a reverse 1031 exchange) and closing the division offices. In 2020, we sold 35 buildings and land in Greensboro for an aggregate
sale price of $193.4 million. We can provide no assurances, however, that we will dispose of the remainder of these assets on
favorable terms, or at all. The second phase is the planned sale of the remaining assets in both markets. There is no pre-determined
timetable for the second phase.
Results of Operations
Comparison of 2019 to 2018
Laser Spine Institute
In the first quarter of 2019, we provided information on Laser Spine Institute, which occupied a 176,000 square-foot, six-
story building with structured parking in Tampa’s Westshore submarket, a BBD. The building, developed by us, had been used
by Laser Spine Institute for both its company headquarters and an ambulatory surgery center. After the market closed on March 1,
2019, Laser Spine Institute announced it would immediately discontinue its operations. This unexpected announcement affected
all of its locations nationwide. As a result of this sudden closure, we incurred $5.6 million of credit losses on operating lease
receivables and write-offs of $2.3 million of lease incentives, $4.1 million of notes receivable and $11.6 million of tenant
improvements and deferred leasing costs.
Rental and Other Revenues
Rental and other revenues were $15.9 million, or 2.2%, higher in 2019 as compared to 2018 primarily due to development
properties placed in service, acquisitions and higher same property revenues, which increased rental and other revenues by $22.4
million, $4.7 million and $4.0 million, respectively. Same property rental and other revenues were higher primarily due to higher
average GAAP rents per rentable square foot and higher parking income, partly offset by credit losses on operating lease receivables
and write-offs of lease incentives associated with Laser Spine Institute. These increases were partly offset by property dispositions
and lower restoration fees, which decreased rental and other revenues by $11.0 million and $3.8 million, respectively. We expect
rental and other revenues to be higher in 2020 as compared to 2019 due to acquisitions, development properties placed in service
and higher same property revenues (including the effects of Laser Spine Institute credit losses and write-offs in 2019), partly offset
by lost revenue from property dispositions.
Operating Expenses
Rental property and other expenses were $6.1 million, or 2.5%, higher in 2019 as compared to 2018 primarily due to
development properties placed in service, higher same property operating expenses and acquisitions, which increased operating
expenses by $4.9 million, $4.3 million and $0.9 million, respectively. Same property operating expenses were higher primarily
due to higher property taxes, property insurance and repairs and maintenance, partly offset by lower utilities. These increases were
partly offset by a $3.6 million decrease in operating expenses from property dispositions. We expect rental property and other
expenses to be higher in 2020 as compared to 2019 due to higher same property operating expenses, acquisitions and development
properties placed in service, partly offset by lower operating expenses from property dispositions.
Depreciation and amortization was $24.5 million, or 10.7%, higher in 2019 as compared to 2018 primarily due to accelerated
depreciation and amortization of tenant improvements and deferred leasing costs associated with Laser Spine Institute, development
properties placed in service and acquisitions, partly offset by property dispositions. We expect depreciation and amortization to
be higher in 2020 as compared to 2019 due to acquisitions and development properties placed in service, partly offset by accelerated
depreciation and amortization of tenant improvements and deferred leasing costs associated with Laser Spine Institute in 2019
and property dispositions.
In 2019, we recorded aggregate impairments of real estate assets of $5.8 million primarily as a result of shortened hold periods
from classifying all of our assets in Greensboro and Memphis as non-core. In 2018, we recorded aggregate impairments of real
estate assets of $0.4 million, which resulted from changes in market-based inputs and our assumptions about the use of the assets.
26
General and administrative expenses were $4.1 million, or 10.2%, higher in 2019 as compared to 2018 primarily due to certain
previously capitalized lease related costs that are now expensed upon adoption of the new lease accounting standard in 2019 and
higher company-wide base salaries and benefits, executive retirement and consulting costs and severance costs associated with
the anticipated closure of our Greensboro and Memphis offices, partly offset by lower incentive compensation and expensed pre-
development costs. We expect general and administrative expenses to be lower in 2020 as compared to 2019 due to lower severance
costs, salaries and benefits associated with the anticipated closure of our Greensboro and Memphis offices, lower incentive
compensation and executive retirement and consulting costs in 2019.
Interest Expense
Interest expense was $10.2 million, or 14.3%, higher in 2019 as compared to 2018 primarily due to higher average debt
balances, higher average interest rates and lower capitalized interest. We expect interest expense to be higher in 2020 as compared
to 2019 due to higher average debt balances, partly offset by lower average interest rates and higher capitalized interest.
Other Income/(Loss)
Other income/(loss) was $4.5 million lower in 2019 as compared to 2018 primarily due to the write-off of notes receivable
associated with Laser Spine Institute.
Gains on Disposition of Property
Gains on disposition of property were $1.9 million higher in 2019 as compared to 2018 due to the net effect of the disposition
activity in such periods.
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates was $1.0 million, or 46.4%, higher in 2019 as compared to 2018 primarily due
to higher average occupancy. We expect equity in earnings of unconsolidated affiliates to be higher in 2020 as compared to 2019
for the same reason.
Earnings Per Common Share - Diluted
Diluted earnings per common share was $0.34 lower in 2019 as compared to 2018 due to a decrease in net income for the
reasons discussed above.
Comparison of 2018 to 2017
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations”
in our 2018 Annual Report on Form 10-K for a comparison of 2018 to 2017.
27
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,
2019
2018
2017
2019-2018
Change
2018-2017
Change
Net Cash Provided By Operating Activities
$
365,797
$
358,628
$
352,532
$
7,169
$
6,096
Net Cash Used In Investing Activities
Net Cash Provided By/(Used In) Financing Activities
(607,407)
246,209
(306,749)
(130,069)
(200,302)
(142,528)
(300,658)
(106,447)
376,278
12,459
Total Cash Flows
$
4,599
$
(78,190) $
9,702
$
82,789
$
(87,892)
Comparison of 2019 to 2018
The increase in net cash provided by operating activities in 2019 as compared to 2018 was primarily due to higher net cash
from the operations of development properties placed in service, acquisitions and same properties and the timing of cash paid for
operating expenses, partly offset by lower net cash from the settlement of cash flow hedges and property dispositions. We expect
net cash related to operating activities to be higher in 2020 as compared to 2019 due to acquisitions, development properties placed
in service and same properties, partly offset by property dispositions.
The increase in net cash used in investing activities in 2019 as compared to 2018 was primarily due to the acquisition of Bank
of America Tower at Legacy Union in Charlotte in 2019, partly offset by higher net proceeds from disposition activity in 2019
and higher investments in development in-process in 2018. We expect uses of cash for investing activities in 2020 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, 2019, we have approximately $277 million left to fund of our previously-announced development
activity in 2020 and future years. We expect these uses of cash for investing activities will be partly offset by proceeds from
property dispositions in 2020.
The change in net cash provided by/(used in) financing activities in 2019 as compared to 2018 was primarily due to higher
net debt borrowings in 2019. Assuming the net effect of our acquisition, disposition and development activity in 2020 results in
an increase to our assets, we would expect outstanding debt and/or Common Stock balances to increase.
Comparison of 2018 to 2017
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital
Resources” in our 2018 Annual Report on Form 10-K for a comparison of 2018 to 2017.
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
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
28
December 31,
2019
2,543,710
28,859
103,756
2,724
48.91
5,207,937
7,780,506
$
$
$
$
$
2018
2,085,831
28,877
103,557
2,739
38.69
4,112,592
6,227,300
$
$
$
$
$
At December 31, 2019, our mortgages and notes payable and outstanding preferred stock represented 33.1% of our total
capitalization and 39.3% 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, 2019 consisted of $95.3 million of secured indebtedness with an interest
rate of 4.0% and $2,461.4 million of unsecured indebtedness with a weighted average interest rate of 3.56%. The secured
indebtedness was collateralized by real estate assets with an undepreciated book value of $147.1 million. As of December 31,
2019, $471.0 million of our debt does not bear interest at fixed rates or is not protected by interest rate hedge contracts.
Investment Activity
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 2019, we acquired a building in the central business district of Charlotte, which delivered in 2019
and encompasses 841,000 rentable square feet, for a net purchase price of $399.1 million. The assets acquired and liabilities
assumed were recorded at relative 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 $36.9 million of planned leasing capital expenditures. As of the closing date, based on the total anticipated
investment of $436.0 million, the capitalization rate for the acquisition of this building, which was 89.5% leased as of the closing
date, is 6.3% using projected annual GAAP net operating income for 2020. These forward-looking statements are subject to risks
and uncertainties. See “Disclosure Regarding Forward-Looking Statements.”
During the fourth quarter of 2019, we also acquired development land in Richmond and Pittsburgh for an aggregate purchase
price, including capitalized acquisition costs, of $5.8 million.
During the third quarter of 2019, we acquired development land in Raleigh for a purchase price, including capitalized acquisition
costs, of $6.6 million.
During the second quarter of 2019, we and The Bromley Companies formed a joint venture (the "Midtown One joint venture”)
to construct Midtown One, a 150,000 square foot, multi-customer office building located in the mixed-use Midtown Tampa project
in Tampa’s Westshore submarket. Midtown One has an anticipated total investment of $71.3 million. Construction of Midtown
One began in the third quarter of 2019 with a scheduled completion date in the second quarter of 2021. At closing, we agreed to
contribute cash of $20.0 million ($15.9 million of which was funded and/or placed in escrow as of December 31, 2019) in exchange
for an 80.0% interest in the Midtown One joint venture and The Bromley Companies contributed land valued at $5.0 million in
exchange for the remaining 20.0% interest. We also committed to provide a $46.3 million interest-only secured construction loan
to the Midtown One joint venture that is scheduled to mature on the second anniversary of completion. The loan bears interest at
LIBOR plus 250 basis points. As of December 31, 2019, no amounts under the loan have been funded. The Midtown One joint
venture is consolidated.
In 2020, we sold 35 buildings and land in Greensboro for an aggregate sale price of $193.4 million and expect to record
aggregate gains on disposition of property of $105.0 million.
During the fourth quarter of 2019, we sold three buildings for an aggregate sale price of $89.6 million and recorded aggregate
gains on disposition of property of $29.3 million.
During the third quarter of 2019, we sold a building and land parcels for an aggregate sale price of $14.3 million and recorded
aggregate gains on disposition of property of $3.5 million.
During the second quarter of 2019, we sold two buildings and land for an aggregate sale price of $32.5 million and recorded
aggregate gains on disposition of property of $6.7 million.
During the third quarter of 2019, we recorded aggregate impairments of real estate assets of $5.3 million as a result of shortened
hold periods from classifying all of our assets in Greensboro and Memphis as non-core.
29
During the second quarter of 2019, we recorded an impairment of real estate assets of $0.5 million, which resulted from a
change in market-based inputs and our assumptions about the use of the assets.
As of December 31, 2019, we were developing 0.9 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
We have entered into separate equity distribution agreements with each of Wells Fargo Securities, LLC, Robert W. Baird &
Co. Incorporated, BB&T Capital Markets, a division of BB&T Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
BTIG, LLC, Capital One Securities, Inc., Fifth Third Securities, Inc., Jefferies LLC and J.P. Morgan Securities LLC. Under the
terms of the equity distribution agreements, the Company may offer and sell up to $300.0 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 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.
The Company did not issue any shares of Common Stock under these agreements during 2019.
Our $600.0 million unsecured revolving credit facility is scheduled to mature in January 2022 and includes an accordion
feature that allows for an additional $400.0 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 100 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 was $221.0 million and $225.0 million outstanding under our revolving credit facility at December 31, 2019 and
January 24, 2020, respectively. At both December 31, 2019 and January 24, 2020, we had $0.1 million of outstanding letters of
credit, which reduces the availability on our revolving credit facility. As a result, the unused capacity of our revolving credit facility
at December 31, 2019 and January 24, 2020 was $378.9 million and $374.9 million, respectively.
