Annual Statements Open main menu

HIGHWOODS PROPERTIES, INC. - Quarter Report: 2010 September (Form 10-Q)

hiw3q10.htm





UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010
______________


HIGHWOODS PROPERTIES, INC.
(Exact name of registrant as specified in its charter)

 
Maryland
001-13100
56-1871668
 
 
(State or other jurisdiction
of incorporation or organization)
(Commission
File Number)
(I.R.S. Employer
Identification Number)
 

HIGHWOODS REALTY LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)

 
North Carolina
000-21731
56-1869557
 
 
(State or other jurisdiction
of incorporation or organization)
(Commission
File Number)
(I.R.S. Employer
Identification Number)
 

3100 Smoketree Court, Suite 600
Raleigh, NC 27604
(Address of principal executive offices) (Zip Code)
 
919-872-4924
(Registrants’ telephone number, including area code)
______________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Highwoods Properties, Inc.  Yes  S    No £            Highwoods Realty Limited Partnership  Yes  S    No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Highwoods Properties, Inc.  Yes  S    No £            Highwoods Realty Limited Partnership  Yes  £    No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of ‘large accelerated filer,’ ‘accelerated filer’ and ‘smaller reporting company’ in Rule 12b-2 of the Securities Exchange Act.
 
Highwoods Properties, Inc.
Large accelerated filer S    Accelerated filer £      Non-accelerated filer £      Smaller reporting company £
 
Highwoods Realty Limited Partnership
Large accelerated filer £    Accelerated filer £      Non-accelerated filer S      Smaller reporting company £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).
 
Highwoods Properties, Inc.  Yes  £    No S            Highwoods Realty Limited Partnership  Yes  £    No S

The Company had 71,658,232 shares of Common Stock outstanding as of October 21, 2010.



 
 

 


HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP

QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 2010

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
 
   
   
HIGHWOODS PROPERTIES, INC.:
 
   
   
   
   
   
   
HIGHWOODS REALTY LIMITED PARTNERSHIP:
 
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
PART II – OTHER INFORMATION
 
   





PART I - FINANCIAL INFORMATION

 
ITEM 1.  FINANCIAL STATEMENTS

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

The 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 October 21, 2010, the latest practicable date prior to the filing of this Quarterly Report.



HIGHWOODS PROPERTIES, INC.
 
Consolidated Balance Sheets
 
(Unaudited and in thousands, except share and per share amounts)
 
   
September 30,
2010
 
December 31,
2009
 
Assets:
           
Real estate assets, at cost:
             
Land
 
$
345,531
 
$
350,537
 
Buildings and tenant improvements
   
2,900,749
   
2,880,632
 
Land held for development
   
104,010
   
104,148
 
     
3,350,290
   
3,335,317
 
Less-accumulated depreciation
   
(818,347
)
 
(781,073
)
Net real estate assets
   
2,531,943
   
2,554,244
 
For-sale residential condominiums
   
9,576
   
12,933
 
Real estate and other assets, net, held for sale
   
1,249
   
5,031
 
Cash and cash equivalents
   
20,969
   
23,699
 
Restricted cash
   
4,757
   
6,841
 
Accounts receivable, net of allowance of $3,157 and $2,810, respectively
   
22,426
   
21,069
 
Mortgages and notes receivable, net of allowance of $950 and $698, respectively
   
19,942
   
3,143
 
Accrued straight-line rents receivable, net of allowance of $2,457 and $2,443, respectively
   
90,001
   
82,600
 
Investment in unconsolidated affiliates
   
62,456
   
66,077
 
Deferred financing and leasing costs, net of accumulated amortization of $55,143 and $52,129, respectively
   
75,069
   
73,517
 
Prepaid expenses and other assets
   
39,796
   
37,947
 
Total Assets
 
$
2,878,184
 
$
2,887,101
 
               
Liabilities, Noncontrolling Interests in the Operating Partnership and Equity:
             
Mortgages and notes payable
 
$
1,501,624
 
$
1,469,155
 
Accounts payable, accrued expenses and other liabilities
   
112,738
   
117,328
 
Financing obligations
   
33,625
   
37,706
 
Total Liabilities
   
1,647,987
   
1,624,189
 
Commitments and contingencies
             
Noncontrolling interests in the Operating Partnership
   
123,293
   
129,769
 
Equity:
             
Preferred Stock, $.01 par value, 50,000,000 authorized shares;
             
8.625% Series A Cumulative Redeemable Preferred Shares (liquidation preference $1,000 per share), 29,092 shares issued and outstanding
   
29,092
   
29,092
 
8.000% Series B Cumulative Redeemable Preferred Shares (liquidation preference $25 per share), 2,100,000 shares issued and outstanding
   
52,500
   
52,500
 
Common Stock, $.01 par value, 200,000,000 authorized shares;
             
71,656,232 and 71,285,303 shares issued and outstanding, respectively
   
717
   
713
 
Additional paid-in capital
   
1,762,968
   
1,751,398
 
Distributions in excess of net income available for common stockholders
   
(740,356
)
 
(701,932
)
Accumulated other comprehensive loss
   
(2,975
)
 
(3,811
)
Total Stockholders’ Equity
   
1,101,946
   
1,127,960
 
Noncontrolling interests in consolidated affiliates
   
4,958
   
5,183
 
Total Equity
   
1,106,904
   
1,133,143
 
Total Liabilities, Noncontrolling Interests in the Operating Partnership and Equity
 
$
2,878,184
 
$
2,887,101
 

See accompanying notes to consolidated financial statements.



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

   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2010
 
2009
 
2010
 
2009
 
Rental and other revenues                                                                               
 
$
116,063
 
$
113,170
 
$
345,456
 
$
337,445
 
Operating expenses:
                         
Rental property and other expenses
   
43,505
   
42,564
   
123,544
   
121,743
 
Depreciation and amortization
   
34,281
   
32,367
   
100,363
   
97,590
 
General and administrative
   
8,882
   
9,485
   
24,369
   
27,286
 
Total operating expenses
   
86,668
   
84,416
   
248,276
   
246,619
 
Interest expense:
                         
Contractual
   
22,020
   
20,001
   
65,527
   
60,525
 
Amortization of deferred financing costs
   
858
   
627
   
2,528
   
1,978
 
Financing obligations
   
460
   
706
   
1,330
   
2,151
 
     
23,338
   
21,334
   
69,385
   
64,654
 
Other income:
                         
Interest and other income
   
1,710
   
3,324
   
4,376
   
6,615
 
Gain/(loss) on debt extinguishment
   
(85
)
 
657
   
(85
)
 
1,287
 
     
1,625
   
3,981
   
4,291
   
7,902
 
Income from continuing operations before disposition of property, condominiums and investment in unconsolidated affiliates and equity in earnings of unconsolidated affiliates
   
7,682
   
11,401
   
32,086
   
34,074
 
Gains on disposition of property
   
19
   
34
   
55
   
247
 
Gains on disposition of for-sale residential condominiums
   
54
   
187
   
407
   
823
 
Gains on disposition of investment in unconsolidated affiliates
   
   
   
25,330
   
 
Equity in earnings of unconsolidated affiliates
   
1,018
   
682
   
2,701
   
3,844
 
Income from continuing operations                                                                               
   
8,773
   
12,304
   
60,579
   
38,988
 
Discontinued operations:
                         
Income from discontinued operations
   
   
646
   
411
   
3,220
 
Net gains/(losses) on disposition of discontinued operations
   
   
(377
)
 
(86
)
 
20,639
 
     
   
269
   
325
   
23,859
 
Net income                                                                               
   
8,773
   
12,573
   
60,904
   
62,847
 
Net (income) attributable to noncontrolling interests in the Operating Partnership
   
(366
)
 
(591
)
 
(2,819
)
 
(3,339
)
Net (income)/loss attributable to noncontrolling interests in consolidated affiliates
   
148
   
(24
)
 
(281
)
 
(158
)
Dividends on Preferred Stock
   
(1,677
)
 
(1,677
)
 
(5,031
)
 
(5,031
)
Net income available for common stockholders
 
$
6,878
 
$
10,281
 
$
52,773
 
$
54,319
 
Earnings per Common Share - basic:
                         
Income from continuing operations available for common stockholders
 
$
0.10
 
$
0.15
 
$
0.74
 
$
0.47
 
Income from discontinued operations available for common stockholders
   
   
   
   
0.34
 
Net income available for common stockholders
 
$
0.10
 
$
0.15
 
$
0.74
 
$
0.81
 
Weighted average Common Shares outstanding - basic
   
71,631
   
70,902
   
71,549
   
66,912
 
Earnings per Common Share - diluted:
                         
Income from continuing operations available for common stockholders
 
$
0.10
 
$
0.14
 
$
0.74
 
$
0.47
 
Income from discontinued operations available for common stockholders
   
   
   
   
0.34
 
Net income available for common stockholders
 
$
0.10
 
$
0.14
 
$
0.74
 
$
0.81
 
Weighted average Common Shares outstanding - diluted
   
75,638
   
75,072
   
75,537
   
71,024
 
Dividends declared per Common Share
 
$
0.425
 
$
0.425
 
$
1.275
 
$
1.275
 
Net income available for common stockholders:
                         
Income from continuing operations available for common stockholders
 
$
6,878
 
$
10,027
 
$
52,465
 
$
31,851
 
Income from discontinued operations available for common stockholders
   
   
254
   
308
   
22,468
 
Net income available for common stockholders
 
$
6,878
 
$
10,281
 
$
52,773
 
$
54,319
 

See accompanying notes to consolidated financial statements.



HIGHWOODS PROPERTIES, INC.
 
Consolidated Statements of Equity
 
Nine Months Ended September 30, 2010 and 2009
 
(Unaudited and in thousands, except share amounts)


   
Number of Common
 Shares
 
Common Stock
 
Series A Cumulative Redeemable Preferred Shares
 
Series B Cumulative Redeemable Preferred Shares
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive
Loss
 
Non-Controlling Interests in
Consolidated Affiliates
 
Distributions in Excess of Net Income Available for Common Stockholders
 
Total
 
Balance at December 31, 2009
 
71,285,303
 
$
713
 
$
29,092
 
$
52,500
 
$
1,751,398
 
$
(3,811
)
$
5,183
 
$
(701,932
)
$
1,133,143
 
Issuances of Common Stock, net
 
112,815
   
1
   
   
   
2,075
   
   
   
   
2,076
 
Conversion of Common Units to Common Stock
 
93,971
   
1
   
   
   
2,957
   
   
   
   
2,958
 
Dividends on Common Stock
 
   
   
   
   
   
   
   
(91,197
)
 
(91,197
)
Dividends on Preferred Stock
 
   
   
   
   
   
   
   
(5,031
)
 
(5,031
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value
 
   
   
   
   
1,480
   
   
   
   
1,480
 
Distributions to noncontrolling interests in consolidated affiliates
 
   
   
   
   
   
   
(506
)
 
   
(506
)
Issuances of restricted stock, net
 
164,143
   
   
   
   
   
   
   
   
 
Share-based compensation expense
 
   
2
   
   
   
5,058
   
   
   
   
5,060
 
Net (income) attributable to noncontrolling interests in the Operating Partnership
 
   
   
   
   
   
   
   
(2,819
)
 
(2,819
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
 
   
   
   
   
   
   
281
   
(281
)
 
 
Comprehensive income:
                                                     
Net income
 
   
   
   
   
   
   
   
60,904
   
60,904
 
Other comprehensive income
 
   
   
   
   
   
836
   
   
   
836
 
Total comprehensive income
                                                 
61,740
 
Balance at September 30, 2010
 
71,656,232
 
$
717
 
$
29,092
 
$
52,500
 
$
1,762,968
 
$
(2,975
)
$
4,958
 
$
(740,356
)
$
1,106,904
 
 
 

   
Number of Common
 Shares
 
Common Stock
 
Series A Cumulative Redeemable Preferred Shares
 
Series B Cumulative Redeemable Preferred Shares
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive
Loss
 
Non-Controlling Interests in
Consolidated Affiliates
 
Distributions in Excess of Net Income Available for Common Stockholders
 
Total
 
Balance at December 31, 2008
 
63,571,705
 
$
636
 
$
29,092
 
$
52,500
 
$
1,616,093
 
$
(4,792
)
$
6,176
 
$
(639,281
)
$
1,060,424
 
Issuances of Common Stock, net
 
7,156,203
   
72
   
   
   
147,238
   
   
   
   
147,310
 
Conversion of Common Units to Common Stock
 
101,935
   
1
   
   
   
3,240
   
   
   
   
3,241
 
Dividends on Common Stock
 
   
   
   
   
   
   
   
(84,221
)
 
(84,221
)
Dividends on Preferred Stock
 
   
   
   
   
   
   
   
(5,031
)
 
(5,031
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value
 
   
   
   
   
(18,497
)
 
   
   
   
(18,497
)
Distributions to noncontrolling interests in consolidated affiliates
 
   
   
   
   
   
   
(796
)
 
   
(796
)
Issuances of restricted stock, net
 
240,740
   
   
   
   
   
   
   
   
 
Share-based compensation expense
 
   
2
   
   
   
5,202
   
   
   
   
5,204
 
Net (income) attributable to noncontrolling interests in the Operating Partnership
 
   
   
   
   
   
   
   
(3,339
)
 
(3,339
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
 
   
   
   
   
   
   
158
   
(158
)
 
 
Comprehensive income:
                                                     
Net income
 
   
   
   
   
   
   
   
62,847
   
62,847
 
Other comprehensive income
 
   
   
   
   
   
813
   
   
   
813
 
Total comprehensive income
                                                 
63,660
 
Balance at September 30, 2009
 
71,070,583
 
$
711
 
$
29,092
 
$
52,500
 
$
1,753,276
 
$
(3,979
)
$
5,538
 
$
(669,183
)
$
1,167,955
 

See accompanying notes to consolidated financial statements.



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

   
Nine Months Ended
September 30,
 
   
2010
 
2009
 
Operating activities:
             
Net income
 
$
60,904
 
$
62,847
 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Depreciation and amortization
   
100,728
   
99,199
 
Amortization of lease incentives
   
807
   
866
 
Share-based compensation expense
   
5,060
   
5,204
 
Additions to allowance for doubtful accounts
   
3,605
   
4,530
 
Amortization of deferred financing costs
   
2,528
   
1,978
 
Amortization of past cash-flow hedges
   
262
   
(229
)
(Gain)/loss on debt extinguishment
   
85
   
(1,287
)
Net (gains)/losses on disposition of property
   
31
   
(20,886
)
Gains on disposition of for-sale residential condominiums
   
(407
)
 
(823
)
Gains on disposition of investment in unconsolidated affiliates
   
(25,330
)
 
 
Equity in earnings of unconsolidated affiliates
   
(2,701
)
 
(3,844
)
Changes in financing obligations
   
103
   
869
 
Distributions of earnings from unconsolidated affiliates
   
2,933
   
3,076
 
Changes in operating assets and liabilities:
             
Accounts receivable
   
(4,689
)
 
(534
)
Prepaid expenses and other assets
   
(195
)
 
(1,627
)
Accrued straight-line rents receivable
   
(8,477
)
 
(5,058
)
Accounts payable, accrued expenses and other liabilities
   
7,407
   
10,548
 
Net cash provided by operating activities
   
142,654
   
154,829
 
Investing activities:
             
Additions to real estate assets and deferred leasing costs
   
(66,370
)
 
(101,675
)
Net proceeds from disposition of real estate assets
   
6,801
   
61,926
 
Net proceeds from disposition of for-sale residential condominiums
   
3,732
   
7,940
 
Proceeds from disposition of investment in unconsolidated affiliates
   
15,000
   
 
Distributions of capital from unconsolidated affiliates
   
1,591
   
3,257
 
Repayments of mortgages and notes receivable
   
231
   
356
 
Contributions to unconsolidated affiliates
   
(907
)
 
(922
)
Changes in restricted cash and other investing activities
   
2,396
   
(15,506
)
Net cash used in investing activities
   
(37,526
)
 
(44,624
)
Financing activities:
             
Dividends on Common Stock
   
(91,197
)
 
(84,221
)
Dividends on Preferred Stock
   
(5,031
)
 
(5,031
)
Distributions to noncontrolling interests in the Operating Partnership
   
(4,857
)
 
(5,168
)
Distributions to noncontrolling interests in consolidated affiliates
   
(506
)
 
(796
)
Net proceeds from the issuance of Common Stock
   
2,076
   
147,310
 
Borrowings on revolving credit facility
   
4,000
   
128,000
 
Repayments of revolving credit facility
   
(4,000
)
 
(291,000
)
Borrowings on mortgages and notes payable
   
10,368
   
217,215
 
Repayments of mortgages and notes payable
   
(18,205
)
 
(185,084
)
Additions to deferred financing costs
   
(506
)
 
(3,118
)
Net cash used in financing activities
   
(107,858
)
 
(81,893
)
Net increase/(decrease) in cash and cash equivalents
   
(2,730
)
 
28,312
 
Cash and cash equivalents at beginning of the period
   
23,699
   
13,757
 
Cash and cash equivalents at end of the period
 
$
20,969
 
$
42,069
 

See accompanying notes to consolidated financial statements.



