Highwoods Properties
Annual Report 2020

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ☒    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2020 or ☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from [ ] to [ ] HIGHWOODS PROPERTIES, INC. (Exact name of registrant as specified in its charter) Maryland (State or other jurisdiction of incorporation or organization) 001-13100 (Commission File Number) 56-1871668 (I.R.S. Employer Identification Number) HIGHWOODS REALTY LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) North Carolina (State or other jurisdiction of incorporation or organization) 000-21731 (Commission File Number) 56-1869557 (I.R.S. Employer Identification Number) 3100 Smoketree Court, Suite 600 Raleigh, NC 27604 (Address of principal executive offices) (Zip Code) 919-872-4924 (Registrants’ telephone number, including area code) ___________________ Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Trading Symbol(s) Name of Each Exchange on Which Registered Common Stock, $.01 par value, of Highwoods Properties, Inc. HIW New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Highwoods Properties, Inc. Yes ☒ No ☐ Highwoods Realty Limited Partnership Yes ☒ No ☐ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Highwoods Properties, Inc. Yes ☐ No ☒ Highwoods Realty Limited Partnership Yes ☐ No ☒ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Highwoods Properties, Inc. Yes ☒ No ☐ Highwoods Realty Limited Partnership Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Highwoods Properties, Inc. Yes ☒ No ☐ Highwoods Realty Limited Partnership Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Highwoods Properties, Inc. Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐ Highwoods Realty Limited Partnership Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Highwoods Properties, Inc. ☐ Highwoods Realty Limited Partnership ☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Highwoods Properties, Inc. ☒ Highwoods Realty Limited Partnership ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Highwoods Properties, Inc. Yes ☐ No ☒ Highwoods Realty Limited Partnership Yes ☐ No ☒ The aggregate market value of shares of Common Stock of Highwoods Properties, Inc. held by non-affiliates (based upon the closing sale price on the New York Stock Exchange) on June 30, 2020 was approximately $3.8 billion. At January 29, 2021, there were 103,921,110 shares of Common Stock outstanding. There is no public trading market for the Common Units of Highwoods Realty Limited Partnership. As a result, an aggregate market value of the Common Units of Highwoods Realty Limited Partnership cannot be determined. Portions of the Proxy Statement of Highwoods Properties, Inc. to be filed in connection with its Annual Meeting of Stockholders to be held May 11, 2021 are incorporated by reference in Part II, Item 5 and Part III, Items 10, 11, 12, 13 and 14. DOCUMENTS INCORPORATED BY REFERENCE 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 29, 2021, the latest practicable date for financial information prior to the filing of this Annual Report. This report combines the Annual Reports on Form 10-K for the period ended December 31, 2020 of the Company and the Operating Partnership. We believe combining the annual reports into this single report results in the following benefits: • • • • combined reports better reflect how management and investors view the business as a single operating unit; combined reports enhance investors’ understanding of the Company and the Operating Partnership by enabling them to view the business as a whole and in the same manner as management; combined reports are more efficient for the Company and the Operating Partnership and result in savings in time, effort and expense; and combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review. To help investors understand the significant differences between the Company and the Operating Partnership, this report presents the following separate sections for each of the Company and the Operating Partnership: • • • • • Item 6 - Selected Financial Data; Item 9A - Controls and Procedures; Item 15 - Certifications of CEO and CFO Pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act; Consolidated Financial Statements; and the following Notes to Consolidated Financial Statements: • • • Note 11 - Equity; Note 15 - Earnings Per Share and Per Unit; and Note 18 - Quarterly Financial Data. HIGHWOODS PROPERTIES, INC. HIGHWOODS REALTY LIMITED PARTNERSHIP 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 PART IV 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES Page 4 9 20 21 24 25 26 28 30 48 48 48 49 52 53 53 53 53 53 54 3 Table of Contents General PART I ITEM 1. BUSINESS 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, 2020, the Company owned all of the Preferred Units and 103.5 million, or 97.3%, of the Common Units in the Operating Partnership. Limited partners owned the remaining 2.8 million Common Units. Generally, the Operating Partnership is obligated to redeem each Common Unit at the request of the holder thereof for cash equal to the value of one share of Common Stock based on the average of the market price for the 10 trading days immediately preceding the notice date of such redemption, provided that the Company, at its option, may elect to acquire any such Common Units presented for redemption for cash or one share of Common Stock. The Common Units owned by the Company are not redeemable. The Company was incorporated in Maryland in 1994. The Operating Partnership was formed in North Carolina in 1994. Our executive offices are located at 3100 Smoketree Court, Suite 600, Raleigh, NC 27604, and our telephone number is (919) 872-4924. Our primary business is the operation, acquisition and development of office properties. 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 2020, 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 as exhibits to this Annual Report. Business and Operating Strategy Our Strategic Plan focuses on: • • • • owning high-quality, differentiated office buildings in the BBDs of our core markets; improving the operating results of our properties through concentrated leasing, asset management, cost control and customer service efforts; developing and acquiring office buildings in BBDs that improve the overall quality of our portfolio and generate attractive returns over the long term for our stockholders; disposing of properties no longer considered to be core assets primarily due to location, age, quality and/or overall strategic fit; and • maintaining a balance sheet with ample liquidity to meet our funding needs and growth prospects. 4 Table of Contents 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 in the Company’s Proxy Statement filed in connection with its annual meeting of stockholders and under the “Service Not Space/Sustainability” section of our website. Information on our website is not considered part of this Annual Report. Government Regulation We are subject to laws, rules and regulations of the United States and the states and local municipalities in which we operate, including laws and regulations relating to environmental protection and human health and safety. Compliance with these laws, rules and regulations has not had, and is not expected to have, a material effect on our capital expenditures, results of operations and competitive position as compared to prior periods. For more information about environmental laws and regulations, see “Item 1A. Risk Factors - Risks Related to our Operations - Costs of complying with governmental laws and regulations may adversely affect our results of operations.” Information Security We face risks associated with security breaches through cyber attacks, cyber intrusions or otherwise, as well as other significant disruptions of our information technology networks and related systems. The audit committee of the Company’s Board of Directors is responsible for overseeing management’s risk assessment and risk management processes designed to 5 Table of Contents monitor and control information security risk. Management, including the Company’s chief information officer, regularly briefs the audit committee on information security matters. These briefings occur as often as needed, but in no event less than once a year. The Company’s chief information officer also briefs management’s information technology steering committee, which includes the CEO and CFO, as often as needed, but in no event less than four times a year. We have adopted and implemented an approach to identify and mitigate information security risks that we believe is commercially reasonable for real estate companies, including many of the best practices of the National Institute of Standards and Technology cyber security framework. Since January 1, 2018, we have not experienced any information security breaches that resulted in any financial loss. We have a cyber risk insurance policy designed to help us mitigate risk exposure by offsetting costs involved with recovery and remediation after an information security breach or similar event. We regularly engage independent third parties to test our information security processes and systems as part of our overall enterprise risk management. We regularly conduct information security training to ensure all employees are aware of information security risks and to enable them to take steps to mitigate such risks. As part of this program, we also take reasonable steps to ensure any employee who may come into possession of confidential financial or health information has received appropriate information security awareness training. Human Capital Resources We focus our real estate activities in markets where we have extensive local knowledge and own a significant amount of assets. As a result, we operate division offices in Atlanta, Nashville, Orlando, Pittsburgh, Raleigh, Richmond and Tampa, which are led by seasoned real estate professionals with significant commercial real estate experience managing across multiple economic cycles. Shared corporate services, such as accounting, technology, development, asset management, marketing, human resources, legal and tax, are primarily based in Raleigh. Our senior leadership team, led by our CEO, is based in Raleigh and oversees all of the Company’s operations. Fully-Integrated. Unlike some other REITs, which outsource the leasing, management, maintenance and/or customer service of their properties to third parties, we are a fully-integrated REIT that fully staffs the leasing, management, maintenance and customer service of our own portfolio. We believe being a fully- integrated REIT is in the best long-term interests of our stockholders for a number of reasons: • • • • • • • in-house services generally allow us to better anticipate and respond to the many real-time demands of our existing and potential customer base; we are able to provide our customers with more cost-effective services such as build-to-suit construction and space modification, including tenant improvements and expansions; the depth and breadth of our capabilities and resources provide us with market information not generally available; operating efficiencies achieved through our fully-integrated organization provide a competitive advantage in servicing our properties, retaining existing customers and attracting new customers; we can ensure the consistent deployment of a comprehensive preventative maintenance program; our established detailed service request process creates chain of custody for a customer request and tracks status and response time, which enables proactive identification of any underperforming equipment and vital reconnaissance for process improvement and leverage when specifying all aspects of any new construction; and our first-hand relationships with our customers lead to better customer service and often result in customers seeking renewals and additional space. Above all, being a fully-integrated REIT across these diverse functional areas gives us the benefit of engaging and responding to our customers’ needs as an owner versus a vendor. We believe this distinction, a core component of our Company’s value proposition, translates into improved customer service and higher customer retention. We had 359 full-time employees as of December 31, 2020, 72 fewer than we had as of December 31, 2019. The reduction in the number of employees was primarily due to our exiting of the Greensboro and Memphis markets and the subsequent closing of those division offices and the resulting synergies garnered from the ongoing simplification of our business. Over the past three years, our average annual turnover rate was less than 10%. As of December 31, 2020, the average tenure of our employees was 10.5 years and the average age was 49.0 years. 6 Table of Contents Approximately 69% of our employees work in one of our division offices, most of which are directly involved in the management and maintenance of our portfolio. These include property managers, maintenance engineers and technicians, HVAC technicians and project managers. Personnel salaries and related costs of employees directly involved in the management and maintenance of our portfolio are allocated to our portfolio and recorded as rental property and other expenses. Approximately 2% of our employees work in our corporate development department and are directly involved in our development pipeline. When applicable, personnel salaries and related costs of such development employees are capitalized as a development expenditure. Approximately 4% of our employees are leasing professionals principally responsible for leasing our portfolio. When applicable, commissions and related costs of such leasing employees are capitalized as a leasing expenditure. Generally, all other employee costs are recorded as general and administrative expenses. In 2020, the total cost of our workforce, including salaries, commissions, bonuses, equity and non-equity incentive compensation and employee benefits but excluding one-time severance charges, was approximately $58.5 million. Approximately 31% of our employees are highly specialized and skilled trade professionals, such as maintenance engineers and technicians and HVAC technicians. The average age of our trade professionals is 51.2 years, which is nearly three years older than the average age of the remainder of our employee base. Like many employers in our markets and throughout the country, we believe there may be an increasing shortage of trade professionals in the future as there may not be enough younger trade professionals entering the workforce to replace retiring workers. To that end, we have been working with the local trade schools in our markets to implement an apprenticeship program to encourage and incentivize younger workers to obtain the technical skills necessary to become a trade professional. In turn, we hope this program will create a pipeline of future maintenance engineers and technicians and HVAC technicians to join our Company. Total Rewards. We strive to provide career opportunities in an energized, inclusive and collaborative environment tailored to retain, attract and reward highly performing employees. We do so in a culture built on the foundations of collegiality, teamwork, hard work, humility, creativity, humor, respect, acceptance, expertise and dedication to each other, our stockholders and our customers. Our total rewards program, which includes compensation and comprehensive benefits, is crafted to provide fair and competitive pay, insurance plans and other programs to facilitate an overall work-life balance. The program is designed to incentivize and reward employees and emphasize our commitment to exemplary work. Our total rewards program is constructed to meet certain objectives, such as: • • • • • Competitiveness: Compensate with fair pay for comparable jobs within the current labor market in which we compete for talent (none of our full-time employees earns less than $15.00 per hour); Fairness: Reward positive and successful achievements through a consistent pay-for-performance approach administered throughout our Company; Career: Communicate performance expectations and provide career enrichment and/or advancement opportunities to promote our long-term commitment to employees; Respect: Support a diverse and accepting team striving to maintain balance between career and personal life; and Culture: Create and preserve an environment where employees are acknowledged, honored and rewarded for hard work, creativity, energy, collegiality, teamwork, initiative and a measured drive to achieve all in an honest and respectful manner. In addition to offering competitive salaries and wages, we offer comprehensive, locally relevant and innovative benefits to all eligible employees. These include, among other benefits: • • • Comprehensive health insurance coverage; Attractive paid time off, including up to 25 vacation days (depending on tenure), two personal holidays, nine company-wide holidays, one volunteer day, sick leave and parental leave for all new parents for births or adoptions; Competitive match on contributions to our 401(k) retirement savings plan, in which over 90% of our employees participate; and 7 Table of Contents • 15% discount on purchasing Common Stock through our employee stock purchase plan, in which nearly 40% of our employees participate. We do not believe that we have compensation policies or practices that create risks that are reasonably likely to have a material adverse effect on our Company. All employees are paid a base salary. Officers participate in our annual non-equity incentive program. Some non-officer employees are eligible to receive annual bonuses. Approximately 8% of our employees are eligible to receive equity incentive compensation. Other than as described below, we have no compensation policy or program that rewards employees solely on a transaction-specific basis. We have a development cash incentive plan pursuant to which certain employees (but not executive officers) can receive a cash payout from a development incentive pool. The amount of funds available to be earned under the plan depends upon the timing and cash yields of a qualifying development project and is included in the pro forma budget for the project. The program does not create an inappropriate risk because all development projects (inclusive of any such incentive compensation) must be approved in advance by our named executives and, in most cases, the full board or the investment committee of our board, none of whom are eligible to receive such incentives. We also pay our in- house leasing professionals commissions for signed leases. The payment of leasing commissions does not create an inappropriate risk because amounts payable are derived from net effective cash rents (which deducts leasing capital expenditures and operating expenses) and leases must be executed by an officer of our Company, none of whom is eligible to receive such commissions. Generally, lease transactions of a particular size or that contain terms or conditions that exceed certain guidelines also must be approved in advance by our senior leadership team. Additionally, we have an internal guideline whereby customers that account for more than 3% of our annualized revenues are periodically reviewed with the board. As of December 31, 2020, only the Federal Government (4.3%) and Bank of America (4.1%) accounted for more than 3% of our annualized cash revenues. Employee Empowerment. While we own and operate a collection of high-quality office assets, we believe our team of dedicated real estate professionals is our greatest asset. Over the past five years, by simplifying and streamlining our operations, we have reduced our overall headcount by nearly 100. This right-sizing of our employee base has created, and will continue to create, opportunities for individual career growth. We encourage an “ownership” mentality throughout our Company and empower our employees to continuously seek new and better ways of doing business, particularly in light of the disruptions created by the COVID- 19 pandemic. Health and Safety. Primarily because many of our employees are involved with the management and maintenance of our own portfolio, we have robust health and safety processes and training protocols designed to mitigate workplace incidents, risk and hazards. Among other things, we routinely conduct: • • • • • regulatory-required training of affected employees regarding OSHA compliance; training on fire and life safety systems affecting our buildings and building systems; training on emergency response procedures affecting our people, our buildings and our customers; simulations and table-top exercises to ensure our crisis management and business continuity plans are effective; and training on pandemic safety affecting our people, our buildings and our customers. In addition, in response to the outbreak of COVID-19 in the United States, we prioritized the health and safety of our employees. By mid-March, we transitioned many of our employees in Raleigh and our division offices to working remotely and successfully executed our business continuity plan with no disruption to our financial, operational, communications and other systems. Diversity and Inclusion. We are an equal opportunity employer, with all qualified applicants receiving consideration for employment without regard to race, color, religion, sex, sexual orientation, gender identity, national origin, disability or protected veteran status. As of December 31, 2020, 36% of our employees were female and 20% of our employees were persons of color. Currently, two of the nine members of our Board of Directors are female and two others are persons of color. We have a robust diversity and inclusion initiative with the overall goal of creating opportunities for all people in the commercial real estate industry, in the local communities in which we operate and within our own workforce. First, we have established goals and methods to be sure we are providing opportunities to small and minority vendors to compete for work with our Company. Second, we have created a new employee-focused program, called the “Heart of Highwoods,” to provide opportunities for our employees to volunteer for community service in any ways important to them. To support these efforts, we 8 Table of Contents recently added paid volunteer time off to encourage employees to volunteer in our communities. Third, as a result of listening sessions recently facilitated by an outside diversity and inclusion consultant, we have formed a diversity and inclusion group of employees to advocate for diversity and inclusion throughout our Company. More information regarding our governance policies and human capital programs and initiatives, including our community projects, is available in the Company’s Proxy Statement filed in connection with its annual meeting of stockholders and under the “Meet Highwoods/Highwoods Helps” section of our website. Information on our website is not considered part of this Annual Report. 