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HIGHWOODS PROPERTIES, INC. - Quarter Report: 2015 June (Form 10-Q)


 
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 June 30, 2015
 
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  x    No ¨    Highwoods Realty Limited Partnership  Yes  x    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  x    No ¨    Highwoods Realty Limited Partnership  Yes  x    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 x    Accelerated filer ¨      Non-accelerated filer ¨      Smaller reporting company ¨
Highwoods Realty Limited Partnership
Large accelerated filer ¨    Accelerated filer ¨      Non-accelerated filer x      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 x    Highwoods Realty Limited Partnership  Yes  ¨    No x
 
The Company had 94,118,906 shares of Common Stock outstanding as of July 27, 2015.
 




EXPLANATORY NOTE

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

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

Certain information contained herein is presented as of July 27, 2015, the latest practicable date for financial information prior to the filing of this Quarterly Report.

This report combines the Quarterly Reports on Form 10-Q for the period ended June 30, 2015 of the Company and the Operating Partnership. We believe combining the quarterly reports into this single report results in the following benefits:

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

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

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

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

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

Consolidated Financial Statements;

the following Notes to Consolidated Financial Statements:

Note 8 - Noncontrolling Interests; and

Note 13 - Earnings Per Share and Per Unit;

Item 4 - Controls and Procedures; and

Item 6 - Certifications of CEO and CFO Pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act.





HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP

QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 2015

TABLE OF CONTENTS

 
Page
 
 
PART I - FINANCIAL INFORMATION
 
 
 
 
 
PART II - OTHER INFORMATION
 
ITEM 6. EXHIBITS



2

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HIGHWOODS PROPERTIES, INC.
Consolidated Balance Sheets
(Unaudited and in thousands, except share and per share data)
 
June 30,
2015
 
December 31,
2014
 
 
 
(as revised)
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
407,180

 
$
384,301

Buildings and tenant improvements
3,991,536

 
3,807,315

Development in process
104,693

 
205,971

Land held for development
76,955

 
79,355

 
4,580,364

 
4,476,942

Less-accumulated depreciation
(1,066,945
)
 
(1,024,936
)
Net real estate assets
3,513,419

 
3,452,006

Real estate and other assets, net, held for sale
10,631

 
1,038

Cash and cash equivalents
4,939

 
8,832

Restricted cash
15,703

 
14,595

Accounts receivable, net of allowance of $1,487 and $1,314, respectively
27,027

 
48,557

Mortgages and notes receivable, net of allowance of $410 and $275, respectively
5,935

 
13,116

Accrued straight-line rents receivable, net of allowance of $1,022 and $600, respectively
151,028

 
142,037

Investments in and advances to unconsolidated affiliates
43,979

 
50,685

Deferred financing and leasing costs, net of accumulated amortization of $119,396 and $112,804, respectively
223,380

 
228,768

Prepaid expenses and other assets, net of accumulated amortization of $15,242 and $14,259,
respectively
43,601

 
39,489

Total Assets
$
4,039,642

 
$
3,999,123

Liabilities, Noncontrolling Interests in the Operating Partnership and Equity:
 
 
 
Mortgages and notes payable
$
2,124,028

 
$
2,071,389

Accounts payable, accrued expenses and other liabilities
214,131

 
237,633

Financing obligation
8,962

 
8,962

Total Liabilities
2,347,121

 
2,317,984

Commitments and contingencies

 

Noncontrolling interests in the Operating Partnership
116,260

 
130,048

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), 29,050 and 29,060 shares issued and outstanding, respectively
29,050

 
29,060

Common Stock, $.01 par value, 200,000,000 authorized shares;
 
 
 
94,118,006 and 92,907,310 shares issued and outstanding, respectively
941

 
929

Additional paid-in capital
2,525,227

 
2,464,275

Distributions in excess of net income available for common stockholders
(992,425
)
 
(957,370
)
Accumulated other comprehensive loss
(4,514
)
 
(3,912
)
Total Stockholders’ Equity
1,558,279

 
1,532,982

Noncontrolling interests in consolidated affiliates
17,982

 
18,109

Total Equity
1,576,261

 
1,551,091

Total Liabilities, Noncontrolling Interests in the Operating Partnership and Equity
$
4,039,642

 
$
3,999,123

 
See accompanying notes to consolidated financial statements.

3

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Income
(Unaudited and in thousands, except per share amounts)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Rental and other revenues
$
161,136

 
$
152,722

 
$
318,446

 
$
301,175

Operating expenses:
 
 
 
 
 
 
 
Rental property and other expenses
57,278

 
55,275

 
114,791

 
111,665

Depreciation and amortization
51,240

 
50,443

 
101,548

 
98,608

Impairments of real estate assets

 
588

 

 
588

General and administrative
8,892

 
8,733

 
20,329

 
19,447

Total operating expenses
117,410

 
115,039

 
236,668

 
230,308

Interest expense:
 
 
 
 
 
 
 
Contractual
20,857

 
20,640

 
41,299

 
41,390

Amortization of deferred financing costs
828

 
799

 
1,628

 
1,451

Financing obligation
317

 
(226
)
 
498

 
(266
)
 
22,002

 
21,213

 
43,425

 
42,575

Other income:
 
 
 
 
 
 
 
Interest and other income
1,199

 
1,410

 
2,437

 
2,809

Gains/(losses) on debt extinguishment
(220
)
 
18

 
(220
)
 
18

 
979

 
1,428


2,217


2,827

Income from continuing operations before disposition of investment properties and activity in unconsolidated affiliates
22,703

 
17,898

 
40,570

 
31,119

Gains on disposition of property
2,412

 
5,947

 
3,569

 
5,947

Equity in earnings of unconsolidated affiliates
1,776

 
667

 
3,587

 
638

Income from continuing operations
26,891

 
24,512

 
47,726

 
37,704

Discontinued operations:
 
 
 
 
 
 
 
Net gains on disposition of discontinued operations

 

 

 
384

 

 

 

 
384

Net income
26,891

 
24,512

 
47,726

 
38,088

Net (income) attributable to noncontrolling interests in the Operating Partnership
(782
)
 
(742
)
 
(1,378
)
 
(1,140
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(328
)
 
(438
)
 
(624
)
 
(861
)
Dividends on Preferred Stock
(626
)
 
(627
)
 
(1,253
)
 
(1,254
)
Net income available for common stockholders
$
25,155

 
$
22,705


$
44,471


$
34,833

Earnings per Common Share – basic:
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
0.27