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

Supplemental disclosure of cash flow information:

   
Nine Months Ended
September 30,
 
   
2010
 
2009
 
Cash paid for interest, net of amounts capitalized
 
$
66,435
 
$
64,734
 

Supplemental disclosure of non-cash investing and financing activities:

   
Nine Months Ended
September 30,
 
   
2010
 
2009
 
Unrealized gains on cash-flow hedges                                                                                                         
 
$
 
$
591
 
Conversion of Common Units to Common Stock                                                                                                         
 
$
2,958
 
$
3,241
 
Change in accrued capital expenditures                                                                                                         
 
$
890
 
$
(9,560
)
Write-off of fully depreciated real estate assets                                                                                                         
 
$
34,703
 
$
24,991
 
Write-off of fully amortized deferred financing and leasing costs
 
$
11,521
 
$
14,592
 
Unrealized gains/(losses) on marketable securities of non-qualified deferred compensation plan
 
$
489
 
$
(109
)
Settlement of financing obligation
 
$
4,184
 
$
 
Adjustment of noncontrolling interests in the Operating Partnership to fair value
 
$
(1,480
)
$
18,497
 
Unrealized gain on tax increment financing bond                                                                                                         
 
$
471
 
$
451
 
Mortgages receivable from seller financing                                                                                                         
 
$
17,030
 
$
 
Assumption of mortgages and notes payable                                                                                                         
 
$
40,306
 
$
 

See accompanying notes to consolidated financial statements.



HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements
 
September 30, 2010
 
(tabular dollar amounts in thousands, except per share data)
 
(Unaudited)

1.      Description of Business and Significant Accounting Policies

Description of Business

The Company is a fully-integrated, self-administered and self-managed equity real estate investment trust (“REIT”) that operates in the Southeastern and Midwestern United States. The Company conducts virtually all of its activities through the Operating Partnership. At September 30, 2010, the Company and/or the Operating Partnership wholly owned 294 in-service office, industrial and retail properties, comprising 27.1 million square feet; 96 rental residential units; 580 acres of undeveloped land suitable for future development, of which 490 acres are considered core holdings; one 100% pre-leased office property under re-development; one recently developed office property that is in service but not yet stabilized; and 30 for-sale residential condominiums (which are owned through a consolidated, majority-owned joint venture).

The Company is the sole general partner of the Operating Partnership. At September 30, 2010, the Company owned all of the Preferred Units and 71.2 million, or 95.0%, of the Common Units. Limited partners (including one officer and two directors of the Company) own the remaining 3.8 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, $.01 par value, 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 the nine months ended September 30, 2010, the Company redeemed 93,971 Common Units for a like number of shares of Common Stock, which increased the percentage of Common Units owned by the Company from 94.8% at December 31, 2009 to 95.0% at September 30, 2010.

Basis of Presentation

Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). Our Consolidated Statements of Income for the three and nine months ended September 30, 2009 were revised from previously reported amounts to reflect in discontinued operations the operations for those properties sold or held for sale during the 12 months ended September 30, 2010 which required discontinued operations presentation. Prior period amounts related to additions to allowance for doubtful accounts and amortization of lease commissions in our Consolidated Statements of Cash Flows have been reclassified to conform to the current period presentation.

Our Consolidated Financial Statements include the Operating Partnership, wholly owned subsidiaries and those entities in which we have the controlling financial interest. All significant intercompany transactions and accounts have been eliminated. At September 30, 2010 and December 31, 2009, we were not involved with any entities that were determined to be variable interest entities.

The unaudited interim consolidated financial statements and accompanying unaudited consolidated financial information, in the opinion of management, contain all adjustments (including normal recurring accruals) necessary for a fair presentation of our financial position, results of operations and cash flows. We have omitted certain notes and other information from the interim consolidated financial statements presented in this Quarterly Report on Form 10-Q as permitted by SEC rules and regulations. These Consolidated Financial Statements should be read in conjunction with our 2009 Annual Report on Form 10-K.



 
8

HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per share data)
 


1.      Description of Business and Significant Accounting Policies - Continued

Use of Estimates

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

Recently Issued Accounting Standards

Beginning with our 2010 Annual Report on Form 10-K, we will be required to provide enhanced disclosure about our financial receivables, such as our mortgages and notes receivable, and our policy for measuring credit losses related to those receivables.

2.      Real Estate Assets

Acquisitions

During the third quarter of 2010, we acquired a 336,000 square foot office property in Memphis, TN for $10.0 million in cash and the assumption of secured debt, which was recorded at fair value of $40.3 million with an implied interest rate of 6.4%. The debt matures in November 2015. We have incurred or expect to incur $0.4 million of acquisition-related expenses and approximately $2.3 million of near-term building improvements. In connection with this acquisition, we recorded $2.8 million of above market lease intangible assets and $7.1 million of in-place lease intangible assets with weighted average amortization periods at the time of acquisition of 7.3 and 5.9 years, respectively.

Dispositions

During the second quarter of 2010, we sold seven office properties in Winston Salem, NC for gross proceeds of $12.9 million. In connection with this disposition, we received cash of $4.5 million and provided seller financing of $8.4 million (recorded at fair value of $8.4 million in mortgages and notes receivable) and committed to lend up to an additional $1.7 million for tenant improvements and lease commissions, of which $0.2 million was funded as of September 30, 2010. The three-year, interest-only first mortgage carries a 6.0% average interest rate. Assuming no default exists, the note can be extended by the buyer for two additional one-year periods, subject to an increase in the interest rate to 7.0% in the fourth year and to 8.0% in the fifth year. We have accounted for this disposition using the installment method, whereby the $0.4 million gain on disposition of property has been deferred and will be recognized when the seller financing is repaid.

During the second quarter of 2010, we also sold six industrial properties in Greensboro, NC for gross proceeds of $12.0 million. In connection with this disposition, we received cash of $3.4 million and provided seller financing of $8.6 million (recorded at fair value of $8.6 million in mortgages and notes receivable) and a limited rent guarantee with maximum exposure to loss of $1.0 million as of September 30, 2010. The three-year, interest-only first mortgage carries a 6.25% average interest rate. Assuming no default exists, the note can be extended by the buyer for two additional one-year periods, subject to an increase in the interest rate to 7.0% in the fourth year and to 7.75% in the fifth year. We currently have concluded that a loss from the rent guarantee is not probable. We have accounted for this disposition using the installment method, whereby the $0.3 million impairment was recognized in net gains/(losses) on disposition of discontinued operations in the second quarter of 2010.

During the first quarter of 2010, we recorded a completed sale in connection with the disposition of an office property in Raleigh, NC in the fourth quarter of 2009 where the buyer’s right to compel us to repurchase the property expired. Accordingly, we recognized the $0.2 million gain on disposition of property in the first quarter of 2010.


 
9

HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per share data)
 


3.      Investment in Affiliates

Unconsolidated Affiliates

We have equity interests ranging from 10.0% to 50.0% in various joint ventures with unrelated third parties. The following table sets forth the combined, summarized income statements for our unconsolidated joint ventures:

   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2010
 
2009
 
2010
 
2009
 
Income Statements:
                         
Revenues                                                                      
 
$
26,517
 
$
36,152
 
$
93,819
 
$
112,368
 
Expenses:
                         
Rental property and other expenses
   
12,664
   
17,805
   
45,463
   
54,510
 
Depreciation and amortization
   
6,730
   
9,092
   
24,108
   
26,817
 
Interest expense
   
6,094
   
8,743
   
21,892
   
26,584
 
Total expenses
   
25,488
   
35,640
   
91,463
   
107,911
 
Income before disposition of property
   
1,029
   
512
   
2,356
   
4,457
 
Gains/(losses) on disposition of property
   
   
(463
)
 
   
2,963
 
Net income
 
$
1,029
 
$
49
 
$
2,356
 
$
7,420
 
Our share of:
                         
Net income (1)
 
$
1,018
 
$
682
 
$
2,701
 
$
3,844
 
Depreciation and amortization of real estate assets
 
$
2,115
 
$
3,352
 
$
8,193
 
$
9,825
 
Interest expense
 
$
2,190
 
$
3,491
 
$
8,368
 
$
10,611
 
Gain/(loss) on disposition of property
 
$
 
$
(199
)
$
 
$
582
 
__________
 
(1)
Our share of net income differs from our weighted average ownership percentage in the joint ventures’ net income due to our purchase accounting and other adjustments related primarily to management and leasing fees.

During the second quarter of 2010, we sold our equity interests in a series of unconsolidated joint ventures relating to properties in Des Moines, IA. The assets in the joint ventures included 2.5 million square feet of office (1.7 million square feet), industrial (788,000 square feet) and retail (45,000 square feet) properties, as well as 418 apartment units. In connection with the closing, we received $15.0 million in cash. We had a negative book basis in certain of the joint ventures, primarily as a result of prior cash distributions to the partners. Accordingly, we recorded gain on disposition of investment in unconsolidated affiliates of $25.3 million in the second quarter of 2010. As of the closing date, the joint ventures had approximately $170 million of secured debt, which was non-recourse to us except (1) in the case of customary exceptions pertaining to matters such as misuse of funds, borrower bankruptcy, unpermitted transfers, environmental conditions and material misrepresentations and (2) approximately $9.0 million of direct and indirect guarantees. We have been released by the applicable lenders from all such direct and indirect guarantees and we have no ongoing lender liability relating to such customary exceptions to non-recourse liability with respect to most, but not all, of the debt. The buyer has agreed to indemnify and hold us harmless from any and all future losses that we suffer as a result of our prior investment in the joint ventures (other than losses directly resulting from our acts or omissions). In the event we are exposed to any such future loss, our financial condition and results of operations would not be adversely affected unless the buyer defaults on its indemnification obligation.

 
10

HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per share data)
 


3.      Investment in Affiliates - Continued

Consolidated Affiliates

We own a majority interest in Plaza Residential, LLC (“Plaza Residential”), a joint venture which was formed to develop and sell 139 for-sale residential condominiums constructed above an office tower developed by us in Raleigh, NC. For-sale residential condominiums in our Consolidated Balance Sheets include 30 and 40 completed, but unsold, condominiums owned by Plaza Residential at September 30, 2010 and December 31, 2009, respectively. We initially record receipts of earnest money deposits in accounts payable, accrued expenses and other liabilities in accordance with the deposit method. We then record completed sales when units close and the remaining net cash is received. During the three months ended September 30, 2010 and 2009, we received $0.6 million and $2.9 million, respectively, in gross proceeds and recorded $0.5 million and $2.7 million, respectively, of cost of goods sold from condominium sales activity. During the nine months ended September 30, 2010 and 2009, we received $4.0 million and $8.4 million, respectively, in gross proceeds and had $3.6 million and $7.6 million, respectively, of cost of goods sold from condominium sales activity.

4.      Deferred Financing and Leasing Costs

The following table sets forth total deferred financing and leasing costs, net of accumulated amortization:

   
September 30,
2010
 
December 31,
2009
 
Deferred financing costs
 
$
17,078
 
$
16,811
 
Less accumulated amortization
   
(6,917
)
 
(4,549
)
     
10,161
   
12,262
 
Deferred leasing costs
   
113,134
   
108,835
 
Less accumulated amortization
   
(48,226
)
 
(47,580
)
     
64,908
   
61,255
 
Deferred financing and leasing costs, net                                                                                              
 
$
75,069
 
$
73,517
 

Amortization of deferred financing and leasing costs were as follows:

   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2010
 
2009
 
2010
 
2009
 
Amortization of deferred financing costs
 
$
858
 
$
627
 
$
2,528
 
$
1,978
 
Amortization of lease commissions (included in depreciation and amortization)
 
$
3,912
 
$
3,806
 
$
11,495
 
$
11,598
 
Amortization of lease incentives (included in rental and other revenues)
 
$
270
 
$
318
 
$
807
 
$
866
 

The following table sets forth scheduled future amortization for deferred financing and leasing costs:

   
Amortization of Deferred Financing Costs
 
Amortization of Lease Commissions
 
Amortization of Lease Incentives
 
September 30, 2010 through December 31, 2010
 
$
788
 
$
3,855
 
$
261
 
2011                                                                                     
   
2,680
   
13,825
   
982
 
2012                                                                                     
   
2,526
   
11,390
   
881
 
2013                                                                                     
   
897
   
9,151
   
683
 
2014                                                                                     
   
520
   
7,015
   
512
 
Thereafter                                                                                     
   
2,750
   
14,947
   
1,406
 
   
$
10,161
 
$
60,183
 
$
4,725
 

 
11

HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per share data)
 


4.      Deferred Financing and Leasing Costs - Continued

The weighted average remaining amortization periods for deferred financing and leasing costs were 3.6 years and 6.3 years, respectively, as of September 30, 2010.

5.      Mortgages and Notes Payable

The following table sets forth our consolidated mortgages and notes payable:

   
September 30,
2010
 
December 31,
2009
 
Secured indebtedness                                                                                                      
 
$
763,107
 
$
720,727
 
Unsecured indebtedness                                                                                                      
   
738,517
   
748,428
 
Total mortgages and notes payable                                                                                                
 
$
1,501,624
 
$
1,469,155
 

At September 30, 2010, our secured mortgage loans were secured by real estate assets with an aggregate undepreciated book value of $1.2 billion.

Our $400.0 million unsecured revolving credit facility is scheduled to mature on February 21, 2013 and includes an accordion feature that allows for an additional $50.0 million of borrowing capacity subject to additional lender commitments. Assuming we continue to have three publicly announced ratings from the credit rating agencies, the interest rate and facility fee under our revolving credit facility are based on the lower of the two highest publicly announced ratings. Based on our current credit ratings, the interest rate is LIBOR plus 290 basis points and the annual facility fee is 60 basis points. There were no amounts outstanding under our revolving credit facility at September 30, 2010 and October 21, 2010. At September 30, 2010 and October 21, 2010, we had $1.1 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 September 30, 2010 and October 21, 2010 was $398.9 million.

Our $70.0 million secured construction facility, of which $52.1 million was outstanding at September 30, 2010, is initially scheduled to mature on December 20, 2010. The outstanding balance increased in the third quarter of 2010 due to the use of proceeds to reduce the balance outstanding under a bank term loan due in March 2012. Assuming no defaults have occurred, we have options to extend the maturity date for two successive one-year periods. During the third quarter of 2010, we submitted our notice to extend the maturity date by one year. Upon payment of the extension fee and assuming no default exists at December 20, 2010, the facility will be extended until December 20, 2011. The interest rate is LIBOR plus 85 basis points. This facility had $17.9 million of availability at September 30, 2010 and October 21, 2010.

We are currently in compliance with all debt covenants and requirements.