During the third quarter of 2019, the Operating Partnership issued $400.0 million aggregate principal amount of 3.050% notes
due February 2030, less original issuance discount of $1.0 million. These notes were priced to yield 3.079%. During the third
quarter of 2019, prior to the issuance of the 3.050% notes, we obtained $150.0 million notional amount of forward-starting swaps.
Upon the subsequent issuance of the notes, we terminated the forward-starting swaps and paid cash upon settlement. The unrealized
loss of $6.6 million in accumulated other comprehensive income/(loss) will be reclassified to interest expense as interest payments
are made on the debt. Underwriting fees and other expenses were incurred that aggregated $3.4 million; these costs were deferred
and will be amortized over the term of the notes. The net effect of the amortization of these items resulted in an effective fixed
interest rate of 3.37%.
During the third quarter of 2019, we prepaid without penalty $100.0 million of our $200.0 million unsecured bank term loan
that is scheduled to mature in January 2022. The interest rate on the term loan at our current credit ratings is LIBOR plus 110 basis
points. We recorded $0.3 million of loss on debt extinguishment related to this prepayment.
During the first quarter of 2019, we prepaid without penalty our $225.0 million, seven-year unsecured bank term loan, which
was scheduled to mature in June 2020. The interest rate on the term loan was LIBOR plus 110 basis points. We recorded $0.4
million of loss on debt extinguishment related to this prepayment.
During the first quarter of 2019, the Operating Partnership issued $350.0 million aggregate principal amount of 4.20% notes
due April 2029, less original issuance discount of $1.0 million. These notes were priced to yield 4.234%. During 2018, we obtained
an aggregate of $225.0 million notional amount of forward-starting swaps. Upon issuance of the notes, we terminated the forward-
starting swaps and paid cash upon settlement. The unrealized loss of $5.1 million in accumulated other comprehensive income/
(loss) will be reclassified to interest expense as interest payments are made on the debt. Underwriting fees and other expenses
were incurred that aggregated $3.1 million; these costs were deferred and will be amortized over the term of the notes. The net
effect of the amortization of these items resulted in an effective fixed interest rate of 4.52%.
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."
30
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 $30.0 million with respect to other loans in some circumstances.
As of December 31, 2019, the Operating Partnership had the following unsecured notes outstanding ($ in thousands):
Notes due June 2021
Notes due January 2023
Notes due March 2027
Notes due March 2028
Notes due April 2029
Notes due February 2030
Face Amount
300,000
$
250,000
$
300,000
$
350,000
$
350,000
$
400,000
$
$
$
$
$
$
$
Carrying
Amount
Stated
Interest Rate
Effective
Interest Rate
299,369
249,201
297,134
346,621
349,091
399,009
3.200%
3.625%
3.875%
4.125%
4.200%
3.050%
3.363%
3.752%
4.038%
4.271%
4.234%
3.079%
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.
31
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, 2019 (in thousands):
Mortgages and Notes Payable:
Principal payments (1)
Interest payments
Financing Lease Obligations
Purchase Obligations:
Lease and contractual commitments and
contingent consideration (2)
Operating Lease Obligations:
Amounts due during the years ending December 31,
Total
2020
2021
2022
2023
2024
Thereafter
$ 2,566,303
$
1,952
$ 302,032
$ 523,115
$ 252,201
$
2,291
$ 1,484,712
571,365
90,038
84,758
71,740
56,868
56,401
211,560
15
15
—
—
466,770
400,264
64,443
943
—
—
—
—
—
1,120
Operating ground leases
94,369
2,086
2,127
2,169
2,167
2,123
83,697
Total
__________
$ 3,698,822
$ 494,355
$ 453,360
$ 597,967
$ 311,236
$ 60,815
$ 1,781,089
(1) Excludes amortization of premiums, discounts, debt issuance costs and/or purchase accounting adjustments.
(2) Consists primarily of commitments under signed leases and contracts for operating properties, excluding tenant-funded tenant improvements,
and contracts for development/redevelopment projects. This includes $340.9 million of contractual commitments related to our in-process
development activity and newly acquired properties, of which $279.8 million is scheduled to be funded in 2020. 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, 2019 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 3.75% and 2.81%, respectively,
at December 31, 2019. For additional information about our operating lease obligations, mortgages and notes payable and purchase
obligations, see Notes 2, 6 and 8, respectively, to our Consolidated Financial Statements.
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. 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.”
The amount of future distributions that will be made is at the discretion of the Company's Board of Directors. 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 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;
32
•
•
•
•
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.
During each quarter of 2019, the Company declared and paid a cash dividend of $0.475 per share of Common Stock.
On February 4, 2020, the Company declared a cash dividend of $0.48 per share of Common Stock, which is payable on
March 10, 2020 to stockholders of record as of February 18, 2020.
Current and Future Cash Needs
We anticipate that our available cash and cash equivalents, cash flows from operating activities and other available financing
sources, including the issuance of debt securities by the Operating Partnership, the issuance of secured debt, bank term loans,
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.
We had $9.5 million of cash and cash equivalents as of December 31, 2019. The unused capacity of our revolving credit
facility at December 31, 2019 and January 24, 2020 was $378.9 million and $374.9 million, respectively, excluding an accordion
feature that allows for an additional $400.0 million of borrowing capacity subject to additional lender commitments.
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 2020, in addition to completing the first phase of our plan to exit Greensboro and Memphis, we also expect to sell
$100 million to $150 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.
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;
33
•
•
Impairments of real estate assets and investments in unconsolidated affiliates;
Sales of real estate; and
• Leases.
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.
Initial direct costs, primarily commissions, related to the leasing of our office 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 and our in-house
personnel for new leases or lease renewals are capitalized. Capitalized leasing costs are amortized on a straight-line basis over the
initial fixed terms of the respective leases. All other costs to negotiate or arrange a lease 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 accounted for as asset acquisitions, 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 and other identifiable intangible assets and assumed liabilities. We allocate fair value on a relative basis
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.
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.
34
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 our evaluation of events or changes in
circumstances indicate that the carrying value may not be recoverable, 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 of real estate where we have collected the consideration to which we are entitled in exchange for transferring the
real estate, 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. Any post sale involvement is accounted for as separate performance obligations and when the separate
performance obligations are satisfied, the sales price allocated to each is recognized.
Leases
To generate positive cash flow, as a lessor, we generally lease our office properties to lessees in exchange for fixed monthly
payments that cover rent, property taxes, insurance and certain cost recoveries, primarily common area maintenance (“CAM”).
Office properties owned by us that are under lease are primarily located in Atlanta, Charlotte, Nashville, Orlando, Pittsburgh,
Raleigh, Richmond and Tampa and are leased to a wide variety of lessees across many industries. Our leases were determined to
be operating leases and mostly range from three to 10 years. Payments from customers for CAM are considered nonlease components
that are separated from lease components and are generally accounted for in accordance with the revenue recognition standard.
However, we qualified for and elected the practical expedient related to combining the components because the lease component
is classified as an operating lease and the timing and pattern of transfer of CAM income, which is not the predominant component,
is the same as the lease component. As such, consideration for CAM is accounted for as part of the overall consideration in the
lease. Payments from customers for property taxes and insurance are considered noncomponents of the lease and therefore no
consideration is allocated to them because they do not transfer a good or service to the customer. Fixed contractual payments from
our 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.
35
Some of our leases are subject to annual changes in the Consumer Price Index (“CPI”). Although increases in the CPI are not
estimated as part of our measurement of straight-line rental revenue, to the extent that actual CPI is greater or less than the CPI
at lease commencement, the amount of straight-line rent recognized in a given year is affected accordingly.
Some of our leases have termination options and/or extension options. Termination options allow the customer to terminate
the lease prior to the end of the lease term under certain circumstances. Termination options generally become effective half way
or further into the original lease term and require advance notification from the customer and payment of a termination fee that
reimburses us for a portion of the remaining rent under the original lease term and the undepreciated lease inception costs such
as commissions, tenant improvements and lease incentives. Termination fee income is recognized on a straight-line basis from
the date of the executed termination agreement through lease expiration when the amount of the fee is determinable and collectability
of the fee is reasonably assured. Our extension options generally require a re-negotiation with the customer at market rates.
Lease related receivables, which include accounts receivable and accrued straight-line rents receivable, are reduced for credit
losses. Such amounts are recognized as a reduction to rental and other revenues. We regularly evaluate the collectability of our
lease related receivables. Our evaluation of collectability 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 reduce
the related receivable balance for amounts deemed uncollectible. If our assumptions regarding the collectability of lease related
receivables prove incorrect, we could experience credit losses in excess of what was recognized in rental and other revenues.
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 the National Association of Real Estate Investment
Trusts ("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;
•
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
36
•
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
Unconsolidated affiliates:
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,
2019
2018
2017
$
141,683
$
177,630
$
191,663
(1,214)
(1,207)
(1,239)
251,545
227,045
225,052
1,400
—
—
(38,582)
(37,096)
(53,170)
2,425
—
2,284
—
2,298
(4,617)
357,257
368,656
359,987
(2,488)
354,769
3.33
$
$
(2,492)
366,164
3.45
$
$
(2,492)
357,495
3.39
$
$
106,445
106,268
105,594
In addition, the Company believes NOI 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 less rental property and other expenses. 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, same property NOI and cash NOI.
As of December 31, 2019, our same property portfolio consisted of 207 in-service properties encompassing 28.3 million
rentable square feet that were wholly owned during the entirety of the periods presented (from January 1, 2018 to December 31,
2019). As of December 31, 2018, our same property portfolio consisted of 210 in-service properties encompassing 28.1 million
rentable square feet that were wholly owned during the entirety of the periods presented (from January 1, 2017 to December 31,
2018). The change in our same property portfolio was due to the addition of three newly developed properties encompassing 0.8
million rentable square feet placed in service during 2017. These additions were offset by the removal of six properties encompassing
0.6 million rentable square feet that were sold during 2019.
Rental and other revenues related to properties not in our same property portfolio were $57.0 million and $45.0 million for
the years ended December 31, 2019 and 2018, respectively. Rental property and other expenses related to properties not in our
same property portfolio were $14.8 million and $13.0 million for the years ended December 31, 2019 and 2018, respectively.
37
The following table sets forth the Company’s NOI, same property NOI and same property cash NOI (in thousands):
Net income
Equity in earnings of unconsolidated affiliates
Gains on disposition of property
Other (income)/loss
Interest expense
General and administrative expenses
Impairments of real estate assets
Depreciation and amortization
Net operating income
Non same property and other net operating income
Same property net operating income
Same property net operating income
Lease termination fees, straight-line rent and other non-cash adjustments
Same property cash net operating income
Year Ended December 31,
2019
2018
$
141,683
$
177,630
(3,276)
(39,517)
2,510
81,648
44,067
5,849
254,504
487,468
(42,202)
445,266
445,266
(15,617)
429,649
$
$
$
(2,238)
(37,638)
(1,940)
71,422
40,006
423
229,955
477,620
(32,052)
445,568
445,568
(21,293)
424,275
$
$
$
38
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 existing and prospective debt instruments. We generally do not hold or issue these derivative contracts for trading
or speculative purposes.
At December 31, 2019, we had $2,035.7 million principal amount of fixed rate debt outstanding, a $747.7 million increase
as compared to December 31, 2018, excluding 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 $2,107.1 million. If interest rates had been 100 basis points
higher, the aggregate fair market value of our fixed rate debt would have been $125.7 million lower. If interest rates had been 100
basis points lower, the aggregate fair market value of our fixed rate debt would have been $136.8 million higher.