 
$
0.25

 
$
0.47

 
$
0.38

Income from discontinued operations available for common stockholders

 

 

 
0.01

Net income available for common stockholders
$
0.27

 
$
0.25

 
$
0.47

 
$
0.39

Weighted average Common Shares outstanding – basic
94,055

 
90,254

 
93,641

 
90,111

Earnings per Common Share – diluted:
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
0.27

 
$
0.25

 
$
0.47

 
$
0.38

Income from discontinued operations available for common stockholders

 

 

 
0.01

Net income available for common stockholders
$
0.27

 
$
0.25

 
$
0.47

 
$
0.39

Weighted average Common Shares outstanding – diluted
97,049

 
93,312

 
96,666

 
93,172

Dividends declared per Common Share
$
0.425

 
$
0.425

 
$
0.850

 
$
0.850

Net income available for common stockholders:
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
25,155

 
$
22,705

 
$
44,471

 
$
34,461

Income from discontinued operations available for common stockholders

 

 

 
372

Net income available for common stockholders
$
25,155

 
$
22,705

 
$
44,471

 
$
34,833

See accompanying notes to consolidated financial statements.

4

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Comprehensive Income
(Unaudited and in thousands)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
26,891

 
$
24,512

 
$
47,726

 
$
38,088

Other comprehensive income/(loss):
 
 
 
 
 
 
 
Unrealized gains on tax increment financing bond
1

 
105

 
194

 
270

Unrealized gains/(losses) on cash flow hedges
269

 
(2,846
)
 
(2,645
)
 
(4,250
)
Amortization of cash flow hedges
925

 
944

 
1,849

 
1,872

Total other comprehensive income/(loss)
1,195

 
(1,797
)
 
(602
)
 
(2,108
)
Total comprehensive income
28,086

 
22,715

 
47,124

 
35,980

Less-comprehensive (income) attributable to noncontrolling interests
(1,110
)
 
(1,180
)
 
(2,002
)
 
(2,001
)
Comprehensive income attributable to common stockholders
$
26,976

 
$
21,535

 
$
45,122

 
$
33,979


See accompanying notes to consolidated financial statements.



5

Table of Contents

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

 
Number of Common Shares
 
Common Stock
 
Series A Cumulative Redeemable Preferred Shares
 
Additional Paid-In Capital
 
Accumulated Other Compre-hensive Loss
 
Non-controlling Interests in Consolidated Affiliates
 
Distributions in Excess of Net Income Available for Common Stockholders
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(as revised)
 
(as revised)
Balance at December 31, 2014
92,907,310

 
$
929

 
$
29,060

 
$
2,464,275

 
$
(3,912
)
 
$
18,109

 
$
(957,370
)
 
$
1,551,091

Issuances of Common Stock, net of issuance costs and tax withholdings
1,055,491

 
11

 

 
43,205

 

 

 

 
43,216

Conversions of Common Units to Common Stock
26,820

 

 

 
1,206

 

 

 

 
1,206

Dividends on Common Stock


 

 

 

 

 

 
(79,526
)
 
(79,526
)
Dividends on Preferred Stock


 

 

 

 

 

 
(1,253
)
 
(1,253
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value


 

 

 
11,475

 

 

 

 
11,475

Distributions to noncontrolling interests in consolidated affiliates


 

 

 

 

 
(751
)
 

 
(751
)
Issuances of restricted stock
128,951

 

 

 

 

 

 

 

Redemptions/repurchases of Preferred Stock
 
 

 
(10
)
 

 

 

 

 
(10
)
Share-based compensation expense, net of forfeitures
(566
)
 
1

 

 
5,066

 

 

 

 
5,067

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


 

 

 

 

 

 
(1,378
)
 
(1,378
)
Net (income) attributable to noncontrolling interests in consolidated affiliates


 

 

 

 

 
624

 
(624
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income


 

 

 

 

 

 
47,726

 
47,726

Other comprehensive loss


 

 

 

 
(602
)
 

 

 
(602
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
47,124

Balance at June 30, 2015
94,118,006

 
$
941

 
$
29,050

 
$
2,525,227

 
$
(4,514
)
 
$
17,982

 
$
(992,425
)
 
$
1,576,261



 
Number of Common Shares
 
Common Stock
 
Series A Cumulative Redeemable Preferred Shares
 
Additional Paid-In Capital
 
Accumulated Other Compre-hensive Loss
 
Non-controlling Interests in Consolidated Affiliates
 
Distributions in Excess of Net Income Available for Common Stockholders
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(as revised)
 
(as revised)
Balance at December 31, 2013
89,920,915

 
$
899

 
$
29,077

 
$
2,370,368

 
$
(2,611
)
 
$
21,396

 
$
(911,662
)
 
$
1,507,467

Issuances of Common Stock, net of issuance costs and tax withholdings
281,992

 
3

 

 
8,709

 

 

 

 
8,712

Conversions of Common Units to Common Stock
4,417

 

 

 
162

 

 

 

 
162

Dividends on Common Stock

 

 

 

 

 

 
(76,605
)
 
(76,605
)
Dividends on Preferred Stock

 

 

 

 

 

 
(1,254
)
 
(1,254
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value

 

 

 
(18,337
)
 

 

 

 
(18,337
)
Distributions to noncontrolling interests in consolidated affiliates

 

 

 

 

 
(940
)
 

 
(940
)
Issuances of restricted stock
154,383

 

 

 

 

 

 

 

Share-based compensation expense, net of forfeitures

 
2

 

 
5,379

 

 

 

 
5,381

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

 

 

 

 

 

 
(1,140
)
 
(1,140
)
Net (income) attributable to noncontrolling interests in consolidated affiliates

 

 

 

 

 
861

 
(861
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 

 
38,088

 
38,088

Other comprehensive loss

 

 

 

 
(2,108
)
 

 

 
(2,108
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
35,980

Balance at June 30, 2014
90,361,707

 
$
904

 
$
29,077

 
$
2,366,281

 
$
(4,719
)
 
$
21,317

 
$
(953,434
)
 
$
1,459,426


See accompanying notes to consolidated financial statements.