6.      Derivative Financial Instruments

We had no outstanding interest rate hedge contracts at September 30, 2010 or December 31, 2009. The following table sets forth the effect of our past cash-flow hedges on accumulated other comprehensive loss (“AOCL”) and interest expense:

   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2010
 
2009
 
2010
 
2009
 
Derivatives Designated as Cash-flow Hedges:
                         
Unrealized gain recognized in AOCL on derivatives (effective portion):
                         
Interest rate hedge contracts
 
$
 
$
177
 
$
 
$
591
 
                           
(Gain)/loss reclassified out of AOCL into interest expense (effective portion):
                         
Interest rate hedge contracts
 
$
(25
)
$
(89
)
$
262
 
$
(229
)

 
12

HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per share data)
 


7.      Noncontrolling Interests

Noncontrolling Interests in the Operating Partnership

Noncontrolling interests in the Operating Partnership relate to the ownership of Common Units by various individuals and entities other than the Company. The following table sets forth noncontrolling interests in the Operating Partnership:

   
Nine Months Ended
September 30,
 
   
2010
 
2009
 
Beginning noncontrolling interests in the Operating Partnership
 
$
129,769
 
$
111,278
 
Adjustments of noncontrolling interests in the Operating Partnership to fair value
   
(1,480
)
 
18,497
 
Conversion of Common Units to Common Stock
   
(2,958
)
 
(3,241
)
Net income attributable to noncontrolling interests in the Operating Partnership
   
2,819
   
3,339
 
Distributions to noncontrolling interests in the Operating Partnership
   
(4,857
)
 
(5,168
)
Total noncontrolling interests in the Operating Partnership
 
$
123,293
 
$
124,705
 

The following table sets forth the change in equity from net income available for common stockholders and transfers from noncontrolling interests:

   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2010
 
2009
 
2010
 
2009
 
Net income available for common stockholders
 
$
6,878
 
$
10,281
 
$
52,773
 
$
54,319
 
Conversion of Common Units to Common Stock
   
   
3,052
   
2,958
   
3,241
 
Change in equity from net income available for common stockholders and conversion of Common Units to Common Stock
 
$
6,878
 
$
13,333
 
$
55,731
 
$
57,560
 

Noncontrolling Interests in Consolidated Affiliates

Noncontrolling interests in consolidated affiliates relates to our respective joint venture partners’ 50.0% interest in Highwoods-Markel Associates, LLC and both legal and estimated economic interests of 7% in Plaza Residential. Each of our joint venture partners is an unrelated third party.

8.      Disclosure About Fair Value of Financial Instruments

The following summarizes the three levels of inputs that we use to measure fair value, as well as the assets, noncontrolling interests in the Operating Partnership and liabilities that we recognize at fair value using those levels of inputs.

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

Our Level 1 assets are investments in marketable securities which we use to pay benefits under our non-qualified deferred compensation plan. Our Level 1 noncontrolling interests in the Operating Partnership relate to the ownership of Common Units by various individuals and entities other than the Company. Our Level 1 liability is our non-qualified deferred compensation obligation.

 
13

HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per share data)
 


8.      Disclosure About Fair Value of Financial Instruments - Continued

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. We had no Level 2 assets or liabilities at September 30, 2010 and December 31, 2009.

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 are our tax increment financing bond, which is not routinely traded but whose fair value is determined using an estimate of projected redemption value based on quoted bid/ask prices for similar unrated municipal bonds, and real estate assets recorded at fair value on a non-recurring basis as a result of our quarterly impairment analysis, which were valued using independent appraisals.

The following tables set forth the assets, noncontrolling interests in the Operating Partnership and liability that we measure at fair value by level within the fair value hierarchy. We determine the level based on the lowest level of substantive input used to determine fair value.

       
Level 1
 
Level 3
 
   
September 30,
2010
 
Quoted Prices in Active Markets for Identical Assets or Liabilities
 
Significant
Unobservable
Inputs
 
Assets:
                   
Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)
 
$
3,232
 
$
3,232
 
$
 
Tax increment financing bond (in prepaid expenses and other assets)
   
17,342
   
   
17,342
 
Total Assets
 
$
20,574
 
$
3,232
 
$
17,342
 
                     
Noncontrolling Interests in the Operating Partnership
 
$
123,293
 
$
123,293
 
$
 
                     
Liability:
                   
Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)
 
$
3,846
 
$
3,846
 
$
 

       
Level 1
 
Level 3
 
   
December 31,
2009
 
Quoted Prices in Active Markets for Identical Assets or Liabilities
 
Significant
Unobservable
Inputs
 
Assets:
                   
Marketable securities of non-qualified deferred compensation plan
 
$
6,135
 
$
6,135
 
$
 
Tax increment financing bond
   
16,871
   
   
16,871
 
Impaired real estate assets
   
32,000
   
   
32,000
 
Total Assets
 
$
55,006
 
$
6,135
 
$
48,871
 
                     
Noncontrolling Interests in the Operating Partnership
 
$
129,769
 
$
129,769
 
$
 
                     
Liability:
                   
Non-qualified deferred compensation obligation
 
$
6,898
 
$
6,898
 
$
 


 
14

HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per share data)
 


8.      Disclosure About Fair Value of Financial Instruments – Continued

The following table sets forth our Level 3 asset:

   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2010
 
2009
 
2010
 
2009
 
Asset:
                         
Tax Increment Financing Bond
                         
Beginning balance
 
$
17,017
 
$
17,660
 
$
16,871
 
$
17,468
 
Unrealized gain (in AOCL)
   
325
   
259
   
471
   
451
 
Ending balance
 
$
17,342
 
$
17,919
 
$
17,342
 
$
17,919
 

In the fourth quarter of 2007, we acquired a tax increment financing bond associated with a property developed by us. This bond amortizes to maturity in 2020. The estimated fair value at September 30, 2010 was $1.9 million below the outstanding principal due on the bond. If the yield-to-maturity used to fair value this bond was 100 basis points higher, the fair value of the bond would have been $0.8 million lower as of September 30, 2010. If the yield-to-maturity used to fair value this bond was 100 basis points lower, the fair value of the bond would have been $0.8 million higher as of September 30, 2010. Currently, we intend to hold this bond and have concluded that we will not be required to sell this bond before recovery of the bond principal. Payment of the principal and interest for the bond is guaranteed by us and, therefore, we have recorded no credit losses related to the bond in the three and nine months ended September 30, 2010 and 2009. There is no legal right of offset with the liability, which we report as a financing obligation, related to this tax increment financing bond.

The following table sets forth the carrying amounts and fair values of our financial instruments:

   
Carrying
Amount
 
Fair Value
 
September 30, 2010
             
Cash and cash equivalents
 
$
20,969
 
$
20,969
 
Restricted cash
 
$
4,757
 
$
4,757
 
Accounts, mortgages and notes receivable
 
$
42,368
 
$
42,481
 
Marketable securities of non-qualified deferred compensation plan
 
$
3,232
 
$
3,232
 
Tax increment financing bond
 
$
17,342
 
$
17,342
 
Mortgages and notes payable
 
$
1,501,624
 
$
1,597,621
 
Financing obligations
 
$
33,625
 
$
22,861
 
Non-qualified deferred compensation obligation
 
$
3,846
 
$
3,846
 
Noncontrolling interests in the Operating Partnership
 
$
123,293
 
$
123,293
 
               
December 31, 2009
             
Cash and cash equivalents
 
$
23,699
 
$
23,699
 
Restricted cash
 
$
6,841
 
$
6,841
 
Accounts, mortgages and notes receivable
 
$
24,212
 
$
24,212
 
Marketable securities of non-qualified deferred compensation plan
 
$
6,135
 
$
6,135
 
Tax increment financing bond
 
$
16,871
 
$
16,871
 
Mortgages and notes payable
 
$
1,469,155
 
$
1,440,317
 
Financing obligations
 
$
37,706
 
$
31,664
 
Non-qualified deferred compensation obligation
 
$
6,898
 
$
6,898
 
Noncontrolling interests in the Operating Partnership
 
$
129,769
 
$
129,769
 


 
15

HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per share data)
 


8.      Disclosure About Fair Value of Financial Instruments – Continued

The carrying values of our cash and cash equivalents, restricted cash, accounts receivable, marketable securities of non-qualified deferred compensation plan, tax increment financing bond, non-qualified deferred compensation obligation and noncontrolling interests in the Operating Partnership are equal to or approximate fair value. The fair values of our mortgages and notes receivable, mortgages and notes payable and financing obligations were estimated using the income or market approaches to approximate the price that would be paid in an orderly transaction between market participants on the respective measurement dates.

9.      Share-Based Payments

During the nine months ended September 30, 2010, we granted 190,826 stock options at an exercise price equal to the closing market price of a share of our Common Stock on the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, which resulted in a weighted-average grant date fair value per share of $4.96. During the nine months ended September 30, 2010, we also granted 89,635 shares of time-based restricted stock and 78,151 shares of total return-based restricted stock with weighted-average grant date fair values per share of $29.05 and $29.75, respectively. We recorded stock-based compensation expense of $1.6 million each during the three months ended September 30, 2010 and 2009 and $5.1 million and $5.2 million during the nine months ended September 30, 2010 and 2009, respectively. At September 30, 2010, there was $8.4 million of total unrecognized stock-based compensation costs, which will be recognized over a weighted average remaining contractual term of 1.7 years.

10.      Comprehensive Income and Accumulated Other Comprehensive Loss

The following table sets forth the components of comprehensive income:

   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2010
 
2009
 
2010
 
2009
 
Net income                                                                               
 
$
8,773
 
$
12,573
 
$
60,904
 
$
62,847
 
Other comprehensive income/(loss):
                         
Unrealized gain on tax increment financing bond
   
325
   
259
   
471
   
451
 
Unrealized gains on cash-flow hedges
   
   
177
   
   
591
 
Amortization of past cash-flow hedges
   
(25
)
 
(89
)
 
262
   
(229
)
Settlement of past cash-flow hedge from disposition of investment in unconsolidated affiliate
   
   
   
103
   
 
Total other comprehensive income
   
300
   
347
   
836
   
813
 
Total comprehensive income
 
$
9,073
 
$
12,920
 
$
61,740
 
$
63,660
 

The following table sets forth the components of AOCL:

   
September 30,
2010
 
December 31,
2009
 
Tax increment financing bond                                                                                                      
 
$
1,895
 
$
2,366
 
Past cash-flow hedges                                                                                                      
   
1,080
   
1,445
 
Total accumulated other comprehensive loss                                                                                                
 
$
2,975
 
$
3,811
 


 
16

HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per share data)
 


11.      Discontinued Operations

The following table sets forth our operations which required classification as discontinued operations:

   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2010
 
2009
 
2010
 
2009
 
Rental and other revenues                                                                                     
 
$
 
$
1,455
 
$
1,432
 
$
7,837
 
Operating expenses:
                         
Rental property and other expenses
   
   
488
   
656
   
3,010
 
Depreciation and amortization
   
   
322
   
365
   
1,609
 
Total operating expenses
   
   
810
   
1,021
   
4,619
 
Other income                                                                                     
   
   
1
   
   
2
 
Income before net gains/(losses) on disposition of discontinued operations
   
   
646
   
411
   
3,220
 
Net gains/(losses) on disposition of discontinued operations
   
   
(377
)
 
(86
)
 
20,639
 
Total discontinued operations                                                                                     
 
$
 
$
269
 
$
325
 
$
23,859
 

The following table sets forth the major classes of assets and liabilities of the properties classified as held for sale:

   
September 30,
2010
 
December 31,
2009
 
Assets:
             
Land
 
$
 
$
867
 
Buildings and tenant improvements                                                                                                 
   
   
3,876
 
Land held for development                                                                                                 
   
1,217
   
1,197
 
Total real estate assets                                                                                            
   
1,217
   
5,940
 
Less accumulated depreciation                                                                                                 
   
   
(1,484
)
Net real estate assets
   
1,217
   
4,456
 
Deferred leasing costs, net
   
   
209
 
Accrued straight line rents receivable
   
   
289
 
Prepaid expenses and other assets
   
32
   
77
 
Real estate and other assets, net, held for sale
 
$
1,249
 
$
5,031
 
Liabilities of real estate and other assets, net, held for sale (1)
 
$
12
 
$
12
 
__________
 
(1)
Included in accounts payable, accrued expenses and other liabilities.
 


 
17

HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per share data)
 

 
12.      Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per Common Share:

   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2010
 
2009
 
2010
 
2009
 
Earnings per Common Share - basic:
                         
Numerator:
                         
Income from continuing operations
 
$
8,773
 
$
12,304
 
$
60,579
 
$
38,988
 
Net (income) attributable to noncontrolling  interests in the Operating Partnership from continuing operations
   
(366
)
 
(576
)
 
(2,802
)
 
(1,948
)
Net (income)/loss attributable to noncontrolling interests in consolidated affiliates from continuing operations
   
148
   
(24
)
 
(281
)
 
(158
)
Dividends on Preferred Stock
   
(1,677
)
 
(1,677
)
 
(5,031
)
 
(5,031
)
Income from continuing operations available for common stockholders
   
6,878
   
10,027
   
52,465
   
31,851
 
Income from discontinued operations
   
   
269
   
325
   
23,859
 
Net (income) attributable to noncontrolling interests in the Operating Partnership from discontinued operations
   
   
(15
)
 
(17
)
 
(1,391
)
Income from discontinued operations available for common stockholders
   
   
254
   
308
   
22,468
 
Net income available for common stockholders
 
$
6,878
 
$
10,281
 
$
52,773
 
$
54,319
 
Denominator:
                         
Denominator for basic earnings per Common Share – weighted average shares
   
71,631
   
70,902
   
71,549
   
66,912
 
Earnings per Common Share – basic:
                         
Income from continuing operations available for common stockholders
 
$
0.10
 
$
0.15
 
$
0.74
 
$
0.47
 
Income from discontinued operations available for common stockholders
   
   
   
   
0.34
 
Net income available for common stockholders
 
$
0.10
 
$
0.15
 
$
0.74
 
$
   0.81
 
Earnings per Common Share - diluted:
                         
Numerator:
                         
Income from continuing operations
 
$
8,773
 
$
12,304
 
$
60,579
 
$
38,988
 
Net (income)/loss attributable to noncontrolling interests in consolidated affiliates from continuing operations
   
148
   
(24
)
 
(281
)
 
(158
)
Dividends on Preferred Stock
   
(1,677
)
 
(1,677
)
 
(5,031
)
 
(5,031
)
Income from continuing operations available for common stockholders before net (income) attributable to noncontrolling interests in the Operating Partnership
   
7,244
   
10,603
   
55,267
   
33,799
 
Income from discontinued operations available for common stockholders
   
   
269
   
325
   
23,859
 
Net income available for common stockholders before net income attributable to noncontrolling interests in the Operating Partnership
 
$
7,244
 
$
10,872
 
$
55,592
 
$
57,658
 
Denominator:
                         
Denominator for basic earnings per Common Share –weighted average shares
   
71,631
   
70,902
   
71,549
   
66,912
 
Add:
                         
Stock options using the treasury method
   
210
   
121
   
183
   
52
 
Noncontrolling interests partnership units
   
3,797
   
4,049
   
3,805
   
4,060
 
Denominator for diluted earnings per Common Share – adjusted weighted average shares and assumed conversions (1)
   
75,638
   
75,072
   
75,537
   
71,024
 
Earnings per Common Share – diluted:
                         
Income from continuing operations available for common stockholders
 
$
0.10
 
$
0.14
 
$
0.74
 
$
0.47
 
Income from discontinued operations available for common stockholders
   
   
   
   
0.34
 
Net income available for common stockholders
 
$
0.10
 
$
0.14
 
$
0.74
 
$
0.81
 
__________

 
18

HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per share data)
 


12.      Earnings Per Share Continued
 
(1)
Options and warrants aggregating 0.7 million and 0.9 million shares were outstanding during the three months ended September 30, 2010 and 2009, respectively, and 0.7 million and 1.2 million shares were outstanding during the nine months ended September 30, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per Common Share because the impact of including such shares would be anti-dilutive.

13.      Segment Information

Our principal business is the operation, acquisition and development of rental real estate properties. We evaluate our business by product type and by geographic location. Each product type has different customers and economic characteristics as to rental rates and terms, cost per square foot of buildings, the purposes for which customers use the space, the degree of maintenance and customer support required and customer dependency on different economic drivers, among others. The operating results by geographic grouping are also regularly reviewed by our chief operating decision maker for assessing performance and other purposes. There are no material inter-segment transactions.