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. Risks Related to the COVID-19 Pandemic The COVID-19 pandemic and its ongoing impact on the U.S. economy could materially and adversely impact or disrupt our financial condition, results of operations, cash flows and performance. The COVID-19 pandemic has had, and another pandemic in the future could have, repercussions across regional and global economies and financial markets. The spread of COVID-19 in many countries, including the United States, has significantly adversely impacted global economic activity, including initially causing a worldwide economic recession, and has contributed to significant volatility in financial markets. The global impact of the pandemic has been rapidly evolving and many countries, including the United States, continue to react by instituting stay-at-home orders, restricting many business and travel activities, mandating the partial or complete closures of certain business and schools and taking other actions to mitigate the spread of the virus, most of which have a negative effect on economic activity, including the use of and demand for office space. Many private businesses, including some of our customers, have recommended certain of their employees to continue to work from home or are rotating employees in and out of the office to encourage social distancing in the workplace. Due to these events, during 2020, the usage of our assets was significantly lower and, as a result, parking and parking-related revenues were lower during this period. We cannot predict when, if and to what extent these restrictions and other actions will end and when, if and to what extent economic activity, including the use of and demand for office space, will return to pre-COVID-19 levels. The COVID-19 pandemic is negatively impacting almost every industry directly or indirectly, including industries in which we and our customers operate. A number of our customers have requested rent relief during this pandemic. We have also incurred and may in the future incur losses due to customers that default on their leases, file bankruptcy and/or otherwise experience significant financial difficulty as a result of the COVID-19 pandemic. In 2020, such losses totaled $4.5 million, consisting of lost rental revenues resulting from customers that filed bankruptcy or otherwise irrevocably defaulted on their leases and non-cash credit losses of straight-line rent receivables. Of the straight-line rent receivable credit losses incurred during 2020, $1.3 million were due to the conversion of fixed rent leases to percentage rent leases for certain customers that remain in occupancy but have been impacted by social distancing measures. In addition, many of our employees are currently working remotely. An extended period of work-from-home arrangements involving our employees could strain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business. The COVID-19 pandemic, or a future pandemic, could also have material and adverse effects on our ability to successfully operate and on our financial condition, results of operations and cash flows due to, among other factors: • • • • a complete or partial closure of, or other operational issues at, one or more of our properties resulting from government or customer action; the reduced economic activity could severely impact our customers’ businesses, financial condition and liquidity and may cause one or more of our customers to be unable to meet their obligations to us in full, or at all, or to otherwise seek modifications of such obligations; the reduced economic activity could negatively impact our prospects for leasing additional space and/or renewing leases with existing customers; severe disruption and instability in the global financial markets, negative impacts to our credit ratings and deteriorations in credit and financing conditions may affect our ability to access debt and equity capital on attractive 9 Table of Contents terms, or at all, resulting in an inability to fund our business operations, including funding our development pipeline or addressing maturing liabilities on a timely basis, and such an environment may affect our customers’ ability to fund their business operations and meet their obligations to us; the financial impact of the COVID-19 pandemic could negatively impact our future compliance with financial covenants of our revolving credit facility and other debt agreements and result in a default and potentially an acceleration of repayment of indebtedness, which in turn could negatively impact our ability to make additional borrowings under our revolving credit facility and pay dividends, among other things; weaker economic conditions due to the pandemic could require us to recognize future impairment losses; a deterioration in our or our customers’ ability to operate in affected areas or delays in the supply of products or services to us or our customers from vendors that are needed for our or our customers’ operations could adversely affect our operations and those of our customers; potential changes in customer behavior, such as the continued social acceptance, desirability and perceived economic benefits of work-from-home arrangements, could materially and negatively impact the future demand for office space over the long-term even after the pandemic subsides; and the potential negative impact on the health of our employees, particularly if a significant number of them are impacted, could result in a deterioration in our ability to ensure business continuity during this disruption. • • • • • The extent to which the COVID-19 pandemic impacts our operations and those of our customers will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic and its resulting impact on economic activity, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic, social and behavioral effects of the pandemic and containment measures, among others. Financial difficulties experienced by our customers, including the potential for bankruptcies or other early terminations of their leases, could reduce our cash flows, which could impact our ability to continue paying dividends to our stockholders at expected levels or at all. The rapid development and fluidity of this situation precludes any prediction as to the full adverse impact of the COVID-19 pandemic. Nevertheless, the COVID-19 pandemic presents material uncertainty and risk with respect to our financial condition, results of operations, cash flows and performance. Moreover, many of the other risk factors set forth in this Annual Report should be interpreted as heightened risks as a result of the impact of the COVID-19 pandemic. Risks Related to our Operations 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. Occupancy in our office portfolio decreased from 92.0% at December 31, 2019 to 90.3% at December 31, 2020. Average occupancy in 2021 will be lower, perhaps significantly lower, if the COVID-19 pandemic causes vacancies and move-outs due to (a) customers that default on their leases, file bankruptcy or otherwise experience significant financial difficulty and/or (b) potential changes in customer behavior, such as the continued social acceptance, desirability and perceived economic benefits of work-from-home arrangements, which could materially and negatively impact the future demand for office space over the long-term. Further, given the COVID-19 pandemic and its impact on economic activity, we have been experiencing slower speculative new leasing and we expect that trend will continue in 2021. 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. 10 Table of Contents We face considerable competition in the leasing market and may be unable to renew existing leases or re-let space on terms similar to the existing leases, or we may spend significant capital in our efforts to renew and re-let space, which may adversely affect our results of operations. In addition to seeking to increase our average occupancy by leasing current vacant space, we also concentrate our leasing efforts on renewing existing leases. Because we compete with a number of other developers, owners and operators of office and office-oriented, mixed-use properties, we may be unable to renew leases with our existing customers and, if our current customers do not renew their leases, we may be unable to re-let the space to new customers. To the 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 (including as a result of the COVID-19 pandemic), 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 11 Table of Contents be no assurances that any such expenditures would result in higher occupancy or higher rental rates or deter existing customers from relocating to properties owned by our competitors. Costs of complying with governmental laws and regulations may adversely affect our results of operations. All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. Some of these laws and regulations may impose joint and several liability on customers, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether 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. Natural disasters and climate change could have an adverse impact on our cash flow and operating results. Climate change may add to the unpredictability and frequency of natural disasters and severe weather conditions and create additional uncertainty as to future trends and exposures. Many of our buildings are located in areas that are subject to natural disasters and severe weather conditions such as hurricanes, earthquakes, droughts, snow storms, floods and fires. The impact of climate change or the occurrence of natural disasters can delay new development projects, increase investment costs to repair or replace damaged properties, increase operating costs, create additional investment costs to make improvements to existing properties to comply with climate change regulations, increase future property insurance costs and negatively impact the demand for office space. 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 12 Table of Contents 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 properties. 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 to be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is impossible for us to entirely mitigate this risk. A security breach or other significant disruption involving our IT networks and related systems could: • • • • • • • disrupt the proper functioning of our networks and systems and therefore our operations and/or those of certain of our customers; result in misstated financial reports, violations of loan covenants, missed reporting deadlines and/or missed permitting deadlines; result in our inability to properly monitor our compliance with the rules and regulations regarding our qualification as a REIT; result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of, proprietary, confidential, sensitive or otherwise valuable information of ours or others, which others could use to compete against us or which could expose us to damage claims by third-parties for disruptive, destructive or otherwise harmful purposes and outcomes; result in our inability to maintain the building systems relied upon by our customers for the efficient use of their leased space; require significant management attention and resources to remedy any damages that result; subject us to claims for breach of contract, damages, credits, penalties or termination of leases or other agreements; or 13 Table of Contents • damage our reputation among our customers and investors generally. Additionally, we face potential heightened cybersecurity risks during the COVID-19 pandemic as our level of dependence on our IT networks and related systems increases, stemming from employees working remotely, and the number of malware campaigns and phishing attacks preying on the uncertainties surrounding the COVID-19 pandemic increases. These heightened cybersecurity risks may increase our vulnerability to cyber attacks and cause disruptions to our internal control procedures. Any or all of the foregoing could have a material adverse effect on our results of operations, financial condition and cash flows. Risks Related to our Capital Recycling Activity Recent and future acquisitions and development properties may fail to perform in accordance with our expectations and may require renovation and development costs exceeding our estimates. In the normal course of business, we typically evaluate potential acquisitions, enter into non-binding letters of intent, and may, at any time, enter into contracts to acquire additional properties. Acquired properties may fail to perform in accordance with our expectations due to lease-up risk, renovation cost risks and other factors. In addition, the renovation and improvement costs we incur in bringing an acquired property up to our standards may exceed our original estimates. We may not have the financial resources to make suitable acquisitions or renovations on favorable terms or at all. Further, we face significant competition for attractive investment opportunities from an indeterminate number of other real estate investors, including investors with significantly greater capital resources and access to capital than we have, such as domestic and foreign corporations and financial institutions, publicly-traded and privately-held REITs, private institutional investment funds, investment banking firms, life insurance companies and pension funds. Moreover, owners of office properties may be reluctant to sell, resulting in fewer acquisition opportunities. As a result of such increased competition and limited opportunities, we may be unable to acquire additional properties or the purchase price of such properties may be significantly elevated, which would reduce our expected return from making any such acquisitions. In addition to acquisitions, we periodically consider developing or re-developing properties. Risks associated with development and re-development activities include: • • • • the unavailability of favorable financing; construction costs exceeding original estimates; construction and lease-up delays resulting in increased debt service expense and construction costs; and 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 14 Table of Contents 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. From time to time, we own, develop and acquire properties in joint ventures with other persons or entities when circumstances warrant the use of these structures. Types of joint venture investments include noncontrolling ownership interests in entities such as partnerships and limited liability companies and tenant-in-common interests in which we own less than 100% of the undivided interests in a real estate asset. Our participation in joint ventures is subject to the risks that: • • • • • • we could become engaged in a dispute with any of our joint venture partners that might affect our ability to develop or operate a property; our joint ventures are subject to debt and the refinancing of such debt may require equity capital calls; our joint venture partners may default on their obligations necessitating that we fulfill their obligation ourselves; our joint venture partners may have different objectives than we have regarding the appropriate timing and terms of any renovation, sale or refinancing of properties; our joint venture partners may be structured differently than us for tax purposes, which could create conflicts of interest; and we or our joint venture partners may have competing interests in our markets that could create conflicts of interest. Risks Related to our Financing Activities 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 would 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 15 Table of Contents 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, 2020, we had $150.0 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 would adversely affect our financial condition and results of operations. From time to time, we manage our exposure to interest rate risk with interest rate hedge contracts that effectively fix or cap a portion of our variable rate debt. In addition, we utilize fixed rate debt at market rates. If interest rates decrease, the fair market value of any existing interest rate hedge contracts or outstanding fixed-rate debt would decline. 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. The Financial Conduct Authority (“FCA”) that regulates LIBOR intends to stop compelling banks to submit rates for the calculation of LIBOR at some point in the future. 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 at least 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. Risks Related to our Status as a REIT 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 16 Table of Contents 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. Compliance with the REIT requirements may limit our growth prospects. In particular, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investment in securities (other than government securities, securities of taxable REIT subsidiaries and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities, securities of taxable REIT subsidiaries and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our total assets can be represented by the securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments, which could adversely affect our financial condition and results of operations. The prohibited transactions tax may limit our ability to sell properties. A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property held primarily for sale to customers in the ordinary course of business. We may be subject to the prohibited transaction tax equal to 100% of net gain upon a disposition of real property. Although a safe harbor to the characterization of the sale of real property by a REIT as a prohibited transaction is available, we cannot assure you that we can in all cases comply with the safe harbor or that we will avoid owning property that may be characterized as held primarily for sale to customers in the ordinary course of business. Consequently, we may choose not to engage in certain sales of our properties or may conduct such sales through our taxable REIT subsidiary, which would be subject to federal and state income taxation. Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends. 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. While tax deficiency notices from the jurisdictions conducting previous audits have not been material, 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. Risks Related to an Investment in our Securities The price of our Common Stock is volatile and may decline. Our Common Stock, particularly at the beginning of the COVID-19 pandemic, has experienced significant price and volume fluctuations, often without regard to our operating performance. For example, during the year ended December 31, 2020, the closing price for our Common Stock ranged from a high of $52.51 in February 2020 to a low of $28.12 at the beginning of the COVID-19 pandemic in March 2020. 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; 17 Table of Contents • • • • • • • our financial condition and performance; the market’s perception of our growth prospects 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 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 indeterminate 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. 18 Table of Contents 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, 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 19 Table of Contents 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. None. ITEM 1B. UNRESOLVED STAFF COMMENTS 20 Table of Contents 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, 2020: Market Rentable Square Feet Occupancy Percentage of Annualized Cash Rental Revenue (1) Atlanta Nashville Raleigh Tampa Pittsburgh Orlando Richmond Charlotte Other Total __________ 5,416,000 4,567,000 4,834,000 3,618,000 2,151,000 1,791,000 2,037,000 841,000 654,000 25,909,000 88.8 % 92.8 91.2 89.7 92.9 87.8 88.7 89.6 87.5 90.3 % 21.3 % 19.8 18.4 13.4 8.3 6.8 6.2 4.0 1.8 100.0 % (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 2020 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 The following table sets forth operating information about in-service properties that we wholly own: 2016 2017 2018 2019 2020 __________ Year Ended December 31, 2020 2019 (in thousands) 2018 — — (40) (4,489) (4,529) 841 898 (6) (557) 1,176 — 351 (2) (491) (142) Average Occupancy Annualized GAAP Rent Per Square Foot (1) Annualized Cash Rent Per Square Foot (2) 92.8 % $ 92.5 % $ 91.7 % $ 91.4 % $ 90.7 % $ 23.24 24.05 24.68 26.46 29.23 $ $ $ $ $ 22.55 23.46 24.06 25.06 28.21 (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. 21 Table of Contents Customers The following table sets forth information concerning the 20 largest customers of properties that we wholly own at December 31, 2020: 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 Mars Petcare PPG Industries Vanderbilt University EQT Corporation Tivity Bass, Berry & Sims American General Life Novelis State of Georgia Lifepoint Corporate Services PNC Bank Delta Community Credit Union Avanos Medical Marsh USA Willis Towers Watson Global Payments Total __________ 1,178,487 $ 652,313 506,128 624,540 223,700 361,215 294,389 317,052 263,598 213,951 173,834 168,949 288,443 202,991 159,142 128,589 193,199 136,246 162,849 168,051 6,417,666 $ 28,133 26,727 18,195 16,926 9,850 9,837 8,817 8,265 7,717 7,170 6,335 6,267 5,764 5,545 5,121 4,885 4,713 4,667 4,564 4,537 194,035 4.26 % 4.05 2.76 2.56 1.49 1.49 1.34 1.25 1.17 1.09 0.96 0.95 0.87 0.84 0.78 0.74 0.71 0.71 0.69 0.69 29.40 % 6.2 13.2 16.7 10.2 10.4 10.3 5.4 3.8 2.2 4.1 6.1 3.7 3.6 8.3 7.1 11.8 8.2 6.6 3.3 12.2 8.7 (1) Annualized Cash Rental Revenue is cash rental revenue (base rent plus cost recovery income, excluding straight-line rent) for the month of December 2020 multiplied by 12. 22 Table of Contents Lease Expirations The following tables set forth scheduled lease expirations for existing leases at office properties that we wholly owned at December 31, 2020: Lease Expiring (1) Number of Leases Expiring Rentable Square Feet Subject to Expiring Leases Percentage of Leased Square Footage Represented by Expiring Leases 2021 (3) 2022 2023 2024 2025 2026 2027 2028 2029 2030 Thereafter __________ 362 366 291 259 228 148 85 65 68 101 101 2,074 1,913,644 1,923,263 2,341,142 2,477,527 2,880,807 1,863,015 1,726,509 1,503,344 1,202,446 1,379,684 4,192,266 23,403,647 Annualized Cash Rental Revenue Under Expiring Leases (2) (in thousands) 52,999 55,031 64,912 73,936 82,530 50,806 50,443 37,441 33,001 35,278 123,931 660,308 8.2 % $ 8.2 10.0 10.6 12.3 8.0 7.4 6.4 5.1 5.9 17.9 100.0 % $ Average Annual Cash Rental Rate Per Square Foot for Expirations Percent of Annualized Cash Rental Revenue Represented by Expiring Leases (2) $ $ 27.70 28.61 27.73 29.84 28.65 27.27 29.22 24.91 27.44 25.57 29.56 28.21 8.0 % 8.3 9.8 11.2 12.5 7.7 7.6 5.7 5.0 5.3 18.9 100.0 % (1) Expirations that have been renewed are reflected above based on the renewal expiration date. Expirations include leases related to completed not stabilized development properties but exclude leases related to developments in-process. (2) Annualized Cash Rental Revenue is cash rental revenue (base rent plus cost recovery income, excluding straight-line rent) for the month of December 2020 multiplied by 12. (3) Includes 52,000 rentable square feet of leases that are on a month-to-month basis, which represent 0.2% of total annualized cash rental revenue. In-Process Development As of December 31, 2020, we were developing 0.8 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, 2020 (1) Pre Leased % Estimated Completion Estimated Stabilization GlenLake Seven (2) Midtown West (3) Asurion __________ Raleigh Tampa Nashville 125,700 $ 150,000 552,800 828,500 $ $ ($ in thousands) 43,881 71,300 285,000 400,181 $ 36,966 47,069 225,727 309,762 100.0 % 6.6 98.3 81.9 % 1Q 21 2Q 21 4Q 21 1Q 21 4Q 22 1Q 22 (1) Includes deferred lease commissions which are classified in deferred leasing costs on our Consolidated Balance Sheets. (2) Recorded on our Consolidated Balance Sheets in land and buildings and tenant improvements, not development in-process. (3) We own an 80.0% interest in this consolidated joint venture. 23 Table of Contents Land Held for Development We wholly owned 220 acres of development land at December 31, 2020. We estimate that we can develop approximately 5.0 million rentable square feet of office space on the 161 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, 2020: Market Kansas City (2) Raleigh Richmond (3) Total __________ (1) Weighted Average Ownership Interest is calculated using Rentable Square Feet. (2) Excluding our 26.5% ownership interest in a real estate brokerage services company. (3) This joint venture is consolidated. Rentable Square Feet 292,000 636,000 345,000 1,273,000 Weighted Average Ownership Interest (1) 50.0 % 25.0 50.0 37.5 % Occupancy 85.3 % 91.0 99.2 91.9 % 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. 24 Table of Contents The Company is the sole general partner of the Operating Partnership. The following table sets forth information with respect to the Company’s executive ITEM X. INFORMATION ABOUT OUR EXECUTIVE OFFICERS officers: Name Theodore J. Klinck Brian M. Leary Mark F. Mulhern Jeffrey D. Miller Brendan C. Maiorana Age 55 46 61 50 45 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 Intercontinental Exchange, Inc. (NYSE:ICE), a leading operator of global exchanges and clearing houses and provider of mortgage technology, data and listings services, 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 Treasurer. Mr. Maiorana became executive vice president of finance in July 2019 and assumed the role of treasurer in January 2021. 