6

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
 
Six Months Ended
June 30,
 
2015
 
2014
Operating activities:
 
 
 
Net income
$
47,726

 
$
38,088

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
101,548

 
98,608

Amortization of lease incentives and acquisition-related intangible assets and liabilities
9

 
234

Share-based compensation expense
5,067

 
5,381

Allowance for losses on accounts and accrued straight-line rents receivable
1,174

 
1,278

Accrued interest on mortgages and notes receivable
(268
)
 
(232
)
Amortization of deferred financing costs
1,628

 
1,451

Amortization of cash flow hedges
1,849

 
1,872

Amortization of mortgages and notes payable fair value adjustments
84

 
(902
)
Impairments of real estate assets

 
588

(Gains)/losses on debt extinguishment
220

 
(18
)
Net gains on disposition of property
(3,569
)
 
(6,331
)
Equity in earnings of unconsolidated affiliates
(3,587
)
 
(638
)
Changes in financing obligation
162

 
(628
)
Distributions of earnings from unconsolidated affiliates
3,438

 
1,216

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
1,723

 
1,491

Prepaid expenses and other assets
(4,365
)
 
(4,962
)
Accrued straight-line rents receivable
(11,417
)
 
(10,365
)
Accounts payable, accrued expenses and other liabilities
(19,127
)
 
(11,597
)
Net cash provided by operating activities
122,295

 
114,534

Investing activities:
 
 
 
Investments in acquired real estate and related intangible assets, net of cash acquired
(4,277
)
 

Investments in development in process
(44,601
)
 
(69,928
)
Investments in tenant improvements and deferred leasing costs
(61,282
)
 
(54,794
)
Investments in building improvements
(23,513
)
 
(28,877
)
Net proceeds from disposition of real estate assets
6,070

 
8,975

Distributions of capital from unconsolidated affiliates
10,077

 
468

Investments in mortgages and notes receivable
(1,772
)
 
(234
)
Repayments of mortgages and notes receivable
9,221

 
16,817

Investments in and advances to unconsolidated affiliates

 
(6,225
)
Changes in restricted cash and other investing activities
(6,741
)
 
686

Net cash used in investing activities
(116,818
)
 
(133,112
)
Financing activities:
 
 
 
Dividends on Common Stock
(79,526
)
 
(76,605
)
Redemptions/repurchases of Preferred Stock
(10
)
 

Redemptions of Common Units

 
(93
)
Dividends on Preferred Stock
(1,253
)
 
(1,254
)
Distributions to noncontrolling interests in the Operating Partnership
(2,485
)
 
(2,497
)
Distributions to noncontrolling interests in consolidated affiliates
(751
)
 
(940
)
Proceeds from the issuance of Common Stock
47,678

 
11,404

Costs paid for the issuance of Common Stock
(735
)
 
(42
)
Repurchase of shares related to tax withholdings
(3,727
)
 
(2,650
)
Borrowings on revolving credit facility
183,900

 
302,100

Repayments of revolving credit facility
(233,900
)
 
(360,800
)
Borrowings on mortgages and notes payable
125,000

 
296,949

Repayments of mortgages and notes payable
(41,887
)
 
(134,648
)
Payments on financing obligation
(162
)
 
(1,364
)
Additions to deferred financing costs and other financing activities
(1,512
)
 
(2,467
)
Net cash provided by/(used in) financing activities
(9,370
)
 
27,093

Net increase/(decrease) in cash and cash equivalents
$
(3,893
)
 
$
8,515

See accompanying notes to consolidated financial statements.

7

Table of Contents


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

 
Six Months Ended
June 30,
 
2015
 
2014
Net increase/(decrease) in cash and cash equivalents
$
(3,893
)
 
$
8,515

Cash and cash equivalents at beginning of the period
8,832

 
10,184

Cash and cash equivalents at end of the period
$
4,939

 
$
18,699


Supplemental disclosure of cash flow information:
 
 
Six Months Ended
June 30,
 
2015
 
2014
Cash paid for interest, net of amounts capitalized
$
40,540

 
$
41,468


Supplemental disclosure of non-cash investing and financing activities:
 
 
Six Months Ended
June 30,
 
2015
 
2014
Unrealized losses on cash flow hedges
$
(2,645
)
 
$
(4,250
)
Conversions of Common Units to Common Stock
1,206

 
162

Changes in accrued capital expenditures
(3,250
)
 
10,726

Write-off of fully depreciated real estate assets
31,011

 
16,994

Write-off of fully amortized deferred financing and leasing costs
17,812

 
13,273

Adjustment of noncontrolling interests in the Operating Partnership to fair value
(11,475
)
 
18,337

Unrealized gains on tax increment financing bond
194

 
270

Assumption of mortgages and notes payable related to acquisition activities
19,277

 

Receivable related to redemption of investment in unconsolidated affiliate

 
4,660

Reduction in the carrying amount of real estate purchased from unconsolidated affiliate by our share of the unconsolidated affiliate's gain
3,124

 

Contingent consideration in connection with the acquisition of land
900

 


See accompanying notes to consolidated financial statements.

8

Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Balance Sheets
(Unaudited and in thousands, except unit and per unit data)
 
June 30,
2015
 
December 31,
2014
 
 
 
(as revised)
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
407,180

 
$
384,301

Buildings and tenant improvements
3,991,536

 
3,807,315

Development in process
104,693

 
205,971

Land held for development
76,955

 
79,355

 
4,580,364

 
4,476,942

Less-accumulated depreciation
(1,066,945
)
 
(1,024,936
)
Net real estate assets
3,513,419

 
3,452,006

Real estate and other assets, net, held for sale
10,631

 
1,038

Cash and cash equivalents
4,939

 
8,938

Restricted cash
15,703

 
14,595

Accounts receivable, net of allowance of $1,487 and $1,314, respectively
27,027

 
48,557

Mortgages and notes receivable, net of allowance of $410 and $275, respectively
5,935

 
13,116

Accrued straight-line rents receivable, net of allowance of $1,022 and $600, respectively
151,028

 
142,037

Investments in and advances to unconsolidated affiliates
43,979

 
50,685

Deferred financing and leasing costs, net of accumulated amortization of $119,396 and $112,804, respectively
223,380

 
228,768

Prepaid expenses and other assets, net of accumulated amortization of $15,242 and $14,259,
respectively
43,601

 
39,489

Total Assets
$
4,039,642

 
$
3,999,229

Liabilities, Redeemable Operating Partnership Units and Capital:
 
 
 
Mortgages and notes payable
$
2,124,028

 
$
2,071,389

Accounts payable, accrued expenses and other liabilities
214,131

 
237,547

Financing obligation
8,962

 
8,962

Total Liabilities
2,347,121

 
2,317,898

Commitments and contingencies

 

Redeemable Operating Partnership Units:
 
 
 
Common Units, 2,910,135 and 2,936,955 outstanding, respectively
116,260

 
130,048

Series A Preferred Units (liquidation preference $1,000 per unit), 29,050 and 29,060 units issued and
outstanding, respectively
29,050

 
29,060

Total Redeemable Operating Partnership Units
145,310

 
159,108

Capital:
 
 
 
Common Units:
 
 
 
General partner Common Units, 966,193 and 954,355 outstanding, respectively
15,335

 
15,078

Limited partner Common Units, 92,743,004 and 91,544,146 outstanding, respectively
1,518,408

 
1,492,948

Accumulated other comprehensive loss
(4,514
)
 
(3,912
)
Noncontrolling interests in consolidated affiliates
17,982

 
18,109

Total Capital
1,547,211

 
1,522,223

Total Liabilities, Redeemable Operating Partnership Units and Capital
$
4,039,642

 
$
3,999,229


See accompanying notes to consolidated financial statements.