Our accounting policies of the segments are the same as those used in our Consolidated Financial Statements. All operations are within the United States and, at September 30, 2010, no single customer of the Wholly Owned Properties generated more than 9.4% of our consolidated revenues on an annualized basis.

The following table summarizes the rental and other revenues and net operating income, the primary industry property-level performance metric which is defined as rental and other revenues less rental property and other expenses, for each reportable segment:

   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2010
 
2009
 
2010
 
2009
 
Rental and Other Revenues: (1)
                         
Office:
                         
Atlanta, GA
 
$
11,870
 
$
12,617
 
$
36,069
 
$
36,213
 
Greenville, SC
   
3,312
   
3,429
   
10,440
   
10,668
 
Kansas City, MO
   
3,673
   
3,742
   
11,045
   
11,200
 
Memphis, TN
   
9,692
   
8,185
   
24,889
   
22,615
 
Nashville, TN
   
14,599
   
14,901
   
44,564
   
45,498
 
Orlando, FL
   
2,920
   
3,110
   
8,985
   
8,903
 
Piedmont Triad, NC
   
5,802
   
5,720
   
17,722
   
17,575
 
Raleigh, NC
   
18,814
   
18,205
   
56,070
   
54,509
 
Richmond, VA
   
12,210
   
12,173
   
35,486
   
35,114
 
Tampa, FL
   
17,831
   
17,480
   
53,810
   
50,600
 
Total Office Segment
   
100,723
   
99,562
   
299,080
   
292,895
 
Industrial:
                         
Atlanta, GA
   
3,660
   
3,904
   
11,478
   
11,775
 
Piedmont Triad, NC
   
3,259
   
2,859
   
9,324
   
9,872
 
Total Industrial Segment
   
6,919
   
6,763
   
20,802
   
21,647
 
Retail:
                         
Kansas City, MO
   
8,103
   
6,466
   
24,540
   
21,755
 
Piedmont Triad, NC
   
   
47
   
(40
)
 
161
 
Raleigh, NC
   
30
   
30
   
105
   
90
 
Total Retail Segment
   
8,133
   
6,543
   
24,605
   
22,006
 
Residential:
                         
Kansas City, MO                                                         
   
288
   
302
   
969
   
897
 
Total Residential Segment
   
288
   
302
   
969
   
897
 
Total Rental and Other Revenues                                                                    
 
$
116,063
 
$
113,170
 
$
345,456
 
$
337,445
 


 
19

HIGHWOODS PROPERTIES, INC.
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per share data)
 


13.      Segment Information – Continued

   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2010
 
2009
 
2010
 
2009
 
Net Operating Income: (1)
                         
Office:
                         
Atlanta, GA
 
$
7,394
 
$
7,894
 
$
22,864
 
$
22,903
 
Greenville, SC
   
1,858
   
2,014
   
6,308
   
6,643
 
Kansas City, MO
   
2,160
   
2,342
   
6,700
   
6,845
 
Memphis, TN
   
5,507
   
4,844
   
15,015
   
12,893
 
Nashville, TN
   
9,490
   
9,713
   
29,426
   
29,648
 
Orlando, FL
   
1,555
   
1,637
   
4,891
   
4,667
 
Piedmont Triad, NC
   
3,843
   
3,638
   
11,698
   
11,535
 
Raleigh, NC
   
12,611
   
11,945
   
38,445
   
36,735
 
Richmond, VA
   
7,632
   
7,837
   
23,988
   
23,897
 
Tampa, FL
   
10,903
   
10,246
   
32,716
   
29,630
 
Total Office Segment
   
62,953
   
62,110
   
192,051
   
185,396
 
Industrial:
                         
Atlanta, GA
   
2,493
   
2,903
   
8,056
   
8,906
 
Piedmont Triad, NC
   
2,460
   
2,087
   
6,835
   
7,630
 
Total Industrial Segment
   
4,953
   
4,990
   
14,891
   
16,536
 
Retail:
                         
Atlanta, GA (2)
   
(5
)
 
(6
)
 
(16
)
 
(18
)
Kansas City, MO
   
4,569
   
3,494
   
14,668
   
13,454
 
Piedmont Triad, NC (2)
   
   
(72
)
 
(40
)
 
18
 
Raleigh, NC (2)
   
10
   
(1
)
 
29
   
9
 
Total Retail Segment
   
4,574
   
3,415
   
14,641
   
13,463
 
Residential:
                         
Kansas City, MO
   
168
   
163
   
594
   
517
 
Raleigh, NC (2)
   
(90
)
 
(72
)
 
(265
)
 
(210
)
Total Residential Segment
   
78
   
91
   
329
   
307
 
Total Net Operating Income                                                                    
   
72,558
   
70,606
   
221,912
   
215,702
 
Reconciliation to income from continuing operations before disposition of property, condominiums and investment in unconsolidated affiliates and equity in earnings of unconsolidated affiliates:
                         
Depreciation and amortization
   
(34,281
)
 
(32,367
)
 
(100,363
)
 
(97,590
)
General and administrative expense
   
(8,882
)
 
(9,485
)
 
(24,369
)
 
(27,286
)
Interest expense
   
(23,338
)
 
(21,334
)
 
(69,385
)
 
(64,654
)
Interest and other income
   
1,625
   
3,981
   
4,291
   
7,902
 
Income from continuing operations before disposition of property, condominiums and investment in unconsolidated affiliates and equity in earnings of unconsolidated affiliates
 
$
7,682
 
$
11,401
 
$
32,086
 
$
34,074
 
__________
 
(1)
Net of discontinued operations.
 
(2)
Negative NOI with no corresponding revenues represents expensed real estate taxes and other carrying costs associated with land held for development that is currently zoned for the respective product type.



















 
 
 
 
 
[This page is intentionally left blank]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Consolidated Balance Sheets
 
(Unaudited and in thousands, except unit and per unit amounts)
 
   
September 30,
2010
 
December 31,
2009
 
Assets:
           
Real estate assets, at cost:
             
Land
 
$
345,531
 
$
350,537
 
Buildings and tenant improvements
   
2,900,749
   
2,880,632
 
Land held for development
   
104,010
   
104,148
 
     
3,350,290
   
3,335,317
 
Less-accumulated depreciation
   
(818,347
)
 
(781,073
)
Net real estate assets
   
2,531,943
   
2,554,244
 
For-sale residential condominiums
   
9,576
   
12,933
 
Real estate and other assets, net, held for sale
   
1,249
   
5,031
 
Cash and cash equivalents
   
20,937
   
23,519
 
Restricted cash
   
4,757
   
6,841
 
Accounts receivable, net of allowance of $3,157 and $2,810, respectively
   
22,426
   
21,069
 
Mortgages and notes receivable, net of allowance of $950 and $698, respectively
   
19,942
   
3,143
 
Accrued straight-line rents receivable, net of allowance of $2,457 and $2,443, respectively
   
90,001
   
82,600
 
Investment in unconsolidated affiliates
   
61,321
   
64,894
 
Deferred financing and leasing costs, net of accumulated amortization of $55,143 and $52,129, respectively
   
75,069
   
73,517
 
Prepaid expenses and other assets
   
39,778
   
37,947
 
Total Assets
 
$
2,876,999
 
$
2,885,738
 
               
Liabilities, Redeemable Operating Partnership Units and Capital:
             
Mortgages and notes payable
 
$
1,501,624
 
$
1,469,155
 
Accounts payable, accrued expenses and other liabilities
   
112,738
   
117,331
 
Financing obligations
   
33,625
   
37,706
 
Total Liabilities
   
1,647,987
   
1,624,192
 
Commitments and contingencies
             
Redeemable Operating Partnership Units:
             
Common Units, 3,797,150 and 3,891,121 outstanding, respectively
   
123,293
   
129,769
 
Series A Preferred Units (liquidation preference $1,000 per unit), 29,092 shares issued and outstanding
   
29,092
   
29,092
 
Series B Preferred Units (liquidation preference $25 per unit), 2,100,000 shares issued and outstanding
   
52,500
   
52,500
 
Total Redeemable Operating Partnership Units
   
204,885
   
211,361
 
Capital:
             
Common Units:
             
General partner Common Units, 750,446 and 747,676 outstanding, respectively
   
10,218
   
10,485
 
Limited partner Common Units, 70,496,977 and 70,128,818 outstanding, respectively
   
1,011,926
   
1,038,328
 
Accumulated other comprehensive loss
   
(2,975
)
 
(3,811
)
Noncontrolling interests in consolidated affiliates
   
4,958
   
5,183
 
Total Capital
   
1,024,127
   
1,050,185
 
Total Liabilities, Redeemable Operating Partnership Units and Capital
 
$
2,876,999
 
$
2,885,738
 

See accompanying notes to consolidated financial statements.



HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Consolidated Statements of Income
 
(Unaudited and in thousands, except per unit amounts)

   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2010
 
2009
 
2010
 
2009
 
Rental and other revenues                                                                               
 
$
116,063
 
$
113,170
 
$
345,456
 
$
337,445
 
Operating expenses:
                         
Rental property and other expenses
   
43,505
   
42,564
   
123,334
   
121,492
 
Depreciation and amortization
   
34,281
   
32,367
   
100,363
   
97,590
 
General and administrative
   
8,882
   
9,485
   
24,579
   
27,537
 
Total operating expenses
   
86,668
   
84,416
   
248,276
   
246,619
 
Interest expense:
                         
Contractual
   
22,020
   
20,001
   
65,527
   
60,525
 
Amortization of deferred financing costs
   
858
   
627
   
2,528
   
1,978
 
Financing obligations
   
460
   
706
   
1,330
   
2,151
 
     
23,338
   
21,334
   
69,385
   
64,654
 
Other income:
                         
Interest and other income
   
1,710
   
3,324
   
4,376
   
6,615
 
Gain/(loss) on debt extinguishment
   
(85
)
 
657
   
(85
)
 
1,287
 
     
1,625
   
3,981
   
4,291
   
7,902
 
Income from continuing operations before disposition of property, condominiums and investment in unconsolidated affiliates and equity in earnings of unconsolidated affiliates
   
7,682
   
11,401
   
32,086
   
34,074
 
Gains on disposition of property
   
19
   
34
   
55
   
247
 
Gains on disposition of for-sale residential condominiums
   
54
   
187
   
407
   
823
 
Gains on disposition of investment in unconsolidated affiliates
   
   
   
25,330
   
 
Equity in earnings of unconsolidated affiliates
   
1,033
   
669
   
2,705
   
3,779
 
Income from continuing operations                                                                               
   
8,788
   
12,291
   
60,583
   
38,923
 
Discontinued operations:
                         
Income from discontinued operations
   
   
646
   
411
   
3,220
 
Net gains/(losses) on disposition of discontinued operations
   
   
(377
)
 
(86
)
 
20,639
 
     
   
269
   
325
   
23,859
 
Net income                                                                               
   
8,788
   
12,560
   
60,908
   
62,782
 
Net (income)/loss attributable to noncontrolling interests in consolidated affiliates
   
148
   
(24
)
 
(281
)
 
(158
)
Distributions on Preferred Units
   
(1,677
)
 
(1,677
)
 
(5,031
)
 
(5,031
)
Net income available for common unitholders
 
$
7,259
 
$
10,859
 
$
55,596
 
$
57,593
 
Earnings per Common Unit - basic:
                         
Income from continuing operations available for common unitholders
 
$
0.10
 
$
0.15
 
$
0.74
 
$
0.48
 
Income from discontinued operations available for common unitholders
   
   
   
   
0.34
 
Net income available for common unitholders
 
$
0.10
 
$
0.15
 
$
0.74
 
$
0.82
 
Weighted average Common Units outstanding - basic
   
75,019
   
74,542
   
74,945
   
70,563
 
Earnings per Common Unit - diluted:
                         
Income from continuing operations available for common unitholders
 
$
0.10
 
$
0.15
 
$
0.74
 
$
0.48
 
Income from discontinued operations available for common unitholders
   
   
   
   
0.34
 
Net income available for common unitholders
 
$
0.10
 
$
0.15
 
$
0.74
 
$
0.82
 
Weighted average Common Units outstanding - diluted
   
75,229
   
74,663
   
75,128
   
70,615
 
Distributions declared per Common Unit
 
$
0.425
 
$
0.425
 
$
1.275
 
$
1.275
 
Net income available for common unitholders:
                         
Income from continuing operations available for common unitholders
 
$
7,259
 
$
10,590
 
$
55,271
 
$
33,734
 
Income from discontinued operations available for common unitholders
   
   
269
   
325
   
23,859
 
Net income available for common unitholders
 
$
7,259
 
$
10,859
 
$
55,596
 
$
57,593
 

See accompanying notes to consolidated financial statements.



HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Consolidated Statements of Capital
 
Nine months ended September 30, 2010 and 2009
 
(Unaudited and in thousands)

   
Common Units
               
   
General
Partner
 
Limited
Partner
 
Accumulated
Other
Comprehensive
Loss
 
Noncontrolling
Interests in
Consolidated
Affiliates
 
Total
 
Balance at December 31, 2009
 
$
10,485
 
$
1,038,328
 
$
(3,811
)
$
5,183
 
$
1,050,185
 
Issuance of Common Units, net
   
21
   
2,055
   
   
   
2,076
 
Distributions on Common Units
   
(956
)
 
(94,577
)
 
   
   
(95,533
)
Distributions on Preferred Units
   
(50
)
 
(4,981
)
 
   
   
(5,031
)
Share-based compensation expense
   
51
   
5,009
   
   
   
5,060
 
Distribution to noncontrolling interests in consolidated affiliates
   
   
   
   
(506
)
 
(506
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
   
61
   
6,071
   
   
   
6,132
 
Net (income) attributable to noncontrolling interests in consolidated affiliates
   
(3
)
 
(278
)
 
   
281
   
 
Comprehensive income:
                               
Net income
   
609
   
60,299
   
   
   
60,908
 
Other comprehensive income
   
   
   
836
   
   
836
 
Total comprehensive income
                           
61,744
 
Balance at September 30, 2010
 
$
10,218
 
$
1,011,926
 
$
(2,975
)
$
4,958
 
$
1,024,127
 


   
Common Units
               
   
General
Partner
 
Limited
Partner
 
Accumulated
Other
Comprehensive
Loss
 
Noncontrolling
Interests in
Consolidated
Affiliates
 
Total
 
Balance at December 31, 2008
 
$
9,759
 
$
966,378
 
$
(4,792
)
$
6,176
 
$
977,521
 
Issuance of Common Units, net
   
1,473
   
145,837
   
   
   
147,310
 
Distributions on Common Units
   
(889
)
 
(87,978
)
 
   
   
(88,867
)
Distributions on Preferred Units
   
(50
)
 
(4,981
)
 
   
   
(5,031
)
Share-based compensation expense
   
52
   
5,152
   
   
   
5,204
 
Distribution to noncontrolling interests in consolidated affiliates
   
   
   
   
(796
)
 
(796
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
   
(139
)
 
(13,846
)
 
   
   
(13,985
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
   
(2
)
 
(156
)
 
   
158
   
 
Comprehensive income:
                               
Net income
   
628
   
62,154
   
   
   
62,782
 
Other comprehensive income
   
   
   
813
   
   
813
 
Total comprehensive income
                           
63,595
 
Balance at September 30, 2009
 
$
10,832
 
$
1,072,560
 
$
(3,979
)
$
5,538
 
$
1,084,951
 

See accompanying notes to consolidated financial statements.