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. 25 Table of Contents 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, 2020, the Company had 782 common stockholders of record. There is no public trading market for the Common Units. On December 31, 2020, the Operating Partnership had 107 holders of record of Common Units (other than the Company). At December 31, 2020, there were 103.9 million shares of Common Stock outstanding and 2.8 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, 2015 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, 2015 to December 31, 2016 2017 2018 2019 2020 123.23 111.96 108.63 127.34 136.40 118.05 100.79 130.42 113.28 132.84 171.49 145.75 113.16 203.04 138.28 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. 26 Table of Contents During the fourth quarter of 2020, the Company issued an aggregate of 3,570 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 11, 2021. 27 Table of Contents 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): ITEM 6. SELECTED FINANCIAL 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) Total assets Mortgages and notes payable, net __________ Year Ended December 31, 2020 736,900 $ 357,914 $ — $ 344,914 $ 357,914 $ 344,914 $ 2019 735,979 $ 141,683 $ — $ 134,430 $ 141,683 $ 134,430 $ 2018 720,035 $ 177,630 $ — $ 169,343 $ 177,630 $ 169,343 $ 2017 702,737 $ 191,663 $ — $ 182,873 $ 191,663 $ 182,873 $ 2016 665,634 122,546 418,593 115,461 541,139 521,789 3.32 $ 3.32 $ 3.32 $ 3.32 $ 1.92 $ 1.30 $ 1.30 $ 1.30 $ 1.30 $ 1.90 $ 1.64 $ 1.64 $ 1.64 $ 1.64 $ 1.85 $ 1.78 $ 1.78 $ 1.78 $ 1.78 $ 1.76 $ 1.17 5.30 1.17 5.30 2.50 $ $ $ $ $ $ $ $ $ $ $ 2020 5,209,417 $ 2,470,021 $ 2019 5,138,244 $ 2,543,710 $ 2018 4,675,009 $ 2,085,831 $ 2017 4,623,791 $ 2,014,333 $ 2016 4,561,050 1,948,047 $ $ December 31, (1) Includes a special cash dividend of $0.80 per share declared in the quarter ended December 31, 2016 and paid January 10, 2017. 28 Table of Contents The information in the following tables should be read in conjunction with the Operating Partnership’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 unit data): Rental and other revenues Income from continuing operations Income from discontinued operations Income from continuing operations available for common unitholders Net income Net income available for common unitholders Earnings per Common Unit – basic: Income from continuing operations available for common unitholders Net income available for common unitholders Earnings per Common Unit – diluted: Income from continuing operations available for common unitholders Net income available for common unitholders Distributions declared per Common Unit (1) Total assets Mortgages and notes payable, net __________ 2020 2019 2018 2017 2016 Year Ended December 31, $ $ $ $ $ $ $ $ $ $ $ 736,900 $ 357,914 $ — $ 354,252 $ 357,914 $ 354,252 $ 735,979 $ 141,683 $ — $ 137,981 $ 141,683 $ 137,981 $ 720,035 $ 177,630 $ — $ 173,931 $ 177,630 $ 173,931 $ 702,737 $ 191,663 $ — $ 187,932 $ 191,663 $ 187,932 $ 3.33 $ 3.33 $ 3.33 $ 3.33 $ 1.92 $ 1.30 $ 1.30 $ 1.30 $ 1.30 $ 1.90 $ 1.64 $ 1.64 $ 1.64 $ 1.64 $ 1.85 $ 1.79 $ 1.79 $ 1.79 $ 1.79 $ 1.76 $ December 31, 665,634 122,546 418,593 118,792 541,139 537,385 1.18 5.33 1.18 5.32 2.50 2020 5,209,417 $ 2,470,021 $ 2019 5,138,244 $ 2,543,710 $ 2018 4,675,009 $ 2,085,831 $ 2017 4,623,791 $ 2,014,333 $ 2016 4,561,050 1,948,047 $ $ (1) Includes a special cash distribution of $0.80 per unit declared in the quarter ended December 31, 2016 and paid January 10, 2017. 29 Table of Contents 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 important factors that could cause our actual results to differ materially from those contained in any forward-looking statement. Currently, one of the most significant factors that could cause actual outcomes to differ materially from our forward-looking statements is the ongoing adverse effect of the COVID-19 pandemic, and federal, state, and/or local regulatory guidelines and private business actions to control it, on our financial condition, operating results and cash flows, our customers, the use of and demand for office space, the real estate market in which we operate, the global economy and the financial markets. The extent to which the COVID-19 pandemic impacts us and our customers will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic and its ongoing impact on the U.S. economy and potential changes in customer behavior, among others. Additional factors, many of which may be influenced by the COVID-19 pandemic, that could cause actual outcomes or results to differ materially from those indicated in these statements include: • • • • • • • • • • • • the financial condition of our customers could deteriorate or further worsen; counterparties under our debt instruments, particularly our revolving credit facility, may attempt to avoid their obligations thereunder, which, if successful, would reduce our available liquidity; 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; natural disasters and climate change could have an adverse impact on our cash flow and 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. 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. 30 Table of Contents 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. COVID-19 The unprecedented nationwide efforts to slow the spread of the COVID-19 virus have obviously had a significant impact on the U.S. economy. It is very difficult to predict when, if and to what extent economic activity will return to pre-COVID-19 levels. The COVID-19 pandemic did have somewhat of an impact on our 2020 financial results, as described further in “Results of Operations.” Our financial results for 2021 and future leasing activity could be adversely affected by the COVID-19 pandemic. Factors that could cause actual results to differ materially from our current expectations are set forth under “Item 1A. Risk Factors” and “Disclosure Regarding Forward-Looking Statements.” While all buildings and parking facilities have remained open for business, the usage of our assets in 2020 was significantly lower due to the COVID-19 pandemic. As a result, parking and parking-related revenues were lower during this period. In addition, our operating expenses, net of expense recoveries, were lower during this period due to reduced electricity, janitorial and other variable expenses. Until usage increases, which will depend on the duration of the COVID- 19 pandemic, which is difficult to estimate, we expect that reduced usage will continue to result in reduced parking revenues, which will be partially offset by reduced operating expenses. We do not expect usage to increase over the current level until the infection rate across the U.S. and, more specifically, our markets begins to meaningfully decline and/or an increasing number of employers believe the risk of virus spread in the workplace is manageable. Given the COVID-19 pandemic and its impact on economic activity, we have been experiencing slower speculative new leasing and we expect that trend will continue in 2021. It is too early to predict the pandemic’s impact on renewal activity in 2021. Lower overall leasing will negatively impact our rental revenues. We have incurred and may in the future incur losses due to customers that default on their leases, file bankruptcy and/or otherwise experience significant financial difficulty as a result of the COVID-19 pandemic. In 2020, such losses totaled $4.5 million, consisting of lost rental revenues resulting from customers that filed bankruptcy or otherwise irrevocably defaulted on their leases and non-cash credit losses of straight-line rent receivables. Of the straight-line rent receivable credit losses incurred during 2020, $1.3 million were due to the conversion of fixed rent leases to percentage rent leases for certain customers that remain in occupancy but have been impacted by social distancing measures. Generally, in cases where an otherwise viable, creditworthy customer has been able to demonstrate disruption due to the complete or partial shutdown of its business operations, we have agreed and/or may agree to defer, but not abate, the payment of rent for a limited period of time or, as noted above, convert traditional leases to percentage rent leases. In other cases, we have agreed and/or may agree to abate rent for a limited period of time as consideration for a lease term extension. The extent of any losses will depend on whether or not the collectability of future rents from customers experiencing financial difficulty is deemed to be probable under GAAP. For a discussion of the impact of the COVID-19 pandemic on our liquidity and balance sheet, see “Liquidity and Capital Resources” below. 31 Table of Contents 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 decreased from 92.0% at December 31, 2019 to 90.3% at December 31, 2020. We expect average occupancy for our office portfolio to be approximately 89% to 90% for 2021. However, average occupancy in 2021 will be lower, perhaps significantly lower, if the COVID-19 pandemic causes vacancies and move-outs due to (a) customers that default on their leases, file bankruptcy or otherwise experience significant financial difficulty and/or (b) potential changes in customer behavior, such as the continued social acceptance, desirability and perceived economic benefits of work-from-home arrangements, which could materially and negatively impact the future demand for office space over the long-term. 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 2020 (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 160,178 6.3 29.10 $ (1.66) 27.44 $ 5.06 $ 1.05 $ $ $ $ $ Renewal All Office 305,795 465,973 3.4 29.43 $ (1.01) 28.42 $ 1.35 $ 0.58 $ 4.4 29.32 (1.24) 28.08 2.62 0.74 (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 $28.08 per rentable square foot, 8.4% higher compared to previous leases in the same office spaces. 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, 2020, no customer accounted for more than 3% of our cash revenues other than the Federal Government and Bank of America, which accounted for 4.3% and 4.1%, respectively, of our cash revenues on an annualized basis. Upon stabilization of the MetLife III development project in Raleigh, it is expected that MetLife will account for approximately 3.4% of our revenues based on annualized cash revenues for December 2020. 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 32 Table of Contents 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 typically 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 $16.3 million, or 3.9%, higher in 2020 as compared to 2019 due to a decrease of $10.4 million in same property expenses, mostly from reduced usage of our assets because of the COVID-19 pandemic, and an increase of $6.0 million in same property revenues. Same property revenues were higher primarily due to higher average GAAP rents per rentable square foot and no credit losses and write-offs associated with Laser Spine Institute (See “Results of Operations - Comparison of 2020 to 2019 - Laser Spine Institute”), partly offset by lower cost recovery income and lower parking income as a result of reduced usage of our assets because of the COVID-19 pandemic. We expect same property NOI to be lower in 2021 as compared to 2020 as an anticipated increase in same property expenses, mostly from increased usage of our assets, is expected to more than offset higher anticipated same property revenues. We expect same property revenues to be higher due to higher average GAAP rents per rentable square foot, higher cost recovery income and higher parking income, partly offset by an anticipated decrease in average occupancy. With the fluidity of the COVID-19 pandemic and its uncertain impact on economic activity, same property NOI could be further negatively impacted if the COVID-19 pandemic causes losses related to customer difficulties. In addition to the effect of same property NOI, whether or not NOI increases typically depends upon whether the NOI from our acquired properties and development properties placed in service exceeds the NOI from property dispositions. NOI was $17.6 million, or 3.6%, higher in 2020 as compared to 2019 primarily due to acquisitions, higher same property NOI and development properties placed in service, partly offset by NOI lost from property dispositions. We expect NOI to be lower in 2021 as compared to 2020 due to NOI lost from property dispositions and lower same property NOI, partly offset by NOI from the acquisition of our joint venture partner’s 75.0% interest in our Highwoods DLF Forum, LLC joint venture (the “Forum”) in the first quarter of 2021 and development properties placed in service. Similar to same property NOI, NOI could be further negatively impacted if the COVID-19 pandemic causes losses related to customer difficulties. 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. For a discussion regarding dividends and distributions, see “Liquidity and Capital Resources - Dividends and Distributions.” 33 Table of Contents Liquidity and Capital Resources We continue to maintain a conservative and flexible balance sheet and believe we have ample liquidity to fund our operations and growth prospects. As of January 29, 2021, we had approximately $85 million of existing cash and zero drawn on our $600 million revolving credit facility, which is scheduled to mature in January 2022. Assuming we are in compliance with our covenants, we have an option to extend the maturity for two additional six-month periods. At December 31, 2020, 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 37.7% and there were 106.8 million diluted shares of Common Stock outstanding. 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 $599.9 million of availability at January 29, 2021. 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. Subject to potential losses related to customer financial difficulties due to the COVID-19 pandemic, we generally believe existing cash and rental and other revenues will continue to be sufficient to fund short-term liquidity needs such as funding operating and general and administrative expenses, paying interest expense, maintaining our existing quarterly dividend and funding existing portfolio capital expenditures, including building improvement costs, tenant improvement costs and lease commissions. 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 $104 million at December 31, 2020. 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. We have no debt scheduled to mature during 2021 except for the remaining $150.0 million principal amount of 3.20% (3.363% effective rate) notes that are scheduled to mature in June 2021. We intend to exercise our right to redeem the remaining 3.20% notes at par on April 15, 2021. During 2021, we forecast funding approximately $109 million of our $503 million development pipeline, which was over 75% funded as of December 31, 2020. We generally believe we will be able to satisfy these obligations with existing cash, borrowings under our revolving credit facility, new bank term loans, issuance of other unsecured debt, mortgage debt and/or proceeds from the sale of additional non-core assets. 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 34 Table of Contents 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. Results of Operations Comparison of 2020 to 2019 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, in the first quarter of 2019, 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 $0.9 million, or 0.1%, higher in 2020 as compared to 2019 primarily due to acquisitions, development properties placed in service and higher same property revenues, which increased rental and other revenues by $31.4 million, $6.9 million and $6.0 million, respectively. Same property rental and other revenues were higher primarily due to higher average GAAP rents per rentable square foot and no credit losses and write-offs associated with Laser Spine Institute, partly offset by lower cost recovery income and lower parking income as a result of reduced usage of our assets because of the COVID-19 pandemic. These increases were partly offset by lost revenue of $42.8 million from property dispositions. We expect rental and other revenues to be higher in 2021 as compared to 2020 due to the acquisition of our joint venture partner’s 75.0% interest in the Forum, development properties placed in service and higher same property revenues, partly offset by lost revenue from property dispositions. Rental and other revenues, particularly same property revenues, could be adversely affected, perhaps significantly, in the event customers default on their leases, file bankruptcy and/or otherwise experience significant financial difficulty as a result of the COVID-19 pandemic or if our overall leasing and demand for office space are negatively impacted by potential changes in customer behavior, such as the continued social acceptance, desirability and perceived economic benefits of work-from-home arrangements. Operating Expenses Rental property and other expenses were $16.7 million, or 6.7%, lower in 2020 as compared to 2019 primarily due to property dispositions and lower same property operating expenses, which decreased operating expenses by $13.5 million and $10.4 million, respectively. Same property operating expenses were lower primarily due to lower utilities, contract services and repairs and maintenance as a result of reduced usage of our assets because of the COVID-19 pandemic, partly offset by higher property taxes. These decreases were partly offset by acquisitions and development properties placed in service, which increased operating expenses by $6.6 million and $1.6 million, respectively. We expect rental property and other expenses to be higher in 2021 as compared to 2020 due to higher same property operating expenses as a result of increased usage of our assets, the acquisition of our joint venture partner’s 75.0% interest in the Forum and development properties placed in service, partly offset by lower operating expenses from property dispositions. Depreciation and amortization was $12.9 million, or 5.1%, lower in 2020 as compared to 2019 primarily due to property dispositions and accelerated depreciation and amortization of tenant improvements and deferred leasing costs associated with Laser Spine Institute in 2019, partly offset by acquisitions and development properties placed in service. We expect depreciation and amortization to be higher in 2021 as compared to 2020 due to the acquisition of our joint venture partner’s 75.0% interest in the Forum and development properties placed in service, partly offset by fully amortized acquisition-related intangible assets and property dispositions. In 2020, we recorded an impairment of real estate assets of $1.8 million, which resulted from a change in market-based inputs and our assumptions about the use of the assets. In 2019, we recorded aggregate impairments of real estate assets of $5.8 35 Table of Contents million primarily as a result of shortened hold periods from classifying all of our assets in Greensboro and Memphis as non-core. General and administrative expenses were $3.0 million, or 6.9%, lower in 2020 as compared to 2019 primarily due to lower incentive compensation, salaries and benefits, expensed pre-development costs and executive retirement and consulting costs, partly offset by higher severance and early retirement costs. We expect general and administrative expenses to be lower in 2021 as compared to 2020 due to lower salaries and benefits, severance and early retirement costs, partly offset by higher long-term equity incentive compensation. Interest Expense Interest expense was $0.7 million, or 0.8%, lower in 2020 as compared to 2019 primarily due to lower average interest rates and higher capitalized interest, partly offset by higher average debt balances. We expect interest expense to be lower in 2021 as compared to 2020 for similar reasons. Other Loss Other loss was $1.7 million in 2020 primarily due to losses on debt extinguishment and $2.5 million in 2019 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 $176.4 million higher in 2020 as compared to 2019 primarily due to our market rotation plan of exiting the Greensboro and Memphis markets in 2020. Equity in Earnings of Unconsolidated Affiliates Equity in earnings of unconsolidated affiliates was $0.7 million, or 22.3%, higher in 2020 as compared to 2019 primarily due to higher average occupancy. We expect equity in earnings of unconsolidated affiliates to be lower in 2021 as compared to 2020 due to the acquisition of our joint venture partner’s 75.0% interest in the Forum. Equity in earnings of unconsolidated affiliates could be adversely affected, perhaps significantly, in the event customers of our unconsolidated affiliates default on their leases, file bankruptcy and/or otherwise experience significant financial difficulty as a result of the COVID-19 pandemic. Earnings Per Common Share - Diluted Diluted earnings per common share was $2.02 higher in 2020 as compared to 2019 due to an increase in net income for the reasons discussed above. Comparison of 2019 to 2018 For a comparison of 2019 to 2018, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations” in our 2019 Annual Report on Form 10-K. 36 Table of Contents 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): Net Cash Provided By Operating Activities Net Cash Provided By/(Used In) Investing Activities Net Cash Provided By/(Used In) Financing Activities Total Cash Flows $ $ 358,160 $ 110,682 (294,340) 174,502 $ 365,797 $ (607,407) 246,209 4,599 $ Comparison of 2020 to 2019 Year Ended December 31, 2020 2019 2018 358,628 $ (306,749) (130,069) (78,190) $ (7,637) $ 2020-2019 Change 2019-2018 Change 7,169 (300,658) 376,278 82,789 718,089 (540,549) 169,903 $ The change in net cash provided by operating activities in 2020 as compared to 2019 was primarily due to property dispositions and the timing of cash paid for operating expenses, partly offset by higher net cash from the operations of acquisitions, development properties placed in service and same properties and the settlement of cash flow hedges in 2019. We expect net cash related to operating activities to be higher in 2021 as compared to 2020 due to the acquisition of our joint venture partner’s 75.0% interest in the Forum, development properties placed in service and same properties, partly offset by property dispositions. With the fluidity of the COVID-19 pandemic and its uncertain impact on economic activity, net cash related to operating activities could be negatively impacted if the COVID-19 pandemic causes losses related to customer difficulties. The change in net cash provided by/(used in) investing activities in 2020 as compared to 2019 was primarily due to the acquisition of Bank of America Tower at Legacy Union in Charlotte in 2019 and net proceeds from disposition activity in 2020, partly offset by higher investments in development in-process in 2020. We expect uses of cash for investing activities in 2021 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, 2020, we have approximately $104 million left to fund of our previously-announced development activity in 2021 and future years. We expect these uses of cash for investing activities will be partly offset by proceeds from property dispositions in 2021. The change in net cash provided by/(used in) financing activities in 2020 as compared to 2019 was primarily due to higher net debt borrowings in 2019. Assuming the net effect of our acquisition, disposition and development activity in 2021 results in an increase to our assets, we would expect outstanding debt and/or Common Stock balances to increase. Comparison of 2019 to 2018 For a comparison of 2019 to 2018, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in our 2019 Annual Report on Form 10-K. 