At December 31, 2019, we had $471.0 million of variable rate debt outstanding, a $61.0 million decrease as compared to
December 31, 2018, not protected by interest rate hedge contracts. If the weighted average interest rate on this variable rate debt
had been 100 basis points higher or lower, the annual interest expense at December 31, 2019 would increase or decrease by $4.7
million.
See "Item 1A. Risk Factors - Increases in interest rates would increase our interest expense."
At December 31, 2019, we had $50.0 million of variable rate debt outstanding with $50.0 million of related floating-to-fixed
interest rate swaps. These swaps effectively fix the underlying one-month LIBOR rate at a weighted average rate of 1.693%. If
the underlying LIBOR interest rates increase or decrease by 100 basis points, the aggregate fair market value of the swaps at
December 31, 2019 would increase or decrease by $1.0 million.
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 44 for Index to Consolidated Financial Statements of Highwoods Properties, Inc.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
39
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 Theodore J. Klinck, 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, 2019 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, 2019, 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 as of December 31, 2019.
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Highwoods Properties, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Highwoods Properties, Inc. and subsidiaries (the “Company”)
as of December 31, 2019 based on criteria established in Internal Control-Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control-Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019 of the Company and
our report dated February 4, 2020 expressed an unqualified opinion on those financial statements.
Basis for Opinion
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 are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
February 4, 2020
41
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 2019 that
materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Disclosure Controls and Procedures
SEC rules 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.
ITEM 9B. OTHER INFORMATION
Thomas P. Anderson, 71, was elected to join the Company’s Board of Directors effective January 29, 2020. Mr. Anderson,
who will serve on the Company’s compensation and governance committee, qualifies as an independent director under the standards
of the New York Stock Exchange.
Mr. Anderson has had an extensive career in banking, finance, investment management and real estate. He retired in June
2019 after 18 years as Chief Executive Officer of the Medical University of South Carolina Foundation. Previously, Mr. Anderson
spent 27 years at Bank of America as President of Bank of America South Carolina and head of its Carolinas Business Banking
group. He is a life trustee of the Saul Alexander Foundation, a director and treasurer of the Winwood Farm Home for Boys, and
a Senior Vice President at Plantation Services, a real estate and land management firm.
42
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 12, 2020. No changes have been made to the procedures by which stockholders may recommend nominees to
the Company's board of directors since the 2019 annual meeting, which was held on May 8, 2019. 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 12, 2020.
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 12, 2020.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information about certain relationships and related transactions, if any, 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 12, 2020.
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 12, 2020.
43
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Highwoods Properties, Inc.
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 2019 and 2018
Consolidated Statements of Income for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018 and
2017
Consolidated Statements of Equity for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
Page
45
47
48
49
50
52
54
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Highwoods Properties, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Highwoods Properties, Inc. and subsidiaries (the “Company”)
as of December 31, 2019 and 2018, 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, 2019, and the related notes (collectively referred to as the
“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established
in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 4, 2020, expressed an unqualified opinion on the Company’s internal control over
financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that
were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are
material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and
we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the
accounts or disclosures to which they relate.
Impairment of Real Estate Assets-Refer to Notes 1 and 3 to the financial statements
Critical Audit Matter Description
The Company performs an impairment analysis of properties which begins with an evaluation of events or changes in circumstances
that may indicate that the carrying value may not be recoverable, such as a significant decline in occupancy, identification of
materially adverse legal or environmental factors, a change in the 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.
The Company makes judgments to evaluate real estate assets for possible indications of impairment. Changes in these judgments
could have a material impact on the real estate assets identified for further analysis.
Given the Company’s evaluation of possible indications of impairment of real estate assets requires management to make judgments,
performing audit procedures to evaluate whether management appropriately identified events or changes in circumstances
indicating that the carrying amounts of real estate assets may not be recoverable required a high degree of auditor judgment.
45
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the evaluation of real estate assets for possible indications of impairment included the following,
among others:
• We tested the effectiveness of controls over management’s identification of possible circumstances that may indicate that the
carrying amounts of real estate assets are no longer recoverable, including controls over management’s designation of an asset
as core or non-core, occupancy and management’s estimates of fair values.
• We evaluated management’s identification of impairment indicators by developing an independent determination if properties
exhibit an indicator of impairment by:
•
Inquiring of management and reading investment committee and board minutes to identify properties that should be
evaluated as non-core and therefore may impact the anticipated holding period.
• Testing real estate assets for possible indications of impairment, including searching for adverse asset-specific
circumstances and/or market conditions by circulating a questionnaire to regional property managers.
• With the assistance of our fair value specialists, developing an independent expectation of impairment indicators and
comparing such expectation to management’s analysis.
Real Estate and Related Assets-Acquisitions-Refer to Notes 1 and 3 to the financial statements
Critical Audit Matter Description
The Company acquired a building in the central business district of Charlotte, which delivered in 2019 for a net purchase price of
$399.1 million. The Company accounted for the acquisition as an asset acquisition. Accordingly, the purchase price paid for assets
acquired and liabilities assumed was allocated, based on relative fair value as determined by management, with the assistance of
third-party specialists, to land, buildings, tenant improvements and intangible assets and liabilities such as above and below market
leases and acquired in-place leases. Management assessed the relative fair value based on estimated cash flow projections that
utilized discount and capitalization rates as well as available market information.
Given the allocation of relative fair value to the assets acquired and liabilities assumed required management to make significant
estimates related to assumptions such as discount rates, capitalization rates, market rental rates and land values, performing audit
procedures to evaluate the reasonableness of these assumptions required a high degree of auditor judgment and an increased extent
of effort, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the relative fair value of assets acquired and liabilities assumed included the following, among
others:
• We tested the effectiveness of controls over the purchase price allocation, including management’s controls over the review
of the third-party appraisal, the identification of real estate assets, intangible assets and liabilities and the valuation methodology
for estimating the relative fair value of assets acquired and liabilities assumed.
• With the assistance of our fair value specialists, we evaluated the reasonableness of the valuation methodology, discount rates,
capitalization rates, market rental rates and land values, by developing a range of independent estimates and comparing our
estimates to those used by management.
• We tested the mathematical accuracy of the valuation models and the source information underlying the determination of the
intangible assets and liabilities fair value.
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
February 4, 2020
We have served as the Company’s auditor since 2006.
46
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
Mortgages and notes receivable, net of allowance of $0 and $44, respectively
Accrued straight-line rents receivable
Investments in and advances to unconsolidated affiliates
Deferred leasing costs, net of accumulated amortization of $146,125 and $149,275, respectively
Prepaid expenses and other assets, net of accumulated depreciation of $20,017 and $18,074,
respectively
Total Assets
Liabilities, Noncontrolling Interests in the Operating Partnership and Equity:
Mortgages and notes payable, net
Accounts payable, accrued expenses and other liabilities
Total Liabilities
Commitments and contingencies
December 31,
2019
2018
$
515,095
$
491,441
5,128,150
4,676,862
172,706
99,163
165,537
128,248
5,915,114
5,462,088
(1,388,566)
(1,296,562)
4,526,548
4,165,526
20,790
9,505
5,237
23,370
1,501
234,652
26,298
231,347
—
3,769
6,374
25,952
5,599
220,088
23,585
195,273
$
$
58,996
5,138,244
2,543,710
286,911
$
$
28,843
4,675,009
2,085,831
218,922
2,830,621
2,304,753
Noncontrolling interests in the Operating Partnership
133,216
105,960
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), 28,859 and 28,877 shares issued and outstanding, respectively
28,859
28,877
Common Stock, $.01 par value, 200,000,000 authorized shares;
103,756,046 and 103,557,065 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
1,038
1,036
2,954,779
2,976,197
(831,808)
(769,303)
(471)
9,913
2,152,397
2,246,720
22,010
17,576
2,174,407
2,264,296
Total Liabilities, Noncontrolling Interests in the Operating Partnership and Equity
$
5,138,244
$
4,675,009
See accompanying notes to consolidated financial statements.
47
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
Other income/(loss)
Gains on disposition of property
Equity in earnings of unconsolidated affiliates
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:
Net income available for common stockholders
Weighted average Common Shares outstanding – basic
Earnings per Common Share – diluted:
Net income available for common stockholders
Weighted average Common Shares outstanding – diluted
Year Ended December 31,
2019
2018
2017
$
735,979
$
720,035
$
702,737
248,511
254,504
5,849
44,067
552,931
81,648
(2,510)
39,517
3,276
242,415
229,955
423
40,006
512,799
71,422
1,940
37,638
2,238
236,888
227,832
1,445
39,648
505,813
69,105
2,283
54,157
7,404
141,683
177,630
191,663
(3,551)
(1,214)
(2,488)
134,430
1.30
$
$
(4,588)
(1,207)
(2,492)
169,343
1.64
$
$
103,692
103,439
(5,059)
(1,239)
(2,492)
182,873
1.78
102,682
1.30
$
1.64
$
1.78
106,445
106,268
105,594
$
$
$
See accompanying notes to consolidated financial statements.
48
HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Comprehensive Income
(in thousands)
Comprehensive income:
Net income
Other comprehensive income/(loss):
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,
2018
2017
2019
$
141,683
$
177,630
$
191,663
(9,134)
(1,250)
(10,384)
131,299
(4,765)
126,534
$
4,161
(2,086)
2,075
179,705
(5,795)
173,910
$
1,732
1,157
2,889
194,552
(6,298)
188,254
See accompanying notes to consolidated financial statements.
49
HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Equity
(in thousands, except share amounts)
Balance at December 31, 2016
101,665,554
$
1,017
$
28,920
$ 2,850,881
$
4,949
$
17,961
$
(749,412)
$ 2,154,316
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
Dividends on Common Stock ($1.76 per share)
Dividends on Preferred Stock ($86.25 per share)
Adjustment of noncontrolling interests in the Operating
Partnership to fair value
Distributions to noncontrolling interests in consolidated
affiliates
1,480,573
10,000
Issuances of restricted stock
110,748
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, 2017
Issuances of Common Stock, net of issuance costs and
tax withholdings
Conversions of Common Units to Common Stock
Dividends on Common Stock ($1.85 per share)
Dividends on Preferred Stock ($86.25 per share)
Adjustment of noncontrolling interests in the Operating
Partnership to fair value
Distributions to noncontrolling interests in consolidated
affiliates
33,652
90,001
Issuances of restricted stock
172,440
Redemptions/repurchases of Preferred Stock
Share-based compensation expense, net of forfeitures
(5,903)
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, 2018
15
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
—
—
—
—
(28)
—
—
—
—
—
70,962
511
—
—
354
—
—
—
6,691
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,889
—
—
—
—
—
(1,784)
—
—
—
—
—
—
70,977
511
(180,805)
(180,805)
(2,492)
(2,492)
—
—
—
—
—
354
(1,784)
—
(28)
6,692
(5,059)
(5,059)
1,239
(1,239)
—
—
—
191,663
—
191,663
2,889
194,552
—
—
—
—
—
—
—
—
3
—
—
—
—
—
—
—
—
—
—
—
(15)
—
—
—
—
—
1,865
4,043
—
—
33,427
—
—
—
7,463
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,075
—
—
—
—
—
(1,047)
—
—
—
—
—
—
1,865
4,043
(191,302)
(191,302)
(2,492)
(2,492)
—
—
—
—
—
33,427
(1,047)
—
(15)
7,466
(4,588)
(4,588)
1,207
(1,207)
—
—
—
177,630
—
177,630
2,075
179,705
103,266,875
1,033
28,892
2,929,399
7,838
17,416
(747,344)
2,237,234
103,557,065
$
1,036
$
28,877
$ 2,976,197
$
9,913
$
17,576
$
(769,303)
$ 2,264,296
50
HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Equity - Continued
(in thousands, except share amounts)
Balance at December 31, 2018
103,557,065
$
1,036
$
28,877
$ 2,976,197
$
9,913
$
17,576
$
(769,303)
$ 2,264,296
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
(143)
15,000
Issuances of Common Stock, net of issuance costs and
tax withholdings
Conversions of Common Units to Common Stock
Dividends on Common Stock ($1.90 per share)
Dividends on Preferred Stock ($86.25 per share)
Adjustment of noncontrolling interests in the Operating
Partnership to fair value
Distributions to noncontrolling interests in consolidated
affiliates
Contributions from noncontrolling interests in
consolidated affiliates
Issuances of restricted stock
190,934
Redemptions/repurchases of Preferred Stock
Share-based compensation expense, net of forfeitures
(6,810)
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, 2019
—
—
—
—
—
—
—
—
—
2
—
—
—
—
—
—
—
—
—
—
—
—
(18)
—
—
—
—
—
298
663
—
—
(29,557)
—
—
—
—
7,178
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(10,384)
—
—
—
—
—
(1,767)
4,987
—
—
—
—
—
—
298
663
(196,935)
(196,935)
(2,488)
(2,488)
—
—
—
—
—
—
(29,557)
(1,767)
4,987
—
(18)
7,180
(3,551)
(3,551)
1,214
(1,214)
—
—
—
141,683
—
141,683
(10,384)
131,299
103,756,046
$
1,038
$
28,859
$ 2,954,779
$
(471)
$
22,010
$
(831,808)
$ 2,174,407
See accompanying notes to consolidated financial statements.