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

   
Nine Months Ended
September 30,
 
   
2010
 
2009
 
Operating activities:
             
Net income
 
$
60,908
 
$
62,782
 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Depreciation and amortization
   
100,728
   
99,199
 
Amortization of lease incentives
   
807
   
866
 
Share-based compensation expense
   
5,060
   
5,204
 
Additions to allowance for doubtful accounts
   
3,605
   
4,530
 
Amortization of deferred financing costs
   
2,528
   
1,978
 
Amortization of past cash-flow hedges
   
262
   
(229
)
(Gain)/loss on debt extinguishment
   
85
   
(1,287
)
Net (gains)/losses on disposition of property
   
31
   
(20,886
)
Gains on disposition of for-sale residential condominiums
   
(407
)
 
(823
)
Gains on disposition of investment in unconsolidated affiliates
   
(25,330
)
 
 
Equity in earnings of unconsolidated affiliates
   
(2,705
)
 
(3,779
)
Changes in financing obligations
   
103
   
869
 
Distributions of earnings from unconsolidated affiliates
   
2,887
   
3,033
 
Changes in operating assets and liabilities:
             
Accounts receivable
   
(4,689
)
 
(534
)
Prepaid expenses and other assets
   
(177
)
 
(1,606
)
Accrued straight-line rents receivable
   
(8,477
)
 
(5,058
)
Accounts payable, accrued expenses and other liabilities
   
7,407
   
10,551
 
Net cash provided by operating activities
   
142,626
   
154,810
 
Investing activities:
             
Additions to real estate assets and deferred leasing costs
   
(66,370
)
 
(101,675
)
Net proceeds from disposition of real estate assets
   
6,801
   
61,926
 
Net proceeds from disposition of for-sale residential condominiums
   
3,732
   
7,940
 
Proceeds from disposition of investment in unconsolidated affiliates
   
15,000
   
 
Distributions of capital from unconsolidated affiliates
   
1,591
   
3,257
 
Repayments of mortgages and notes receivable
   
231
   
356
 
Contributions to unconsolidated affiliates
   
(907
)
 
(922
)
Changes in restricted cash and other investing activities
   
2,398
   
(15,514
)
Net cash used in investing activities
   
(37,524
)
 
(44,632
)
Financing activities:
             
Distributions on Common Units
   
(95,533
)
 
(88,867
)
Distributions on Preferred Units
   
(5,031
)
 
(5,031
)
Distributions to noncontrolling interests in consolidated affiliates
   
(506
)
 
(796
)
Net proceeds from the issuance of Common Units
   
2,076
   
147,310
 
Borrowings on revolving credit facility
   
4,000
   
128,000
 
Repayments of revolving credit facility
   
(4,000
)
 
(291,000
)
Borrowings on mortgages and notes payable
   
10,368
   
217,215
 
Repayments of mortgages and notes payable
   
(18,205
)
 
(185,084
)
Additions to deferred financing costs
   
(853
)
 
(3,675
)
Net cash used in financing activities
   
(107,684
)
 
(81,928
)
Net increase/(decrease) in cash and cash equivalents
   
(2,582
)
 
28,250
 
Cash and cash equivalents at beginning of the period
   
23,519
   
13,649
 
Cash and cash equivalents at end of the period
 
$
20,937
 
$
41,899
 

See accompanying notes to consolidated financial statements.



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

Supplemental disclosure of cash flow information:

   
Nine Months Ended
September 30,
 
   
2010
 
2009
 
Cash paid for interest, net of amounts capitalized
 
$
66,435
 
$
64,734
 

Supplemental disclosure of non-cash investing and financing activities:

   
Nine Months Ended
September 30,
 
   
2010
 
2009
 
Unrealized gains on cash-flow hedges                                                                                                         
 
$
 
$
591
 
Change in accrued capital expenditures                                                                                                         
 
$
890
 
$
(9,560
)
Write-off of fully depreciated real estate assets                                                                                                         
 
$
34,703
 
$
24,991
 
Write-off of fully amortized deferred financing and leasing costs
 
$
11,521
 
$
14,592
 
Unrealized gains/(losses) on marketable securities of non-qualified deferred compensation plan
 
$
489
 
$
(109
)
Settlement of financing obligation
 
$
4,184
 
$
 
Adjustment of Redeemable Common Units to fair value
 
$
(6,476
)
$
13,427
 
Unrealized gain on tax increment financing bond                                                                                                         
 
$
471
 
$
451
 
Mortgages receivable from seller financing                                                                                                         
 
$
17,030
 
$
 
Assumption of mortgages and notes payable                                                                                                         
 
$
40,306
 
$
 

See accompanying notes to consolidated financial statements.




HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements
 
September 30, 2010
 
(tabular dollar amounts in thousands, except per unit data)
 
(Unaudited)

1.      Description of Business and Significant Accounting Policies

Description of Business

The Company is a fully-integrated, self-administered and self-managed equity real estate investment trust (“REIT”) that operates in the Southeastern and Midwestern United States. The Company conducts virtually all of its activities through the Operating Partnership. At September 30, 2010, the Company and/or the Operating Partnership wholly owned 294 in-service office, industrial and retail properties, comprising 27.1 million square feet; 96 rental residential units; 580 acres of undeveloped land suitable for future development, of which 490 acres are considered core holdings; one 100% pre-leased office property under re-development; one recently developed office property that is in service but not yet stabilized; and 30 for-sale residential condominiums (which are owned through a consolidated, majority-owned joint venture).

The Company is the sole general partner of the Operating Partnership. At September 30, 2010, the Company owned all of the Preferred Units and 71.2 million, or 95.0%, of the Common Units. Limited partners (including one officer and two directors of the Company) own the remaining 3.8 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, $.01 par value, 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 the nine months ended September 30, 2010, the Company redeemed 93,971 Common Units for a like number of shares of Common Stock, which increased the percentage of Common Units owned by the Company from 94.8% at December 31, 2009 to 95.0% at September 30, 2010.

Basis of Presentation

Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). Our Consolidated Statements of Income for the three and nine months ended September 30, 2009 were revised from previously reported amounts to reflect in discontinued operations the operations for those properties sold or held for sale during the 12 months ended September 30, 2010 which required discontinued operations presentation. Prior period amounts related to additions to allowance for doubtful accounts and amortization of lease commissions in our Consolidated Statements of Cash Flows have been reclassified to conform to the current period presentation.

Our Consolidated Financial Statements include wholly owned subsidiaries and those entities in which we have the controlling financial interest. All significant intercompany transactions and accounts have been eliminated. At September 30, 2010 and December 31, 2009, we were not involved with any entities that were determined to be variable interest entities.

The unaudited interim consolidated financial statements and accompanying unaudited consolidated financial information, in the opinion of management, contain all adjustments (including normal recurring accruals) necessary for a fair presentation of our financial position, results of operations and cash flows. We have omitted certain notes and other information from the interim consolidated financial statements presented in this Quarterly Report on Form 10-Q as permitted by SEC rules and regulations. These Consolidated Financial Statements should be read in conjunction with our 2009 Annual Report on Form 10-K.



 
27

HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per unit data)
 


1.      Description of Business and Significant Accounting Policies - Continued

Use of Estimates

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

Recently Issued Accounting Standards

Beginning with our 2010 Annual Report on Form 10-K, we will be required to provide enhanced disclosure about our financial receivables, such as our mortgages and notes receivable, and our policy for measuring credit losses related to those receivables.

2.      Real Estate Assets

Acquisitions

During the third quarter of 2010, we acquired a 336,000 square foot office property in Memphis, TN for $10.0 million in cash and the assumption of secured debt, which was recorded at fair value of $40.3 million with an implied interest rate of 6.4%. The debt matures in November 2015. We have incurred or expect to incur $0.4 million of acquisition-related expenses and approximately $2.3 million of near-term building improvements. In connection with this acquisition, we recorded $2.8 million of above market lease intangible assets and $7.1 million of in-place lease intangible assets with weighted average amortization periods at the time of acquisition of 7.3 and 5.9 years, respectively.

Dispositions

During the second quarter of 2010, we sold seven office properties in Winston Salem, NC for gross proceeds of $12.9 million. In connection with this disposition, we received cash of $4.5 million and provided seller financing of $8.4 million (recorded at fair value of $8.4 million in mortgages and notes receivable) and committed to lend up to an additional $1.7 million for tenant improvements and lease commissions, of which $0.2 million was funded as of September 30, 2010. The three-year, interest-only first mortgage carries a 6.0% average interest rate. Assuming no default exists, the note can be extended by the buyer for two additional one-year periods, subject to an increase in the interest rate to 7.0% in the fourth year and to 8.0% in the fifth year. We have accounted for this disposition using the installment method, whereby the $0.4 million gain on disposition of property has been deferred and will be recognized when the seller financing is repaid.

During the second quarter of 2010, we also sold six industrial properties in Greensboro, NC for gross proceeds of $12.0 million. In connection with this disposition, we received cash of $3.4 million and provided seller financing of $8.6 million (recorded at fair value of $8.6 million in mortgages and notes receivable) and a limited rent guarantee with maximum exposure to loss of $1.0 million as of September 30, 2010. The three-year, interest-only first mortgage carries a 6.25% average interest rate. Assuming no default exists, the note can be extended by the buyer for two additional one-year periods, subject to an increase in the interest rate to 7.0% in the fourth year and to 7.75% in the fifth year. We currently have concluded that a loss from the rent guarantee is not probable. We have accounted for this disposition using the installment method, whereby the $0.3 million impairment was recognized in net gains/(losses) on disposition of discontinued operations in the second quarter of 2010.

During the first quarter of 2010, we recorded a completed sale in connection with the disposition of an office property in Raleigh, NC in the fourth quarter of 2009 where the buyer’s right to compel us to repurchase the property expired. Accordingly, we recognized the $0.2 million gain on disposition of property in the first quarter of 2010.


 
28

HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per unit data)
 


3.      Investment in Affiliates

Unconsolidated Affiliates

We have equity interests ranging from 10.0% to 50.0% in various joint ventures with unrelated third parties. The following table sets forth the combined, summarized income statements for our unconsolidated joint ventures:

   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2010
 
2009
 
2010
 
2009
 
Income Statements:
                         
Revenues                                                                      
 
$
25,508
 
$
35,150
 
$
90,774
 
$
108,614
 
Expenses:
                         
Rental property and other expenses
   
12,096
   
17,283
   
43,751
   
52,851
 
Depreciation and amortization
   
6,364
   
8,657
   
23,005
   
25,508
 
Interest expense
   
5,907
   
8,535
   
21,311
   
25,947
 
Total expenses
   
24,367
   
34,475
   
88,067
   
104,306
 
Income before disposition of property
   
1,141
   
675
   
2,707
   
4,308
 
Gains/(losses) on disposition of property
   
   
(463
)
 
   
2,963
 
Net income
 
$
1,141
 
$
212
 
$
2,707
 
$
7,271
 
Our share of:
                         
Net income (1)
 
$
1,033
 
$
669
 
$
2,705
 
$
3,779
 
Depreciation and amortization of real estate assets
 
$
2,076
 
$
3,311
 
$
8,077
 
$
8,906
 
Interest expense
 
$
2,166
 
$
3,465
 
$
8,294
 
$
10,531
 
Gain/(loss) on disposition of property
 
$
 
$
(199
)
$
 
$
582
 
__________
 
(1)
Our share of net income differs from our weighted average ownership percentage in the joint ventures’ net income due to our purchase accounting and other adjustments related primarily to management and leasing fees.

During the second quarter of 2010, we sold our equity interests in a series of unconsolidated joint ventures relating to properties in Des Moines, IA. The assets in the joint ventures included 2.5 million square feet of office (1.7 million square feet), industrial (788,000 square feet) and retail (45,000 square feet) properties, as well as 418 apartment units. In connection with the closing, we received $15.0 million in cash. We had a negative book basis in certain of the joint ventures, primarily as a result of prior cash distributions to the partners. Accordingly, we recorded gain on disposition of investment in unconsolidated affiliates of $25.3 million in the second quarter of 2010. As of the closing date, the joint ventures had approximately $170 million of secured debt, which was non-recourse to us except (1) in the case of customary exceptions pertaining to matters such as misuse of funds, borrower bankruptcy, unpermitted transfers, environmental conditions and material misrepresentations and (2) approximately $9.0 million of direct and indirect guarantees. We have been released by the applicable lenders from all such direct and indirect guarantees and we have no ongoing lender liability relating to such customary exceptions to non-recourse liability with respect to most, but not all, of the debt. The buyer has agreed to indemnify and hold us harmless from any and all future losses that we suffer as a result of our prior investment in the joint ventures (other than losses directly resulting from our acts or omissions). In the event we are exposed to any such future loss, our financial condition and results of operations would not be adversely affected unless the buyer defaults on its indemnification obligation.


 
29

HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per unit data)
 


3.      Investment in Affiliates - Continued

Consolidated Affiliates

We own a majority interest in Plaza Residential, LLC (“Plaza Residential”), a joint venture which was formed to develop and sell 139 for-sale residential condominiums constructed above an office tower developed by us in Raleigh, NC. For-sale residential condominiums in our Consolidated Balance Sheets include 30 and 40 completed, but unsold, condominiums owned by Plaza Residential at September 30, 2010 and December 31, 2009, respectively. We initially record receipts of earnest money deposits in accounts payable, accrued expenses and other liabilities in accordance with the deposit method. We then record completed sales when units close and the remaining net cash is received. During the three months ended September 30, 2010 and 2009, we received $0.6 million and $2.9 million, respectively, in gross proceeds and recorded $0.5 million and $2.7 million, respectively, of cost of goods sold from condominium sales activity. During the nine months ended September 30, 2010 and 2009, we received $4.0 million and $8.4 million, respectively, in gross proceeds and had $3.6 million and $7.6 million, respectively, of cost of goods sold from condominium sales activity.

4.      Deferred Financing and Leasing Costs

The following table sets forth total deferred financing and leasing costs, net of accumulated amortization:

   
September 30,
2010
 
December 31,
2009
 
Deferred financing costs
 
$
17,078
 
$
16,811
 
Less accumulated amortization
   
(6,917
)
 
(4,549
)
     
10,161
   
12,262
 
Deferred leasing costs
   
113,134
   
108,835
 
Less accumulated amortization
   
(48,226
)
 
(47,580
)
     
64,908
   
61,255
 
Deferred financing and leasing costs, net                                                                                              
 
$
75,069
 
$
73,517
 

Amortization of deferred financing and leasing costs were as follows:

   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2010
 
2009
 
2010
 
2009
 
Amortization of deferred financing costs
 
$
858
 
$
627
 
$
2,528
 
$
1,978
 
Amortization of lease commissions (included in depreciation and amortization)
 
$
3,912
 
$
3,806
 
$
11,495
 
$
11,598
 
Amortization of lease incentives (included in rental and other revenues)
 
$
270
 
$
318
 
$
807
 
$
866
 

The following table sets forth scheduled future amortization for deferred financing and leasing costs:

   
Amortization of Deferred Financing Costs
 
Amortization of Lease Commissions
 
Amortization of Lease Incentives
 
September 30, 2010 through December 31, 2010
 
$
788
 
$
3,855
 
$
261
 
2011                                                                                     
   
2,680
   
13,825
   
982
 
2012                                                                                     
   
2,526
   
11,390
   
881
 
2013                                                                                     
   
897
   
9,151
   
683
 
2014                                                                                     
   
520
   
7,015
   
512
 
Thereafter                                                                                     
   
2,750
   
14,947
   
1,406
 
   
$
10,161
 
$
60,183
 
$
4,725
 

 
30

HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per unit data)
 


4.      Deferred Financing and Leasing Costs - Continued

The weighted average remaining amortization periods for deferred financing and leasing costs were 3.6 years and 6.3 years, respectively, as of September 30, 2010.

5.      Mortgages and Notes Payable

The following table sets forth our consolidated mortgages and notes payable:

   
September 30,
2010
 
December 31,
2009
 
Secured indebtedness                                                                                                      
 
$
763,107
 
$
720,727
 
Unsecured indebtedness                                                                                                      
   
738,517
   
748,428
 
Total mortgages and notes payable                                                                                                
 
$
1,501,624
 
$
1,469,155
 

At September 30, 2010, our secured mortgage loans were secured by real estate assets with an aggregate undepreciated book value of $1.2 billion.