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 37 December 31, 2020 2,470,021 $ 28,826 $ 103,922 2,839 39.63 $ 4,230,938 $ 6,729,785 $ 2019 2,543,710 28,859 103,756 2,724 48.91 5,207,937 7,780,506 $ $ $ $ $ Table of Contents At December 31, 2020, our mortgages and notes payable and outstanding preferred stock represented 37.1% of our total capitalization and 37.7% of the undepreciated book value of our assets. See also “Executive Summary - Liquidity and Capital Resources.” Our mortgages and notes payable as of December 31, 2020 consisted of $93.4 million of secured indebtedness with an interest rate of 4.0% and $2,390.7 million of unsecured indebtedness with a weighted average interest rate of 3.42%. The secured indebtedness was collateralized by real estate assets with an undepreciated book value of $147.9 million. As of December 31, 2020, $150.0 million of our debt does not bear interest at fixed rates or is not protected by interest rate hedge contracts. Investment Activity Acquisitions 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 – Risks Related to our Capital Recycling Activity – 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.” On January 21, 2021, we acquired our joint venture partner’s 75.0% interest in the Forum, which owned five buildings in Raleigh encompassing 636,000 rentable square feet, for a purchase price of $131.3 million. We previously accounted for our 25.0% interest in this joint venture using the equity method of accounting. During the second quarter of 2020, we acquired development land in Raleigh for a purchase price, including capitalized acquisition costs, of $2.3 million. During the first quarter of 2020, we acquired development land in Nashville for a purchase price of $6.2 million, which consisted of the issuance of 118,592 Common Units and capitalized acquisition costs. Dispositions On January 15, 2021, we sold a building in Atlanta for a sale price of $30.7 million and expect to record a gain on disposition of property of $18.9 million. During the fourth quarter of 2020, we sold nine buildings in Greensboro and Memphis for an aggregate sale price of $129.7 million (before closing credits to buyer of $1.2 million) and recorded aggregate gains on disposition of property of $52.5 million. During the third quarter of 2020, we sold two buildings in Memphis for an aggregate sale price of $23.3 million (before closing credits to buyer of $0.7 million) and recorded aggregate gains on disposition of property of $9.4 million. During the third quarter of 2020, we also recognized $0.6 million of aggregate gains related to the disposition of property in the first quarter of 2020. During the second quarter of 2020, we sold land in Atlanta for a sale price of $2.8 million and recorded a loss on disposition of property of $0.1 million. During the second quarter of 2020, we also recognized $0.4 million of gain related to the satisfaction of a performance obligation as part of a 2016 land sale. During the first quarter of 2020, we sold 41 buildings and land in Greensboro and Memphis for an aggregate sale price of $338.4 million (before closing credits to buyer of $3.8 million) and recorded aggregate gains on disposition of property of $153.1 million. Impairments During the second quarter of 2020, we recorded an impairment of real estate assets of $1.8 million, which resulted from a change in market-based inputs and our assumptions about the use of the assets. 38 Table of Contents In-Process Development As of December 31, 2020, we were developing 0.8 million rentable square feet of office properties. For a table summarizing our announced and in-process office developments, see “Item 2. Properties - In-Process Development.” Financing Activity During the first quarter of 2020, we entered into separate equity distribution agreements with each of Wells Fargo Securities, LLC, BofA Securities, Inc., BTIG, LLC, Capital One Securities, Inc., Fifth Third Securities, Inc., Jefferies LLC, J.P. Morgan Securities LLC, Regions Securities LLC and SunTrust Robinson Humphrey, Inc. 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 (which may include block trades). The Company did not issue any shares of Common Stock under these agreements during 2020. 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 were no amounts outstanding under our revolving credit facility at both December 31, 2020 and January 29, 2021. At both December 31, 2020 and January 29, 2021, 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 both December 31, 2020 and January 29, 2021 was $599.9 million. During the third quarter of 2020, the Operating Partnership issued $400.0 million aggregate principal amount of 2.600% notes due February 2031, less original issuance discount of $1.6 million. These notes were priced to yield 2.645%. 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 2.74%. The net proceeds from the issuance were used: (1) to finance the Operating Partnership’s cash tender offer to purchase $150.0 million principal amount of its 3.20% notes due June 15, 2021 at a purchase price of 101.908% of the face amount of the notes, plus accrued and unpaid interest; (2) to prepay without penalty our $100.0 million unsecured bank term loan that was scheduled to mature in January 2022 and which bore interest at LIBOR plus 110 basis points; and (3) for general corporate purposes. We recorded $3.7 million of aggregate losses on debt extinguishment related to the repurchase of the 3.20% notes and the term loan prepayment. We regularly evaluate the financial condition of the financial institutions that participate in our credit facilities and as counterparties under interest rate swap agreements using publicly available information. Based on this review, we currently expect these financial institutions to perform their obligations under our existing facilities and swap agreements. For information regarding our interest hedging activities and other market risks associated with our debt financing activities, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.” Covenant Compliance We are currently in compliance with financial covenants and other requirements with respect to our consolidated debt. Although we expect to remain in compliance with these covenants and ratios for at least the next year, depending upon our future operating performance, property and financing transactions and general economic conditions, we cannot assure you that we will continue to be in compliance. Our revolving credit facility and bank term loans require us to comply with customary operating covenants and various financial requirements. Upon an event of default on the revolving credit facility, the lenders having at least 51.0% of the total commitments under the revolving credit facility can accelerate all borrowings then outstanding, and we could be prohibited from borrowing any further amounts under our revolving credit facility, which would adversely affect our ability to fund our operations. In addition, certain of our unsecured debt agreements contain cross-default provisions giving the unsecured lenders the right to declare a default if we are in default under more than $30.0 million with respect to other loans in some circumstances. 39 Table of Contents As of December 31, 2020, the Operating Partnership had the following unsecured notes outstanding ($ 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 Notes due February 2031 $ $ $ $ $ $ $ Face Amount 150,000 $ 250,000 $ 300,000 $ 350,000 $ 350,000 $ 400,000 $ 400,000 $ Carrying Amount 149,901 249,464 297,534 347,035 349,189 399,106 398,423 Stated Interest Rate 3.200 % 3.625 % 3.875 % 4.125 % 4.200 % 3.050 % 2.600 % Effective Interest Rate 3.363 % 3.752 % 4.038 % 4.271 % 4.234 % 3.079 % 2.645 % The indenture that governs these outstanding notes requires us to comply with customary operating covenants and various financial ratios. The trustee or the holders of at least 25.0% in principal amount of any series of notes can accelerate the principal amount of such series upon written notice of a default that remains uncured after 60 days. We may not be able to repay, refinance or extend any or all of our debt at maturity or upon any acceleration. If any refinancing is done at higher interest rates, the increased interest expense could adversely affect our cash flow and ability to pay distributions. Any such refinancing could also impose tighter financial ratios and other covenants that restrict our ability to take actions that could otherwise be in our best interest, such as funding new development activity, making opportunistic acquisitions, repurchasing our securities or paying distributions. Contractual Obligations The following table sets forth a summary regarding our known contractual obligations, including required interest payments for those items that are interest bearing, at December 31, 2020 (in thousands): Mortgages and Notes Payable: Principal payments (1) Interest payments Purchase Obligations: Lease and contractual commitments and contingent consideration (2) Operating Lease Obligations: Operating ground leases Total __________ $ $ Total 2021 2022 2023 2024 2025 Thereafter Amounts due during the years ending December 31, 2,493,351 $ 569,554 152,032 $ 81,588 202,115 $ 79,070 252,201 $ 67,268 2,291 $ 66,801 982 $ 66,722 1,883,730 208,105 212,916 194,121 17,231 — — — 1,564 92,283 3,368,104 $ 2,127 429,868 $ 2,169 300,585 $ 2,167 321,636 $ 2,123 71,215 $ 2,170 69,874 $ 81,527 2,174,926 (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 $127.6 million of contractual commitments related to our in-process development activity and newly acquired properties, of which $112.5 million is scheduled to be funded in 2021. For a description of our development activity, see “Item 2. Properties - In-Process Development.” 2021 includes future spend for tenant improvements that can be used at the option of the customer during the remaining lease term. 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, 2020 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 3.58% and 1.25%, respectively, at December 31, 2020. 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. 40 Table of Contents 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 – Risks Related to an Investment in our Securities – 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; 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 2020, the Company declared and paid a cash dividend of $0.48 per share of Common Stock. On February 2, 2021, the Company declared a cash dividend of $0.48 per share of Common Stock, which is payable on March 9, 2021 to stockholders of record as of February 16, 2021. 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, including the remaining $150.0 million principal amount of unsecured notes that are scheduled to mature on June 15, 2021. We intend to exercise our right to redeem the remaining 3.20% notes at par on April 15, 2021. We had $109.3 million of cash and cash equivalents as of December 31, 2020. The unused capacity of our revolving credit facility at both December 31, 2020 and January 29, 2021 was $599.9 million, 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 41 Table of Contents 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 the remainder of 2021, we expect to sell an additional $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. See also “Executive Summary - Liquidity and Capital Resources.” Critical Accounting Estimates The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from our estimates. The policies used in the preparation of our Consolidated Financial Statements are described in Note 1 to our Consolidated Financial Statements. However, certain of our significant accounting policies contain an increased level of assumptions used or estimates made in determining their impact in our Consolidated Financial Statements. Management has reviewed and determined the appropriateness of our critical accounting policies and estimates with the audit committee of the Company’s Board of Directors. We consider our critical accounting estimates to be those used in the determination of the reported amounts and disclosure related to the following: • • • • Real estate and related assets; Impairments of real estate assets and investments in unconsolidated affiliates; Sales of real estate; 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 the 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. 42 Table of Contents 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 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. 43 Table of Contents 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 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 are 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. 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 the credit quality of our customer, historical trends of the customer and changes in customer payment terms. We do not maintain a general reserve to estimate amounts that may not be collectible. 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. 44 Table of Contents 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 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. 45 Table of Contents 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 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, 2020 2019 2018 $ $ $ 357,914 $ (1,174) 238,816 1,778 (215,173) 2,395 384,556 (2,488) 382,068 $ 141,683 $ (1,214) 251,545 1,400 (38,582) 2,425 357,257 (2,488) 354,769 $ 3.58 $ 3.33 $ 106,714 106,445 177,630 (1,207) 227,045 — (37,096) 2,284 368,656 (2,492) 366,164 3.45 106,268 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, 2020, our same property portfolio consisted of 159 in-service properties encompassing 24.4 million rentable square feet that were wholly owned during the entirety of the periods presented (from January 1, 2019 to December 31, 2020). 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). The change in our same property portfolio was due to the addition of four newly developed properties encompassing 0.4 million rentable square feet placed in service during 2018. These additions were offset by the removal of 51 properties encompassing 4.4 million rentable square feet that were sold during 2020 and one property encompassing less than 0.1 million rentable square feet that is planned for demolition. Rental and other revenues related to properties not in our same property portfolio were $90.0 million and $95.1 million for the years ended December 31, 2020 and 2019, respectively. Rental property and other expenses related to properties not in our same property portfolio were $23.2 million and $29.5 million for the years ended December 31, 2020 and 2019, respectively. 46 Table of Contents 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 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 (1) Same property cash net operating income __________ Year Ended December 31, 2020 2019 $ $ $ $ 357,914 $ (4,005) (215,897) 1,707 80,962 41,031 1,778 241,585 505,075 (66,820) 438,255 $ 438,255 $ (27,653) 410,602 $ 141,683 (3,276) (39,517) 2,510 81,648 44,067 5,849 254,504 487,468 (65,546) 421,922 421,922 (19,654) 402,268 (1) Includes $3.4 million of temporary rent deferrals, net of repayments, granted by the Company during the year ended December 31, 2020. 47 Table of Contents 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, 2020, we had $2,284.0 million principal amount of fixed rate debt outstanding, a $248.3 million increase as compared to December 31, 2019, 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 $2,452.8 million. If interest rates had been 100 basis points higher, the aggregate fair market value of our fixed rate debt would have been $152.1 million lower. If interest rates had been 100 basis points lower, the aggregate fair market value of our fixed rate debt would have been $165.6 million higher. At December 31, 2020, we had $150.0 million of variable rate debt outstanding, a $321.0 million decrease as compared to December 31, 2019, 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, 2020 would increase or decrease by $1.5 million. See “Item 1A. Risk Factors – Risks Related to our Financing Activities – Increases in interest rates would increase our interest expense.” At December 31, 2020, 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, 2020 would increase or decrease by $0.5 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 56 for Index to Consolidated Financial Statements of Highwoods Properties, Inc. and Highwoods Realty Limited Partnership. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 48 Table of Contents 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, 2020 based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. 49 Table of Contents We have concluded that, at December 31, 2020, 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, 2020. Management’s Annual Report on the Operating Partnership’s Internal Control Over Financial Reporting The Operating Partnership is also 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. Under the supervision of the Company’s CEO and CFO, we conducted an evaluation of the effectiveness of the Operating Partnership’s internal control over financial reporting at December 31, 2020 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, as of December 31, 2020, the Operating Partnership’s internal control over financial reporting was effective. SEC rules do not require us to obtain an attestation report of Deloitte & Touche LLP on the effectiveness of the Operating Partnership’s internal control over financial reporting. 50 Table of Contents 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, 2020, 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, 2020, 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, 2020 of the Company and our report dated February 9, 2021 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 9, 2021 51 Table of Contents 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 2020 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. There were also no changes in the Operating Partnership’s internal control over financial reporting during the fourth quarter of 2020 that materially affected, or are reasonably likely to materially affect, the Operating Partnership’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. The Company’s CEO and CFO also concluded that the Operating Partnership’s disclosure controls and procedures were effective at the end of the period covered by this Annual Report. None. ITEM 9B. OTHER INFORMATION 52 Table of Contents ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE PART III 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 11, 2021. No changes have been made to the procedures by which stockholders may recommend nominees to the Company’s board of directors since the 2020 annual meeting, which was held on May 12, 2020. 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 11, 2021. 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 11, 2021. 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 11, 2021. 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 11, 2021. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 53 Table of Contents PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES Reference is made to the Index to Consolidated Financial Statements on page 56 for a list of the Consolidated Financial Statements of Highwoods Properties, Inc. and Highwoods Realty Limited Partnership included in this report. Exhibit Number 1 3.1 3.2 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16 10.1 10.2 Exhibits Description Form of Equity Distribution Agreement, dated February 5, 2020, among Highwoods Properties, Inc., Highwoods Realty Limited Partnership and each of the firms named therein (filed as part of the Company’s Current Report on Form 8-K dated February 5, 2020) Amended and Restated Charter of the Company (filed as part of the Company’s Current Report on Form 8-K dated May 15, 2008) Amended and Restated Bylaws of the Company (filed as part of the Company’s Current Report on Form 8-K dated May 15, 2008) Indenture among the Operating Partnership, the Company and U.S. Bank National Association (as successor in interest to Wachovia Bank, N.A.) dated as of December 1, 1996 (filed as part of the Operating Partnership’s Current Report on Form 8-K dated December 2, 1996) Form of 3.875% Notes due March 1, 2027 (filed as part of the Company’s Current Report on Form 8-K dated February 23, 2017) Officers’ Certificate Establishing the Terms of the 3.875% Notes, dated February 23, 2017 (filed as part of the Company’s Current Report on Form 8-K dated February 23, 2017) Form of 3.625% Notes due January 15, 2023 (filed as part of the Company’s Current Report on Form 8-K dated December 18, 2012) Officers’ Certificate Establishing the Terms of the 3.625% Notes, dated as of December 18, 2012 (filed as part of the Company ’s Current Report on Form 8-K dated December 18, 2012) Form of 3.20% Notes due June 15, 2021 (filed as part of the Company’s Current Report on Form 8-K dated May 27, 2014) Officers’ Certificate Establishing the Terms of the 3.20% Notes, dated as of May 27, 2014 (filed as part of the Company’s Current Report on Form 8-K dated May 27, 2014) Form of 4.125% Notes due March 15, 2028 (filed as part of the Company’s Current Report on Form 8-K dated March 5, 2018) Officers’ Certificate Establishing the Terms of the 4.125% Notes, dated March 5, 2018 (filed as part of the Company ’s Current Report on Form 8-K dated March 5, 2018) Form of 4.20% Notes due April 15, 2029 (filed as part of the Company’s Current Report on Form 8-K dated March 7, 2019) Officers’ Certificate Establishing the Terms of the 4.20% Notes, dated March 7, 2019 (filed as part of the Company’s Current Report on Form 8-K dated March 7, 2019) Form of 3.050% Notes due February 15, 2030 (filed as part of the Company’s Current Report on Form 8-K dated September 13, 2019) Officers’ Certificate Establishing the Terms of the 3.050% Notes, dated September 13, 2019 (filed as part of the Company’s Current Report on Form 8-K dated September 13, 2019) Form of 2.600% Notes due February 1, 2031 (filed as part of the Company’s Current Report on Form 8-K dated August 13, 2020) Officers’ Certificate Establishing the Terms of the 2.600% Notes, dated August 13, 2020 (filed as part of the Company ’s Current Report on Form 8-K dated August 13, 2020) Description of Registered Securities (filed as part of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019) Second Restated Agreement of Limited Partnership, dated as of January 1, 2000, of the Operating Partnership (filed as part of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004) Amendment No. 1, dated as of July 22, 2004, to the Second Restated Agreement of Limited Partnership, dated as of January 1, 2000, of the Operating Partnership (filed as part of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004) 54 Table of Contents Exhibit Number 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 10.13 21 23.1 23.2 31.1 31.2 31.3 31.4 32.1 32.2 32.3 32.4 101.INS 101.SCH 101.CAL 101.DEF 101.LAB 101.PRE 104 Description Amendment No. 2, dated as of July 19, 2018, to the Second Restated Agreement of Limited Partnership, dated as of January 1, 2000, of the Operating Partnership (filed as part of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018) * 2015 Long-Term Equity Incentive Plan (filed as part of the Company’s Current Report on Form 8-K dated May 13, 2015) Form of warrants to purchase Common Stock of the Company (filed as part of the Company’s Annual Report on Form 10-K for the year ended December 31, 1997) * Highwoods Properties, Inc. Retirement Plan, effective as of March 1, 2006 (filed as part of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007) * Highwoods Properties, Inc. 2020 Employee Stock Purchase Plan (filed as part of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020) * Executive Supplemental Employment Agreement, dated as of September 1, 2015 between the Company and Theodore J. Klinck (filed as part of the Company’s Current Report on Form 8-K dated September 1, 2015) * Executive Supplemental Employment Agreement, dated as of September 29, 2014 between the Company and Mark F. Mulhern (filed as part of the Company’s Current Report on Form 8-K dated October 1, 2014) * Amended and Restated Executive Supplemental Employment Agreement, dated as of February 12, 2013, between the Company and Jeffrey D. Miller (filed as part of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012) * Executive Supplemental Employment Agreement, dated as of July 19, 2019, between the Company and Brendan C. Maiorana (filed as part of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019) * Executive Supplemental Employment Agreement, dated as of July 19, 2019, between the Company and Brian M. Leary (filed as part of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019) Fifth Amended and Restated Credit Agreement, dated as of October 18, 2017, by and among the Company, the Operating Partnership, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, Wells Fargo Bank, National Association and PNC Bank, National Association, as Co-Syndication Agents, and the Other Lenders named therein (filed as part of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017) Schedule of Subsidiaries (filed as part of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019) Consent of Deloitte & Touche LLP for the Company Consent of Deloitte & Touche LLP for the Operating Partnership Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act for the Company Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act for the Company Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act for the Operating Partnership Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act for the Operating Partnership Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act for the Company Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act for the Company Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act for the Operating Partnership Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act for the Operating Partnership Inline XBRL Instance Document (the instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document) Inline XBRL Taxonomy Extension Schema Document Inline XBRL Taxonomy Extension Calculation Linkbase Document Inline XBRL Taxonomy Extension Definition Linkbase Document Inline XBRL Taxonomy Extension Labels Linkbase Document Inline XBRL Taxonomy Extension Presentation Linkbase Document Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) __________ * Represents management contract or compensatory plan. 55 Table of Contents INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Highwoods Properties, Inc. Report of Independent Registered Public Accounting Firm Consolidated Financial Statements: Consolidated Balance Sheets at December 31, 2020 and 2019 Consolidated Statements of Income for the Years Ended December 31, 2020, 2019 and 2018 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019 and 2018 Consolidated Statements of Equity for the Years Ended December 31, 2020, 2019 and 2018 Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018 Highwoods Realty Limited Partnership: Report of Independent Registered Public Accounting Firm Consolidated Financial Statements: Consolidated Balance Sheets at December 31, 2020 and 2019 Consolidated Statements of Income for the Years Ended December 31, 2020, 2019 and 2018 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019 and 2018 Consolidated Statements of Capital for the Years Ended December 31, 2020, 2019 and 2018 Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018 Notes to Consolidated Financial Statements Schedule III __________ Page 57 59 60 61 62 64 66 68 69 70 71 72 74 109 All other schedules are omitted because they are not applicable or because the required information is included in our Consolidated Financial Statements or notes thereto. 