9

Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Income
(Unaudited and in thousands, except per unit amounts)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Rental and other revenues
$
161,136

 
$
152,722

 
$
318,446

 
$
301,175

Operating expenses:
 
 
 
 
 
 
 
Rental property and other expenses
57,278

 
55,258

 
114,791

 
111,632

Depreciation and amortization
51,240

 
50,443

 
101,548

 
98,608

Impairments of real estate assets

 
588

 

 
588

General and administrative
8,892

 
8,750

 
20,329

 
19,480

Total operating expenses
117,410

 
115,039

 
236,668

 
230,308

Interest expense:
 
 
 
 
 
 
 
Contractual
20,857

 
20,640

 
41,299

 
41,390

Amortization of deferred financing costs
828

 
799

 
1,628

 
1,451

Financing obligation
317

 
(226
)
 
498

 
(266
)
 
22,002

 
21,213

 
43,425

 
42,575

Other income:
 
 
 
 
 
 
 
Interest and other income
1,199

 
1,410

 
2,437

 
2,809

Gains/(losses) on debt extinguishment
(220
)
 
18

 
(220
)
 
18

 
979

 
1,428

 
2,217

 
2,827

Income from continuing operations before disposition of investment properties and activity in unconsolidated affiliates
22,703

 
17,898

 
40,570

 
31,119

Gains on disposition of property
2,412

 
5,947

 
3,569

 
5,947

Equity in earnings of unconsolidated affiliates
1,776

 
667

 
3,587

 
638

Income from continuing operations
26,891

 
24,512

 
47,726

 
37,704

Discontinued operations:
 
 
 
 
 
 
 
Net gains on disposition of discontinued operations

 

 

 
384

 

 

 

 
384

Net income
26,891

 
24,512

 
47,726

 
38,088

Net (income) attributable to noncontrolling interests in consolidated affiliates
(328
)
 
(438
)
 
(624
)
 
(861
)
Distributions on Preferred Units
(626
)
 
(627
)
 
(1,253
)
 
(1,254
)
Net income available for common unitholders
$
25,937

 
$
23,447

 
$
45,849

 
$
35,973

Earnings per Common Unit – basic:
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
0.27

 
$
0.25

 
$
0.48

 
$
0.38

Income from discontinued operations available for common unitholders

 

 

 
0.01

Net income available for common unitholders
$
0.27

 
$
0.25

 
$
0.48

 
$
0.39

Weighted average Common Units outstanding – basic
96,556

 
92,782

 
96,153

 
92,640

Earnings per Common Unit – diluted:
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
0.27

 
$
0.25

 
$
0.48

 
$
0.38

Income from discontinued operations available for common unitholders

 

 

 
0.01

Net income available for common unitholders
$
0.27

 
$
0.25

 
$
0.48

 
$
0.39

Weighted average Common Units outstanding – diluted
96,640

 
92,903

 
96,257

 
92,763

Distributions declared per Common Unit
$
0.425

 
$
0.425

 
$
0.850

 
$
0.850

Net income available for common unitholders:
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
25,937

 
$
23,447

 
$
45,849

 
$
35,589

Income from discontinued operations available for common unitholders

 

 

 
384

Net income available for common unitholders
$
25,937

 
$
23,447

 
$
45,849

 
$
35,973

See accompanying notes to consolidated financial statements.

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Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Comprehensive Income
(Unaudited and in thousands)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
26,891

 
$
24,512

 
$
47,726

 
$
38,088

Other comprehensive income/(loss):
 
 
 
 
 
 
 
Unrealized gains on tax increment financing bond
1

 
105

 
194

 
270

Unrealized gains/(losses) on cash flow hedges
269

 
(2,846
)
 
(2,645
)
 
(4,250
)
Amortization of cash flow hedges
925

 
944

 
1,849

 
1,872

Total other comprehensive income/(loss)
1,195

 
(1,797
)
 
(602
)
 
(2,108
)
Total comprehensive income
28,086

 
22,715

 
47,124

 
35,980

Less-comprehensive (income) attributable to noncontrolling interests
(328
)
 
(438
)
 
(624
)
 
(861
)
Comprehensive income attributable to common unitholders
$
27,758


$
22,277

 
$
46,500

 
$
35,119


See accompanying notes to consolidated financial statements.


11

Table of Contents

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

 
Common Units
 
Accumulated
Other
Comprehensive Loss
 
Noncontrolling
Interests in
Consolidated
Affiliates
 
Total
 
General
Partners’
Capital
 
Limited
Partners’
Capital
 
 
(as revised)
 
(as revised)
 
 
 
 
 
(as revised)
Balance at December 31, 2014
$
15,078

 
$
1,492,948

 
$
(3,912
)
 
$
18,109

 
$
1,522,223

Issuances of Common Units, net of issuance costs and tax withholdings
432

 
42,784

 

 

 
43,216

Distributions paid on Common Units
(817
)
 
(80,846
)
 

 

 
(81,663
)
Distributions paid on Preferred Units
(13
)
 
(1,240
)
 

 

 
(1,253
)
Share-based compensation expense, net of forfeitures
51

 
5,016

 

 

 
5,067

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(751
)
 
(751
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
133

 
13,115

 

 

 
13,248

Net (income) attributable to noncontrolling interests in consolidated affiliates
(6
)
 
(618
)
 

 
624

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
477

 
47,249

 

 

 
47,726

Other comprehensive loss

 

 
(602
)
 

 
(602
)
Total comprehensive income
 
 
 
 
 
 
 
 
47,124

Balance at June 30, 2015
$
15,335

 
$
1,518,408

 
$
(4,514
)
 