Our $400.0 million unsecured revolving credit facility is scheduled to mature on February 21, 2013 and includes an accordion feature that allows for an additional $50.0 million of borrowing capacity subject to additional lender commitments. Assuming we continue to have three publicly announced ratings from the credit rating agencies, the interest rate and facility fee under our revolving credit facility are based on the lower of the two highest publicly announced ratings. Based on our current credit ratings, the interest rate is LIBOR plus 290 basis points and the annual facility fee is 60 basis points. There were no amounts outstanding under our revolving credit facility at September 30, 2010 and October 21, 2010. At September 30, 2010 and October 21, 2010, we had $1.1 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 September 30, 2010 and October 21, 2010 was $398.9 million.

Our $70.0 million secured construction facility, of which $52.1 million was outstanding at September 30, 2010, is initially scheduled to mature on December 20, 2010. The outstanding balance increased in the third quarter of 2010 due to the use of proceeds to reduce the balance outstanding under a bank term loan due in March 2012. Assuming no defaults have occurred, we have options to extend the maturity date for two successive one-year periods. During the third quarter of 2010, we submitted our notice to extend the maturity date by one year. Upon payment of the extension fee and assuming no default exists at December 20, 2010, the facility will be extended until December 20, 2011. The interest rate is LIBOR plus 85 basis points. This facility had $17.9 million of availability at September 30, 2010 and October 21, 2010.

We are currently in compliance with all debt covenants and requirements.

6.      Derivative Financial Instruments

We had no outstanding interest rate hedge contracts at September 30, 2010 or December 31, 2009. The following table sets forth the effect of our past cash-flow hedges on accumulated other comprehensive loss (“AOCL”) and interest expense:

   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2010
 
2009
 
2010
 
2009
 
Derivatives Designated as Cash-flow Hedges:
                         
Unrealized gain recognized in AOCL on derivatives (effective portion):
                         
Interest rate hedge contracts
 
$
 
$
177
 
$
 
$
591
 
                           
(Gain)/loss reclassified out of AOCL into interest expense (effective portion):
                         
Interest rate hedge contracts
 
$
(25
)
$
(89
)
$
262
 
$
(229
)

 
31

HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per unit data)
 


7.      Noncontrolling Interests

Noncontrolling Interests in Consolidated Affiliates

Noncontrolling interests in consolidated affiliates relates to our respective joint venture partners’ 50.0% interest in Highwoods-Markel Associates, LLC and both legal and estimated economic interests of 7% in Plaza Residential. Each of our joint venture partners is an unrelated third party.

8.      Disclosure About Fair Value of Financial Instruments

The following summarizes the three levels of inputs that we use to measure fair value, as well as the assets, noncontrolling interests in the Operating Partnership and liabilities that we recognize at fair value using those levels of inputs.

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

Our Level 1 assets are investments in marketable securities which we use to pay benefits under our non-qualified deferred compensation plan. Our Level 1 noncontrolling interests in the Operating Partnership relate to the ownership of Common Units by various individuals and entities other than the Company. Our Level 1 liability is our non-qualified deferred compensation obligation.

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. We had no Level 2 assets or liabilities at September 30, 2010 and December 31, 2009.

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 are our tax increment financing bond, which is not routinely traded but whose fair value is determined using an estimate of projected redemption value based on quoted bid/ask prices for similar unrated municipal bonds, and real estate assets recorded at fair value on a non-recurring basis as a result of our quarterly impairment analysis, which were valued using independent appraisals.

The following tables set forth the assets and liability that we measure at fair value by level within the fair value hierarchy. We determine the level based on the lowest level of substantive input used to determine fair value.

       
Level 1
 
Level 3
 
   
September 30,
2010
 
Quoted Prices in Active Markets for Identical Assets or Liabilities
 
Significant
Unobservable
Inputs
 
Assets:
                   
Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)
 
$
3,232
 
$
3,232
 
$
 
Tax increment financing bond (in prepaid expenses and other assets)
   
17,342
   
   
17,342
 
Total Assets
 
$
20,574
 
$
3,232
 
$
17,342
 
                     
Liability:
                   
Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)
 
$
3,846
 
$
3,846
 
$
 


 
32

HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per unit data)
 


8.      Disclosure About Fair Value of Financial Instruments – Continued

       
Level 1
 
Level 3
 
   
December 31,
2009
 
Quoted Prices in Active Markets for Identical Assets or Liabilities
 
Significant
Unobservable
Inputs
 
Assets:
                   
Marketable securities of non-qualified deferred compensation plan
 
$
6,135
 
$
6,135
 
$
 
Tax increment financing bond
   
16,871
   
   
16,871
 
Impaired real estate assets
   
32,000
   
   
32,000
 
Total Assets
 
$
55,006
 
$
6,135
 
$
48,871
 
                     
Liability:
                   
Non-qualified deferred compensation obligation
 
$
6,898
 
$
6,898
 
$
 

The following table sets forth our Level 3 asset:

   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2010
 
2009
 
2010
 
2009
 
Asset:
                         
Tax Increment Financing Bond
                         
Beginning balance
 
$
17,017
 
$
17,660
 
$
16,871
 
$
17,468
 
Unrealized gain (in AOCL)
   
325
   
259
   
471
   
451
 
Ending balance
 
$
17,342
 
$
17,919
 
$
17,342
 
$
17,919
 

In the fourth quarter of 2007, we acquired a tax increment financing bond associated with a property developed by us. This bond amortizes to maturity in 2020. The estimated fair value at September 30, 2010 was $1.9 million below the outstanding principal due on the bond. If the yield-to-maturity used to fair value this bond was 100 basis points higher, the fair value of the bond would have been $0.8 million lower as of September 30, 2010. If the yield-to-maturity used to fair value this bond was 100 basis points lower, the fair value of the bond would have been $0.8 million higher as of September 30, 2010. Currently, we intend to hold this bond and have concluded that we will not be required to sell this bond before recovery of the bond principal. Payment of the principal and interest for the bond is guaranteed by us and, therefore, we have recorded no credit losses related to the bond in the three and nine months ended September 30, 2010 and 2009. There is no legal right of offset with the liability, which we report as a financing obligation, related to this tax increment financing bond.


 
33

HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per unit data)
 


8.      Disclosure About Fair Value of Financial Instruments – Continued

The following table sets forth the carrying amounts and fair values of our financial instruments:

   
Carrying
Amount
 
Fair Value
 
September 30, 2010
             
Cash and cash equivalents
 
$
20,937
 
$
20,937
 
Restricted cash
 
$
4,757
 
$
4,757
 
Accounts , mortgages and notes receivable
 
$
42,368
 
$
42,481
 
Marketable securities of non-qualified deferred compensation plan
 
$
3,232
 
$
3,232
 
Tax increment financing bond
 
$
17,342
 
$
17,342
 
Mortgages and notes payable
 
$
1,501,624
 
$
1,597,621
 
Financing obligations
 
$
33,625
 
$
22,861
 
Non-qualified deferred compensation obligation
 
$
3,846
 
$
3,846
 
               
December 31, 2009
             
Cash and cash equivalents
 
$
23,519
 
$
23,519
 
Restricted cash
 
$
6,841
 
$
6,841
 
Accounts, mortgages and notes receivable
 
$
24,212
 
$
24,212
 
Marketable securities of non-qualified deferred compensation plan
 
$
6,135
 
$
6,135
 
Tax increment financing bond
 
$
16,871
 
$
16,871
 
Mortgages and notes payable
 
$
1,469,155
 
$
1,440,317
 
Financing obligations
 
$
37,706
 
$
31,664
 
Non-qualified deferred compensation obligation
 
$
6,898
 
$
6,898
 

The carrying values of our cash and cash equivalents, restricted cash, accounts receivable, marketable securities of non-qualified deferred compensation plan, tax increment financing bond and non-qualified deferred compensation obligation are equal to or approximate fair value. The fair values of our mortgages and notes receivable, mortgages and notes payable and financing obligations were estimated using the income or market approaches to approximate the price that would be paid in an orderly transaction between market participants on the respective measurement dates.


 
34

HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per unit data)
 


9.      Share-Based Payments

During the nine months ended September 30, 2010, the Company granted 190,826 stock options at an exercise price equal to the closing market price of a share of its Common Stock on the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, which resulted in a weighted-average grant date fair value per share of $4.96. During the nine months ended September 30, 2010, the Company also granted 89,635 shares of time-based restricted stock and 78,151 shares of total return-based restricted stock with weighted-average grant date fair values per share of $29.05 and $29.75, respectively. We recorded stock-based compensation expense of $1.6 million each during the three months ended September 30, 2010 and 2009 and $5.1 million and $5.2 million during the nine months ended September 30, 2010 and 2009, respectively. At September 30, 2010, there was $8.4 million of total unrecognized stock-based compensation costs, which will be recognized over a weighted average remaining contractual term of 1.7 years.

10.      Comprehensive Income and Accumulated Other Comprehensive Loss

The following table sets forth the components of comprehensive income:

   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2010
 
2009
 
2010
 
2009
 
Net income                                                                               
 
$
8,788
 
$
12,560
 
$
60,908
 
$
62,782
 
Other comprehensive income/(loss):
                         
Unrealized gain on tax increment financing bond
   
325
   
259
   
471
   
451
 
Unrealized gains on cash-flow hedges
   
   
177
   
   
591
 
Amortization of past cash-flow hedges
   
(25
)
 
(89
)
 
262
   
(229
)
Settlement of past cash-flow hedge from disposition of investment in unconsolidated affiliate
   
   
   
103
   
 
Total other comprehensive income
   
300
   
347
   
836
   
813
 
Total comprehensive income
 
$
9,088
 
$
12,907
 
$
61,744
 
$
63,595
 

The following table sets forth the components of AOCL:

   
September 30,
2010
 
December 31,
2009
 
Tax increment financing bond                                                                                                      
 
$
1,895
 
$
2,366
 
Past cash-flow hedges                                                                                                      
   
1,080
   
1,445
 
Total accumulated other comprehensive loss                                                                                                
 
$
2,975
 
$
3,811
 


 
35

HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per unit data)
 


11.      Discontinued Operations

The following table sets forth our operations which required classification as discontinued operations:

   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2010
 
2009
 
2010
 
2009
 
Rental and other revenues                                                                                     
 
$
 
$
1,455
 
$
1,432
 
$
7,837
 
Operating expenses:
                         
Rental property and other expenses
   
   
488
   
656
   
3,010
 
Depreciation and amortization
   
   
322
   
365
   
1,609
 
Total operating expenses
   
   
810
   
1,021
   
4,619
 
Other income                                                                                     
   
   
1
   
   
2
 
Income before net gains/(losses) on disposition of discontinued operations
   
   
646
   
411
   
3,220
 
Net gains/(losses) on disposition of discontinued operations
   
   
(377
)
 
(86
)
 
20,639
 
Total discontinued operations                                                                                     
 
$
 
$
269
 
$
325
 
$
23,859
 

The following table sets forth the major classes of assets and liabilities of the properties classified as held for sale:

   
September 30,
2010
 
December 31,
2009
 
Assets:
             
Land
 
$
 
$
867
 
Buildings and tenant improvements                                                                                                 
   
   
3,876
 
Land held for development                                                                                                 
   
1,217
   
1,197
 
Total real estate assets                                                                                            
   
1,217
   
5,940
 
Less accumulated depreciation                                                                                                 
   
   
(1,484
)
Net real estate assets
   
1,217
   
4,456
 
Deferred leasing costs, net
   
   
209
 
Accrued straight line rents receivable
   
   
289
 
Prepaid expenses and other assets
   
32
   
77
 
Real estate and other assets, net, held for sale
 
$
1,249
 
$
5,031
 
Liabilities of real estate and other assets, net, held for sale (1)
 
$
12
 
$
12
 
__________
 
(1)
Included in accounts payable, accrued expenses and other liabilities.
 


 
36

HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per unit data)
 

 
12.      Earnings Per Unit

The following table sets forth the computation of basic and diluted earnings per Common Unit:

   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2010
 
2009
 
2010
 
2009
 
Earnings per Common Unit - basic:
                         
Numerator:
                         
Income from continuing operations
 
$
8,788
 
$
12,291
 
$
60,583
 
$
38,923
 
Net (income)/loss attributable to noncontrolling interests in consolidated affiliates from continuing operations
   
148
   
(24
)
 
(281
)
 
(158
)
Distributions on Preferred Units
   
(1,677
)
 
(1,677
)
 
(5,031
)
 
(5,031
)
Income from continuing operations available for common unitholders
   
7,259
   
10,590
   
55,271
   
33,734
 
Income from discontinued operations available for common unitholders
   
   
269
   
325
   
23,859
 
Net income available for common unitholders
 
$
7,259
 
$
10,859
 
$
55,596
 
$
57,593
 
Denominator:
                         
Denominator for basic earnings per Common Unit – weighted average units (1)
   
75,019
   
74,542
   
74,945
   
70,563
 
Earnings per Common Unit - basic:
                         
Income from continuing operations available for common unitholders
 
$
0.10
 
$
0.15
 
$
0.74
 
$
0.48
 
Income from discontinued operations available for common unitholders
   
   
   
   
0.34
 
Net income available for common unitholders
 
$
0.10
 
$
0.15
 
$
0.74
 
$
0.82
 
Earnings per Common Unit - diluted:
                         
Numerator:
                         
Income from continuing operations
 
$
8,788
 
$
12,291
 
$
60,583
 
$
38,923
 
Net (income)/loss attributable to noncontrolling interests in consolidated affiliates from continuing operations
   
148
   
(24
)
 
(281
)
 
(158
)
Distributions on Preferred Units
   
(1,677
)
 
(1,677
)
 
(5,031
)
 
(5,031
)
Income from continuing operations available for common unitholders
   
7,259
   
10,590
   
55,271
   
33,734
 
Income from discontinued operations available for common unitholders
   
   
269
   
325
   
23,859
 
Net income available for common unitholders
 
$
7,259
 
$
10,859
 
$
55,596
 
$
57,593
 
Denominator:
                         
Denominator for basic earnings per Common Unit –weighted average units
   
75,019
   
74,542
   
74,945
   
70,563
 
Add:
                         
Stock options using the treasury method
   
210
   
121
   
183
   
52
 
Denominator for diluted earnings per Common Unit – adjusted weighted average units and assumed conversions (1)
   
75,229
   
74,663
   
75,128
   
70,615
 
Earnings per Common Unit - diluted:
                         
Income from continuing operations available for common unitholders
 
$
0.10
 
$
0.15
 
$
0.74
 
$
0.48
 
Income from discontinued operations available for common unitholders
   
   
   
   
0.34
 
Net income available for common unitholders
 
$
0.10
 
$
0.15
 
$
0.74
 
$
0.82
 
__________
 
(1)  
Options and warrants aggregating 0.7 million and 0.9 million units were outstanding during the three months ended September 30, 2010 and 2009, respectively, and 0.7 million and 1.2 million units were outstanding during the nine months ended September 30, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per Common Unit because the impact of including such shares would be anti-dilutive.

 
37

HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per unit data)
 


13.      Segment Information

Our principal business is the operation, acquisition and development of rental real estate properties. We evaluate our business by product type and by geographic location. Each product type has different customers and economic characteristics as to rental rates and terms, cost per square foot of buildings, the purposes for which customers use the space, the degree of maintenance and customer support required and customer dependency on different economic drivers, among others. The operating results by geographic grouping are also regularly reviewed by our chief operating decision maker for assessing performance and other purposes. There are no material inter-segment transactions.

Our accounting policies of the segments are the same as those used in our Consolidated Financial Statements. All operations are within the United States and, at September 30, 2010, no single customer of the Wholly Owned Properties generated more than 9.4% of our consolidated revenues on an annualized basis.