51
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,
2019
2018
2017
$
141,683
$
177,630
$
191,663
Depreciation and amortization
254,504
229,955
227,832
Amortization of lease incentives and acquisition-related intangible assets and
liabilities
Share-based compensation expense
Credit losses on operating lease receivables
Write-off of mortgages and notes 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
Equity in earnings of unconsolidated affiliates
Distributions of earnings from unconsolidated affiliates
Settlement of cash flow hedges
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
(505)
7,180
9,861
4,087
(184)
2,970
(1,250)
1,619
5,849
640
(39,517)
(3,276)
1,149
(11,749)
(3,271)
1,610
(29,828)
24,225
365,797
(1,943)
7,466
1,212
—
(451)
2,857
(2,086)
1,449
423
—
(37,638)
(2,238)
2,104
7,216
1,759
1,217
(23,203)
(7,101)
358,628
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
Net proceeds from disposition of real estate assets
Distributions of capital from unconsolidated affiliates
Repayments of mortgages and notes receivable
Investments in and advances to unconsolidated affiliates
Changes in other investing activities
Net cash used in investing activities
$
(424,222)
(116,111)
(138,754)
(53,826)
133,326
7,833
295
(9,977)
(5,971)
(607,407) $
(50,649)
(150,310)
(121,534)
(68,256)
88,813
105
1,312
—
(6,230)
(306,749) $
(1,172)
6,692
1,508
—
(509)
3,166
1,157
705
1,445
26
(54,157)
(7,404)
5,078
7,322
(4,974)
7,908
(32,234)
(1,520)
352,532
(1,840)
(150,944)
(109,742)
(63,780)
129,503
11,670
2,917
(10,063)
(8,023)
(200,302)
52
HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Cash Flows – Continued
(in thousands)
Financing activities:
Dividends on Common Stock
Special dividend on Common Stock
Redemptions/repurchases of Preferred Stock
Dividends on Preferred Stock
Distributions to noncontrolling interests in the Operating Partnership
Special distribution 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 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 and restricted cash
Cash and cash equivalents and restricted cash at beginning of the period
Cash and cash equivalents and restricted cash at end of the period
Reconciliation of cash and cash equivalents and restricted cash:
Cash and cash equivalents at end of the period
Restricted cash at end of the period
Cash and cash equivalents and restricted cash at end of the period
Supplemental disclosure of cash flow information:
$
$
$
$
Year Ended December 31,
2019
2018
2017
(196,935) $
—
(18)
(2,488)
(5,189)
—
(1,767)
2,086
—
(1,788)
604,600
(565,600)
747,990
(326,876)
—
(7,806)
246,209
4,599
10,143
14,742
$
(191,302) $
—
(15)
(2,492)
(5,167)
—
(1,047)
3,637
(95)
(1,677)
438,900
(501,900)
345,863
(211,803)
—
(2,971)
(130,069)
(78,190)
88,333
10,143
$
(180,805)
(81,205)
(28)
(2,492)
(4,987)
(2,271)
(1,784)
76,268
(1,283)
(4,008)
780,300
(535,300)
656,001
(832,553)
(57)
(8,324)
(142,528)
9,702
78,631
88,333
Year Ended December 31,
2019
2018
2017
9,505
5,237
14,742
$
$
3,769
6,374
10,143
$
$
3,272
85,061
88,333
Year Ended December 31,
2019
2018
2017
Cash paid for interest, net of amounts capitalized
$
72,014
$
67,235
$
68,207
Supplemental disclosure of non-cash investing and financing activities:
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 leasing costs
Write-off of fully amortized debt issuance costs
Adjustment of noncontrolling interests in the Operating Partnership to fair value
Contingent consideration in connection with the acquisition of land
Contributions from noncontrolling interests in consolidated affiliates
Initial recognition of lease liabilities related to right of use assets
$
Year Ended December 31,
2019
2018
2017
(9,134) $
663
5,625
85,727
45,042
1,791
29,557
1,200
4,987
35,349
$
4,161
4,043
(165)
76,558
34,191
2,733
(33,427)
—
—
—
1,732
511
(1,912)
59,108
40,517
11,724
(354)
750
—
—
See accompanying notes to consolidated financial statements.
53
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
(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, 2019, we
owned or had an interest in 31.7 million rentable square feet of in-service properties, 1.2 million rentable square feet of office
properties under development and approximately 275 acres of development land.
The Company is the sole general partner of the Operating Partnership. At December 31, 2019, the Company owned all of
the Preferred Units and 103.3 million, or 97.4%, of the Common Units in the Operating Partnership. Limited partners owned the
remaining 2.7 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 2019, the Company redeemed
15,000 Common Units for a like number of shares of Common Stock.
Basis of Presentation
Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United
States of America (“GAAP”).
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,
2019, three properties owned through a joint venture investment were consolidated. We also consolidate those entities deemed to
be variable interest entities in which we are determined to be the primary beneficiary. At December 31, 2019, we have involvement
with, and are the primary beneficiary in, an entity that we concluded to be a variable interest entity (see Note 4).
In addition, during 2019, we acquired a building using a special purpose entity owned by a qualified intermediary to facilitate
a potential Section 1031 reverse exchange under the Internal Revenue Code. To realize the tax deferral available under the Section
1031 exchange, we must complete the Section 1031 exchange, and take title to the to-be-exchanged building within 180 days of
the acquisition date. We have determined that this entity is a variable interest entity of which we are the primary beneficiary and
therefore, we consolidate this entity. As of December 31, 2019, this variable interest entity had total assets, liabilities and cash
flows of $425.0 million, $24.0 million and $2.5 million, respectively.
All intercompany transactions and accounts have been eliminated.
Certain amounts within the Consolidated Statements of Income for the years ended December 31, 2018 and 2017 were removed
and/or combined to conform to the current year presentation.
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.
54
Insurance
We are primarily self-insured for health care claims for participating employees. We have stop-loss coverage to limit our
exposure to significant claims on a per claim and annual aggregate basis. We determine our liabilities for claims, including incurred
but not reported losses, based on all relevant information, including actuarial estimates of claim liabilities. At December 31, 2019,
a reserve of $0.6 million was recorded to cover estimated reported and unreported claims.
Other Events
During the third quarter of 2019, we announced a series of planned investment activities. First, during the fourth quarter of
2019, we acquired Bank of America Tower at Legacy Union in Charlotte’s uptown CBD submarket for a total investment of $436
million. Bank of America Tower at Legacy Union is a trophy, LEED gold-registered office building encompassing 841,000 square
feet with structured parking that delivered in 2019. Second, we have a two-phased plan to exit the Greensboro and Memphis
markets. The first phase consists of selling a select portfolio of assets in Greensboro and Memphis by mid-2020 with a total sales
price that approximates the $436 million total investment for Bank of America Tower at Legacy Union (with the intent of executing
a reverse 1031 exchange) and closing the division offices. In 2020, we sold 35 buildings and land in Greensboro for an aggregate
sale price of $193.4 million. We can provide no assurances, however, that we will dispose of the remainder of these assets on
favorable terms, or at all. The second phase is the planned sale of the remaining assets in both markets. There is no pre-determined
timetable for the second phase. As a result of the announced plan to exit the Greensboro and Memphis markets and close our
division offices, we recorded $1.8 million of severance costs in 2019.
During the first quarter of 2019, Laser Spine Institute, which leased a 176,000 square foot building with structured parking
in Tampa’s Westshore submarket, suddenly ceased operations. As a result of this sudden closure, we incurred $5.6 million of credit
losses on operating lease receivables and $2.3 million of write-offs of lease incentives (in rental and other revenues), $4.1 million
of write-offs of notes receivable (in other income/(loss)) and $11.6 million of write-offs of tenant improvements and deferred
leasing costs (in depreciation and amortization).
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 $214.7 million, $191.0 million and $184.4 million for the years ended December 31, 2019, 2018 and 2017,
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.
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 accounted for as asset acquisitions, 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 and other identifiable intangible assets and assumed liabilities. We allocate fair value on a relative basis
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
55
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 our evaluation of events or changes in
circumstances indicate that the carrying value may not be recoverable, 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 of real estate where we have collected the consideration to which we are entitled in exchange for transferring the
real estate, 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. Any post sale involvement is accounted for as separate performance obligations and when the separate
performance obligations are satisfied, the sales price allocated to each is recognized.
56
Leases
See Note 2 for significant accounting policies and related disclosures with respect to revenue recognition for our leases,
accounting for initial direct costs and lease incentive costs and credit losses on operating lease receivables as a result of the lease
standard adoption effective January 1, 2019.
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.
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 and escrows and reserves for debt service, real estate taxes and property insurance established
pursuant to certain mortgage financing arrangements.
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.
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 differences between such income and the amount
recognized for tax purposes.
Concentration of Credit Risk
At December 31, 2019, properties that we wholly own were leased to 1,785 customers. The geographic locations that comprise
greater than 10.0% of our rental and other revenues are Atlanta, Nashville, Raleigh and Tampa. Our customers engage in a wide
variety of businesses. No single customer generated more than 5% of our consolidated revenues during 2019.
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-
57
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, 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 existing and prospective 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. Changes in the fair value of derivatives
designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income/(loss) and are
subsequently reclassified into interest expense as interest payments are made on our debt.
We account for terminated derivative instruments by recognizing the related accumulated other 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 other 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 (inclusive of 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.
Recently Issued Accounting Standards
The Financial Accounting Standards Board ("FASB") issued an accounting standards update ("ASU") that eliminates the
requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a
hedging instrument to be presented in the same income statement line as the hedged item when the hedged item affects earnings.
We adopted the ASU as of January 1, 2019 with no material effect on our Consolidated Financial Statements.
The FASB issued an ASU that changes certain disclosure requirements for fair value measurements. The ASU is required to
be adopted in 2020 and applied prospectively. We do not expect such adoption to have a material effect on our Notes to Consolidated
Financial Statements.
2. Leases
On January 1, 2019, we adopted Accounting Standards Codification Topic 842 “Leases” (“ASC 842”), which supersedes
Accounting Standards Codification Topic 840 “Leases” (“ASC 840”). Information in this Note 2 with respect to our leases and
lease related costs as both lessee and lessor and lease related receivables as lessor is presented under ASC 842 as of and for the
year ended December 31, 2019 and under ASC 840 as of and for the year ended December 31, 2018.