56 Table of Contents 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, 2020 and 2019, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and the schedule listed in the Index at Item 15 (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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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, 2020, 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 9, 2021, 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 Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 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 that determine whether specific real estate assets possess indicators of impairment. Changes in those judgments could have a material impact on the real estate assets that are 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. 57 Table of Contents 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 and using reputable market surveys. ◦ With the assistance of our fair value specialists, developing an independent expectation of impairment indicators and comparing such expectation to management’s analysis. /s/ Deloitte & Touche LLP Raleigh, North Carolina February 9, 2021 We have served as the Company’s auditor since 2006. 58 Table on Contents 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 Accrued straight-line rents receivable Investments in and advances to unconsolidated affiliates Deferred leasing costs, net of accumulated amortization of $151,698 and $146,125, respectively Prepaid expenses and other assets, net of accumulated depreciation of $21,154 and $20,017, respectively Liabilities, Noncontrolling Interests in the Operating Partnership and Equity: Total Assets Mortgages and notes payable, net Accounts payable, accrued expenses and other liabilities Total Liabilities Commitments and contingencies Noncontrolling interests in the Operating Partnership Equity: Preferred Stock, $0.01 par value, 50,000,000 authorized shares; 8.625% Series A Cumulative Redeemable Preferred Shares (liquidation preference $1,000 per share), 28,826 and 28,859 shares issued and outstanding, respectively Common Stock, $0.01 par value, 200,000,000 authorized shares; 103,921,546 and 103,756,046 shares issued and outstanding, respectively Additional paid-in capital Distributions in excess of net income available for common stockholders Accumulated other comprehensive loss Total Stockholders’ Equity Noncontrolling interests in consolidated affiliates Total Equity Total Liabilities, Noncontrolling Interests in the Operating Partnership and Equity See accompanying notes to consolidated financial statements. 59 $ $ $ December 31, 2020 2019 $ 466,872 $ 4,981,637 259,681 131,474 5,839,664 (1,418,379) 4,421,285 11,360 109,322 79,922 27,488 1,341 259,381 27,104 209,329 62,885 5,209,417 $ 515,095 5,128,150 172,706 99,163 5,915,114 (1,388,566) 4,526,548 20,790 9,505 5,237 23,370 1,501 234,652 26,298 231,347 58,996 5,138,244 2,470,021 $ 268,727 2,738,748 2,543,710 286,911 2,830,621 112,499 133,216 28,826 28,859 1,039 2,993,946 (686,225) (1,462) 2,336,124 22,046 2,358,170 5,209,417 $ 1,038 2,954,779 (831,808) (471) 2,152,397 22,010 2,174,407 5,138,244 Table on Contents 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, 2020 2019 2018 $ 736,900 $ 735,979 $ 720,035 231,825 241,585 1,778 41,031 516,219 80,962 (1,707) 215,897 4,005 357,914 (9,338) (1,174) (2,488) 344,914 $ 248,511 254,504 5,849 44,067 552,931 81,648 (2,510) 39,517 3,276 141,683 (3,551) (1,214) (2,488) 134,430 $ 3.32 $ 1.30 $ 103,876 103,692 3.32 $ 1.30 $ 106,714 106,445 242,415 229,955 423 40,006 512,799 71,422 1,940 37,638 2,238 177,630 (4,588) (1,207) (2,492) 169,343 1.64 103,439 1.64 106,268 $ $ $ See accompanying notes to consolidated financial statements. 60 Table on Contents 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, 2020 2019 2018 $ 357,914 $ 141,683 $ 177,630 (1,238) 247 (991) 356,923 (10,512) 346,411 $ (9,134) (1,250) (10,384) 131,299 (4,765) 126,534 $ 4,161 (2,086) 2,075 179,705 (5,795) 173,910 $ See accompanying notes to consolidated financial statements. 61 Table of Contents HIGHWOODS PROPERTIES, INC. Consolidated Statements of Equity (in thousands, except share amounts) 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 Issuances of restricted stock Redemptions/repurchases of Preferred Stock Share-based compensation expense, net of forfeitures Net (income) attributable to noncontrolling interests in the Operating Partnership Net (income) attributable to noncontrolling interests in consolidated affiliates Comprehensive income: Net income Other comprehensive income Total comprehensive income Balance at December 31, 2018 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 Redemptions/repurchases of Preferred Stock Share-based compensation expense, net of forfeitures Net (income) attributable to noncontrolling interests in the Operating Partnership Net (income) attributable to noncontrolling interests in consolidated affiliates Comprehensive income: Net income Other comprehensive loss Total comprehensive income Balance at December 31, 2019 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 $ 103,266,875 33,652 90,001 $ 1,033 — — — — $ 28,892 — — — — $ 2,929,399 1,865 4,043 — — $ 7,838 — — — — 172,440 (5,903) 103,557,065 (143) 15,000 190,934 (6,810) — — — — 3 — — — — 1,036 — — — — — — — — — 2 — — — — — — — (15) — — — — — 28,877 — — — — — — — — (18) — — — — — 33,427 — — — 7,463 — — — — 2,976,197 298 663 — — (29,557) — — — — 7,178 — — — — — — — — — — — — 2,075 9,913 — — — — — — — — — — — — — (10,384) 17,416 — — — — — (1,047) — — — — 1,207 — — 17,576 — — — — — (1,767) 4,987 — — — — 1,214 — — Distributions in Excess of Net Income Available for Common Stockholders $ $ (747,344) — — (191,302) (2,492) — — — — — (4,588) (1,207) 177,630 — (769,303) — — (196,935) (2,488) — — — — — — (3,551) (1,214) 141,683 — Total 2,237,234 1,865 4,043 (191,302) (2,492) 33,427 (1,047) — (15) 7,466 (4,588) — 177,630 2,075 179,705 2,264,296 298 663 (196,935) (2,488) (29,557) (1,767) 4,987 — (18) 7,180 (3,551) — 141,683 (10,384) 131,299 103,756,046 $ 1,038 $ 28,859 $ 2,954,779 $ (471) $ 22,010 $ (831,808) $ 2,174,407 62 Table of Contents HIGHWOODS PROPERTIES, INC. Consolidated Statements of Equity - Continued (in thousands, except share amounts) Balance at December 31, 2019 Issuances of Common Stock, net of issuance costs and tax withholdings Conversions of Common Units to Common Stock Dividends on Common Stock ($1.92 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 Issuances of restricted stock Redemptions/repurchases of Preferred Stock Share-based compensation expense, net of forfeitures Net (income) attributable to noncontrolling interests in the Operating Partnership Net (income) attributable to noncontrolling interests in consolidated affiliates Comprehensive income: Net income Other comprehensive loss Total comprehensive income Balance at December 31, 2020 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 $ 103,756,046 19,377 3,570 $ 1,038 — — — — $ 28,859 — — — — $ 2,954,779 2,196 145 — — $ (471) — — — — 149,304 (6,751) — — — — 1 — — — — — — — (33) — — — — — 30,617 — — — 6,209 — — — — — — — — — — — — (991) 22,010 — — — — — (1,138) — — — — 1,174 — — Distributions in Excess of Net Income Available for Common Stockholders $ $ (831,808) — — (199,331) (2,488) — — — — — (9,338) (1,174) 357,914 — Total 2,174,407 2,196 145 (199,331) (2,488) 30,617 (1,138) — (33) 6,210 (9,338) — 357,914 (991) 356,923 103,921,546 $ 1,039 $ 28,826 $ 2,993,946 $ (1,462) $ 22,046 $ (686,225) $ 2,358,170 See accompanying notes to consolidated financial statements. 63 Table on Contents 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: Depreciation and amortization 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 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 Investments in mortgages and notes receivable Repayments of mortgages and notes receivable Investments in and advances to unconsolidated affiliates Changes in other investing activities Net cash provided by/(used in) investing activities $ 64 Year Ended December 31, 2020 2019 2018 $ 357,914 $ 141,683 $ 177,630 241,585 (2,537) 6,210 5,458 — (118) 3,092 247 1,681 1,778 3,674 (215,897) (4,005) 1,533 — 437 (365) (36,576) (5,951) 358,160 254,504 (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 (2,363) (160,612) (137,997) (62,154) 484,311 72 (32) 310 — (10,853) 110,682 $ (424,222) (116,111) (138,754) (53,826) 133,326 7,833 — 295 (9,977) (5,971) (607,407) $ 229,955 (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 (50,649) (150,310) (121,534) (68,256) 88,813 105 — 1,312 — (6,230) (306,749) Table on Contents HIGHWOODS PROPERTIES, INC. Consolidated Statements of Cash Flows – Continued (in thousands) Financing activities: Dividends on Common Stock Redemptions/repurchases of Preferred Stock Dividends on Preferred Stock Distributions to noncontrolling interests in the Operating Partnership Distributions to noncontrolling interests in consolidated affiliates Proceeds from the issuance of Common Stock Costs paid for the issuance of Common Stock Repurchase of shares related to tax withholdings Borrowings on revolving credit facility Repayments of revolving credit facility Borrowings on mortgages and notes payable Repayments of mortgages and notes payable Payments 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: Cash paid for interest, net of amounts capitalized 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 (1) 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 Issuances of Common Units to acquire real estate assets 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, 2020 2019 2018 $ $ (199,331) $ (33) (2,488) (5,456) (1,138) 3,571 (215) (1,160) 129,000 (350,000) 398,364 (251,952) (3,193) (10,309) (294,340) 174,502 14,742 189,244 $ (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 Year Ended December 31, 2020 2019 2018 $ $ 109,322 $ 79,922 189,244 $ 9,505 $ 5,237 14,742 $ 3,769 6,374 10,143 Year Ended December 31, 2020 2019 2018 $ 72,350 $ 72,014 $ 67,235 $ Year Ended December 31, 2020 2019 2018 (1,238) $ 145 (1,913) 46,656 25,618 1,438 (30,617) 6,163 — — — (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) Accrued capital expenditures included in accounts payable, accrued expenses and other liabilities at December 31, 2020, 2019 and 2018 were $66.0 million, $67.9 million and $62.2 million, respectively. See accompanying notes to consolidated financial statements. 65 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors of the General Partner of Highwoods Realty Limited Partnership: Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Highwoods Realty Limited Partnership and subsidiaries (the “Operating Partnership”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, capital, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Operating Partnership as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Operating Partnership’s management. Our responsibility is to express an opinion on the Operating Partnership’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Operating Partnership 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. The Operating Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Operating Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. 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 Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Impairment of Real Estate Assets - Refer to Notes 1 and 3 to the financial statements Critical Audit Matter Description The Operating Partnership 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 Operating Partnership makes judgments that determine whether specific real estate assets possess indicators of impairment. Changes in those judgments could have a material impact on the real estate assets that are identified for further analysis. Given the Operating Partnership’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 66 circumstances indicating that the carrying amounts of real estate assets may not be recoverable required a high degree of auditor judgment. 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 and using reputable market surveys. ◦ With the assistance of our fair value specialists, developing an independent expectation of impairment indicators and comparing such expectation to management’s analysis. /s/ Deloitte & Touche LLP Raleigh, North Carolina February 9, 2021 We have served as the Operating Partnership’s auditor since 2006. 67 Table of Contents HIGHWOODS REALTY LIMITED PARTNERSHIP Consolidated Balance Sheets (in thousands, except unit and per unit data) December 31, 2020 2019 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 Accrued straight-line rents receivable Investments in and advances to unconsolidated affiliates Deferred leasing costs, net of accumulated amortization of $151,698 and $146,125, respectively Prepaid expenses and other assets, net of accumulated depreciation of $21,154 and $20,017, respectively Total Assets Liabilities, Redeemable Operating Partnership Units and Capital: Mortgages and notes payable, net Accounts payable, accrued expenses and other liabilities Total Liabilities Commitments and contingencies Redeemable Operating Partnership Units: Common Units, 2,838,725 and 2,723,703 outstanding, respectively Series A Preferred Units (liquidation preference $1,000 per unit), 28,826 and 28,859 units issued and outstanding, respectively Total Redeemable Operating Partnership Units Capital: Common Units: General partner Common Units, 1,063,515 and 1,060,709 outstanding, respectively Limited partner Common Units, 102,449,222 and 102,286,528 outstanding, respectively Accumulated other comprehensive loss Noncontrolling interests in consolidated affiliates Total Capital Total Liabilities, Redeemable Operating Partnership Units and Capital See accompanying notes to consolidated financial statements. 68 $ $ $ $ 466,872 $ 4,981,637 259,681 131,474 5,839,664 (1,418,379) 4,421,285 11,360 109,322 79,922 27,488 1,341 259,381 27,104 209,329 62,885 5,209,417 $ 515,095 5,128,150 172,706 99,163 5,915,114 (1,388,566) 4,526,548 20,790 9,505 5,237 23,370 1,501 234,652 26,298 231,347 58,996 5,138,244 2,470,021 $ 268,727 2,738,748 2,543,710 286,911 2,830,621 112,499 28,826 141,325 23,087 2,285,673 (1,462) 22,046 2,329,344 5,209,417 $ 133,216 28,859 162,075 21,240 2,102,769 (471) 22,010 2,145,548 5,138,244 Table of Contents HIGHWOODS REALTY LIMITED PARTNERSHIP Consolidated Statements of Income (in thousands, except per unit 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 consolidated affiliates Distributions on Preferred Units Net income available for common unitholders Earnings per Common Unit – basic: Net income available for common unitholders Weighted average Common Units outstanding – basic Earnings per Common Unit – diluted: Net income available for common unitholders Weighted average Common Units outstanding – diluted Year Ended December 31, 2020 2019 2018 $ 736,900 $ 735,979 $ 720,035 231,825 241,585 1,778 41,031 516,219 80,962 (1,707) 215,897 4,005 357,914 (1,174) (2,488) 354,252 $ 248,511 254,504 5,849 44,067 552,931 81,648 (2,510) 39,517 3,276 141,683 (1,214) (2,488) 137,981 $ 3.33 $ 1.30 $ 106,297 106,014 3.33 $ 1.30 $ 106,305 106,036 242,415 229,955 423 40,006 512,799 71,422 1,940 37,638 2,238 177,630 (1,207) (2,492) 173,931 1.64 105,826 1.64 105,859 $ $ $ See accompanying notes to consolidated financial statements. 69 Table of Contents HIGHWOODS REALTY LIMITED PARTNERSHIP 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 unitholders Year Ended December 31, 2020 2019 2018 $ 357,914 $ 141,683 $ 177,630 (1,238) 247 (991) 356,923 (1,174) 355,749 $ (9,134) (1,250) (10,384) 131,299 (1,214) 130,085 $ 4,161 (2,086) 2,075 179,705 (1,207) 178,498 $ See accompanying notes to consolidated financial statements. 70 Table of Contents HIGHWOODS REALTY LIMITED PARTNERSHIP Consolidated Statements of Capital (in thousands) Balance at December 31, 2017 Issuances of Common Units, net of issuance costs and tax withholdings Distributions on Common Units ($1.85 per unit) Distributions on Preferred Units ($86.25 per unit) Share-based compensation expense, net of forfeitures Distributions to noncontrolling interests in consolidated affiliates Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner Net (income) attributable to noncontrolling interests in consolidated affiliates Comprehensive income: Net income Other comprehensive income Total comprehensive income Balance at December 31, 2018 Issuances of Common Units, net of issuance costs and tax withholdings Distributions on Common Units ($1.90 per unit) Distributions on Preferred Units ($86.25 per unit) Share-based compensation expense, net of forfeitures Distributions to noncontrolling interests in consolidated affiliates Contributions from noncontrolling interests in consolidated affiliates Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner Net (income) attributable to noncontrolling interests in consolidated affiliates Comprehensive income: Net income Other comprehensive loss Total comprehensive income Balance at December 31, 2019 Issuances of Common Units, net of issuance costs and tax withholdings Distributions on Common Units ($1.92 per unit) Distributions on Preferred Units ($86.25 per unit) Share-based compensation expense, net of forfeitures Distributions to noncontrolling interests in consolidated affiliates Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner Net (income) attributable to noncontrolling interests in consolidated affiliates Comprehensive income: Net income Other comprehensive loss Total comprehensive income Balance at December 31, 2020 $ Common Units General Partners’ Capital Limited Partners’ Capital Accumulated Other Comprehensive Income/(Loss) Noncontrolling Interests in Consolidated Affiliates $ 21,830 19 (1,957) (25) 75 — 372 (12) 1,776 — 22,078 3 (2,013) (25) 72 — — (280) (12) 1,417 — 21,240 84 (2,040) (25) 62 — 199 (12) 3,579 — $ 2,161,258 1,846 (193,755) (2,467) 7,391 — 36,920 (1,195) 175,854 — 2,185,852 295 (199,334) (2,463) 7,108 — — (27,753) (1,202) 140,266 — 2,102,769 8,275 (201,962) (2,463) 6,148 — 19,733 (1,162) 354,335 — $ 7,838 — — — — — — — — 2,075 9,913 — — — — — — — — — (10,384) (471) — — — — — — — — (991) $ 17,416 — — — — (1,047) — 1,207 — — 17,576 — — — — (1,767) 4,987 — 1,214 — — 22,010 — — — — (1,138) — 1,174 — — $ 23,087 $ 2,285,673 $ (1,462) $ 22,046 $ Total 2,208,342 1,865 (195,712) (2,492) 7,466 (1,047) 37,292 — 177,630 2,075 179,705 2,235,419 298 (201,347) (2,488) 7,180 (1,767) 4,987 (28,033) — 141,683 (10,384) 131,299 2,145,548 8,359 (204,002) (2,488) 6,210 (1,138) 19,932 — 357,914 (991) 356,923 2,329,344 See accompanying notes to consolidated financial statements. 71 Table of Contents HIGHWOODS REALTY LIMITED PARTNERSHIP Consolidated Statements of Cash Flows (in thousands) Operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 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 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 Investments in mortgages and notes receivable Repayments of mortgages and notes receivable Investments in and advances to unconsolidated affiliates Changes in other investing activities Net cash provided by/(used in) investing activities $ 72 Year Ended December 31, 2020 2019 2018 $ 357,914 $ 141,683 $ 177,630 241,585 (2,537) 6,210 5,458 — (118) 3,092 247 1,681 1,778 3,674 (215,897) (4,005) 1,533 — 437 (365) (36,576) (5,951) 358,160 254,504 (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 (2,363) (160,612) (137,997) (62,154) 484,311 72 (32) 310 — (10,853) 110,682 $ (424,222) (116,111) (138,754) (53,826) 133,326 7,833 — 295 (9,977) (5,971) (607,407) $ 229,955 (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 (50,649) (150,310) (121,534) (68,256) 88,813 105 — 1,312 — (6,230) (306,749) Table of Contents HIGHWOODS REALTY LIMITED PARTNERSHIP Consolidated Statements of Cash Flows - Continued (in thousands) Financing activities: Distributions on Common Units Redemptions/repurchases of Preferred Units Distributions on Preferred Units Distributions to noncontrolling interests in consolidated affiliates Proceeds from the issuance of Common Units Costs paid for the issuance of Common Units Repurchase of units 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: Cash paid for interest, net of amounts capitalized Supplemental disclosure of non-cash investing and financing activities: Unrealized gains/(losses) on cash flow hedges Changes in accrued capital expenditures (1) 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 Redeemable Common Units to fair value Issuances of Common Units to acquire real estate assets 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, 2020 2019 2018 (204,002) $ (33) (2,488) (1,138) 3,571 (215) (1,160) 129,000 (350,000) 398,364 (251,952) (3,193) (11,094) (294,340) 174,502 14,742 189,244 $ (201,347) $ (18) (2,488) (1,767) 2,086 — (1,788) 604,600 (565,600) 747,990 (326,876) — (8,583) 246,209 4,599 10,143 14,742 $ (195,712) (15) (2,492) (1,047) 3,637 (95) (1,677) 438,900 (501,900) 345,863 (211,803) — (3,728) (130,069) (78,190) 88,333 10,143 Year Ended December 31, 2020 2019 2018 109,322 $ 79,922 189,244 $ 9,505 $ 5,237 14,742 $ 3,769 6,374 10,143 $ $ $ $ Year Ended December 31, 2020 2019 2018 $ 72,350 $ 72,014 $ 67,235 $ Year Ended December 31, 2020 2019 2018 (1,238) $ (1,913) 46,656 25,618 1,438 (26,880) 6,163 — — — (9,134) $ 5,625 85,727 45,042 1,791 27,256 — 1,200 4,987 35,349 4,161 (165) 76,558 34,191 2,733 (38,049) — — — — __________ (1) Accrued capital expenditures included in accounts payable, accrued expenses and other liabilities at December 31, 2020, 2019 and 2018 were $66.0 million, $67.9 million and $62.2 million, respectively. See accompanying notes to consolidated financial statements. 