The following table summarizes the rental and other revenues and net operating income, the primary industry property-level performance metric which is defined as rental and other revenues less rental property and other expenses, for each reportable segment:

   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2010
 
2009
 
2010
 
2009
 
Rental and Other Revenues: (1)
                         
Office:
                         
Atlanta, GA
 
$
11,870
 
$
12,617
 
$
36,069
 
$
36,213
 
Greenville, SC
   
3,312
   
3,429
   
10,440
   
10,668
 
Kansas City, MO
   
3,673
   
3,742
   
11,045
   
11,200
 
Memphis, TN
   
9,692
   
8,185
   
24,889
   
22,615
 
Nashville, TN
   
14,599
   
14,901
   
44,564
   
45,498
 
Orlando, FL
   
2,920
   
3,110
   
8,985
   
8,903
 
Piedmont Triad, NC
   
5,802
   
5,720
   
17,722
   
17,575
 
Raleigh, NC
   
18,814
   
18,205
   
56,070
   
54,509
 
Richmond, VA
   
12,210
   
12,173
   
35,486
   
35,114
 
Tampa, FL
   
17,831
   
17,480
   
53,810
   
50,600
 
Total Office Segment
   
100,723
   
99,562
   
299,080
   
292,895
 
Industrial:
                         
Atlanta, GA
   
3,660
   
3,904
   
11,478
   
11,775
 
Piedmont Triad, NC
   
3,259
   
2,859
   
9,324
   
9,872
 
Total Industrial Segment
   
6,919
   
6,763
   
20,802
   
21,647
 
Retail:
                         
Kansas City, MO
   
8,103
   
6,466
   
24,540
   
21,755
 
Piedmont Triad, NC
   
   
47
   
(40
)
 
161
 
Raleigh, NC
   
30
   
30
   
105
   
90
 
Total Retail Segment
   
8,133
   
6,543
   
24,605
   
22,006
 
Residential:
                         
Kansas City, MO                                                         
   
288
   
302
   
969
   
897
 
Total Residential Segment
   
288
   
302
   
969
   
897
 
Total Rental and Other Revenues                                                                    
 
$
116,063
 
$
113,170
 
$
345,456
 
$
337,445
 


 
38

HIGHWOODS REALTY LIMITED PARTNERSHIP
 
Notes To Consolidated Financial Statements (Continued)
 
(tabular dollar amounts in thousands, except per unit data)
 


13.      Segment Information - Continued

   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2010
 
2009
 
2010
 
2009
 
Net Operating Income: (1)
                         
Office:
                         
Atlanta, GA
 
$
7,395
 
$
7,895
 
$
22,888
 
$
22,929
 
Greenville, SC
   
1,858
   
2,014
   
6,314
   
6,651
 
Kansas City, MO
   
2,160
   
2,342
   
6,706
   
6,853
 
Memphis, TN
   
5,507
   
4,844
   
15,029
   
12,908
 
Nashville, TN
   
9,490
   
9,713
   
29,454
   
29,683
 
Orlando, FL
   
1,555
   
1,637
   
4,896
   
4,672
 
Piedmont Triad, NC
   
3,843
   
3,637
   
11,709
   
11,547
 
Raleigh, NC
   
12,610
   
11,945
   
38,480
   
36,778
 
Richmond, VA
   
7,632
   
7,837
   
24,010
   
23,925
 
Tampa, FL
   
10,903
   
10,246
   
32,747
   
29,665
 
Total Office Segment
   
62,953
   
62,110
   
192,233
   
185,611
 
Industrial:
                         
Atlanta, GA
   
2,493
   
2,903
   
8,064
   
8,916
 
Piedmont Triad, NC
   
2,460
   
2,087
   
6,841
   
7,639
 
Total Industrial Segment
   
4,953
   
4,990
   
14,905
   
16,555
 
Retail:
                         
Atlanta, GA (2)
   
(5
)
 
(6
)
 
(16
)
 
(18
)
Kansas City, MO
   
4,569
   
3,494
   
14,682
   
13,470
 
Piedmont Triad, NC (2)
   
   
(72
)
 
(40
)
 
18
 
Raleigh, NC (2)
   
10
   
(1
)
 
29
   
9
 
Total Retail Segment
   
4,574
   
3,415
   
14,655
   
13,479
 
Residential:
                         
Kansas City, MO
   
168
   
163
   
594
   
518
 
Raleigh, NC (2)
   
(90
)
 
(72
)
 
(265
)
 
(210
)
Total Residential Segment
   
78
   
91
   
329
   
308
 
Total Net Operating Income                                                                    
   
72,558
   
70,606
   
222,122
   
215,953
 
Reconciliation to income from continuing operations before disposition of property, condominiums and investment in unconsolidated affiliates and equity in earnings of unconsolidated affiliates:
                         
Depreciation and amortization
   
(34,281
)
 
(32,367
)
 
(100,363
)
 
(97,590
)
General and administrative expense
   
(8,882
)
 
(9,485
)
 
(24,579
)
 
(27,537
)
Interest expense
   
(23,338
)
 
(21,334
)
 
(69,385
)
 
(64,654
)
Interest and other income
   
1,625
   
3,981
   
4,291
   
7,902
 
Income from continuing operations before disposition of property, condominiums and investment in unconsolidated affiliates and equity in earnings of unconsolidated affiliates
 
$
7,682
 
$
11,401
 
$
32,086
 
$
34,074
 
__________
 
(1)
Net of discontinued operations.
 
(2)
Negative NOI with no corresponding revenues represents expensed real estate taxes and other carrying costs associated with land held for development that is currently zoned for the respective product type.
 


 
 
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company is a fully integrated, self-administered and self-managed equity REIT that provides leasing, management, development, construction and other customer-related services for our properties and for third parties. The Company conducts virtually all of its activities through the Operating Partnership and is its sole general partner. At September 30, 2010, we owned or had an interest in 329 in-service office, industrial and retail properties, encompassing approximately 32.3 million square feet, which includes one recently developed office property that had not yet reached the earlier of original projected stabilization date or 95% occupancy aggregating 148,000 square feet, two office properties under development aggregating 231,000 square feet and a 12.5% interest in a 261,000 square foot office property directly owned by the Company (included in the Company’s Consolidated Financial Statements, but not included in the Operating Partnership’s Consolidated Financial Statements); 30 for-sale residential condominiums and 96 rental residential units. We are based in Raleigh, North Carolina, and our properties and development land are located in Florida, Georgia, Mississippi, Missouri, North Carolina, South Carolina, Tennessee and Virginia. Additional information about us can be found on our website at www.highwoods.com. Information on our website is not part of this Quarterly Report.

You should read the following discussion and analysis in conjunction with the accompanying Consolidated Financial Statements and related notes contained elsewhere in this Quarterly Report.
 
 
Disclosure Regarding Forward-Looking Statements

Some of the information in this Quarterly 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 “Business.” You can identify forward-looking statements by our use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “continue” or other similar words. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that our plans, intentions or expectations will be achieved. When considering such forward-looking statements, you should keep in mind the following important factors that could cause our actual results to differ materially from those contained in any forward-looking statement:

 
·
the financial condition of our customers could deteriorate;

 
·
we may not be able to lease or release second generation space, defined as previously occupied space that becomes available for lease, quickly or on as favorable terms as old leases;

 
·
we may not be able to lease our newly constructed buildings as quickly or on as favorable terms as originally anticipated;

 
·
we may not be able to complete development, acquisition, reinvestment, disposition or joint venture projects as quickly or on as favorable terms as anticipated;

 
·
development activity by our competitors in our existing markets could result in an excessive supply of office, industrial and retail properties relative to customer demand;

 
·
our Southeastern and Midwestern United States markets may suffer declines in economic growth;

 
·
unanticipated increases in interest rates could increase our debt service costs;

 
·
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 to repay or refinance outstanding debt upon maturity; and

 
·
the Company could lose key executive officers.

 
 
This list of risks and uncertainties, however, is not intended to be exhaustive. You should also review the other cautionary statements we make in “Item 1A. Business – Risk Factors” set forth in our 2009 Annual Report on Form 10-K. 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.

 
Executive Summary

Our Strategic Plan focuses on:

 
·
owning high-quality, differentiated real estate assets in the better submarkets in our core markets; and

 
·
maintaining a conservative, flexible balance sheet with ample liquidity to meet our funding needs and growth prospects.
 
Execution of our Plan includes (1) growing net operating income at our existing properties through concentrated leasing, asset management and customer service efforts and (2) developing properties in in-fill locations and acquiring strategic properties that are accretive to long-term earnings and stockholder value. While we own and operate a limited number of industrial, retail and residential properties, our operating results depend heavily on successfully leasing and operating our office properties. Economic growth in Florida, Georgia, North Carolina and Tennessee is and will continue to be an important determinative factor in predicting our future operating results. Our portfolio has changed significantly over the past five years and now consists of a higher proportion of Class A and B properties, which are generally expected to outperform competitive properties in our core markets. We have repositioned our portfolio primarily by selling non-core properties and developing properties in in-fill locations. Our real estate professionals are seasoned and cycle-tested. Our senior leadership team has significant experience and maintains important relationships with market participants in each of our core markets. Our focus for the next 12 months is to lease and operate our existing portfolio as effectively and efficiently as possible and acquire and develop additional real estate assets that improve the overall quality of our portfolio and generate attractive returns over the long-term for our stockholders.

 
Results of Operations

Results for the three and nine months ended September 30, 2009 were revised from previously reported amounts to reflect in discontinued operations the operations for those properties sold or held for sale which required discontinued operations presentation.

Three Months Ended September 30, 2010 and 2009

Rental and Other Revenues

Rental and other revenues from continuing operations were 2.6% higher in the third quarter of 2010 as compared to the third quarter of 2009 primarily due to the acquisitions of an office property in Tampa, FL in the fourth quarter of 2009 and an office property in Memphis, TN in the third quarter of 2010 and the contribution of development properties recently placed in service. This increase is partly offset by slightly lower average occupancy and lower operating expense recoveries from lower real estate tax and utilities expenses in our same property portfolio. We expect rental and other revenues for the remainder of 2010, adjusted for any discontinued operations, to be relatively unchanged as compared to the same period in 2009.

Operating Expenses

Rental property and other expenses were 2.2% higher in the third quarter of 2010 as compared to the third quarter of 2009 primarily due to our recent acquisition activity and the contribution of development properties recently placed in service, offset by lower expenses from management’s continuing efforts to reduce operating expenses in our same property portfolio. As a result, operating margin, defined as rental and other revenues less rental property and other expenses expressed as a percentage of rental and other revenues, was slightly higher at 62.5% in the third quarter of 2010 as compared to 62.4% in the third quarter of 2009. We expect the trend for rental property and other expenses for the remainder of 2010, adjusted for any discontinued operations, to be relatively unchanged as compared to the same period in 2009 for primarily the same factors.

 
 
Depreciation and amortization was 5.9% higher in the third quarter of 2010 as compared to the third quarter of 2009 primarily due to our recent acquisition activity and the contribution of development properties recently placed in service. We expect depreciation expense for the remainder of 2010, adjusted for any discontinued operations, to be higher over the same period in 2009 due to recent acquisitions and the contribution of development projects recently placed in service.

General and administrative expenses were 6.4% lower in the third quarter of 2010 as compared to the third quarter of 2009 primarily due to lower deferred compensation expense from a decrease in the value of marketable securities held under our non-qualified deferred compensation plan, lower short-term incentive compensation, and lower expenses from management’s continuing efforts to reduce general and administrative expenses. We expect general and administrative expenses for the remainder of 2010, adjusted for changes in value of marketable securities held under our deferred compensation plan, to be lower over the same period in 2009 due to lower short-term incentive compensation and lower expenses from management’s continuing efforts to reduce general and administrative expenses.

Other Income

Other income was $2.4 million lower in the third quarter of 2010 as compared to the third quarter of 2009 primarily due to a decrease in the value of marketable securities held under our non-qualified deferred compensation plan and gains on debt extinguishment and environmental settlement in 2009.

Interest Expense

Interest expense was 9.4% higher in the third quarter of 2010 as compared to the third quarter of 2009 primarily due to lower capitalized interest from decreased development in process, higher debt balances from the assumption of $40.3 million of debt related to the acquisition of an office property in Memphis, TN in the third quarter of 2010 and higher fees on our new revolving credit facility. We expect interest expense for the remainder of 2010 to be higher over the same period in 2009 due to lower capitalized interest from decreased development in process, higher debt balances from the assumption of debt related to the acquisition of the Memphis office property and higher fees on our new revolving credit facility.

Nine Months Ended September 30, 2010 and 2009

Rental and Other Revenues

Rental and other revenues from continuing operations were 2.4% higher in the nine months ended September 30, 2010 as compared to the same period in 2009 primarily due to our recent acquisition activity and the contribution of development properties recently placed in service, partly offset by lower operating expense recoveries from lower real estate tax and utilities expenses.

Operating Expenses

Rental property and other expenses were 1.5% higher in the nine months ended September 30, 2010 as compared to the same period in 2009 primarily due to our recent acquisition activity and the contribution of development properties recently placed in service. As a result, operating margin was higher at 64.2% in the nine months ended September 30, 2010 as compared to 63.9% in the nine months ended September 30, 2009.

Depreciation and amortization was 2.8% higher in the nine months ended September 30, 2010 as compared to the same period in 2009 primarily due to our recent acquisition activity and the contribution of development properties recently placed in service.

General and administrative expenses were 10.7% lower in the nine months ended September 30, 2010 as compared to the same period in 2009 primarily due to lower deferred compensation expense caused by a decrease in the value of marketable securities held under our non-qualified deferred compensation plan, lower compensation costs from lower headcount, lower short and long-term incentive compensation, and lower expenses from management’s continuing efforts to reduce general and administrative expenses.

 
 
Other Income

Other income was $3.6 million lower in the nine months ended September 30, 2010 as compared to the same period in 2009 primarily due to a decrease in the value of marketable securities held under our non-qualified deferred compensation plan and gains on debt extinguishment and environmental settlement in 2009.

Interest Expense

Interest expense was 7.3% higher in the nine months ended September 30, 2010 as compared to the same period in 2009 primarily due to lower capitalized interest resulting from decreased development in process, higher debt balances from the assumption of debt related to the acquisition of one office property in Memphis, TN in the third quarter of 2010 and higher fees on our new revolving credit facility.

Gains on Disposition of Investment in Unconsolidated Affiliates and Equity in Earnings of Unconsolidated Affiliates

Gains on disposition of investment in unconsolidated affiliates were $25.3 million higher in the nine months ended September 30, 2010 as compared to the same period in 2009 due to the disposition of our equity interests in a series of unconsolidated joint ventures relating to properties in Des Moines, IA. Equity in earnings of unconsolidated affiliates was $1.1 million lower in the nine months ended September 30, 2010 as compared to the same period in 2009 primarily due to the disposition of one office property in one of our unconsolidated joint ventures in 2009.

Discontinued Operations

Discontinued operations were $23.5 million lower in the nine months ended September 30, 2010 as compared to the same period in 2009 primarily due to the disposition of three retail properties in Kansas City, MO in 2009.



 
Liquidity and Capital Resources

Overview

Our goal is to maintain a conservative and flexible balance sheet with access to multiple sources of debt and equity capital and sufficient availability under our credit facilities. We generally use rents received from customers to fund our operating expenses, capital expenditures and distributions. To fund property acquisitions, development activity or building renovations and repay debt upon maturity, we may use current cash balances, sell assets, obtain new debt, use our revolving credit facility and/or issue equity. Our debt generally consists of mortgage debt, unsecured debt securities and borrowings under our secured and unsecured credit facilities.

Statements of Cash Flows

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):

   
Nine Months Ended
September 30,
     
   
2010
 
2009
 
Change
 
Net cash provided by operating activities                                                                                          
 
$
142,654
 
$
154,829
 
$
(12,175
)
Net cash (used in) investing activities                                                                                          
   
(37,526
)
 
(44,624
)
 
7,098
 
Net cash (used in) financing activities                                                                                          
   
(107,858
)
 
(81,893
)
 
(25,965
)
Total net cash flows                                                                                          
 
$
(2,730
)
$
28,312
 
$
(31,042
)

In calculating cash flow from operating activities, depreciation and amortization, which are non-cash expenses, are added back to net income. As a result, we have historically generated a positive amount of cash from operating activities. From period to period, cash flow from operations depends primarily upon changes in our net income, as discussed more fully above under “Results of Operations,” changes in receivables and payables, and net additions or decreases in our overall portfolio, which affect the amount of depreciation and amortization expense.

Cash used in or provided by investing activities generally relates to capitalized costs incurred for leasing and major building improvements and our acquisition, development, disposition and joint venture capital 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 of capital from our joint ventures.