We adopted ASC 842 using the modified retrospective approach whereby the cumulative effect of adoption was recognized
on the adoption date and prior periods were not restated. There was no net cumulative effect adjustment to retained earnings as
of January 1, 2019 as a result of this adoption. ASC 842 sets out the principles for the recognition, measurement, presentation and
disclosure of leases for both lessees and lessors. We operate as both a lessor and a lessee. As a lessor, we are required under ASC
842 to account for leases using an approach that is substantially equivalent to ASC 840's guidance for operating leases and other
leases such as sales-type leases and direct financing leases. In addition, ASC 842 requires lessors to capitalize and amortize only
incremental direct leasing costs. As a lessee, we are required under the new standard to apply a dual approach, classifying leases,
such as ground leases, as either finance or operating leases based on the principle of whether or not the lease is effectively a
financed purchase. This classification determines whether lease expense is recognized based on an effective interest method or
58
on a straight-line basis over the term of the lease. ASC 842 also requires lessees to record a right of use asset and a lease liability
for all leases with a term of greater than a year regardless of their classification. We have also elected the practical expedient not
to recognize right of use assets and lease liabilities for leases with a term of a year or less.
On adoption of the standard, we elected the package of practical expedients provided for in ASC 842, including:
• No reassessment of whether any expired or existing contracts were or contained leases;
• No reassessment of the lease classification for any expired or existing leases; and
• No reassessment of initial direct costs for any existing leases.
The package of practical expedients was made as a single election and was consistently applied to all existing leases as of
January 1, 2019. We also elected the practical expedient provided to lessors in a subsequent amendment to ASC 842 that removed
the requirement to separate lease and nonlease components, provided certain conditions were met.
Information as Lessor Under ASC 842
To generate positive cash flow, as a lessor, we generally lease our office properties to lessees in exchange for fixed monthly
payments that cover rent, property taxes, insurance and certain cost recoveries, primarily common area maintenance (“CAM”).
Office properties owned by us that are under lease are primarily located in Atlanta, Charlotte, Nashville, Orlando, Pittsburgh,
Raleigh, Richmond and Tampa and are leased to a wide variety of lessees across many industries. Our leases were determined to
be operating leases and mostly range from three to 10 years. Payments from customers for CAM are considered nonlease components
that are separated from lease components and are generally accounted for in accordance with the revenue recognition standard.
However, we qualified for and elected the practical expedient related to combining the components because the lease component
is classified as an operating lease and the timing and pattern of transfer of CAM income, which is not the predominant component,
is the same as the lease component. As such, consideration for CAM is accounted for as part of the overall consideration in the
lease. Payments from customers for property taxes and insurance are considered noncomponents of the lease and therefore no
consideration is allocated to them because they do not transfer a good or service to the customer. Fixed contractual payments from
our 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.
Some of our leases are subject to annual changes in the Consumer Price Index (“CPI”). Although increases in the CPI are not
estimated as part of our measurement of straight-line rental revenue, to the extent that actual CPI is greater or less than the CPI
at lease commencement, the amount of straight-line rent recognized in a given year is affected accordingly.
Some of our leases have termination options and/or extension options. Termination options allow the customer to terminate
the lease prior to the end of the lease term under certain circumstances. Termination options generally become effective half way
or further into the original lease term and require advance notification from the customer and payment of a termination fee that
reimburses us for a portion of the remaining rent under the original lease term and the undepreciated lease inception costs such
as commissions, tenant improvements and lease incentives. Termination fee income is recognized on a straight-line basis from
the date of the executed termination agreement through lease expiration when the amount of the fee is determinable and collectability
of the fee is reasonably assured. Our extension options generally require a re-negotiation with the customer at market rates.
Initial direct costs, primarily commissions, related to the leasing of our office 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 and our in-house
personnel for new leases or lease renewals are capitalized. Capitalized leasing costs are amortized on a straight-line basis over the
initial fixed terms of the respective leases. All other costs to negotiate or arrange a lease are expensed as incurred.
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.
Lease related receivables, which include accounts receivable and accrued straight-line rents receivable, are reduced for credit
losses. Such amounts are recognized as a reduction to rental and other revenues. We regularly evaluate the collectability of our
lease related receivables. Our evaluation of collectability primarily consists of reviewing past due account balances and considering
59
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 reduce
the related receivable balance for amounts deemed uncollectible. If our assumptions regarding the collectability of lease related
receivables prove incorrect, we could experience credit losses in excess of what was recognized in rental and other revenues.
We recognized rental and other revenues related to operating lease payments of $723.1 million during the year ended
December 31, 2019, of which variable lease payments were $65.4 million. The following table sets forth the undiscounted cash
flows for future minimum base rents to be received from customers for leases in effect at December 31, 2019 for the properties
that we wholly own:
2020
2021
2022
2023
2024
Thereafter
$
$
647,558
621,080
596,698
537,225
474,258
2,213,294
5,090,113
Information as Lessor Under ASC 840
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.
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 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.
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.
60
The following table sets forth the activity of allowance for doubtful accounts:
Allowance for Doubtful Accounts - Straight-Line Rent
Allowance for Doubtful Accounts - Accounts Receivable
Allowance for Doubtful Accounts - Notes Receivable
Totals
Allowance for Doubtful Accounts - Straight-Line Rent
Allowance for Doubtful Accounts - Accounts Receivable
Allowance for Doubtful Accounts - Notes Receivable
Totals
Balance at
December 31,
2017
Additions
Deductions
Balance at
December 31,
2018
$
$
$
819
753
72
599
969
—
$
(777) $
(556)
(28)
1,644
$
1,568
$
(1,361) $
641
1,166
44
1,851
Balance at
December 31,
2016
Additions
Deductions
Balance at
December 31,
2017
$
$
692
624
105
$
1,503
$
(1,376) $
500
—
(371)
(33)
819
753
72
1,421
$
2,003
$
(1,780) $
1,644
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.
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 scheduled future minimum base rents to be received from customers for leases in effect at
December 31, 2018 for the properties that we wholly own:
2019
2020
2021
2022
2023
Thereafter
$
$
618,014
581,399
524,381
488,157
428,461
2,068,891
4,709,303
Information as Lessee Under ASC 842
We have 20 properties subject to operating ground leases in Atlanta, Nashville, Orlando, Raleigh and Tampa with a weighted
average remaining term of 52 years. Rental payments on these leases are adjusted periodically based on either the CPI or on a pre-
determined schedule. The monthly payments on a pre-determined schedule are recognized on a straight-line basis over the terms
of the respective leases. Changes in the CPI are not estimated as part of our measurement of straight-line rental expense. Upon
initial adoption of ASC 842, we recognized a lease liability of $35.3 million (in accounts payable, accrued expenses and other
liabilities) and a related right of use asset of $29.7 million (in prepaid expenses and other assets) on our Consolidated Balance
Sheets equal to the present value of the minimum lease payments required under each ground lease. The difference between the
recorded lease liability and right of use asset represents the accrued straight-line rent liability previously recognized under ASC
840. We used a discount rate of approximately 4.5%, which was derived from our assessment of the credit quality of the Company
and adjusted to reflect secured borrowing, estimated yield curves and long-term spread adjustments over appropriate tenors. Some
of our ground leases contain extension options; however, these did not impact our calculation of the right of use asset and liability
as they extend beyond the useful life of the properties subject to the operating ground leases. We recognized $2.5 million of ground
lease expense, of which $2.2 million was paid in cash, during the year ended December 31, 2019.
61
The following table sets forth the undiscounted cash flows of our scheduled obligations for future minimum payments on
operating ground leases at December 31, 2019 and a reconciliation of those cash flows to the operating lease liability at
December 31, 2019:
2020
2021
2022
2023
2024
Thereafter
Discount
Lease liability
$
$
2,086
2,127
2,169
2,167
2,123
83,697
94,369
(59,470)
34,899
Information as Lessee Under ASC 840
Certain of our properties are subject to operating ground leases. Rental payments on these leases are adjusted periodically
based on either the CPI or on a pre-determined schedule. Total rental property expense recorded for operating ground leases was
$2.5 million for each the years ended December 31, 2018 and 2017.
The following table sets forth our scheduled obligations for future minimum payments on operating ground leases at
December 31, 2018:
2019
2020
2021
2022
2023
Thereafter
3. Real Estate Assets
Acquisitions
$
$
2,184
2,223
2,263
2,305
2,308
86,577
97,860
During 2019, we acquired a building in the central business district of Charlotte, which delivered in 2019 and encompasses
841,000 rentable square feet, for a net purchase price of $399.1 million. The assets acquired and liabilities assumed were recorded
at relative 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 2019, we also acquired four development parcels totaling approximately 10 acres in Raleigh, Richmond and Pittsburgh
for an aggregate purchase price, including capitalized acquisition costs, of $12.4 million.
During 2018, we acquired two development parcels totaling approximately nine acres in Nashville for an aggregate purchase
price, including capitalized acquisition costs, of $50.6 million.
During 2017, we acquired fee simple title to land in Raleigh that was previously subject to a ground lease for a purchase price,
including capitalized acquisition costs and contingent consideration, of $2.6 million.
Dispositions
During 2019, we sold a total of six buildings and various land parcels for an aggregate sale price of $136.4 million and recorded
aggregate gains on disposition of property of $39.5 million.
During 2018, we sold a total of three buildings and various land parcels for an aggregate sale price of $90.6 million and
recorded aggregate gains on disposition of property of $37.6 million.
62
During 2017, we sold a total of 15 buildings and land for an aggregate sale price of $135.6 million (before closing credits to
buyer of $3.7 million) and recorded aggregate gains on disposition of property of $54.2 million.
Impairments
During 2019, we recorded aggregate impairments of real estate assets of $5.8 million as a result of shortened hold periods
from classifying all of our assets in Greensboro and Memphis as non-core and changes in market-based inputs and our assumptions
about the use of the assets.
During 2018 and 2017, we recorded aggregate impairments of real estate assets of $0.4 million and $1.4 million, respectively.
These impairments resulted from changes in market-based inputs and our assumptions about the use of the assets.
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 difference between the cost of these investments and the net book value of the underlying net
assets was $0.7 million and $0.6 million at December 31, 2019 and 2018, respectively.
The following table sets forth our ownership in unconsolidated affiliates at December 31, 2019:
Joint Venture
Plaza Colonnade, Tenant-in-Common
Kessinger/Hunter & Company, LC
Highwoods DLF Forum, LLC
Location
Kansas City
Kansas City
Raleigh
Ownership
Interest
50.0%
26.5%
25.0%
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, 2019,
2018 and 2017, we recognized $0.5 million, $0.4 million and $1.4 million, respectively, of development/construction, management
and leasing fees from our unconsolidated joint ventures. At both December 31, 2019 and 2018, we had receivables of $0.1 million
related to these fees in accounts receivable.
Consolidated Variable Interest Entity
During the second quarter of 2019, we and The Bromley Companies formed a joint venture (the "Midtown One joint venture”)
to construct Midtown One, a 150,000 square foot, multi-customer office building located in the mixed-use Midtown Tampa project
in Tampa’s Westshore submarket. Midtown One has an anticipated total investment of $71.3 million. Construction of Midtown
One began in the third quarter of 2019 with a scheduled completion date in the second quarter of 2021. At closing, we agreed to
contribute cash of $20.0 million ($15.9 million of which was funded and/or placed in escrow as of December 31, 2019) in exchange
for an 80.0% interest in the Midtown One joint venture and The Bromley Companies contributed land valued at $5.0 million in
exchange for the remaining 20.0% interest. We also committed to provide a $46.3 million interest-only secured construction loan
to the Midtown One joint venture that is scheduled to mature on the second anniversary of completion. The loan bears interest at
LIBOR plus 250 basis points. As of December 31, 2019, no amounts under the loan have been funded.