73 Table of Contents HIGHWOODS PROPERTIES, INC. HIGHWOODS REALTY LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2020 (tabular dollar amounts in thousands, except per share and per unit 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, 2020, we owned or had an interest in 27.2 million rentable square feet of in-service properties, 1.2 million rentable square feet of office properties under development and approximately 230 acres of development land. The Company is the sole general partner of the Operating Partnership. At December 31, 2020, the Company owned all of the Preferred Units and 103.5 million, or 97.3%, of the Common Units in the Operating Partnership. Limited partners owned the remaining 2.8 million Common Units. In the event the Company issues shares of Common Stock, the net proceeds of the issuance are contributed to the Operating Partnership in exchange for additional Common Units. Generally, the Operating Partnership is obligated to redeem each Common Unit at the request of the holder thereof for cash equal to the value of one share of Common Stock based on the average of the market price for the 10 trading days immediately preceding the notice date of such redemption, provided that the Company, at its option, may elect to acquire any such Common Units presented for redemption for cash or one share of Common Stock. The Common Units owned by the Company are not redeemable. During 2020, the Company redeemed 3,570 Common Units for a like number of shares of Common Stock and the Operating Partnership issued 118,592 Common Units to acquire real estate assets. 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. The Operating Partnership’s Consolidated Financial Statements include wholly owned subsidiaries and those entities in which the Operating Partnership 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, 2020, 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, 2020, 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. We determined that this entity was a variable interest entity of which we were the primary beneficiary and therefore, we consolidated this entity as of December 31, 2019. During 2020, we completed the exchange by acquiring 100% of the special purpose entity. All intercompany transactions and accounts have been eliminated. Certain amounts within the Consolidated Statements of Income for the year ended December 31, 2018 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. 74 Table of Contents 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, 2020, a reserve of $0.5 million was recorded to cover estimated reported and unreported claims. 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 the initial fixed terms of the respective leases, which generally are from three to 10 years. Depreciation expense for real estate assets was $204.6 million, $214.7 million and $191.0 million for the years ended December 31, 2020, 2019 and 2018, 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 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 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. 75 Table of Contents 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 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 76 Table of Contents 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. Redeemable Common Units and Preferred Units Limited partners holding Common Units other than the Company (“Redeemable Common Units”) have the right to put any and all of the Common Units to the Operating Partnership and the Company has the right to put any and all of the Preferred Units to the Operating Partnership in exchange for their liquidation preference plus accrued and unpaid distributions in the event of a corresponding redemption by the Company of the underlying Preferred Stock. Consequently, these Redeemable Common Units and Preferred Units are classified outside of permanent partners’ capital in the Operating Partnership’s accompanying balance sheets. The recorded value of the Redeemable Common Units is based on fair value at the balance sheet date as measured by the closing price of Common Stock on that date multiplied by the total number of Redeemable Common Units outstanding. The recorded value of the Preferred Units is based on their redemption value. 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. Other than income taxes related to its taxable REIT subsidiary, the Operating Partnership does not reflect any federal income taxes in its financial statements, since as a partnership the taxable effects of its operations are attributed to its partners. The Operating Partnership does record state income tax for states that tax partnership income directly. 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, 2020, properties that we wholly own were leased to 1,378 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 2020. We maintain our cash and cash equivalents and our restricted cash at financial or other intermediary institutions. The combined account balances at each institution may exceed FDIC insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. Additionally, from time to time in connection with tax-deferred 1031 transactions, our restricted cash balances may be commingled with other funds being held by any such intermediary institution, which would subject our balance to the credit risk of the institution. 77 Table of Contents 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 and Per Unit 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 for 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. Basic earnings per unit of the Operating Partnership is computed by dividing net income available for common unitholders by the weighted Common Units outstanding - basic. Diluted earnings per unit is computed by dividing net income available for common unitholders by the weighted Common Units outstanding - basic plus the dilutive effect of options and warrants, using the treasury stock method. Weighted Common Units outstanding - basic includes all of the Company’s unvested restricted stock where distributions 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 changes certain disclosure requirements for fair value measurements. We adopted the ASU as of January 1, 2020 with no material effect on our Notes to Consolidated Financial Statements. The FASB issued an ASU that provides temporary optional expedients and exceptions to the guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). Entities can elect not to apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Entities can also elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met. The guidance in this ASU is optional and may be elected over the period March 12, 2020 through December 31, 2022 as reference rate reform activities occur. We will continue to evaluate the impact of this ASU; however, we currently expect to avail ourselves of such optional expedients and exceptions should our modified contracts meet the required criteria. Due to the business disruptions and challenges severely affecting the global economy caused by the COVID-19 pandemic, lessors may provide rent deferrals and other lease concessions to lessees. In April 2020, the FASB staff issued a question and answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 pandemic. Under existing lease guidance, we would have to determine, on a lease by lease basis, if a lease concession was the result of a new arrangement reached with the tenant (treated within the lease modification accounting framework) or if a lease concession was under the enforceable rights and obligations within the existing lease agreement (precluded from applying the lease modification accounting framework). The Lease Modification 78 Table of Contents Q&A allows us, if certain criteria have been met, to bypass the lease by lease analysis, and instead elect to either apply the lease modification accounting framework or not, with such election applied consistently to leases with similar characteristics and similar circumstances. We have elected the practical expedient and will not apply lease modification accounting on a lease by lease basis where applicable. As a result, $3.7 million of deferred rent is included in accounts receivable on our Consolidated Balance Sheets at December 31, 2020. 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 years ended December 31, 2020 and 2019 and under ASC 840 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 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 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 are 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. 79 Table of Contents 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 the credit quality of our customer, historical trends of the customer and changes in customer payment terms. We do not maintain a general reserve to estimate amounts that may not be collectible. 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 $726.0 million and $723.1 million, of which variable lease payments were $56.0 million and $65.4 million, during the years ended December 31, 2020 and 2019, respectively. 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, 2020 for the properties that we wholly own: 2021 2022 2023 2024 2025 Thereafter $ $ 623,888 619,530 570,417 513,483 432,272 2,049,545 4,809,135 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 80 Table of Contents 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. 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 Balance at December 31, 2017 819 $ 753 72 1,644 $ $ $ Additions Deductions 599 969 — 1,568 $ $ (777) (556) (28) (1,361) Balance at December 31, 2018 641 $ 1,166 44 1,851 $ 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. 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 51 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 $2.6 million and $2.5 million of ground lease expense during the years ended December 31, 2020 and 2019, respectively, and paid $2.2 million in cash during both years. 81 Table of Contents The following table sets forth the undiscounted cash flows of our scheduled obligations for future minimum payments on operating ground leases at December 31, 2020 and a reconciliation of those cash flows to the operating lease liability at December 31, 2020: 2021 2022 2023 2024 2025 Thereafter Discount Lease liability $ $ 2,127 2,169 2,167 2,123 2,170 81,527 92,283 (57,892) 34,391 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 the year ended December 31, 2018. 3. Real Estate Assets Acquisitions During 2020, we acquired two development parcels totaling less than one acre in Raleigh and Nashville for an aggregate purchase price of $8.5 million, including the issuance of 118,592 Common Units and capitalized acquisition costs. 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. Dispositions During 2020, we sold a total of 52 buildings, encompassing 4,489,000 rentable square feet, in Greensboro and Memphis and various land parcels for an aggregate sale price of $494.2 million (before closing credits to buyer of $5.7 million) and recorded aggregate gains on disposition of property of $215.5 million. During 2020, we also recognized $0.4 million of gain related to the satisfaction of a performance obligation as part of a 2016 land sale. 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. Impairments During 2020, we recorded an impairment of real estate assets of $1.8 million, which resulted from a change in market-based inputs and our assumptions about the use of the assets. 82 Table of Contents 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, we recorded an impairment of real estate assets of $0.4 million, which resulted from a change 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 $0.6 million and $0.7 million at December 31, 2020 and 2019, respectively. The following table sets forth our ownership in unconsolidated affiliates at December 31, 2020: Joint Venture Plaza Colonnade, Tenant-in-Common Kessinger/Hunter & Company, LC Highwoods DLF Forum, LLC (1) __________ Location Kansas City Kansas City Raleigh Ownership Interest 50.0% 26.5% 25.0% (1) We acquired our joint venture partner’s 75.0% interest in our Highwoods DLF Forum, LLC joint venture (the “Forum”) in the first quarter of 2021. See Note 19. 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, 2020, 2019 and 2018, we recognized $1.0 million, $0.5 million and $0.4 million, respectively, of development/construction, management and leasing fees from our unconsolidated joint ventures. At December 31, 2020 and 2019, we had receivables of $0.2 million and $0.1 million, respectively, related to these fees in accounts receivable. Consolidated Variable Interest Entity In 2019, we and The Bromley Companies formed a joint venture (the “Midtown One joint venture”) to construct Midtown West, a 150,000 square foot, multi- customer office building located in the mixed-use Midtown Tampa project in Tampa’s Westshore submarket. Midtown West has an anticipated total investment of $71.3 million. Construction of Midtown West 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, which has been fully funded, 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, 2020, $18.5 million under the loan has been funded. 83 Table of Contents 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 is consolidated and all intercompany transactions and accounts are 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 Deferred leasing costs Prepaid expenses and other assets Accounts payable, accrued expenses and other liabilities December 31, 2020 $ $ $ $ 46,873 196 75 2,693 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 $30.7 million had the entity been liquidated at December 31, 2020. 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, 2020 2019 $ $ $ $ 361,027 $ (151,698) 209,329 $ 63,748 $ (37,838) 25,910 $ 377,472 (146,125) 231,347 65,971 (34,014) 31,957 84 Table of Contents The following table sets forth amortization of intangible assets and below market lease liabilities: 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) $ $ $ $ $ 34,401 $ 1,847 $ 1,137 $ 510 $ (6,031) $ 37,386 $ 4,281 $ 1,290 $ 557 $ (6,633) $ 36,486 1,908 1,677 557 (6,085) Year Ended December 31, 2020 2019 2018 The following table sets forth scheduled future amortization of intangible assets and below market lease liabilities: Amortization of Deferred Leasing Costs and Acquisition- Related Intangible Assets (in Depreciation and Amortization) $ $ 34,063 30,011 26,496 23,348 19,224 60,979 194,121 8.3 Amortization of Lease Incentives (in Rental and Other Revenues) 1,563 $ 1,353 1,279 1,133 1,064 4,523 10,915 $ 9.5 Amortization of Acquisition- Related Intangible Assets (in Rental and Other Revenues) Amortization of Acquisition- Related Below Market Lease Liabilities (in Rental and Other Revenues) $ $ $ $ 711 601 447 373 342 1,819 4,293 9.7 (4,958) (3,977) (3,600) (2,932) (1,673) (8,770) (25,910) 8.6 Years Ending December 31, 2021 2022 2023 2024 2025 Thereafter Weighted average remaining amortization periods as of December 31, 2020 (in years) 85 Table of Contents 6. Mortgages and Notes Payable Our mortgages and notes payable consisted 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) 2.600% (2.645% effective rate) notes due 2031 (8) Variable rate term loan due 2022 (9) Variable rate term loan due 2022 (10) Revolving credit facility due 2022 Less-unamortized debt issuance costs Total mortgages and notes payable, net __________ December 31, 2020 2019 93,350 $ 93,350 95,303 95,303 149,901 249,464 297,534 347,035 349,189 399,106 398,423 — 200,000 — 2,390,652 (13,981) 2,470,021 $ 299,369 249,201 297,134 346,621 349,091 399,009 — 100,000 200,000 221,000 2,461,425 (13,018) 2,543,710 $ $ (1) Our secured mortgage loan was collateralized by real estate assets with an undepreciated book value of $147.9 million at December 31, 2020. We paid down $2.0 million of secured loan balances through principal amortization during 2020. (2) Net of unamortized original issuance discount of $0.1 million and $0.6 million as of December 31, 2020 and 2019, respectively. (3) Net of unamortized original issuance discount of $0.5 million and $0.8 million as of December 31, 2020 and 2019, respectively. (4) Net of unamortized original issuance discount of $2.5 million and $2.9 million as of December 31, 2020 and 2019, respectively. (5) Net of unamortized original issuance discount of $3.0 million and $3.4 million as of December 31, 2020 and 2019, respectively. (6) Net of unamortized original issuance discount of $0.8 million and $0.9 million as of December 31, 2020 and 2019, respectively. (7) Net of unamortized original issuance discount of $0.9 million and $1.0 million as of December 31, 2020 and 2019, respectively. (8) Net of unamortized original issuance discount of $1.6 million as of December 31, 2020. (9) This debt was repaid in 2020. (10) 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 $150.0 million was 1.25% at December 31, 2020. 86 Table of Contents The following table sets forth scheduled future principal payments, including amortization, due on our mortgages and notes payable at December 31, 2020: Years Ending December 31, 2021 2022 2023 2024 2025 (1) Thereafter Less-unamortized debt issuance costs Principal Amount 150,504 $ 200,686 251,024 1,124 (185) 1,880,849 (13,981) 2,470,021 $ __________ (1) Represents amortization of discounts in excess of principal payments due. 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. There were no amounts outstanding under our revolving credit facility at both December 31, 2020 and January 29, 2021. At both December 31, 2020 and January 29, 2021, 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 both December 31, 2020 and January 29, 2021 was $599.9 million. During 2020, the Operating Partnership issued $400.0 million aggregate principal amount of 2.600% notes due February 2031, less original issuance discount of $1.6 million. These notes were priced to yield 2.645%. 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 proceeds from the issuance were used: (1) to finance the Operating Partnership’s cash tender offer to purchase $150.0 million principal amount of its 3.20% notes due June 15, 2021 at a purchase price of 101.908% of the face amount of the notes, plus accrued and unpaid interest; (2) to prepay without penalty our $100.0 million unsecured bank term loan that was scheduled to mature in January 2022 and which bore interest at LIBOR plus 110 basis points; and (3) for general corporate purposes. We recorded $3.7 million of aggregate losses on debt extinguishment related to the repurchase of the 3.20% notes and the term loan prepayment. 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 2019, we prepaid without penalty the remaining $225.0 million on our seven-year unsecured bank term loan, which was scheduled to mature in June 2020. The term loan bore interest at LIBOR plus 110 basis points. We recorded $0.4 million of loss on debt extinguishment related to this prepayment. During 2019, we prepaid without penalty $100.0 million on our $200.0 million unsecured bank term loan and recorded $0.3 million of loss on debt extinguishment related to this prepayment. During 2020, we prepaid without penalty the remaining $100.0 million upon issuance of the $400.0 million aggregate principal amount of 2.600% notes due February 2031. The term loan was scheduled to mature in January 2022 and bore interest at LIBOR plus 110 basis points. During 2018, we paid off at maturity $200.0 million principal amount of 7.5% unsecured notes. 87 Table of Contents 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. 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 $149.9 million carrying amount of 2021 notes outstanding, $249.5 million carrying amount of 2023 notes outstanding, $297.5 million carrying amount of 2027 notes outstanding, $347.0 million carrying amount of 2028 notes outstanding, $349.2 million carrying amount of 2029 notes outstanding, $399.1 million carrying amount of 2030 notes outstanding and $398.4 million carrying amount of 2031 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 within one year from February 9, 2021 (the date of issuance of the annual financial statements) and the adequacy of our estimated cash flows from operating activities and other available financing sources to meet these needs. In particular, we have considered our scheduled debt maturities during such one-year period, including the remaining $150.0 million principal amount of unsecured notes that are scheduled to mature on June 15, 2021. We intend to exercise our right to redeem the remaining 3.20% notes at par on April 15, 2021. We have concluded it is probable we will 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; 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 $8.3 million, $5.6 million and $6.7 million for the years ended December 31, 2020, 2019 and 2018, 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. 88 Table of Contents 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. We previously 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. We previously 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 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 2021, we estimate that $0.5 million will be reclassified as a net increase to interest expense. The following table sets forth the fair value of our derivatives: December 31, 2020 2019 Derivatives: Derivatives designated as cash flow hedges in accounts payable, accrued expenses and other liabilities: Interest rate swaps $ 846 $ 154 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 $ $ (1,238) $ (9,134) $ 4,161 247 $ (1,250) $ (2,086) Year Ended December 31, 2020 2019 2018 89 Table of Contents 8. Commitments and Contingencies Lease and Contractual Commitments We have $212.9 million of lease and contractual commitments at December 31, 2020. 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 $58.0 million was recorded on our Consolidated Balance Sheets at December 31, 2020. Contingent Consideration We had $0.8 million and $5.3 million of contingent consideration related to certain parcels of acquired development land at December 31, 2020 and 2019, 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. COVID-19 Since early March 2020, efforts to slow the spread of the COVID-19 virus have had a significant impact on the U.S. economy. We continue to follow the policies described in Notes 1 and 2, including those related to impairments of real estate assets and investments in unconsolidated affiliates, leases and estimates of credit losses on operating lease receivables. While the results of our current analyses did not result in any material adjustments to amounts as of and for the year ended December 31, 2020, circumstances related to the COVID-19 pandemic may result in recording impairments, lease modifications and credit losses in future periods. 90 Table of Contents 9. Noncontrolling Interests Noncontrolling Interests in Consolidated Affiliates At December 31, 2020, 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 Issuances of Common Units 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 Total noncontrolling interests in the Operating Partnership Year Ended December 31, 2020 2019 $ $ 133,216 $ (30,617) 6,163 (145) 9,338 (5,456) 112,499 $ 105,960 29,557 — (663) 3,551 (5,189) 133,216 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 Increase in additional paid in capital from conversions of Common Units to Common Stock Issuances of Common Units Change from net income available for common stockholders and transfers from noncontrolling interests Year Ended December 31, 2020 2019 2018 $ $ 344,914 $ 145 (6,163) 338,896 $ 134,430 $ 663 — 135,093 $ 169,343 4,043 — 173,386 91 Table of Contents 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. Our Level 2 liabilities include the fair value of our mortgages and notes payable and 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. 