Cash used in or provided by financing activities generally relates to distributions, incurrence and repayment of debt and issuances, repurchases or redemptions of Common Stock, Common Units and Preferred Stock. As discussed previously, 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 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.

Cash provided by operating activities was $12.2 million lower in the nine months ended September 30, 2010 as compared to the same period in 2009 primarily due to the impact of dispositions and lower cash rents in our same property portfolio, partly offset by higher cash rents from recently acquired buildings, the contribution of development properties recently placed in service and higher lease termination fees.

Cash used in investing activities was $7.1 million lower in the nine months ended September 30, 2010 as compared to the same period in 2009 primarily due to lower development activities in 2010, partly offset by the acquisition of an office building in Memphis, TN in the third quarter of 2010 and lower dispositions in 2010.

Cash used in financing activities was $26.0 million higher in the nine months ended September 30, 2010 as compared to the same period in 2009 primarily due to greater reductions in outstanding debt balances in 2009, mostly funded with the net proceeds from our May 2009 equity offering, and dividends on a higher number of outstanding shares of Common Stock in 2010.

 
 
Capitalization

The following table sets forth the Company’s capitalization (in thousands, except per share amounts):

   
September 30,
2010
 
December 31,
2009
 
Mortgages and notes payable, at recorded book value
 
$
1,501,624
 
$
1,469,155
 
Financing obligations                                                                                             
 
$
33,625
 
$
37,706
 
Preferred Stock, at liquidation value                                                                                             
 
$
81,592
 
$
81,592
 
               
Common Stock outstanding                                                                                             
   
71,656
   
71,285
 
Common Units outstanding (not owned by the Company)
   
3,797
   
3,891
 
               
Per share stock price at period end                                                                                             
 
$
32.47
 
$
33.35
 
Market value of Common Stock and Common Units
 
$
2,449,959
 
$
2,507,120
 
Total market capitalization with debt and obligations
 
$
4,066,800
 
$
4,095,573
 

Our mortgages and notes payable represented 36.9% of our total market capitalization and were comprised of $763.1 million of secured indebtedness with a weighted average interest rate of 6.15% and $738.5 million of unsecured indebtedness with a weighted average interest rate of 5.43%. At September 30, 2010, our outstanding mortgages and notes payable and financing obligations were secured by real estate assets with an aggregate undepreciated book value of $1.2 billion.

Current and Future Cash Needs

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 existing revolving credit facility and secured construction credit facility (which had $398.9 million and $17.9 million of availability, respectively, at October 21, 2010). 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 existing buildings not related to a specific customer. Tenant improvements are the costs required to customize space for the specific needs of customers in spaces other than in new development projects. We anticipate that our available cash and cash equivalents and cash provided by operating activities, together with cash available from borrowings under our credit facilities, will be adequate to meet our short-term liquidity requirements.

Our long-term liquidity uses generally consist of the retirement or refinancing of debt upon maturity (including mortgage debt, our revolving and construction credit facilities, term loans and other unsecured debt), funding of existing and new building development or land infrastructure projects and funding acquisitions of buildings and development land. Excluding capital expenditures for leasing costs and tenant improvements and for normal building improvements, our expected future capital expenditures for started and/or committed new development/redevelopment projects were approximately $13.2 million at September 30, 2010. Additionally, we may, from time to time, retire some or all of our remaining outstanding Preferred Stock and/or unsecured debt securities through redemptions, open market repurchases, privately negotiated acquisitions or otherwise.

We expect to meet our liquidity needs through a combination of:
 
 
·
cash flow from operating activities;

 
·
borrowings under our credit facilities;

 
·
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.
 
Recent Acquisition Activity

During the third quarter of 2010, we acquired a 336,000 square foot office property in Memphis, TN for $10.0 million in cash and the assumption of secured debt, which was recorded at fair value of $40.3 million with an implied interest rate of 6.4%. The debt matures in November 2015. We have incurred or expect to incur approximately $2.3 million of near-term building improvements and $0.4 million of acquisition-related expenses.

Financing Activity

Our $400.0 million unsecured revolving credit facility is scheduled to mature on February 21, 2013 and includes an accordion feature that allows for an additional $50.0 million of borrowing capacity subject to additional lender commitments. Assuming we continue to have three publicly announced ratings from the credit rating agencies, the interest rate and facility fee under our revolving credit facility are based on the lower of the two highest publicly announced ratings. Based on our current credit ratings, the interest rate is LIBOR plus 290 basis points and the annual facility fee is 60 basis points. We expect to 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. Continuing ability to borrow under the revolving credit facility allows us to quickly capitalize on strategic opportunities at short-term interest rates. There were no amounts outstanding under our revolving credit facility at September 30, 2010 and October 21, 2010. At September 30, 2010 and October 21, 2010, we had $1.1 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 September 30, 2010 and October 21, 2010 was $398.9 million.

Our $70.0 million secured construction facility, of which $52.1 million was outstanding at September 30, 2010, is initially scheduled to mature on December 20, 2010. Assuming no defaults have occurred, we have options to extend the maturity date for two successive one-year periods. During the third quarter of 2010, we submitted our notice to extend the maturity date by one year. Upon payment of the extension fee and assuming no default exists at December 20, 2010, the facility will be extended until December 20, 2011. The interest rate is LIBOR plus 85 basis points. This facility had $17.9 million of availability at September 30, 2010 and October 21, 2010.

We regularly evaluate the financial condition of the lenders that participate in our credit facilities using publicly available information. Based on this review, we currently expect our lenders, which are major financial institutions, to perform their obligations under our existing facilities.

Covenant Compliance

We are currently in compliance with the covenants and other requirements with respect to our outstanding 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, bank term loan due in February 2011 ($137.5 million outstanding as of September 30, 2010) and bank term loan due in March 2012 ($10.0 million outstanding as of September 30, 2010) require us to comply with customary operating covenants and various financial requirements. Additionally, if we were to fail to make a payment when due with respect to any of our other obligations with aggregate unpaid principal of at least $10.0 million, and such failure remains uncured for more than 120 days, the lenders under our credit facility could provide notice of their intent to accelerate all amounts due thereunder. Upon an event of default on the revolving credit facility, the lenders having at least 66.7% 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.

The Operating Partnership has $390.9 million principal amount of 2017 bonds outstanding and $200.0 million principal amount of 2018 bonds 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% in principal amount of either series of bonds 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.

Off Balance Sheet Arrangements

During the second quarter of 2010, we sold our equity interests in a series of unconsolidated joint ventures relating to properties in Des Moines, IA. The assets in the joint ventures included 2.5 million square feet of office (1.7 million square feet), industrial (788,000 square feet) and retail (45,000 square feet) properties, as well as 418 apartment units. In connection with the closing, we received $15.0 million in cash. We had a negative book basis in certain of the joint ventures, primarily as a result of prior cash distributions to the partners. Accordingly, we recorded gain on disposition of investment in unconsolidated affiliates of $25.3 million in the second quarter of 2010. As of the closing date, the joint ventures had approximately $170 million of secured debt, which was non-recourse to us except (1) in the case of customary exceptions pertaining to matters such as misuse of funds, borrower bankruptcy, unpermitted transfers, environmental conditions and material misrepresentations and (2) approximately $9.0 million of direct and indirect guarantees. We have been released by the applicable lenders from all such direct and indirect guarantees and we have no ongoing lender liability relating to such customary exceptions to non-recourse liability with respect to most, but not all, of the debt. The buyer has agreed to indemnify and hold us harmless from any and all future losses that we suffer as a result of our prior investment in the joint ventures (other than losses directly resulting from our acts or omissions). In the event we are exposed to any such future loss, our financial condition and results of operations would not be adversely affected unless the buyer defaults on its indemnification obligation.

In connection with the disposition of six industrial properties in Piedmont Triad, NC in the second quarter of 2010, we entered into a guarantee agreement with the buyer relating to an existing 237,500 square foot lease with one customer, who has leased space in the properties for 14 years. This agreement guarantees the payment of rent for an approximate two-year period from March 2011 through June 2013 in the event the customer exercises its limited termination right. As of September 30, 2010, our maximum exposure under this rent guarantee agreement was approximately $0.9 million. No accrual has been recorded for this guarantee because we currently have concluded that a loss is not probable.

There were no other significant changes to our off balance sheet arrangements in the nine months ended September 30, 2010. For information regarding our off balance sheet arrangements at December 31, 2009, see Note 8 to the Consolidated Financial Statements in our 2009 Annual Report on Form 10-K.

Interest Rate Hedging Activities

To meet, in part, our liquidity requirements, we borrow funds at a combination of fixed and variable rates. Borrowings under our revolving credit facility, construction facility and bank term loans bear interest at variable rates. Our long-term debt, which consists of secured and unsecured long-term financings and the issuance of unsecured debt securities, typically bears interest at fixed rates although some loans bear interest at variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We 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. We also enter into treasury lock or similar agreements from time to time in order to limit our exposure to an increase in interest rates with respect to future debt offerings. We had no outstanding interest rate hedge contracts at September 30, 2010.

 
 
Critical Accounting Estimates

There were no changes made by management to the critical accounting policies in the nine months ended September 30, 2010. For a description of our critical accounting estimates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates” in our 2009 Annual Report on Form 10-K.

 
Funds From Operations

The Company believes that FFO and FFO per share are beneficial to management and investors and are important indicators of the performance of any equity REIT. Because FFO and FFO per share calculations exclude such factors as depreciation and amortization 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, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient on a stand-alone basis. As a result, management believes that the use of FFO and FFO per share, together with the required GAAP presentations, provide 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 and FFO 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 FFO and FFO per share include adjustments that investors may deem subjective, such as adding back expenses such as depreciation and amortization. Furthermore, FFO per share does not depict the amount that accrues directly to the stockholders’ benefit. Accordingly, FFO and FFO per share should never be considered as alternatives to net income or net income 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 dividends to holders of Preferred Stock and less excess of Preferred Stock redemption cost over carrying value;

 
·
Less net income attributable to noncontrolling interests;

 
·
Plus depreciation and amortization of real estate assets;

 
·
Less gains, or plus losses, from sales of depreciable operating properties (but excluding impairment losses) and excluding items that are classified as extraordinary items under GAAP;

 
·
Plus or minus adjustments for unconsolidated partnerships and joint ventures (to reflect funds from operations on the same basis); and

 
·
Plus or minus adjustments for depreciation and amortization and gains/(losses) on sales related to discontinued operations.

In calculating FFO, the Company adds back net income attributable to noncontrolling interests in the Operating Partnership, which the Company believes is consistent with standard industry practice for REITs that operate through an UPREIT structure. The Company believes that it is important to present FFO on an as-converted basis since all of the Common Units not owned by the Company are redeemable on a one-for-one basis for shares of its Common Stock.



The Company’s FFO and FFO per share are summarized in the following table ($ in thousands, except per share amounts):

   
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
   
2010
 
2009
 
2010
 
2009
 
   
Amount
 
Per
Share
 
Amount
 
Per
Share
 
Amount
 
Per
Share
 
Amount
 
Per
Share
 
Funds from operations:
                                                 
Net income
 
$
8,773
       
$
12,573
       
$
60,904
       
$
62,847
       
Net (income) attributable to noncontrolling interests in the Operating Partnership
   
(366
)
       
(591
)
       
(2,819
)
       
(3,339
)
     
Net (income)/loss attributable to noncontrolling interests in consolidated affiliates
   
148
         
(24
)
       
(281
)
       
(158
)
     
Dividends on Preferred Stock
   
(1,677
)
       
(1,677
)
       
(5,031
)
       
(5,031
)
     
Net income available for common stockholders
   
6,878
 
$
0.10
   
10,281
 
$
0.14
   
52,773
 
$
0.74
   
54,319
 
$
0.81
 
Add/(Deduct):
                                                 
Depreciation and amortization of real estate assets
   
33,837
   
0.44
   
31,861
   
0.43
   
99,072
   
1.31
   
96,150
   
1.36
 
(Gains) on disposition of depreciable properties
   
(19
)
 
   
(19
)
 
   
(55
)
 
   
(108
)
 
 
(Gains) on disposition of investment in unconsolidated affiliates
   
   
   
   
   
(25,330
)
 
(0.34
)
 
   
 
Net income attributable to noncontrolling interests in the Operating Partnership
   
366
   
   
591
   
   
2,819
   
   
3,339
   
 
Unconsolidated affiliates:
                                                 
Depreciation and amortization of real estate assets
   
2,115
   
0.03
   
3,352
   
0.05
   
8,193
   
0.11
   
9,825
   
0.14
 
(Gains) on disposition of depreciable properties
   
   
   
   
   
   
   
(781
)
 
(0.01
)
Discontinued operations:
                                                 
Depreciation and amortization of real estate assets
   
   
   
322
   
   
365
   
   
1,609
   
0.02
 
(Gains) on disposition of depreciable properties
   
   
   
   
   
(174
)
 
   
(21,016
)
 
(0.30
)
Funds from operations                                                      
 
$
43,177
 
$
0.57
 
$
46,388
 
$
0.62
 
$
137,663
 
$
1.82
 
$
143,337
 
$
2.02
 
                                                   
Weighted average Common Shares outstanding (1)
   
75,638
         
75,072
         
75,537
         
71,024
       
__________
 
(1)
Includes assumed conversion of all potentially dilutive Common Stock equivalents.

 
 
ITEM 3.  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.

To meet in part our long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Our debt consists of secured and unsecured long-term financings, unsecured debt securities, loans and credit facilities, which typically bear interest at fixed rates although some loans bear interest at variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We generally do not hold or issue these derivative contracts for trading or speculative purposes.

At September 30, 2010, we had $1,357 million of fixed rate debt outstanding. The estimated aggregate fair market value of this debt at September 30, 2010 was $1,451 million. If interest rates had been 100 basis points higher, the aggregate fair market value of our fixed rate debt at September 30, 2010 would have been approximately $54.8 million lower. If interest rates had been 100 basis points lower, the aggregate fair market value of our fixed rate debt at September 30, 2010 would have been approximately $58.1 million higher.

At September 30, 2010, we had $147.5 million of variable rate debt outstanding. The estimated aggregate fair market value of this debt at September 30, 2010 was $146.8 million. If the weighted average interest rate on this variable rate debt had been 100 basis points higher or lower at September 30, 2010, the aggregate fair market value of our variable rate debt at September 30, 2010 would have decreased or increased by approximately $0.7 million.

We have no outstanding hedge contracts at September 30, 2010.

 
ITEM 4.  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 management, including the Company’s CEO and CFO, to allow timely decisions regarding required disclosure. The Company’s CEO and CFO have concluded that the disclosure controls and procedures of the Company and the Operating Partnership were each effective at the end of the period covered by this Quarterly Report.

SEC rules also require us 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 generally accepting accounting principles. As defined in Rule 13a-15(f) under the Exchange Act, 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.

 

There were no changes in internal control over financial reporting during the three months ended September 30, 2010 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. There were also no changes in internal control over financial reporting during the three months ended September 30, 2010 that materially affected, or are reasonably likely to materially affect, the Operating Partnership’s internal control over financial reporting.


PART II - OTHER INFORMATION

 
ITEM 5.  EXHIBITS

Exhibit
Number
Description
   
   
   
   
   
   
   
   
   
   
   
   
   
101
The following financial information from the Company’s Quarterly Report on Form 10-Q as of and for the three and nine months ended September 30, 2010 formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of Equity (unaudited), (iv) Consolidated Statements of Cash Flows (unaudited), and (v) Notes to Consolidated Financial Statements (unaudited), tagged as blocks of text.





SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, each of the registrants has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


   
Highwoods Properties, Inc.
 
   
By: 
 
/s/ Terry L. Stevens
     
Terry L. Stevens
     
Senior Vice President and Chief Financial Officer
       



   
Highwoods Realty Limited Partnership
 
   
By: Highwoods Properties, Inc., its sole general partner
 
   
By: 
 
/s/ Terry L. Stevens
     
Terry L. Stevens
     
Senior Vice President and Chief Financial Officer
       


Date: October 28, 2010