$
17,982

 
$
1,547,211



 
Common Units
 
Accumulated
Other
Comprehensive Loss
 
Noncontrolling
Interests in
Consolidated
Affiliates
 
Total
 
General
Partners’
Capital
 
Limited
Partners’
Capital
 
 
(as revised)
 
(as revised)
 
 
 
 
 
(as revised)
Balance at December 31, 2013
$
14,596

 
$
1,445,181

 
$
(2,611
)
 
$
21,396

 
$
1,478,562

Issuances of Common Units, net of issuance costs and tax withholdings
87

 
8,625

 

 

 
8,712

Redemptions of Common Units
(1
)
 
(92
)
 

 

 
(93
)
Distributions paid on Common Units
(788
)
 
(77,966
)
 

 

 
(78,754
)
Distributions paid on Preferred Units
(13
)
 
(1,241
)
 

 

 
(1,254
)
Share-based compensation expense, net of forfeitures
54

 
5,327

 

 

 
5,381

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(940
)
 
(940
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
(171
)
 
(17,004
)
 

 

 
(17,175
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(9
)
 
(852
)
 

 
861

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
381

 
37,707

 

 

 
38,088

Other comprehensive loss

 

 
(2,108
)
 

 
(2,108
)
Total comprehensive income
 
 
 
 
 
 
 
 
35,980

Balance at June 30, 2014
$
14,136

 
$
1,399,685

 
$
(4,719
)
 
$
21,317

 
$
1,430,419


See accompanying notes to consolidated financial statements.

12

Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
 
Six Months Ended
June 30,
 
2015
 
2014
Operating activities:
 
 
 
Net income
$
47,726

 
$
38,088

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
101,548

 
98,608

Amortization of lease incentives and acquisition-related intangible assets and liabilities
9

 
234

Share-based compensation expense
5,067

 
5,381

Allowance for losses on accounts and accrued straight-line rents receivable
1,174

 
1,278

Accrued interest on mortgages and notes receivable
(268
)
 
(232
)
Amortization of deferred financing costs
1,628

 
1,451

Amortization of cash flow hedges
1,849

 
1,872

Amortization of mortgages and notes payable fair value adjustments
84

 
(902
)
Impairments of real estate assets

 
588

(Gains)/losses on debt extinguishment
220

 
(18
)
Net gains on disposition of property
(3,569
)
 
(6,331
)
Equity in earnings of unconsolidated affiliates
(3,587
)
 
(638
)
Changes in financing obligation
162

 
(628
)
Distributions of earnings from unconsolidated affiliates
3,438

 
1,216

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
1,723

 
1,491

Prepaid expenses and other assets
(4,365
)
 
(4,892
)
Accrued straight-line rents receivable
(11,417
)
 
(10,365
)
Accounts payable, accrued expenses and other liabilities
(19,041
)
 
(11,568
)
Net cash provided by operating activities
122,381

 
114,633

Investing activities:
 
 
 
Investments in acquired real estate and related intangible assets, net of cash acquired
(4,277
)
 

Investments in development in process
(44,601
)
 
(69,928
)
Investments in tenant improvements and deferred leasing costs
(61,282
)
 
(54,794
)
Investments in building improvements
(23,513
)
 
(28,877
)
Net proceeds from disposition of real estate assets
6,070

 
8,975

Distributions of capital from unconsolidated affiliates
10,077

 
468

Investments in mortgages and notes receivable
(1,772
)
 
(234
)
Repayments of mortgages and notes receivable
9,221

 
16,817

Investments in and advances to unconsolidated affiliates

 
(6,225
)
Changes in restricted cash and other investing activities
(6,741
)
 
686

Net cash used in investing activities
(116,818
)
 
(133,112
)
Financing activities:
 
 
 
Distributions on Common Units
(81,663
)
 
(78,754
)
Redemptions/repurchases of Preferred Units
(10
)
 

Redemptions of Common Units

 
(93
)
Distributions on Preferred Units
(1,253
)
 
(1,254
)
Distributions to noncontrolling interests in consolidated affiliates
(751
)
 
(940
)
Proceeds from the issuance of Common Units
47,678

 
11,404

Costs paid for the issuance of Common Units
(735
)
 
(42
)
Repurchase of units related to tax withholdings
(3,727
)
 
(2,650
)
Borrowings on revolving credit facility
183,900

 
302,100

Repayments of revolving credit facility
(233,900
)
 
(360,800
)
Borrowings on mortgages and notes payable
125,000

 
296,949

Repayments of mortgages and notes payable
(41,887
)
 
(134,648
)
Payments on financing obligation
(162
)
 
(1,364
)
Additions to deferred financing costs and other financing activities
(2,052
)
 
(2,917
)
Net cash provided by/(used in) financing activities
(9,562
)
 
26,991

Net increase/(decrease) in cash and cash equivalents
$
(3,999
)
 
$
8,512

See accompanying notes to consolidated financial statements.

13

Table of Contents


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

 
Six Months Ended
June 30,
 
2015
 
2014
Net increase/(decrease) in cash and cash equivalents
$
(3,999
)
 
$
8,512

Cash and cash equivalents at beginning of the period
8,938

 
10,281

Cash and cash equivalents at end of the period
$
4,939

 
$
18,793


Supplemental disclosure of cash flow information:
 
 
Six Months Ended
June 30,
 
2015
 
2014
Cash paid for interest, net of amounts capitalized
$
40,540

 
$
41,468


Supplemental disclosure of non-cash investing and financing activities:
 
 
Six Months Ended
June 30,
 
2015
 
2014
Unrealized losses on cash flow hedges
$
(2,645
)
 
$
(4,250
)
Changes in accrued capital expenditures
(3,250
)
 
10,726

Write-off of fully depreciated real estate assets
31,011

 
16,994

Write-off of fully amortized deferred financing and leasing costs
17,812

 
13,273

Adjustment of Redeemable Common Units to fair value
(13,788
)
 
16,725

Unrealized gains on tax increment financing bond
194

 
270

Assumption of mortgages and notes payable related to acquisition activities
19,277

 

Receivable related to redemption of investment in unconsolidated affiliate

 
4,660

Reduction in the carrying amount of real estate purchased from unconsolidated affiliate by our share of the unconsolidated affiliate's gain
3,124

 

Contingent consideration in connection with the acquisition of land
900

 


See accompanying notes to consolidated financial statements.