92 Table of Contents 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: Fair Value at December 31, 2020: 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) Total Liabilities 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) Total Liabilities __________ (1) Amounts are not recorded at fair value on our Consolidated Balance Sheets at December 31, 2020 and 2019. Level 1 Level 2 Quoted Prices in Active Markets for Identical Assets or Liabilities Total Significant Observable Inputs 1,341 $ 2,573 3,914 $ — $ 2,573 2,573 $ 112,499 $ 112,499 $ 1,341 — 1,341 — 2,639,163 $ 846 2,573 2,642,582 $ — $ — 2,573 2,573 $ 2,639,163 846 — 2,640,009 1,501 $ 2,345 3,846 $ — $ 2,345 2,345 $ 133,216 $ 133,216 $ 1,501 — 1,501 — 2,615,776 $ 154 2,345 2,618,275 $ — $ — 2,345 2,345 $ 2,615,776 154 — 2,615,930 $ $ $ $ $ $ $ $ $ $ The Level 3 impaired real estate assets measured at a fair value of $2.1 million in the second quarter of 2020 included a non-core office building. The impairment resulted from a change in our assumptions about the use of the assets and was calculated using brokers’ opinions of value, letters of intent and comparable sales as observable inputs were not available. The Level 3 impaired real estate assets measured at a fair value of $7.6 million in the third quarter of 2019 included 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 a fair value of $0.7 million in the second quarter of 2019 included land held for development. The impairment resulted from a change in our assumptions about the use of the assets and was calculated using the terms of definitive sales contracts as observable inputs were not available. 93 Table of Contents 11. Equity Common Stock Issuances At December 31, 2020, the Company had 96.1 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 $1.92, $1.90 and $1.85 for the years ended December 31, 2020, 2019 and 2018, 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, 2020 2019 2018 $ $ 1.65 $ 0.25 0.02 1.92 $ 1.64 $ 0.13 0.13 1.90 $ 1.48 0.31 0.06 1.85 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: December 31, 2020 8.625% Series A Cumulative Redeemable December 31, 2019 8.625% Series A Cumulative Redeemable Issue Date Number of Shares Outstanding Carrying Value (in thousands) Liquidation Preference Per Share Optional Redemption Date Annual Dividends Payable Per Share 2/12/1997 2/12/1997 29 29 $ $ 28,826 28,859 $ $ 1,000 2/12/2027 1,000 2/12/2027 $ $ 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, 2020 2019 2018 $ $ 74.96 $ 11.29 86.25 $ 79.90 $ 6.35 86.25 $ 71.22 15.03 86.25 The Company’s tax returns have not been examined by the IRS and, therefore, the taxability of dividends is subject to change. 94 Table of Contents Warrants At both December 31, 2020 and 2019, 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. Common Unit Distributions Distributions of the Operating Partnership declared per Common Unit aggregated $1.92, $1.90 and $1.85 for the years ended December 31, 2020, 2019 and 2018, respectively. Redeemable Common Units Generally, the Operating Partnership is obligated to redeem each Redeemable 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 Redeemable Common Unit presented for redemption for cash or one share of Common Stock. When a holder redeems a Redeemable Common Unit for a share of Common Stock or cash, the Company’s share in the Operating Partnership will be increased. The Common Units owned by the Company are not redeemable. Preferred Units The following table sets forth the Operating Partnership’s Preferred Units: December 31, 2020 8.625% Series A Cumulative Redeemable December 31, 2019 8.625% Series A Cumulative Redeemable Number of Units Outstanding (in thousands) Carrying Value Liquidation Preference Per Unit Optional Redemption Date Annual Distributions Payable Per Unit 29 29 $ $ 28,826 28,859 $ $ 1,000 2/12/2027 1,000 2/12/2027 $ $ 86.25 86.25 Issue Date 2/12/1997 2/12/1997 95 Table of Contents 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 130% of base salary. The more senior the position, the greater the portion of compensation that varies with performance. The percentage amount an officer may earn under the annual non-equity incentive plan is the product of the target annual incentive percentage times an “actual performance factor,” which can range from zero to 200%. The actual performance factor depends upon the relationship between actual performance in specific areas at each of our divisions and predetermined goals. For corporate officers, the actual performance factor is based on the goals and criteria applied to the Company’s performance as a whole. For officers who oversee our divisions, the actual performance factor is based on the goals and criteria applied partly to that division’s performance and partly to the Company’s performance overall. Amounts under our annual non-equity incentive plan are accrued and expensed in the year earned, but are typically paid early in the following year. Certain other employees participate in a similar annual non-equity incentive program. Incentive eligibility ranges from 10% 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, 2020 2019 552,373 1,926,324 2,478,697 599,902 2,016,659 2,616,561 Of the possible future issuance under the Company’s long-term equity incentive plans at December 31, 2020, no more than an additional 0.3 million shares can be in the form of restricted stock. During the years ended December 31, 2020, 2019 and 2018, we recognized $6.2 million, $7.2 million and $7.5 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, 2020, there was $5.2 million of total unrecognized share-based compensation costs, which will be recognized over a weighted average remaining contractual term of 1.9 years. 96 Table of Contents - Stock Options Stock options issued from 2014 through 2017 vest ratably on an annual basis over four years and expire after 10 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 following table sets forth stock option activity: Stock options outstanding at December 31, 2017 Exercised Stock options outstanding at December 31, 2018 Exercised Forfeited Stock options outstanding at December 31, 2019 Exercised Forfeited Stock options outstanding at December 31, 2020 (1) (2) __________ Options Outstanding Number of Options 640,822 (44,304) 596,518 (9,026) (2,590) 584,902 (42,163) (5,366) 537,373 Weighted Average Exercise Price $ $ 45.29 40.15 45.67 39.53 48.79 45.75 41.10 50.82 46.07 (1) The outstanding options at December 31, 2020 had a weighted average remaining life of 5.0 years. (2) The Company had 496,656 options exercisable at December 31, 2020 with a weighted average exercise price of $45.54, weighted average remaining life of 4.9 years and intrinsic value of $0.1 million. Of these exercisable options, 436,880 had exercise prices higher than the market price of our Common Stock at December 31, 2020. Cash received or receivable from options exercised was $1.9 million, $0.4 million and $1.9 million for the years ended December 31, 2020, 2019 and 2018, respectively. The total intrinsic value of options exercised during the years ended December 31, 2020, 2019 and 2018 was $0.4 million, $0.1 million and $0.4 million, respectively. The total intrinsic value of options outstanding at December 31, 2020, 2019 and 2018 was $0.1 million, $2.4 million and $0.1 million, respectively. The Company generally does not permit the net cash settlement of exercised stock options, but does permit net share settlement so long as the shares received are held for at least a year. The Company has a practice of issuing new shares to satisfy stock option exercises. - Time-Based Restricted Stock Shares of time-based restricted stock vest ratably on an annual basis 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. 97 Table of Contents The following table sets forth time-based restricted stock activity: 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 Awarded and issued (1) Vested (2) Forfeited Restricted shares outstanding at December 31, 2020 __________ Number of Shares Weighted Average Grant Date Fair Value 172,246 $ 94,984 (73,307) (2,684) 191,239 103,590 (73,036) (3,642) 218,151 83,116 (88,326) (3,751) 209,190 $ 46.46 43.01 44.19 45.89 45.62 45.98 45.79 46.07 45.73 44.88 45.86 45.78 45.34 (1) The weighted average fair value at grant date of time-based restricted stock issued during the years ended December 31, 2020, 2019 and 2018 was $3.7 million, $4.8 million and $4.1 million, respectively. (2) The vesting date fair value of time-based restricted stock that vested during the years ended December 31, 2020, 2019 and 2018 was $3.9 million, $3.3 million and $3.2 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%. For total return-based restricted stock issued prior to 2020, 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. This amount was increased from 75% to 100% for total return-based restricted stock issued in 2020. The weighted average grant date fair value of such shares of total return-based restricted stock issued in 2020, 2019 and 2018 was determined to be $38.31, $39.42 and $40.81, 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) __________ 2020 2019 2018 0.9 % 3.9 % 20.4 % 2.4 % 4.4 % 27.3 % 2.3 % 3.9 % 41.1 % (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. 98 Table of Contents The following table sets forth total return-based restricted stock activity: Restricted shares outstanding at December 31, 2017 Awarded and issued (1) Vested (2) Forfeited (3) Restricted shares outstanding at December 31, 2018 Awarded and issued (1) Vested (2) Forfeited (3) Restricted shares outstanding at December 31, 2019 Awarded and issued (1) Forfeited (3) Restricted shares outstanding at December 31, 2020 __________ Number of Shares Weighted Average Grant Date Fair Value 160,724 77,456 (41,160) (16,926) 180,094 87,344 (45,901) (12,689) 208,848 66,188 (49,852) 225,184 $ $ 44.72 40.81 45.61 45.24 43.34 39.42 43.68 43.58 42.22 38.31 51.93 39.53 (1) The fair value at grant date of total return-based restricted stock issued during the years ended December 31, 2020, 2019 and 2018 was $2.5 million, $3.4 million and $3.2 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 and 2018 was $2.1 million and $1.8 million, respectively, based on the performance of the specific plans. Vested shares include those shares surrendered by employees to satisfy tax withholding obligations in connection with such vesting. There were no vested shares of total return-based restricted stock during the year ended December 31, 2020. (3) The 2020, 2019 and 2018 amounts include 46,852, 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 targeted levels. 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, 2020, 2019 and 2018, we contributed $1.4 million, $1.5 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 $2.6 million and $2.3 million at December 31, 2020 and 2019, respectively, and are included in prepaid expenses and other assets, with an offsetting deferred compensation liability recorded in accounts payable, accrued expenses and other liabilities. Deferred amounts ultimately payable to the participants are based on the value of the related mutual fund investments. Accordingly, changes in the value of the unrelated mutual funds are recorded in interest and other income and the corresponding offsetting changes in the deferred compensation liability are recorded in general and administrative expense. As a result, there is no effect on our net income. 99 Table of Contents 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, 2020 2019 2018 $ $ 2,345 $ 228 — 2,573 $ 1,849 $ 496 — 2,345 $ 2,388 (182) (357) 1,849 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, 2020, 2019 and 2018, the Company issued 47,208, 38,618 and 38,951 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 in each of the years ended December 31, 2020, 2019 and 2018. 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 losses on cash flow hedges Amortization of cash flow hedges (1) Total accumulated other comprehensive loss __________ (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, 2020 and 2019, 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 100 December 31, 2020 2019 (471) $ (1,238) 247 (1,462) $ 9,913 (9,134) (1,250) (471) December 31, 2020 2019 2,612 $ 12,238 (3,577) 11,273 — 87 11,360 $ 4,815 29,581 (16,775) 17,621 2,073 1,096 20,790 $ $ $ $ Table of Contents 15. Earnings Per Share and Per Unit 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: Denominator for basic earnings per Common Share – weighted average shares (1) 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 __________ (1) Includes all unvested restricted stock where dividends on such restricted stock are non-forfeitable. 101 Year Ended December 31, 2020 2019 2018 $ $ $ $ $ 357,914 $ (9,338) (1,174) (2,488) 344,914 $ 141,683 $ (3,551) (1,214) (2,488) 134,430 $ 103,876 103,692 3.32 $ 1.30 $ 357,914 $ (1,174) (2,488) 141,683 $ (1,214) (2,488) 177,630 (4,588) (1,207) (2,492) 169,343 103,439 1.64 177,630 (1,207) (2,492) 354,252 $ 137,981 $ 173,931 103,876 103,692 103,439 8 2,830 22 2,731 106,714 106,445 $ 3.32 $ 1.30 $ 33 2,796 106,268 1.64 Table of Contents The following table sets forth the computation of basic and diluted earnings per unit of the Operating Partnership: Earnings per Common Unit - basic: Numerator: Net income Net (income) attributable to noncontrolling interests in consolidated affiliates Distributions on Preferred Units Net income available for common unitholders Denominator: Denominator for basic earnings per Common Unit – weighted average units (1) Net income available for common unitholders Earnings per Common Unit - diluted: Numerator: Net income Net (income) attributable to noncontrolling interests in consolidated affiliates Distributions on Preferred Units Net income available for common unitholders Denominator: Denominator for basic earnings per Common Unit – weighted average units (1) Add: Stock options using the treasury method Denominator for diluted earnings per Common Unit – adjusted weighted average units and assumed conversions Net income available for common unitholders __________ (1) Includes all unvested restricted stock where distributions on such restricted stock are non-forfeitable. 102 Year Ended December 31, 2020 2019 2018 $ $ $ $ $ $ 357,914 $ (1,174) (2,488) 354,252 $ 141,683 $ (1,214) (2,488) 137,981 $ 106,297 106,014 3.33 $ 1.30 $ 357,914 $ (1,174) (2,488) 354,252 $ 141,683 $ (1,214) (2,488) 137,981 $ 177,630 (1,207) (2,492) 173,931 105,826 1.64 177,630 (1,207) (2,492) 173,931 106,297 106,014 105,826 8 22 106,305 106,036 3.33 $ 1.30 $ 33 105,859 1.64 Table of Contents 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 $1.41, $1.44 and $1.26 per share in 2020, 2019 and 2018, 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 $2.8 billion, respectively, at December 31, 2020 and $4.7 billion and $2.9 billion, respectively, at December 31, 2019. The tax basis of the Operating Partnership’s assets (net of accumulated tax depreciation and amortization) and liabilities was approximately $4.6 billion and $2.8 billion, respectively, at December 31, 2020 and $4.7 billion and $2.9 billion, respectively, at December 31, 2019. During the years ended December 31, 2020, 2019 and 2018, the Company qualified as a REIT and incurred no federal income tax expense; accordingly, the only federal income taxes included in the accompanying Consolidated Financial Statements relate to activities of the Company’s taxable REIT subsidiary. The following table sets forth the Company’s income tax expense: Current tax expense: Federal State Deferred tax expense/(benefit): Federal State Total income tax expense Year Ended December 31, 2020 2019 2018 $ $ 110 $ 240 350 (9) (4) (13) 337 $ 202 $ 148 350 14 (120) (106) 244 $ 133 112 245 (95) (68) (163) 82 The Company’s net deferred tax liability was $0.1 million at both December 31, 2020 and 2019. 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, 2020 and 2019, there were no unrecognized tax benefits. The Company is subject to federal, state and local income tax examinations by taxing authorities for 2017 through 2020. 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. 103 Table of Contents 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. Our segment information as of December 31, 2019 and for the years ended December 31, 2019 and 2018 have been retrospectively revised from previously reported amounts to reflect a change in our reportable segments as a result of recent dispositions. Rental and Other Revenues: Office: Atlanta Charlotte Nashville Orlando Pittsburgh Raleigh Richmond Tampa Total Office Segment Other Total Rental and Other Revenues Net Operating Income: Office: Atlanta Charlotte 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 Net income Year Ended December 31, 2020 2019 2018 $ $ $ $ 146,704 $ 35,733 138,089 49,459 58,518 128,189 48,079 99,520 704,291 32,609 736,900 $ 95,448 $ 28,431 99,901 29,546 35,631 95,926 33,667 67,059 485,609 19,466 505,075 (241,585) (1,778) (41,031) (80,962) (1,707) 215,897 4,005 357,914 $ 151,279 $ 4,650 133,867 52,679 60,755 122,173 49,428 86,431 661,262 74,717 735,979 $ 97,019 $ 3,791 97,386 32,062 36,249 88,402 33,756 50,339 439,004 48,464 487,468 (254,504) (5,849) (44,067) (81,648) (2,510) 39,517 3,276 141,683 $ 141,337 — 121,836 53,771 61,177 118,352 45,729 102,404 644,606 75,429 720,035 87,503 — 88,554 32,841 36,233 86,053 31,276 65,819 428,279 49,341 477,620 (229,955) (423) (40,006) (71,422) 1,940 37,638 2,238 177,630 104 Table of Contents Total Assets: Office: Atlanta Charlotte Nashville Orlando Pittsburgh Raleigh Richmond Tampa Total Office Segment Other Total Assets December 31, 2020 2019 $ $ 1,011,807 $ 443,051 1,191,219 289,129 313,783 839,831 240,976 556,951 4,886,747 322,670 5,209,417 $ 1,040,869 425,045 1,045,125 289,743 323,792 830,128 246,546 521,620 4,722,868 415,376 5,138,244 105 Table of Contents 18. Quarterly Financial Data (Unaudited) The following tables set forth quarterly financial information of the Company: Year Ended December 31, 2020 First Quarter Second Quarter Third Quarter Fourth Quarter Total Rental and other revenues $ 192,800 $ 183,153 $ 181,043 $ 179,904 $ 736,900 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 Earnings per Common Share – diluted: Net income available for common stockholders 191,340 (4,960) (285) (622) 185,473 $ 38,956 (1,017) (289) (622) 37,028 $ 42,331 (1,107) (298) (622) 40,304 $ 85,287 (2,254) (302) (622) 82,109 $ 1.79 $ 0.36 $ 0.39 $ 0.79 $ 1.79 $ 0.36 $ 0.39 $ 0.79 $ 357,914 (9,338) (1,174) (2,488) 344,914 3.32 3.32 $ $ $ Rental and other revenues $ 172,363 $ 184,070 $ 187,475 $ 192,071 $ 735,979 Year Ended December 31, 2019 First Quarter Second Quarter Third Quarter Fourth Quarter Total 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 Earnings per Common Share – diluted: Net income available for common stockholders 8,386 (193) (316) (622) 7,255 $ 41,394 (1,044) (306) (622) 39,422 $ 29,557 (737) (297) (622) 27,901 $ 62,346 (1,577) (295) (622) 59,852 $ 0.07 $ 0.38 $ 0.27 $ 0.58 $ 0.07 $ 0.38 $ 0.27 $ 0.58 $ 141,683 (3,551) (1,214) (2,488) 134,430 1.30 1.30 $ $ $ 106 Table of Contents The following tables set forth quarterly financial information of the Operating Partnership: Year Ended December 31, 2020 First Quarter Second Quarter Third Quarter Fourth Quarter Total Rental and other revenues $ 192,800 $ 183,153 $ 181,043 $ 179,904 $ 736,900 Net income 191,340 38,956 42,331 85,287 357,914 Net (income) attributable to noncontrolling interests in consolidated affiliates Distributions on Preferred Units Net income available for common unitholders Earnings per Common Unit – basic: Net income available for common unitholders Earnings per Common Unit – diluted: Net income available for common unitholders (285) (622) 190,433 $ (289) (622) 38,045 $ (298) (622) 41,411 $ (302) (622) 84,363 $ (1,174) (2,488) 354,252 1.79 $ 0.36 $ 0.39 $ 0.79 $ 1.79 $ 0.36 $ 0.39 $ 0.79 $ 3.33 3.33 $ $ $ 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 consolidated Year Ended December 31, 2019 First Quarter Second Quarter Third Quarter Fourth Quarter Total affiliates Distributions on Preferred Units Net income available for common unitholders Earnings per Common Unit – basic: Net income available for common unitholders Earnings per Common Unit – diluted: Net income available for common unitholders (316) (622) 7,448 $ (306) (622) 40,466 $ (297) (622) 28,638 $ (295) (622) 61,429 $ (1,214) (2,488) 137,981 0.07 $ 0.38 $ 0.27 $ 0.58 $ 0.07 $ 0.38 $ 0.27 $ 0.58 $ 1.30 1.30 $ $ $ 107 Table of Contents 19. Subsequent Events On January 15, 2021, we sold a building in Atlanta for a sale price of $30.7 million and expect to record a gain on disposition of property of $18.9 million. On January 21, 2021, we acquired our joint venture partner’s 75.0% interest in the Forum, which owned five buildings in Raleigh encompassing 636,000 rentable square feet, for a purchase price of $131.3 million. We previously accounted for our 25.0% interest in this joint venture using the equity method of accounting. The assets and liabilities of the joint venture are now wholly owned and we have determined the acquisition constitutes an asset purchase. As such, because the Forum is not a variable interest entity, we expect to allocate our previously held equity interest at historical cost along with the consideration paid and acquisition costs to the assets acquired and liabilities assumed. On February 2, 2021, the Company declared a cash dividend of $0.48 per share of Common Stock, which is payable on March 9, 2021 to stockholders of record as of February 16, 2021. See also Note 8 for information regarding the potential impact of the COVID-19 pandemic in future periods. The severity and duration of the COVID-19 pandemic and the resulting economic recession and the future demand for office space over the long-term are difficult to predict and could materially and adversely impact or disrupt our financial condition, results of operations, cash flows and performance. 