63
We determined that we have a variable interest in the Midtown One joint venture primarily because the entity was designed
to pass along interest rate risk, equity price risk and operation risk to us as both a debt and an equity holder and The Bromley
Companies as an equity holder. The Midtown One joint venture was further determined to be a variable interest entity as it requires
additional subordinated financial support in the form of a loan because the initial equity investment provided by us and The Bromley
Companies is not sufficient to finance its planned investments and operations. We, as majority owner and managing member and
through our control rights as set forth in the joint venture's governance documents, were determined to be the primary beneficiary
as we have both the power to direct the activities that most significantly affect the entity (primarily lease rates, property operations
and capital expenditures) and significant economic exposure through our equity investment and loan commitment. As such, the
Midtown One joint venture was consolidated as of December 31, 2019 and for the period May 29, 2019 through December 31,
2019 and all intercompany transactions and accounts were eliminated. The following table sets forth the assets and liabilities of
the Midtown One joint venture included on our Consolidated Balance Sheets:
Development in-process
Accounts payable, accrued expenses and other liabilities
December 31,
2019
$
$
22,380
1,162
The assets of the Midtown One joint venture can be used only to settle obligations of the joint venture and its creditors have
no recourse to our wholly owned assets.
Other Consolidated Affiliate
We have a 50.0% ownership interest in Highwoods-Markel Associates, LLC (“Markel”), a consolidated joint venture. 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 $30.1 million had the entity been liquidated at December 31,
2019. 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.
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,
2019
2018
$
$
$
$
377,472
(146,125)
231,347
65,971
(34,014)
31,957
$
$
$
$
344,548
(149,275)
195,273
57,955
(32,307)
25,648
64
The following table sets forth amortization of intangible assets and below market lease liabilities:
Year Ended December 31,
2019
2018
2017
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)
$
$
$
$
$
37,386
4,281
1,290
557
$
$
$
$
36,486
1,908
1,677
557
$
$
$
$
41,187
1,765
2,921
557
(6,633) $
(6,085) $
(6,415)
The following table sets forth scheduled future amortization of intangible assets and below market lease liabilities:
Years Ending December 31,
2020
2021
2022
2023
2024
Thereafter
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)
$
38,376
$
1,599
$
1,095
$
510
$
33,581
29,200
25,683
22,631
65,964
1,353
1,119
1,040
890
3,914
777
608
454
380
2,173
—
—
—
—
—
$
215,435
$
9,915
$
5,487
$
510
$
(5,933)
(5,033)
(3,985)
(3,607)
(2,939)
(10,460)
(31,957)
Weighted average remaining amortization periods as of
December 31, 2019 (in years)
8.4
9.2
9.4
1.0
8.8
The following table sets forth the intangible assets acquired and below market lease liabilities assumed as a result of 2019
acquisition activity:
Amount recorded at acquisition
Weighted average remaining amortization periods as of December 31, 2019 (in years)
$
2,059
$
35,637
$
(12,943)
14.4
14.7
14.3
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)
65
6. Mortgages and Notes Payable
Our mortgages and notes payable consist of the following:
Secured indebtedness:
4.00% mortgage loan due 2029 (1)
Unsecured indebtedness:
3.20% (3.363% effective rate) notes due 2021 (2)
3.625% (3.752% effective rate) notes due 2023 (3)
3.875% (4.038% effective rate) notes due 2027 (4)
4.125% (4.271% effective rate) notes due 2028 (5)
4.20% (4.234% effective rate) notes due 2029 (6)
3.050% (3.079% effective rate) notes due 2030 (7)
Variable rate term loan due 2020 (8)
Variable rate term loan due 2022 (9)
Variable rate term loan due 2022 (10)
Revolving credit facility due 2022 (11)
Less-unamortized debt issuance costs
Total mortgages and notes payable, net
__________
December 31,
2019
2018
$
95,303
$
95,303
299,369
249,201
297,134
346,621
349,091
399,009
—
100,000
200,000
221,000
97,179
97,179
298,936
248,938
296,734
346,208
—
—
225,000
200,000
200,000
182,000
2,461,425
1,997,816
(13,018)
(9,164)
$
2,543,710
$
2,085,831
(1) Our secured mortgage loan was collateralized by real estate assets with an undepreciated book value of $147.1 million at December 31,
2019. We paid down $1.9 million of secured loan balances through principal amortization during 2019.
(2) Net of unamortized original issuance discount of $0.6 million and $1.1 million as of December 31, 2019 and 2018, respectively.
(3) Net of unamortized original issuance discount of $0.8 million and $1.1 million as of December 31, 2019 and 2018, respectively.
(4) Net of unamortized original issuance discount of $2.9 million and $3.3 million as of December 31, 2019 and 2018, respectively.
(5) Net of unamortized original issuance discount of $3.4 million and $3.8 million as of December 31, 2019 and 2018, respectively.
(6) Net of unamortized original issuance discount of $0.9 million as of December 31, 2019.
(7) Net of unamortized original issuance discount of $1.0 million as of December 31, 2019.
(8) This debt was repaid in 2019.
(9) As more fully described in Note 7, we entered into floating-to-fixed interest rate swaps that effectively fix LIBOR for $50.0 million of this
loan through January 2022. Accordingly, the equivalent fixed rate of this amount is 2.79%. The interest rate on the remaining $50.0 million
was 2.81% at December 31, 2019.
(10) The interest rate was 2.90% at December 31, 2019.
(11) The interest rate was 2.73% at December 31, 2019.
66
The following table sets forth scheduled future principal payments, including amortization, due on our mortgages and notes
payable at December 31, 2019:
Years Ending December 31,
2020
2021
2022
2023
2024
Thereafter
Less-unamortized debt issuance costs
$
Principal
Amount
248
300,560
521,842
251,180
1,281
1,481,617
(13,018)
$
2,543,710
During 2017, we entered into a $600.0 million unsecured revolving credit facility, which replaced our previously existing
$475.0 million revolving credit facility, and includes an accordion feature that allows for an additional $400.0 million of borrowing
capacity subject to additional lender commitments. Our revolving credit facility is scheduled to mature in January 2022. 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 100 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. We incurred $3.5 million of debt issuance costs, which will be amortized along with certain existing unamortized debt
issuance costs over the remaining term of our new revolving credit facility. We recorded $0.1 million of loss on debt extinguishment.
There was $221.0 million and $225.0 million outstanding under our revolving credit facility at December 31, 2019 and January 24,
2020, respectively. At both December 31, 2019 and January 24, 2020, we had $0.1 million of outstanding letters of credit, which
reduces the availability on our revolving credit facility. As a result, the unused capacity of our revolving credit facility at
December 31, 2019 and January 24, 2020 was $378.9 million and $374.9 million, respectively.
During 2019, the Operating Partnership issued $400.0 million aggregate principal amount of 3.050% notes due February 2030,
less original issuance discount of $1.0 million. These notes were priced to yield 3.079%. Underwriting fees and other expenses
were incurred that aggregated $3.4 million; these costs were deferred and will be amortized over the term of the notes.
During 2019, the Operating Partnership issued $350.0 million aggregate principal amount of 4.20% notes due April 2029,
less original issuance discount of $1.0 million. These notes were priced to yield 4.234%. Underwriting fees and other expenses
were incurred that aggregated $3.1 million; these costs were deferred and will be amortized over the term of the notes.
During 2018, we paid off at maturity $200.0 million principal amount of 7.5% unsecured notes.
During 2018, the Operating Partnership issued $350.0 million aggregate principal amount of 4.125% notes due March 2028,
less original issuance discount of $4.1 million. These notes were priced to yield 4.271%. Underwriting fees and other expenses
were incurred that aggregated $2.9 million; these costs were deferred and will be amortized over the term of the notes.
During 2017, we prepaid without penalty a secured mortgage loan with a fair market value of $108.2 million with an effective
interest rate of 4.22%. We recorded $0.4 million of gain on debt extinguishment related to this prepayment.
During 2017, we modified our $200.0 million, five-year unsecured bank term loan, which was originally scheduled to mature
in January 2019. The modified term loan is scheduled to mature in November 2022 and the interest rate, based on current credit
ratings, was reduced from LIBOR plus 120 basis points to LIBOR plus 110 basis points. We incurred $1.1 million of debt issuance
costs, which will be amortized along with certain existing unamortized debt issuance costs over the remaining term of the modified
loan. We recorded $0.4 million of loss on debt extinguishment.
During 2017, we obtained a $100.0 million secured mortgage loan from a third party lender with an effective interest rate of
4.0%. This loan is scheduled to mature in May 2029. We incurred $0.8 million of debt issuance costs in connection with this loan,
which will be amortized over the term of the loan.
During 2017, the Operating Partnership issued $300.0 million aggregate principal amount of 3.875% notes due March 2027,
less original issuance discount of $4.0 million. These notes were priced to yield 4.038%. Underwriting fees and other expenses
were incurred that aggregated $2.5 million; these costs were deferred and will be amortized over the term of the notes.
67
During 2017, we paid off at maturity $379.7 million principal amount of 5.85% unsecured notes.
We previously 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 was 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 was amortized along with
existing unamortized debt issuance costs over the remaining term of the new loan. During 2017, we prepaid without penalty $125.0
million on this $350.0 million unsecured bank term loan and recorded $0.4 million of loss on debt extinguishment related to this
prepayment. During 2019, we prepaid without penalty the remaining $225.0 million and recorded $0.4 million of loss on debt
extinguishment related to this prepayment.
We previously 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 were scheduled to mature in July 2017. The first mortgage and subordinated notes had
effective interest rates of 5.36% and 8.6%, respectively. The subordinated note and accrued interest thereon was satisfied upon
payment of a "waterfall payment." During 2017, both notes were retired upon payment of the $18.0 million principal balance on
the first mortgage note and a $0.5 million waterfall payment relating to the subordinated note, which resulted in $0.4 million of
gain on debt extinguishment.
We previously 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
2017, we amended our $150.0 million unsecured bank term loan by increasing the borrowed amount to $200.0 million. We incurred
$0.3 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. During 2019, we prepaid without penalty $100.0 million on this $200.0 million
unsecured bank term loan. We recorded $0.3 million of loss on debt extinguishment related to this prepayment.
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 $30.0 million with respect to other loans in some circumstances.
We are currently in compliance with financial covenants with respect to our consolidated debt.
The Operating Partnership has $299.4 million carrying amount of 2021 notes outstanding, $249.2 million carrying amount
of 2023 notes outstanding, $297.1 million carrying amount of 2027 notes outstanding, $346.6 million carrying amount of 2028
notes outstanding, $349.1 million carrying amount of 2029 notes outstanding and $399.0 million carrying amount of 2030 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.
We have considered our short-term liquidity needs and the adequacy of our estimated cash flows from operating activities
and other available financing sources to meet these needs. We intend to meet these short-term liquidity requirements through a
combination of the following:
•
•
•
•
•
•
available cash and cash equivalents;
cash flows from operating activities;
issuance of debt securities by the Operating Partnership;
issuance of secured debt;
bank term loans;
borrowings under our revolving credit facility;
68
•
•
issuance of equity securities by the Company or the Operating Partnership; and
the disposition of non-core assets.
Capitalized Interest
Total interest capitalized to development and significant building and tenant improvement projects was $5.6 million, $6.7
million and $8.8 million for the years ended December 31, 2019, 2018 and 2017, respectively.