14

Table of Contents

HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(tabular dollar amounts in thousands, except per share and per unit data)
(Unaudited)

1.    Description of Business and Significant Accounting Policies

Description of Business

Highwoods Properties, Inc. (the “Company”) is a fully integrated real estate investment trust (“REIT”) that provides leasing, management, development, construction and other customer-related services for its properties and for third parties. The Company conducts its activities through Highwoods Realty Limited Partnership (the “Operating Partnership”). At June 30, 2015, we owned or had an interest in 31.4 million rentable square feet of in-service properties, 0.9 million rentable square feet of properties under development and approximately 500 acres of development land.
 
The Company is the sole general partner of the Operating Partnership. At June 30, 2015, the Company owned all of the Preferred Units and 93.7 million, or 97.0%, of the Common Units in the Operating Partnership. Limited partners own the remaining 2.9 million Common Units. During the six months ended June 30, 2015, the Company redeemed 26,820 Common Units for a like number of shares of Common Stock.

Common Stock Offerings
 
During the three and six months ended June 30, 2015, the Company issued 58,533 and 972,659 shares, respectively, of Common Stock under its equity sales agreements at an average gross sales price of $41.72 and $45.12 per share, respectively, and received net proceeds, after sales commissions, of $2.4 million and $43.2 million, respectively. As a result of this activity and the redemptions discussed above, the percentage of Common Units owned by the Company increased from 96.9% at December 31, 2014 to 97.0% at June 30, 2015.

Basis of Presentation
 
Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Company's Consolidated Financial Statements include the Operating Partnership, wholly owned subsidiaries and those entities in which the Company has the controlling interest. The Operating Partnership's Consolidated Financial Statements include wholly owned subsidiaries and those entities in which the Operating Partnership has the controlling interest. All intercompany transactions and accounts have been eliminated. At December 31, 2014, we had involvement with, but were not the primary beneficiary in, an entity that we concluded to be a variable interest entity (see Note 3).
 
During the second quarter of 2015, as a result of our partner’s irrevocable exercise of a buy-sell provision in one of our joint venture agreements, our partner’s right to put its 80.0% equity interest back to us became no longer exercisable. As a result, we recorded the original contribution transaction as a partial sale and recognized $2.2 million of gain. Our investment in this joint venture now qualifies for the equity method of accounting, which resulted in the retrospective revision of the Consolidated Balance Sheets and Consolidated Statements of Equity and Capital for all prior periods presented. The effects of the retrospective application of the equity method of accounting to the Consolidated Statements of Income, Comprehensive Income and Cash Flows were not material. The effects of the retrospective application of the equity method of accounting to the Company's December 31, 2014 Balance Sheet were as follows:
 
 
December 31,
2014
 
Previously Reported
 
As Revised
Net real estate assets
$
3,481,406

 
$
3,452,006

Investments in and advances to unconsolidated affiliates
$
27,071

 
$
50,685

Total Assets
$
4,004,909

 
$
3,999,123

Financing obligations
$
23,519

 
$
8,962

Distributions in excess of net income available for common stockholders
$
(966,141
)
 
$
(957,370
)
Total Liabilities, Noncontrolling Interests in the Operating Partnership and Equity
$
4,004,909

 
$
3,999,123


15

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


1.    Description of Business and Significant Accounting Policies – Continued
 
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 condensed or omitted certain notes and other information from the interim Consolidated Financial Statements presented in this Quarterly Report as permitted by SEC rules and regulations. These Consolidated Financial Statements should be read in conjunction with our 2014 Annual Report on Form 10-K.

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

Recently Issued Accounting Standards

The Financial Accounting Standards Board ("FASB") recently issued an accounting standards update that requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that we identify the contract with the customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when we satisfy the performance obligations. We will also be required to disclose information regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The accounting standards update is required to be adopted in 2017. Retrospective application is required either to all periods presented or with the cumulative effect of initial adoption recognized in the period of adoption. We are in the process of evaluating this accounting standards update.

The FASB recently issued an accounting standards update that amends consolidation requirements. The amendments significantly change the consolidation analysis required under GAAP and will require companies to reevaluate all previous consolidation conclusions. The accounting standards update is required to be adopted in 2016. We are in the process of evaluating this accounting standards update.

The FASB recently issued an accounting standards update that requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The accounting standards update is required to be adopted in 2016. Retrospective application is required. We are in the process of evaluating this accounting standards update.

16

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



2.    Real Estate Assets

Acquisitions

During the second quarter of 2015, we acquired:

land in Atlanta, GA for a purchase price and related transaction costs of $5.2 million (including contingent consideration of $0.9 million); and

our Highwoods DLF 98/29, LLC joint venture partner’s 77.2% interest in a building in Orlando, FL encompassing 168,000 rentable square feet in exchange for the assumption of secured debt recorded at fair value of $19.3 million (see Note 6). We expensed $0.1 million of acquisition costs (included in general and administrative expenses) related to this acquisition.

The assets acquired and liabilities assumed were recorded at fair value as determined by management based on information available at the acquisition date and on current assumptions as to future operations.

Dispositions
 
During the second quarter of 2015, we sold land for a sale price of $0.5 million and recorded a gain on disposition of property of $0.2 million.

During the first quarter of 2015, we sold:

two buildings for an aggregate sale price of $3.5 million and recorded aggregate gains on disposition of property of $0.4 million; and

land for a sale price of $2.5 million and recorded a gain on disposition of property of $0.8 million.

3.    Mortgages and Notes Receivable

Mortgages and notes receivable were $5.9 million and $13.1 million at June 30, 2015 and December 31, 2014, respectively, and consisted primarily of secured financing provided to a third party. During the second quarter of 2015, $9.9 million of secured acquisition financing provided to a third party in 2012 was repaid, including accrued interest. Previously, we concluded this arrangement to be an interest in a variable interest entity. However, since we did not have the power to direct matters that most significantly impact the activities of the entity, we did not qualify as the primary beneficiary. Accordingly, the entity was not consolidated. Our risk of loss with respect to this arrangement was limited to the carrying value of the mortgage receivable.

We evaluate the ability to collect our mortgages and notes receivable by monitoring the leasing statistics and/or market fundamentals of these assets. As of June 30, 2015, our mortgages and notes receivable were not in default and there were no other indicators of impairment.

17

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



4.    Investments in and Advances to Unconsolidated Affiliates

We have equity interests of up to 50.0% in various joint ventures with unrelated third parties that are accounted for using the equity method of accounting because we have the ability to exercise significant influence over their operating and financial policies.
 