108 Table of Contents HIGHWOODS PROPERTIES, INC. HIGHWOODS REALTY LIMITED PARTNERSHIP NOTE TO SCHEDULE III (in thousands) The following table sets forth the activity of real estate assets and accumulated depreciation: Real estate assets: Beginning balance Acquisitions, development and improvements Cost of real estate sold and retired Ending balance (a) Accumulated depreciation: Beginning balance Depreciation expense Real estate sold and retired Ending balance (b) (a) Reconciliation of total real estate assets to balance sheet caption: Total per Schedule III Development in-process exclusive of land included in Schedule III Real estate assets, net, held for sale Total real estate assets (b) Reconciliation of total accumulated depreciation to balance sheet caption: Total per Schedule III Real estate assets, net, held for sale Total accumulated depreciation 109 2020 December 31, 2019 5,776,804 $ 259,470 (441,441) 5,594,833 $ 5,296,551 $ 677,842 (197,589) 5,776,804 $ 1,405,341 $ 204,585 (187,970) 1,296,562 $ 214,682 (105,903) 1,421,956 $ 1,405,341 $ 2018 5,173,754 274,863 (152,066) 5,296,551 1,211,728 191,035 (106,201) 1,296,562 2020 5,594,833 $ 259,681 (14,850) 2019 5,776,804 $ 172,706 (34,396) 5,839,664 $ 5,915,114 $ 2018 5,296,551 165,537 — 5,462,088 2020 1,421,956 $ (3,577) 2019 1,405,341 $ (16,775) 1,418,379 $ 1,388,566 $ 2018 1,296,562 — 1,296,562 $ $ $ $ $ $ $ $ Table of Contents HIGHWOODS PROPERTIES, INC. HIGHWOODS REALTY LIMITED PARTNERSHIP SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands) December 31, 2020 Initial Costs Costs Capitalized Subsequent to Acquisition Gross Value at Close of Period Property Type 2020 Encumbrance Land Bldg & Improv Land Bldg & Improv Land Bldg & Improv Total Assets (1) Accumulated Depreciation Date of Construction $ — $ 1,444 864 — — — — — — — — — 2,500 1,290 1,380 3,342 7,250 5,785 5,243 9,579 14,775 5,349 5,103 4,777 400 22,717 27,678 2,482 $ 29,081 — 8,924 4,744 14,432 — — — 10,679 21,643 20,449 20,006 8,567 7,733 32,111 — 64,913 — 125,549 123,071 26,334 22,811 89,708 — 143,068 88,962 2 $ 1,478 $ 2 $ 3,960 $ — 303 — — — 406 328 — — — — — — — — (4,439) (29) (4,819) — — — — 450 — — — 11,265 15,166 8,329 710 9,059 14,776 12,684 6,447 4,244 20,514 10,653 4,308 5,022 3,108 19,729 718 26,071 — 906 17,587 11,303 3,523 2,905 710 17,074 11,147 1,444 1,167 — — — 406 328 — — — — 2,500 1,290 1,380 3,342 2,811 5,756 424 9,579 14,775 5,349 5,103 5,227 400 22,717 27,678 40,346 15,166 17,253 5,454 23,491 14,776 12,684 6,447 14,923 42,157 31,102 24,314 13,589 10,841 51,840 718 90,984 — 126,455 140,658 37,637 26,334 92,613 710 160,142 100,109 3,962 $ 41,790 16,333 17,253 5,454 23,491 15,182 13,012 6,447 14,923 42,157 31,102 26,814 14,879 12,221 55,182 3,529 96,740 424 136,034 155,433 42,986 31,437 97,840 1,110 182,859 127,787 1,925 24,040 6,729 8,706 5,341 11,732 7,686 4,589 2,424 7,898 18,043 17,782 13,172 6,872 5,559 26,543 185 23,842 — 33,618 32,298 10,897 7,056 11,172 70 25,234 15,755 1983 1975 2002 1976 1971 1971 1998 2005 2005 1973 1980 1983 1997 1981 1984 1998 N/A 1989 N/A 2009 2001 2000 1999 2017 N/A 1997 1983 29,273 354,749 — 20,087 29,273 374,836 404,109 12,090 2019 5-40 yrs. 110 Life on Which Depreciation is Calculated 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. N/A 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. Description Atlanta, GA 1700 Century Circle 1800 Century Boulevard 1825 Century Boulevard 1875 Century Boulevard 1900 Century Boulevard 2200 Century Parkway 2400 Century Parkway 2500 Century Parkway 2500/2635 Parking Garage 2600 Century Parkway 2635 Century Parkway 2800 Century Parkway 50 Glenlake Century Plaza I Century Plaza II 5405 Windward Parkway Riverpoint - Land Riverwood 100 Tradeport - Land Two Alliance Center One Alliance Center 10 Glenlake North 10 Glenlake South Riverwood 200 Riverwood 300 - Land Monarch Tower Monarch Plaza Charlotte, NC Bank of America Tower Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Industrial Office Industrial Office Office Office Office Office Office Office Office Office Table of Contents HIGHWOODS PROPERTIES, INC. HIGHWOODS REALTY LIMITED PARTNERSHIP SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued) Initial Costs Costs Capitalized Subsequent to Acquisition Gross Value at Close of Period Description Property Type 2020 Encumbrance Land Bldg & Improv Land Bldg & Improv Land Bldg & Improv Total Assets (1) Accumulated Depreciation Date of Construction Nashville, TN 3322 West End 3401 West End 5310 Maryland Way Cool Springs I & II Deck Cool Springs III & IV Deck Cool Springs I Cool Springs II Cool Springs III Cool Springs IV Cool Springs V (Healthways) Harpeth On The Green II Harpeth On The Green III Harpeth On The Green IV Harpeth On The Green V Hickory Trace Highwoods Plaza I Highwoods Plaza II Seven Springs I SouthPointe Ramparts Westwood South 100 Winners Circle The Pinnacle at Symphony Place Seven Springs East (LifePoint) The Shops at Seven Springs Seven Springs West Seven Springs II Bridgestone Tower Virginia Springs II MARS Campus 5501 Virginia Way 1100 Broadway - Land Ovation - Land Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office 3,025 5,862 1,863 — — 1,583 1,824 1,631 1,715 3,688 1,419 1,660 1,713 662 1,164 1,552 1,448 2,076 1,655 2,394 2,106 1,497 — 2,525 803 2,439 2,356 19,223 — 7,010 4,534 29,845 31,063 27,490 22,917 7,201 — — — — — — — 5,677 6,649 6,842 — — — — — — 12,806 — 7,258 141,469 37,587 8,223 51,306 30,048 169,582 — 87,474 25,632 — — 11,806 6,566 3,809 3,990 4,463 15,891 24,705 16,241 19,221 53,100 3,216 2,263 3,171 5,795 6,111 9,951 9,600 13,216 9,430 10,313 12,317 2,760 6,406 192 581 1,995 3,011 110 21,578 32 274 — — — — — — — 15 346 804 — 295 — — — 197 164 307 307 592 310 — 382 — — — — — — — 4,821 — — — 104 111 3,025 5,862 1,863 — — 1,598 2,170 2,435 1,715 3,983 1,419 1,660 1,713 859 1,328 1,859 1,755 2,668 1,965 2,394 2,488 1,497 — 2,525 803 2,439 2,356 19,223 4,821 7,010 4,534 29,845 31,167 39,296 29,483 11,010 3,990 4,463 15,891 24,705 16,241 19,221 53,100 8,893 8,912 10,013 5,795 6,111 9,951 9,600 13,216 9,430 23,119 12,317 10,018 147,875 37,779 8,804 53,301 33,059 169,692 21,578 87,506 25,906 — — 42,321 35,345 12,873 3,990 4,463 17,489 26,875 18,676 20,936 57,083 10,312 10,572 11,726 6,654 7,439 11,810 11,355 15,884 11,395 25,513 14,805 11,515 147,875 40,304 9,607 55,740 35,415 188,915 26,399 94,516 30,440 29,845 31,167 18,539 16,114 6,540 1,314 1,535 7,396 10,089 5,698 6,131 23,044 4,607 5,015 5,598 2,686 2,474 5,020 4,988 5,916 4,107 9,057 6,168 5,121 36,904 8,512 2,604 7,947 4,058 16,369 70 5,505 1,775 — — 1986 1982 1994 2007 2007 1999 1999 2006 2008 2007 1984 1987 1989 1998 2001 1996 1997 2002 1998 1986 1999 1987 2010 2013 2013 2016 2017 2017 2020 2019 2018 N/A N/A 93,350 Life on Which Depreciation is Calculated 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. N/A N/A Table of Contents HIGHWOODS PROPERTIES, INC. HIGHWOODS REALTY LIMITED PARTNERSHIP SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued) Initial Costs Costs Capitalized Subsequent to Acquisition Gross Value at Close of Period Description Broadway Stem - Land Orlando, FL Capital Plaza Three - Land Eola Park - Land The 1800 Eller Drive Building Seaside Plaza Capital Plaza Two Capital Plaza One Landmark Center Two Landmark Center One 300 South Orange Eola Centre Pittsburgh, PA One PPG Place Two PPG Place Three PPG Place Four PPG Place Five PPG Place Six PPG Place EQT Plaza East Liberty - Land Raleigh, NC 3600 Glenwood Avenue 3737 Glenwood Avenue 4800 North Park 5000 North Park 801 Raleigh Corporate Center 2500 Blue Ridge Road 2418 Blue Ridge Road Cape Fear Catawba - Land 2000 CentreGreen 4000 CentreGreen 5000 CentreGreen Property Type Office 2020 Encumbrance Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Land — 2,994 2,027 — 3,893 4,346 3,482 4,743 6,207 3,490 3,758 9,819 2,302 501 620 803 3,353 16,457 2,478 — — 2,678 1,010 828 722 462 131 125 1,529 1,653 1,291 Land 6,218 3,012 2,027 — 3,893 4,346 3,482 4,743 6,207 3,490 3,758 9,819 2,302 501 620 803 3,353 16,457 2,478 — 318 2,678 961 1,100 722 462 129 123 1,138 1,264 1,291 Bldg & Improv Land Bldg & Improv — 6,218 — — — 9,851 29,541 43,394 27,321 22,031 22,655 56,079 11,160 107,643 10,978 2,923 3,239 4,924 25,602 83,812 — 10,994 — 17,630 4,612 — 4,606 1,410 1,630 1,635 — — 34,572 — — 3,526 10,104 8,433 7,668 9,352 10,026 10,243 12,739 51,500 10,655 4,680 3,675 3,168 15,502 15,175 — 4,948 17,281 10,224 2,674 11,233 1,497 2,718 (1,004) (1,635) 12,445 11,339 2,875 18 — — — — — — — — — — — — — — — — — — 318 — (49) 272 — — (2) (2) (391) (389) — 112 Bldg & Improv Total Assets (1) Accumulated Depreciation Date of Construction Life on Which Depreciation is Calculated — 6,218 — N/A N/A — — 13,377 39,645 51,827 34,989 31,383 32,681 66,322 23,899 159,143 21,633 7,603 6,914 8,092 41,104 98,987 — 15,942 17,281 27,854 7,286 11,233 6,103 4,128 626 — 12,445 11,339 37,447 3,012 2,027 13,377 43,538 56,173 38,471 36,126 38,888 69,812 27,657 168,962 23,935 8,104 7,534 8,895 44,457 115,444 2,478 15,942 17,599 30,532 8,247 12,333 6,825 4,590 755 123 13,583 12,603 38,738 — — 9,158 8,963 12,253 7,387 7,595 7,556 12,867 3,710 51,382 5,670 2,737 2,220 2,828 11,416 25,863 — 8,885 8,596 16,546 4,078 4,604 3,844 1,623 382 — 4,544 5,202 4,997 N/A N/A 1983 1982 1999 1975 1985 1983 2000 1969 1983-1985 1983-1985 1983-1985 1983-1985 1983-1985 1983-1985 1987 N/A 1986 1999 1985 1980 2002 1982 1988 1979 N/A 2000 2001 2017 N/A N/A 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. N/A 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. N/A 5-40 yrs. 5-40 yrs. 5-40 yrs. Table of Contents HIGHWOODS PROPERTIES, INC. HIGHWOODS REALTY LIMITED PARTNERSHIP SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued) Initial Costs Costs Capitalized Subsequent to Acquisition Gross Value at Close of Period Description Property Type 2020 Encumbrance 3000 CentreGreen 1000 CentreGreen Cottonwood GlenLake - Land GlenLake One GlenLake Four GlenLake Six 701 Raleigh Corporate Center Highwoods Centre Inveresk Parcel 2 - Land 4201 Lake Boone Trail 4620 Creekstone Drive 4825 Creekstone Drive Pamlico 751 Corporate Center PNC Plaza 4301 Lake Boone Trail 4207 Lake Boone Trail 2301 Rexwoods Drive 4325 Lake Boone Trail 2300 Rexwoods Drive 4709 Creekstone Drive 4700 Six Forks Road 4700 Homewood Court 4800 Six Forks Road Smoketree Tower 4601 Creekstone Drive Weston - Land 4625 Creekstone Drive 11000 Weston Parkway GlenLake Five 11800 Weston Parkway CentreGreen Café CentreGreen Fitness Center Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Land 1,779 1,280 609 13,003 924 1,659 941 1,304 531 657 1,450 149 398 289 2,665 1,206 878 362 919 586 1,301 469 666 1,086 862 2,353 255 22,771 458 2,651 2,263 826 41 27 Bldg & Improv — — 3,244 — — — — — — — 6,311 — — — 16,939 — 3,730 1,818 2,816 — — 4,038 2,665 4,533 4,411 11,743 — — — 18,850 30,264 13,188 3,509 2,322 Bldg & Improv 14,505 12,888 437 114 22,714 20,311 20,118 17,337 7,981 103 684 3,380 10,478 9,188 — 70,389 2,405 1,407 1,650 4,872 8,129 5,383 1,180 2,078 3,433 6,818 6,221 — 6,122 15,357 3,693 13 (2) (1) Land 1,382 1,335 609 3,079 2,248 2,152 576 1,844 264 695 1,450 256 691 289 2,665 1,206 878 362 919 586 1,485 492 666 1,086 862 2,353 472 2,877 726 2,651 2,263 826 41 27 Land (397) 55 — (9,924) 1,324 493 (365) 540 (267) 38 — 107 293 — — — — — — — 184 23 — — — — 217 (19,894) 268 — — — — — 113 Bldg & Improv Total Assets (1) Accumulated Depreciation Date of Construction 14,505 12,888 3,681 114 22,714 20,311 20,118 17,337 7,981 103 6,995 3,380 10,478 9,188 16,939 70,389 6,135 3,225 4,466 4,872 8,129 9,421 3,845 6,611 7,844 18,561 6,221 — 6,122 34,207 33,957 13,201 3,507 2,321 15,887 14,223 4,290 3,193 24,962 22,463 20,694 19,181 8,245 798 8,445 3,636 11,169 9,477 19,604 71,595 7,013 3,587 5,385 5,458 9,614 9,913 4,511 7,697 8,706 20,914 6,693 2,877 6,848 36,858 36,220 14,027 3,548 2,348 4,860 3,736 2,435 56 10,176 7,243 6,532 8,802 4,290 14 1,998 1,511 5,269 7,209 1,817 24,643 3,896 2,130 2,769 2,764 2,938 3,081 2,356 3,925 4,401 10,951 3,545 — 3,621 6,014 8,605 2,836 533 353 2002 2008 1983 N/A 2002 2006 2008 1996 1998 N/A 1998 2001 1999 1980 2018 2008 1990 1993 1992 1995 1998 1987 1982 1983 1987 1984 1997 N/A 1995 1998 2014 2014 2014 2014 Life on Which Depreciation is Calculated 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. N/A 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. Table of Contents HIGHWOODS PROPERTIES, INC. HIGHWOODS REALTY LIMITED PARTNERSHIP SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued) Description Property Type 2020 Encumbrance One City Plaza Edison - Land Charter Square MetLife Global Technology Campus GlenLake Seven Hargett - Land Other Property Richmond, VA 4900 Cox Road Colonnade Building Dominion Place - Pitts Parcel - Land Markel 4521 Hamilton Beach Highwoods Commons Highwoods One Highwoods Two Highwoods Five Highwoods Plaza Innslake Center Highwoods Centre Markel 4501 4600 Cox Road North Park North Shore Commons I North Shore Commons II North Shore Commons C - Land North Shore Commons D - Land Nuckols Corner - Land One Shockoe Plaza Pavilion - Land Lake Brook Commons Sadler & Cox - Land Highwoods Three Stony Point VI (Virginia Urology) Office Office Office Office Office Office Other Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Initial Costs Costs Capitalized Subsequent to Acquisition Gross Value at Close of Period Bldg & Improv 68,375 — 65,881 149,889 — — 20,868 5,311 6,105 — 13,299 4,345 — — — — — — 4,825 13,259 17,081 8,659 — — Land — 2,196 — — 1,662 2,816 (6,084) 15 — (404) 168 10 458 22 226 11 187 195 — 213 169 6 137 (89) Bldg & Improv 26,766 — 4,913 (153) 34,077 — 96,118 3,731 2,462 — (396) 2,997 4,651 14,116 10,292 8,000 5,897 8,023 1,967 (3,367) (3,450) 3,666 12,624 10,848 Land 11,288 8,180 7,267 21,580 1,662 9,398 21,176 1,339 1,364 697 1,749 1,096 979 1,710 1,012 794 1,096 1,040 1,205 1,513 1,869 2,169 1,088 1,978 Bldg & Improv Total Assets (1) Accumulated Depreciation Date of Construction 95,141 — 70,794 149,736 34,077 — 116,986 9,042 8,567 — 12,903 7,342 4,651 14,116 10,292 8,000 5,897 8,023 6,792 9,892 13,631 12,325 12,624 10,848 106,429 8,180 78,061 171,316 35,739 9,398 138,162 10,381 9,931 697 14,652 8,438 5,630 15,826 11,304 8,794 6,993 9,063 7,997 11,405 15,500 14,494 13,712 12,826 20,423 — 10,208 19,477 435 — 50,227 5,460 3,885 — 6,260 3,849 2,261 7,416 3,936 3,744 2,865 3,527 3,505 4,039 5,576 6,976 6,525 3,873 1986 N/A 2015 2015 2020 N/A N/A 1991 2003 N/A 1999 1986 1999 1996 1997 1998 2000 2001 1990 1998 1989 1989 2002 2007 Life on Which Depreciation is Calculated 5-40 yrs. N/A 5-40 yrs. 5-40 yrs. 5-40 yrs. N/A 5-40 yrs. 5-40 yrs. 5-40 yrs. N/A 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. — 55 10 1,552 10 1,562 1 N/A 5-40 yrs. — — — 46 8,864 — — — 231 356 (181) 21 343 358 — — 21,530 (46) 2,877 — 12,128 1,261 1,490 356 — 1,621 1,878 2,276 — — 21,530 — 11,741 — 12,128 1,261 1,490 21,886 — 13,362 1,878 14,404 — — 10,372 — 5,503 — 4,345 N/A N/A 1996 N/A 1996 N/A 2005 N/A N/A 5-40 yrs. N/A 5-40 yrs. N/A 5-40 yrs. Land 11,288 5,984 7,267 21,580 — 6,582 27,260 1,324 1,364 1,101 1,581 1,086 521 1,688 786 783 909 845 1,205 1,300 1,700 2,163 951 2,067 1,497 1,261 1,259 — 181 1,600 1,535 1,918 1,925 25,868 — (2) 1,925 25,866 27,791 2,059 2018 5-40 yrs. 114 Table of Contents HIGHWOODS PROPERTIES, INC. HIGHWOODS REALTY LIMITED PARTNERSHIP SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued) Initial Costs Costs Capitalized Subsequent to Acquisition Gross Value at Close of Period Description Property Type 2020 Encumbrance Stony Point I Stony Point II Stony Point III Stony Point IV Virginia Mutual Waterfront Plaza Innsbrook Centre Elks Pass - Land Tampa, FL Meridian Three Bayshore Place 5525 Gray Street Highwoods Preserve Building V Highwoods Bay Center I HIW Bay Center II - Land Highwoods Preserve Building VII HIW Preserve VII Garage Horizon LakePointe One LakePointe Two Lakeside Lakeside/Parkside Garage One Harbour Place Parkside Pavilion Pavilion Parking Garage Spectrum Tower Place Westshore Square Independence Park - Land Independence One Meridian One Meridian Two 5332 Avion Drive Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Office Bldg & Improv Total Assets (1) Accumulated Depreciation Date of Construction 15,745 13,296 10,762 12,057 7,237 4,638 9,375 — 22,400 15,449 23,977 25,368 38,263 — 16,996 6,932 10,700 41,564 31,059 15,095 5,732 41,945 12,638 22,465 5,801 19,253 26,846 6,892 2,227 10,267 25,550 25,013 39,358 16,862 14,639 11,757 13,012 8,553 5,231 10,289 3,326 25,073 17,725 28,437 26,249 41,764 3,482 17,786 6,932 10,700 43,670 33,731 15,095 5,732 43,961 12,638 22,465 5,801 20,707 30,064 8,018 12,228 12,798 27,399 26,315 45,668 8,432 6,534 5,361 4,467 3,639 2,157 4,093 — 7,048 7,269 8,606 11,031 12,745 — 4,481 2,367 5,546 23,659 15,976 7,504 2,455 18,333 6,111 12,081 3,038 10,099 14,011 3,687 214 5,104 6,028 6,064 3,937 1990 1999 2002 2006 1996 1988 1987 N/A 1989 1990 2005 2001 2007 N/A 2007 2007 1980 1986 1999 1978 2004 1985 1979 1982 1999 1984 1988 1976 N/A 1983 1984 1986 2016 Life on Which Depreciation is Calculated 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. N/A 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. N/A 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. 5-40 yrs. Land 1,384 1,240 995 955 1,301 585 914 3,326 2,673 2,276 4,054 881 3,565 3,482 790 — — 2,106 2,000 — — 2,016 — — — 1,454 3,218 1,126 4,943 2,531 1,849 1,302 — Land 1,117 1,343 995 955 1,316 593 914 3,326 2,673 2,276 4,460 881 3,501 3,482 790 — — 2,106 2,672 — — 2,016 — — — 1,454 3,218 1,126 10,001 2,531 1,849 1,302 6,310 Bldg & Improv Land Bldg & Improv 4,115 13,296 10,762 12,057 1,201 2,291 1,126 — 5,930 3,632 23,977 25,368 38,263 — 16,996 6,932 4,443 41,475 15,211 7,726 5,732 16,693 3,231 6,071 5,801 4,751 6,948 1,706 2,227 5,741 3,187 5,425 39,358 11,630 — — — 6,036 2,347 8,249 — 16,470 11,817 — — — — — — 6,257 89 15,848 7,369 — 25,252 9,407 16,394 — 14,502 19,898 5,186 — 4,526 22,363 19,588 — (267) 103 — — 15 8 — — — — 406 — (64) — — — — — 672 — — — — — — — — — 5,058 — — — 6,310 115 Table of Contents HIGHWOODS PROPERTIES, INC. HIGHWOODS REALTY LIMITED PARTNERSHIP SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued) Initial Costs Costs Capitalized Subsequent to Acquisition Gross Value at Close of Period Description Property Type 2020 Encumbrance Land Bldg & Improv Land Bldg & Improv Land Bldg & Improv Total Assets (1) Accumulated Depreciation Date of Construction Suntrust Financial Centre Suntrust Financial - Land Office Office __________ 1,980 2,225 20,758 — $ 606,086 $ 3,274,841 $ (5,128) $ 1,719,034 $ 600,958 $ 4,993,875 $ 5,594,833 $ 1,421,956 102,138 — 127,158 — 129,138 2,225 25,020 — 1,980 2,225 — — 1992 N/A Life on Which Depreciation is Calculated 5-40 yrs. N/A (1) The cost basis for income tax purposes of aggregate land and buildings and tenant improvements as of December 31, 2020 is $5.5 billion. 116 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Raleigh, State of North Carolina, on February 9, 2021. SIGNATURES Highwoods Properties, Inc. By: /s/ Theodore J. Klinck Theodore J. Klinck President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the dates indicated. Signature /s/ Carlos E. Evans Carlos E. Evans /s/ Theodore J. Klinck Theodore J. Klinck /s/ Charles A. Anderson Charles A. Anderson /s/ Gene H. Anderson Gene H. Anderson /s/ Thomas P. Anderson Thomas P. Anderson /s/ David L. Gadis David L. Gadis /s/ David J. Hartzell David J. Hartzell /s/ Sherry A. Kellett Sherry A. Kellett /s/ Anne H. Lloyd Anne H. Lloyd /s/ Mark F. Mulhern Mark F. Mulhern /s/ Daniel L. Clemmens Daniel L. Clemmens Title Date Chairman of the Board of Directors February 9, 2021 President, Chief Executive Officer and Director February 9, 2021 Director Director Director Director Director Director Director February 9, 2021 February 9, 2021 February 9, 2021 February 9, 2021 February 9, 2021 February 9, 2021 February 9, 2021 Executive Vice President and Chief Financial Officer February 9, 2021 Vice President and Chief Accounting Officer February 9, 2021 117 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Raleigh, State of North Carolina, on February 9, 2021. SIGNATURES Highwoods Realty Limited Partnership By: Highwoods Properties, Inc., its sole general partner By: /s/ Theodore J. Klinck Theodore J. Klinck President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the dates indicated. Signature /s/ Carlos E. Evans Carlos E. Evans /s/ Theodore J. Klinck Theodore J. Klinck /s/ Charles A. Anderson Charles A. Anderson /s/ Gene H. Anderson Gene H. Anderson /s/ Thomas P. Anderson Thomas P. Anderson /s/ David L. Gadis David L. Gadis /s/ David J. Hartzell David J. Hartzell /s/ Sherry A. Kellett Sherry A. Kellett /s/ Anne H. Lloyd Anne H. Lloyd /s/ Mark F. Mulhern Mark F. Mulhern /s/ Daniel L. Clemmens Daniel L. Clemmens Title Date Chairman of the Board of Directors of the General Partner February 9, 2021 President, Chief Executive Officer and Director of the General Partner February 9, 2021 Director of the General Partner February 9, 2021 Director of the General Partner February 9, 2021 Director of the General Partner February 9, 2021 Director of the General Partner February 9, 2021 Director of the General Partner February 9, 2021 Director of the General Partner February 9, 2021 Director of the General Partner February 9, 2021 Executive Vice President and Chief Financial Officer of the General Partner February 9, 2021 Vice President and Chief Accounting Officer of the General Partner February 9, 2021 118 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statements No. 333-160521, 333-204128 and 333-239289 on Form S-8 and Registration Statements No. 333-193865 and 333-236249 on Form S-3 of our reports dated February 9, 2021, relating to the consolidated financial statements and financial statement schedule of Highwoods Properties, Inc. and subsidiaries (the “Company”), and the effectiveness of the Company’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of the Company for the year ended December 31, 2020. Exhibit 23.1 /s/ Deloitte & Touche LLP Raleigh, North Carolina February 9, 2021 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Exhibit 23.2 We consent to the incorporation by reference in Registration Statement No. 333-236249-01 on Form S-3 of our report dated February 9, 2021, relating to the consolidated financial statements and financial statement schedules of Highwoods Realty Limited Partnership and subsidiaries (the “Operating Partnership”) appearing in this Annual Report on Form 10-K of the Operating Partnership for the year ended December 31, 2020. /s/ Deloitte & Touche LLP Raleigh, North Carolina February 9, 2021 Exhibit 31.1 I, Theodore J. Klinck, certify that: CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I have reviewed this Annual Report on Form 10-K of Highwoods Properties, Inc.; 1. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; (c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and 5. The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the Audit Committee of the Registrant’s Board of Directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. Date: February 9, 2021 /s/ Theodore J. Klinck Theodore J. Klinck President and Chief Executive Officer Exhibit 31.2 I, Mark F. Mulhern, certify that: CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I have reviewed this Annual Report on Form 10-K of Highwoods Properties, Inc.; 1. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; (c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and 5. The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the Audit Committee of the Registrant’s Board of Directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. Date: February 9, 2021 /s/ Mark F. Mulhern Mark F. Mulhern Executive Vice President and Chief Financial Officer Exhibit 31.3 I, Theodore J. Klinck, certify that: CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I have reviewed this Annual Report on Form 10-K of Highwoods Realty Limited Partnership; 1. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; (c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and 5. The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the Audit Committee of the Registrant’s Board of Directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. Date: February 9, 2021 /s/ Theodore J. Klinck Theodore J. Klinck President and Chief Executive Officer of the General Partner Exhibit 31.4 I, Mark F. Mulhern, certify that: CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I have reviewed this Annual Report on Form 10-K of Highwoods Realty Limited Partnership; 1. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; (c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and 5. The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the Audit Committee of the Registrant’s Board of Directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. Date: February 9, 2021 /s/ Mark F. Mulhern Mark F. Mulhern Executive Vice President and Chief Financial Officer of the General Partner CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT Exhibit 32.1 In connection with the Annual Report of Highwoods Properties, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Theodore J. Klinck, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Theodore J. Klinck Theodore J. Klinck President and Chief Executive Officer February 9, 2021 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT Exhibit 32.2 In connection with the Annual Report of Highwoods Properties, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark F. Mulhern, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Mark F. Mulhern Mark F. Mulhern Executive Vice President and Chief Financial Officer February 9, 2021 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT Exhibit 32.3 In connection with the Annual Report of Highwoods Realty Limited Partnership (the “Operating Partnership”) on Form 10-K for the period ended December 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Theodore J. Klinck, President and Chief Executive Officer of Highwoods Properties, Inc., general partner of the Operating Partnership, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Operating Partnership. /s/ Theodore J. Klinck Theodore J. Klinck President and Chief Executive Officer of the General Partner February 9, 2021 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT In connection with the Annual Report of Highwoods Realty Limited Partnership (the “Operating Partnership”) on Form 10-K for the period ended December 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark F. Mulhern, Executive Vice President and Chief Financial Officer of Highwoods Properties, Inc., general partner of the Operating Partnership, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Operating Exhibit 32.4 Partnership. /s/ Mark F. Mulhern Mark F. Mulhern Executive Vice President and Chief Financial Officer of the General Partner February 9, 2021 

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