7. Derivative Financial Instruments
During 2019, we entered into $150.0 million notional amount of forward-starting swaps that effectively locked the underlying
10-year treasury rate at 1.87% with respect to a planned issuance of debt securities by the Operating Partnership. Upon the subsequent
issuance of the $400.0 million aggregate principal amount of 3.050% notes due February 2030 during 2019, we terminated the
forward-starting swaps and paid cash upon settlement. The unrealized loss of $6.6 million in accumulated other comprehensive
income/(loss) will be reclassified to interest expense as interest payments are made on the debt.
During 2018, we entered into an aggregate of $225.0 million notional amount of forward-starting swaps that effectively locked
the underlying 10-year treasury rate at a weighted average of 2.86% with respect to a planned issuance of debt securities by the
Operating Partnership. Upon issuance of the $350.0 million aggregate principal amount of 4.20% notes due April 2029 during
2019, we terminated the forward-starting swaps and paid cash upon settlement. The unrealized loss of $5.1 million in accumulated
other comprehensive income/(loss) will be reclassified to interest expense as interest payments are made on the debt.
During 2017, we entered into $150.0 million notional amount of forward-starting swaps that effectively locked the underlying
10-year treasury rate at 2.44% with respect to a planned issuance of debt securities by the Operating Partnership. Upon issuance
of the $350.0 million aggregate principal amount of 4.125% notes due March 2028 during 2018, we terminated the forward-starting
swaps and received cash upon settlement. The unrealized gain of $7.0 million in accumulated other comprehensive income/(loss)
will be reclassified to interest expense as interest payments are made on the debt and a gain of $0.2 million of hedge ineffectiveness
was recognized in interest expense.
During 2017, we also entered into floating-to-fixed interest rate swaps through January 2022 with respect to an aggregate
of $50.0 million LIBOR-based borrowings. These swaps effectively fix the underlying one-month LIBOR rate at a weighted
average rate of 1.693%.
We previously entered into $150.0 million notional amount of forward-starting swaps that effectively locked the underlying
10-year treasury rate at 1.90% with respect to a planned issuance of debt securities by the Operating Partnership. Upon issuance
of the $300.0 million aggregate principal amount of 3.875% notes due March 2027 during 2017, we terminated the forward-starting
swaps and received cash upon settlement. The unrealized gain of $7.3 million in accumulated other comprehensive income/(loss)
will be reclassified to interest expense as interest payments are made on the debt.
We also had floating-to-fixed interest rate swaps with respect to an aggregate of $225.0 million LIBOR-based borrowings.
These swaps effectively fixed the underlying one-month LIBOR rate at a weighted average rate of 1.678%. During 2019, these
interest rate swaps expired.
The counterparties under our swaps are major financial institutions. The swap agreements contain a provision whereby if
we default on certain of our 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.
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. 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 debt. During 2020, we estimate that $0.3 million will be reclassified as a net decrease
to interest expense.
69
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,
2019
2018
$
$
— $
1,146
154
$
3,581
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:
Interest rate swaps
Amount of (gains)/losses reclassified out of accumulated other comprehensive
income/(loss) into interest expense:
Interest rate swaps
8. Commitments and Contingencies
Lease and Contractual Commitments
Year Ended December 31,
2019
2018
2017
$
$
(9,134) $
4,161
$
1,732
(1,250) $
(2,086) $
1,157
We have $466.8 million of lease and contractual commitments at December 31, 2019. 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 $70.5 million was recorded on our Consolidated Balance Sheets
at December 31, 2019.
Contingent Consideration
We had $5.3 million and $5.0 million of contingent consideration related to certain parcels of acquired development land at
December 31, 2019 and 2018, respectively. The contingent consideration for each is payable in cash to a third party if and to the
extent future development milestones as outlined in the purchase agreements are met.
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.
70
9. Noncontrolling Interests
Noncontrolling Interests in Consolidated Affiliates
At December 31, 2019, our noncontrolling interests in consolidated affiliates relate to our joint venture partners' 50.0% interest
in office properties in Richmond and 20.0% interest in an office development property in Tampa. Our joint venture partners are
unrelated third parties.
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,
2019
2018
$
105,960
$
144,009
29,557
(663)
3,551
(5,189)
(33,427)
(4,043)
4,588
(5,167)
Total noncontrolling interests in the Operating Partnership
$
133,216
$
105,960
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
$
134,430
$
169,343
$
182,873
Increase in additional paid in capital from conversions of Common Units to Common
Stock
663
4,043
511
Change from net income available for common stockholders and transfers from
noncontrolling interests
$
135,093
$
173,386
$
183,384
Year Ended December 31,
2019
2018
2017
71
10. Disclosure About Fair Value of Financial Instruments
The following summarizes the 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 interest rate swaps. Our Level 2
liabilities include the fair value of our mortgages and notes payable and remaining 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 assets include any real estate assets recorded at fair value on a non-recurring basis as a result of our quarterly
impairment analysis, which are valued using unobservable local and national industry market data such as comparable sales,
appraisals, brokers' opinions of value and/or the terms of definitive sales contracts. Significant increases or decreases in any
valuation inputs in isolation would result in a significantly lower or higher fair value measurement.
72
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, 2019:
Assets:
Mortgages and notes receivable, at fair value (1)
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)
$
$
$
$
1,501
$
— $
1,501
$
2,345
3,846
133,216
2,615,776
$
$
$
2,345
2,345
133,216
$
$
—
1,501
$
— $
— $
2,615,776
$
154
2,345
—
2,345
154
—
Total Liabilities
$
2,618,275
$
2,345
$
2,615,930
$
Fair Value at December 31, 2018:
Assets:
Mortgages and notes receivable, at fair value (1)
$
5,599
$
— $
5,599
$
Interest rate swaps (in prepaid expenses and other assets)
1,146
—
1,146
Marketable securities of non-qualified deferred compensation plan (in
prepaid expenses and other assets)
Impaired real estate assets
Total Assets
Noncontrolling Interests in the Operating Partnership
Liabilities:
1,849
10,252
18,846
105,960
$
$
Mortgages and notes payable, net, at fair value (1)
$
2,056,248
1,849
—
1,849
105,960
—
—
$
$
6,745
$
— $
— $
2,056,248
$
$
$
$
Interest rate swaps (in accounts payable, accrued expenses and other
liabilities)
Non-qualified deferred compensation obligation (in accounts payable,
accrued expenses and other liabilities)
Total Liabilities
__________
3,581
1,849
—
3,581
1,849
—
$
2,061,678
$
1,849
$
2,059,829
$
(1) Amounts recorded at historical cost on our Consolidated Balance Sheets at December 31, 2019 and 2018.
—
—
—
—
—
—
—
—
—
—
—
10,252
10,252
—
—
—
—
—
The Level 3 impaired real estate assets measured at a fair value of $7.6 million in the third quarter of 2019 include an office
building and land held for development. The aggregate impairments resulted from a change in our assumptions about the use of
the assets and were calculated using brokers’ opinions of value and comparable sales as observable inputs were not available.
The Level 3 impaired real estate assets measured at fair values of $0.7 million and $10.3 million in the second quarter of 2019
and fourth quarter of 2018, respectively, include land held for development. The impairments resulted from a change in our
assumptions about the use of the assets and were calculated using the terms of definitive sales contracts as observable inputs were
not available.
73
11. Equity
Common Stock Issuances
At December 31, 2019, the Company had 96.2 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 $1.90, $1.85 and $1.76 for the years ended
December 31, 2019, 2018 and 2017, respectively.
The following table sets forth the Company's estimated taxability to the common stockholders of dividends per share for
federal income tax purposes:
Ordinary dividend
Capital gains
Return of capital
Total
Year Ended December 31,
2019
2018
2017
$
$
1.64
0.13
0.13
1.90
$
$
1.48
0.31
0.06
1.85
$
$
1.50
0.32
—
1.82
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, 2019
8.625% Series A Cumulative Redeemable
2/12/1997
29
$ 28,859
December 31, 2018
8.625% Series A Cumulative Redeemable
2/12/1997
29
$ 28,877
$
$
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 dividend
Capital gains
Total
Year Ended December 31,
2019
2018
2017
$
$
79.90
6.35
86.25
$
$
71.22
15.03
86.25
$
$
71.00
15.25
86.25
The Company's tax returns have not been examined by the IRS and, therefore, the taxability of dividends is subject to change.
74
Warrants
At December 31, 2019 and 2018, 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.
12. Employee Benefit Plans
Officer, Management and Director Compensation Programs
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 135% 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 following 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 following year.
The Company's officers are eligible to receive a mix of long-term equity incentive awards on or about March 1 of each year.
Prior to 2018, the mix generally consisted of stock options, time-based restricted stock and total return-based restricted stock.
Since 2018, the mix has consisted of time-based restricted stock and total return-based restricted stock. Time-based 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,
2019
599,902
2,016,659
2,616,561
2018
611,518
2,188,696
2,800,214
Of the possible future issuance under the Company' long-term equity incentive plans at December 31, 2019, no more than an
additional 0.4 million shares can be in the form of restricted stock.
During the years ended December 31, 2019, 2018 and 2017, we recognized $7.2 million, $7.5 million and $6.7 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, 2019, there was $5.2 million of total unrecognized share-based compensation
costs, which will be recognized over a weighted average remaining contractual term of 2.1 years.
75
- Stock Options
Stock options issued from 2014 through 2017 vest ratably on an annual basis over four years and expire after 10 years. Stock
options issued in 2013 vest ratably on an annual basis over four years and expire after seven years. All stock options have an
exercise price equal to the last reported stock price of our Common Stock on the New York Stock Exchange ("NYSE") on the last
trading day prior to grant. 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 value of options granted during 2017 was $6.72 per
option. The fair value of the options granted was determined at the grant date using the following assumptions:
Risk free interest rate (1)
Common stock dividend yield (2)
Expected volatility (3)
Average expected option life (years) (4)
__________
2017
2.0%
3.4%
19.5%
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 then current regular dividend rate for a 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:
Stock options outstanding at December 31, 2016
Granted
Exercised
Stock options outstanding at December 31, 2017
Exercised
Stock options outstanding at December 31, 2018
Exercised
Forfeited
Stock options outstanding at December 31, 2019 (1) (2)
__________
Options Outstanding
Number of
Options
Weighted
Average
Exercise Price
587,115
$
168,748
(115,041)
640,822
(44,304)
596,518
(9,026)
(2,590)
584,902
$
42.26
52.49
40.41
45.29
40.15
45.67
39.53
48.79
45.75
(1) The outstanding options at December 31, 2019 had a weighted average remaining life of 5.8 years.
(2) The Company had 443,783 options exercisable at December 31, 2019 with a weighted average exercise price of $44.78, weighted average
remaining life of 5.6 years and intrinsic value of $2.1 million. Of these exercisable options, 84,374 had exercise prices higher than the
market price of our Common Stock at December 31, 2019.
Cash received or receivable from options exercised was $0.4 million, $1.9 million and $5.2 million for the years ended
December 31, 2019, 2018 and 2017, respectively. The total intrinsic value of options exercised during the years ended December 31,
2019, 2018 and 2017 was $0.1 million, $0.4 million and $1.3 million, respectively. The total intrinsic value of options outstanding
at December 31, 2019, 2018 and 2017 was $2.4 million, $0.1 million and $3.9 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.
76
- Time-Based Restricted Stock
Shares of time-based restricted stock vest ratably on an annual basis generally over four years. Beginning in 2019, shares of
time-based restricted stock granted to non-employee directors vest on the first anniversary of the grant date. 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, 2016
Awarded and issued (1)
Vested (2)
Restricted shares outstanding at December 31, 2017
Awarded and issued (1)
Vested (2)
Forfeited
Restricted shares outstanding at December 31, 2018
Awarded and issued (1)
Vested (2)
Forfeited
Restricted shares outstanding at December 31, 2019
__________
Number of
Shares
Weighted
Average Grant
Date Fair
Value
188,981
$
61,404
(78,139)
172,246
94,984
(73,307)
(2,684)
191,239
103,590
(73,036)
(3,642)
218,151
$
42.06
52.49
40.55
46.46
43.01
44.19
45.89
45.62
45.98
45.79
46.07
45.73
(1) The weighted average fair value at grant date of time-based restricted stock issued during the years ended December 31, 2019, 2018 and
2017 was $4.8 million, $4.1 million and $3.2 million, respectively.