The following table sets forth the summarized income statements of our unconsolidated affiliates:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Income Statements:
 
 
 
 
 
 
 
Rental and other revenues
$
12,423

 
$
12,845

 
$
24,654

 
$
25,278

Expenses:
 
 
 
 
 
 
 
Rental property and other expenses
6,031

 
6,236

 
11,698

 
12,439

Depreciation and amortization
3,110

 
3,328

 
6,225

 
6,817

Interest expense
2,032

 
2,301

 
4,181

 
4,512

Total expenses
11,173

 
11,865

 
22,104

 
23,768

Income before disposition of property
1,250

 
980

 
2,550

 
1,510

Gains on disposition of property
16,054

 

 
18,181

 
1,949

Net income
$
17,304

 
$
980

 
$
20,731

 
$
3,459

 
We have a 20.0% interest in SF-HIW Harborview Plaza, LP (“Harborview”). We are the manager and leasing agent for Harborview’s property in Tampa, FL and receive customary management and leasing fees. During 2012, we also provided a three-year $20.8 million interest-only secured loan to Harborview that is scheduled to mature in September 2015. The loan bears interest at LIBOR plus 500 basis points, subject to a LIBOR floor of 0.5%. Previously, we accounted for the original contribution transaction as a financing obligation since our partner had the right to put its 80.0% equity interest back to us any time during the one-year period prior to September 11, 2015. During the second quarter of 2015, as a result of our partner’s irrevocable exercise of a buy-sell provision in our joint venture agreement, our partner’s right to put its 80.0% equity interest back to us became no longer exercisable, which resulted in recording the original contribution transaction as a partial sale. Harborview is now accounted for using the equity method of accounting. See Note 1.

See Note 2 for a description of our acquisition of a building in Orlando, FL from Highwoods DLF 98/29, LLC during the second quarter of 2015. The joint venture recorded a gain on disposition of property of $13.7 million. Our share of $3.1 million was recorded as a reduction to real estate assets.

During the second quarter of 2015, Highwoods KC Glenridge Office, LLC and Highwoods KC Glenridge Land, LLC collectively sold two buildings and land to an unrelated third party for an aggregate sale price of $24.5 million (before closing credits to buyer of $0.3 million for unfunded tenant improvements) and recorded gains on disposition of property of $2.4 million. We recorded $0.9 million as our share of these gains through equity in earnings of unconsolidated affiliates.

During the first quarter of 2015, Highwoods DLF 97/26 DLF 99/32, LP sold a building to an unrelated third party for a sale price of $7.0 million and recorded a gain on disposition of property of $2.1 million. We recorded $1.1 million as our share of this gain through equity in earnings of unconsolidated affiliates.

18

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



5.    Intangible Assets and Below Market Lease Liabilities
 
The following table sets forth total intangible assets and acquisition-related below market lease liabilities, net of accumulated amortization:
 
 
June 30,
2015
 
December 31,
2014
Assets:
 
 
 
Deferred financing costs
$
19,508

 
$
19,478

Less accumulated amortization
(8,093
)
 
(7,953
)
 
11,415

 
11,525

Deferred leasing costs (including lease incentives and above market lease and in-place lease acquisition-related intangible assets)
323,268

 
322,094

Less accumulated amortization
(111,303
)
 
(104,851
)
 
211,965

 
217,243

Deferred financing and leasing costs, net
$
223,380

 
$
228,768

 
 
 
 
Liabilities (in accounts payable, accrued expenses and other liabilities):
 
 
 
Acquisition-related below market lease liabilities
$
55,166

 
$
55,783

Less accumulated amortization
(16,300
)
 
(13,548
)
 
$
38,866

 
$
42,235


The following table sets forth amortization of intangible assets and below market lease liabilities:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Amortization of deferred financing costs
$
828

 
$
799

 
$
1,628

 
$
1,451

Amortization of deferred leasing costs and acquisition-related intangible assets (in depreciation and amortization)
$
10,169

 
$
10,050

 
$
20,462

 
$
19,978

Amortization of lease incentives (in rental and other revenues)
$
422

 
$
399

 
$
784

 
$
750

Amortization of acquisition-related intangible assets (in rental and other revenues)
$
1,189

 
$
1,114

 
$
2,355

 
$
2,230

Amortization of acquisition-related intangible assets (in rental property and other expenses)
$
139

 
$
139

 
$
276

 
$
276

Amortization of acquisition-related below market lease liabilities (in rental and other revenues)
$
(1,674
)
 
$
(1,500
)
 
$
(3,406
)
 
$
(3,022
)


19

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


5.    Intangible Assets and Below Market Lease Liabilities - Continued
 
The following table sets forth scheduled future amortization of intangible assets and below market lease liabilities:
 
 
 
Amortization of Deferred Financing Costs
 
Amortization of Deferred Leasing Costs and Acquisition-Related Intangible Assets (in Depreciation and Amortization)
 
Amortization of Lease Incentives (in Rental and Other Revenues)
 
Amortization of Acquisition-Related Intangible Assets (in Rental and Other Revenues)
 
Amortization of Acquisition-Related Intangible Assets (in Rental Property and Other Expenses)
 
Amortization of Acquisition-Related Below Market Lease Liabilities (in Rental and Other Revenues)
July 1 through December 31, 2015
 
$
1,643

 
$
20,519

 
$
706

 
$
2,213

 
$
273

 
$
(3,098
)
2016
 
3,035

 
35,511

 
1,238

 
3,294

 
553

 
(5,555
)
2017
 
2,720

 
30,630

 
1,121

 
2,294

 
553

 
(5,284
)
2018
 
1,538

 
26,145

 
1,015

 
1,474

 
553

 
(5,123
)
2019
 
1,130

 
21,716

 
822

 
1,054

 
553

 
(4,810
)
Thereafter
 
1,349

 
53,743

 
2,582

 
2,870

 
533

 
(14,996
)
 
 
$
11,415

 
$
188,264

 
$
7,484

 
$
13,199

 
$
3,018

 
$
(38,866
)
Weighted average remaining amortization periods as of June 30, 2015 (in years)
 
4.3

 
7.0

 
7.9

 
6.1

 
5.5

 
7.8


The following table sets forth the intangible assets acquired and below market lease liabilities assumed as a result of 2015 acquisition activity:

 
 
Acquisition-Related Intangible Assets (amortized in Rental and Other Revenues)
 
Acquisition-Related Intangible Assets (amortized in Depreciation and Amortization)
 
Acquisition-Related Below Market Lease Liabilities (amortized in Rental and Other Revenues)
Amount recorded from acquisition activity
 
$
498

 
$
1,671

 
$
(37
)
Weighted average remaining amortization periods as of June 30, 2015 (in years)
 
2.1

 
2.3

 
4.8


6.    Mortgages and Notes Payable
 
The following table sets forth our mortgages and notes payable:
 
 
June 30,
2015
 
December 31,
2014
Secured indebtedness
$
290,101

 
$
312,868

Unsecured indebtedness
1,833,927

 
1,758,521

Total mortgages and notes payable
$
2,124,028

 
$
2,071,389

 
At June 30, 2015, our secured mortgage loans were collateralized by real estate assets with an aggregate undepreciated book value of $545.5 million.
 