(2) The vesting date fair value of time-based restricted stock that vested during the years ended December 31, 2019, 2018 and 2017 was $3.3
million, $3.2 million and $4.1 million, respectively. Vested shares include those shares surrendered by employees to satisfy tax withholding
obligations in connection with such vesting.
- 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 average 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 2019, 2018 and 2017 was determined to be $39.42, $40.81 and
$49.59, 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)
__________
2019
2018
2017
2.4%
4.4%
27.3%
2.3%
3.9%
41.1%
1.6%
3.5%
42.8%
(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 then current regular dividend rate for a 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.
77
The following table sets forth total return-based restricted stock activity:
Restricted shares outstanding at December 31, 2016
Awarded and issued (1) (3)
Vested (2) (3)
Restricted shares outstanding at December 31, 2017
Awarded and issued (1)
Vested (2)
Forfeited (4)
Restricted shares outstanding at December 31, 2018
Awarded and issued (1)
Vested (2)
Forfeited (4)
Restricted shares outstanding at December 31, 2019
__________
Number of
Shares
Weighted
Average Grant
Date Fair
Value
183,724
84,013
(107,013)
160,724
77,456
(41,160)
(16,926)
180,094
87,344
(45,901)
(12,689)
208,848
$
$
39.82
44.76
37.88
44.72
40.81
45.61
45.24
43.34
39.42
43.68
43.58
42.22
(1) The fair value at grant date of total return-based restricted stock issued during the years ended December 31, 2019, 2018 and 2017 was $3.4
million, $3.2 million and $2.4 million, respectively, at target.
(2) The vesting date fair value of total return-based restricted stock that vested during the years ended December 31, 2019, 2018 and 2017 was
$2.1 million, $1.8 million and $5.6 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.
(3) The 2017 amount includes 34,669 additional shares that were issued at the end of the applicable measurement period because actual
performance exceeded certain levels of performance.
(4) The 2019 and 2018 amounts include 9,521 and 13,707 shares, respectively, that were forfeited at the end of the applicable measurement
period because the applicable total return did not meet the target level.
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, 2019, 2018 and 2017, we
contributed $1.5 million, $1.4 million and $1.4 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 any 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 a non-qualified deferred compensation plan. These investments are recorded at fair value, which aggregated
$2.3 million and $1.8 million at December 31, 2019 and 2018, 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
78
the deferred compensation liability are recorded in general and administrative 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,
2019
2018
2017
1,849
$
2,388
$
2,451
496
—
(182)
(357)
2,345
$
1,849
$
492
(555)
2,388
$
$
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 quarter, 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. In the years ended December 31,
2019, 2018 and 2017, the Company issued 38,618, 38,951 and 33,278 shares, respectively, of Common Stock under the ESPP.
The 15% discount on newly issued shares, which is taxable income to the participants and is recorded by us as additional
compensation expense, aggregated $0.3 million, $0.3 million and $0.2 million in the years ended December 31, 2019, 2018 and
2017, respectively. Generally, shares purchased under the ESPP must be held at least one year. The Company satisfies its ESPP
obligations by issuing additional shares of Common Stock.
13. Accumulated Other Comprehensive Income/(Loss)
The following table sets forth the components of accumulated other comprehensive income/(loss):
Cash flow hedges:
Beginning balance
Unrealized gains/(losses) on cash flow hedges
Amortization of cash flow hedges (1)
Total accumulated other comprehensive income/(loss)
__________
December 31,
2019
2018
$
$
$
9,913
(9,134)
(1,250)
(471) $
7,838
4,161
(2,086)
9,913
(1) Amounts reclassified out of accumulated other comprehensive income/(loss) into interest expense.
14. Real Estate and Other Assets Held For Sale
The following table sets forth the assets held for sale at December 31, 2019 and 2018, which are considered non-core:
Assets:
Land
Buildings and tenant improvements
Less-accumulated depreciation
Net real estate assets
Accrued straight-line rents receivable
Deferred leasing costs, net
Real estate and other assets, net, held for sale
79
December 31,
2019
2018
$
$
4,815
29,581
(16,775)
17,621
2,073
1,096
20,790
$
$
—
—
—
—
—
—
—
15. 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:
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
Denominator:
Denominator for basic earnings per Common Share – weighted average shares (1)
Net income available for common stockholders
Earnings per Common Share - diluted:
Numerator:
Net income
Net (income) attributable to noncontrolling interests in consolidated affiliates
Dividends on Preferred Stock
Net income available for common stockholders before net (income) attributable to
noncontrolling interests in the Operating Partnership
Denominator:
Year Ended December 31,
2019
2018
2017
$
141,683
$
177,630
$
191,663
(3,551)
(1,214)
(2,488)
(4,588)
(1,207)
(2,492)
(5,059)
(1,239)
(2,492)
134,430
$
169,343
$
182,873
103,692
103,439
1.30
$
1.64
$
102,682
1.78
141,683
$
177,630
$
191,663
(1,214)
(2,488)
(1,207)
(2,492)
(1,239)
(2,492)
137,981
$
173,931
$
187,932
$
$
$
$
Denominator for basic earnings per Common Share – weighted average shares (1)
103,692
103,439
102,682
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
Net income available for common stockholders
__________
22
2,731
33
2,796
106,445
106,268
$
1.30
$
1.64
$
79
2,833
105,594
1.78
(1) Includes all unvested restricted stock where dividends on such restricted stock are non-forfeitable.
16. 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.
The minimum dividend per share of Common Stock required for the Company to maintain its REIT status was $1.44, $1.26
and $1.37 per share in 2019, 2018 and 2017, 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 $4.7 billion and $2.9
billion, respectively, at December 31, 2019 and $4.3 billion and $2.3 billion, respectively, at December 31, 2018.
During the years ended December 31, 2019, 2018 and 2017, 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. Due to the passage of federal legislation commonly known as the "Tax
Cuts and Jobs Act," which was signed into law on December 22, 2017, the taxable REIT subsidiary was required to decrease the
deferred tax asset balance, which resulted in an increase to tax expense of $0.1 million in 2017.
80
The following table sets forth the Company's income tax expense/(benefit):
Current tax expense/(benefit):
Federal
State
Deferred tax expense/(benefit):
Federal
State
Year Ended December 31,
2019
2018
2017
$
$
202
148
350
14
(120)
(106)
$
133
112
245
(95)
(68)
(163)
Total income tax expense
$
244
$
82
$
(177)
105
(72)
223
(9)
214
142
The Company's net deferred tax liability was $0.1 million and $0.2 million as of December 31, 2019 and 2018, 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, 2019 and 2018, there were no unrecognized tax benefits. The Company is subject to federal,
state and local income tax examinations by taxing authorities for 2016 through 2019. The Company does not expect that the total
amount of unrecognized benefits will materially change within the next year.
17. Segment Information
Our principal business is the operation, acquisition and development of rental real estate properties. We evaluate our business
by geographic location. The operating results by geographic grouping are 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 and which is defined as rental and other revenues less rental
property and other expenses, for each of our reportable segments.
Rental and Other Revenues:
Office:
Atlanta
Charlotte
Greensboro
Memphis
Nashville
Orlando
Pittsburgh
Raleigh
Richmond
Tampa
Total Office Segment
Other
Total Rental and Other Revenues
Year Ended December 31,
2019
2018
2017
$
151,279
$
141,337
$
140,323
4,650
22,154
39,494
133,867
52,679
60,755
122,173
49,428
86,431
722,910
13,069
—
22,322
40,230
121,836
53,771
61,177
118,352
45,729
102,404
707,158
12,877
—
21,453
45,430
111,506
51,236
59,103
119,254
43,959
97,524
689,788
12,949
$
735,979
$
720,035
$
702,737
81
Net Operating Income:
Office:
Atlanta
Charlotte
Greensboro
Memphis
Nashville
Orlando
Pittsburgh
Raleigh
Richmond
Tampa
Total Office Segment
Other
Total Net Operating Income
Reconciliation to net income:
Depreciation and amortization
Impairments of real estate assets
General and administrative expenses
Interest expense
Other income/(loss)
Gains on disposition of property
Equity in earnings of unconsolidated affiliates
Year Ended December 31,
2019
2018
2017
$
97,019
$
87,503
$
89,575
3,791
14,183
24,790
97,386
32,062
36,249
88,402
33,756
50,339
477,977
9,491
487,468
—
14,275
25,659
88,554
32,841
36,233
86,053
31,276
65,819
468,213
9,407
477,620
—
13,612
28,128
81,204
30,526
34,784
86,475
29,946
62,378
456,628
9,221
465,849
(254,504)
(229,955)
(227,832)
(5,849)
(44,067)
(81,648)
(2,510)
39,517
3,276
(423)
(40,006)
(71,422)
1,940
37,638
2,238
(1,445)
(39,648)
(69,105)
2,283
54,157
7,404
Net income
$
141,683
$
177,630
$
191,663
Total Assets:
Office:
Atlanta
Charlotte
Greensboro
Memphis
Nashville
Orlando
Pittsburgh
Raleigh
Richmond
Tampa
Total Office Segment
Other
Total Assets
82
December 31,
2019
2018
$
1,040,869
$
1,047,850
425,045
114,030
148,832
1,045,125
289,743
323,792
830,128
246,546
521,620
4,985,730
152,514
—
118,611
213,276
937,732
306,370
329,918
792,464
248,669
522,263
4,517,153
157,856
$
5,138,244
$
4,675,009
18. Quarterly Financial Data (Unaudited)
The following tables set forth quarterly financial information of the Company:
Year Ended December 31, 2019
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
Rental and other revenues
$
172,363
$
184,070
$
187,475
$
192,071
$
735,979
Net income
8,386
41,394
29,557
62,346
141,683
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:
Net income available for common stockholders
Earnings per Common Share – diluted:
Net income available for common stockholders
$
$
$
(193)
(1,044)
(316)
(622)
7,255
0.07
0.07
$
$
$
(306)
(622)
39,422
0.38
0.38
$
$
$
(737)
(297)
(622)
27,901
0.27
0.27
$
$
$
(1,577)
(3,551)
(295)
(622)
59,852
0.58
0.58
$
$
$
(1,214)
(2,488)
134,430
1.30
1.30
Year Ended December 31, 2018
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
Rental and other revenues
$
180,438
$
178,792
$
179,417
$
181,388
$
720,035
Net income
34,246
52,998
35,009
55,377
177,630
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:
Net income available for common stockholders
Earnings per Common Share – diluted:
Net income available for common stockholders
$
$
$
(888)
(286)
(623)
32,449
0.31
0.31
$
$
$
(1,381)
(308)
(623)
50,686
0.49
0.49
$
$
$
(902)
(324)
(623)
33,160
0.32
0.32
$
$
$
(1,417)
(4,588)
(289)
(623)
53,048
0.51
0.51
$
$
$
(1,207)
(2,492)
169,343
1.64
1.64
19. Subsequent Events
In 2020, we sold 35 buildings and land in Greensboro for an aggregate sale price of $193.4 million and expect to record
aggregate gains on disposition of property of $105.0 million.
On February 4, 2020, the Company declared a cash dividend of $0.48 per share of Common Stock, which is payable on
March 10, 2020 to stockholders of record as of February 18, 2020.
83