20

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


6.    Mortgages and Notes Payable - Continued

Our $475.0 million unsecured revolving credit facility is scheduled to mature in January 2018 and includes an accordion feature that allows for an additional $75.0 million of borrowing capacity subject to additional lender commitments. Assuming no defaults have occurred, we have an option to extend the maturity for two additional six-month periods. The interest rate at our current credit ratings is LIBOR plus 110 basis points and the annual facility fee is 20 basis points. There was $159.0 million and $158.0 million outstanding under our revolving credit facility at June 30, 2015 and July 27, 2015, respectively. At both June 30, 2015 and July 27, 2015, we had $0.4 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 June 30, 2015 and July 27, 2015 was $315.6 million and $316.6 million, respectively.

During the second quarter of 2015, we amended our $225.0 million, seven-year unsecured bank term loan, which was scheduled to mature in January 2019. We increased the borrowed amount to $350.0 million. The amended term loan is now scheduled to mature in June 2020 and the interest rate, based on our current credit ratings, was reduced from LIBOR plus 175 basis points to LIBOR plus 110 basis points. The interest rate is based on the higher of the publicly announced ratings from Moody’s Investors Service or Standard & Poor’s Ratings Services. The financial and other covenants under the amended term loan are unchanged. We incurred $1.3 million of deferred financing fees in connection with this amendment, which will be amortized along with existing unamortized deferred loan fees over the remaining term of the new loan.

During the second quarter of 2015, we prepaid without penalty the remaining $39.4 million balance on a secured mortgage loan with an effective interest rate of 6.43% that was originally scheduled to mature in November 2015. We recorded $0.2 million of loss on debt extinguishment related to this prepayment.

During the second quarter of 2015, we acquired our joint venture partner’s 77.2% interest in a building in Orlando, FL. Simultaneously with this acquisition, the joint venture's previously existing mortgage note was restructured into a new $18.0 million first mortgage note and a $10.2 million subordinated note, both of which are scheduled to mature in July 2017. The first mortgage note is interest only with an effective interest rate of 5.36%, payable monthly. The subordinated note has an effective interest rate of 8.6%. Additionally, we deposited $3.0 million into escrow to fund tenant improvements, leasing commissions and building improvements. The first mortgage note and subordinated note can be prepaid at any time commencing October 2016 upon a sale or refinancing of the property. In such event, the subordinated note and any and all accrued interest thereon would be deemed fully satisfied upon payment of a "waterfall payment," if any. Such "waterfall payment" would be a cash payment equal to 50.0% of the amount, if any, by which the net sale proceeds or appraised value in the event of a refinancing exceeds (1) the outstanding principal of the first mortgage note, (2) the funds deposited by us into escrow to fund tenant improvements, leasing commissions and building improvements and (3) a 10.0% return on such funds deposited by us into escrow. As of June 30, 2015, the fair value of the first mortgage note was $18.3 million and the fair value of the subordinated note equaled the projected waterfall payment of $1.0 million.

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

7.
Derivative Financial Instruments
 
Our interest rate swaps have been designated as and are being accounted for as cash flow hedges with changes in fair value recorded in other comprehensive income/(loss) each reporting period. No gain or loss was recognized related to hedge ineffectiveness or to amounts excluded from effectiveness testing on our cash flow hedges during the six months ended June 30, 2015 and 2014. We have no collateral requirements related to our interest rate swaps.
 
Amounts reported in accumulated other comprehensive loss ("AOCL") related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the period from July 1, 2015 through June 30, 2016, we estimate that $2.9 million will be reclassified to interest expense.
 

21

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


7.
Derivative Financial Instruments - Continued

The following table sets forth the fair value of our derivatives:
 
 
June 30,
2015
 
December 31,
2014
Derivatives:
 
 
 
Derivatives designated as cash flow hedges in accounts payable, accrued expenses and other liabilities:
 
 
 
Interest rate swaps
$
3,366

 
$
2,412


The following table sets forth the effect of our cash flow hedges on AOCL and interest expense:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Derivatives Designated as Cash Flow Hedges:
 
 
 
 
 
 
 
Amount of unrealized gains/(losses) recognized in AOCL on derivatives (effective portion):
 
 
 
 
 
 
 
Interest rate swaps
$
269

 
$
(2,846
)
 
$
(2,645
)
 
$
(4,250
)
Amount of losses reclassified out of AOCL into contractual interest expense (effective portion):
 
 
 
 
 
 
 
Interest rate swaps
$
925

 
$
944

 
$
1,849

 
$
1,872


8.
Noncontrolling Interests

Noncontrolling Interests in Consolidated Affiliates
 
At June 30, 2015, our noncontrolling interests in consolidated affiliates relate to our joint venture partner's 50.0% interest in office properties in Richmond, VA. Our joint venture partner is an unrelated third party.

Noncontrolling Interests in the Operating Partnership

The following table sets forth the Company's noncontrolling interests in the Operating Partnership:
 
 
Six Months Ended
June 30,
 
2015
 
2014
Beginning noncontrolling interests in the Operating Partnership
$
130,048

 
$
106,480

Adjustment of noncontrolling interests in the Operating Partnership to fair value
(11,475
)
 
18,337

Conversions of Common Units to Common Stock
(1,206
)
 
(162
)
Redemptions of Common Units

 
(93
)
Net income attributable to noncontrolling interests in the Operating Partnership
1,378

 
1,140

Distributions to noncontrolling interests in the Operating Partnership
(2,485
)
 
(2,497
)
Total noncontrolling interests in the Operating Partnership
$
116,260

 
$
123,205



22

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


8.
Noncontrolling Interests - Continued

The following table sets forth net income available for common stockholders and transfers from the Company's noncontrolling interests in the Operating Partnership:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Net income available for common stockholders
$
25,155

 
$
22,705

 
$
44,471

 
$
34,833

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

 

 
1,206

 
162

Change from net income available for common stockholders and transfers from noncontrolling interests
$
25,155

 
$
22,705

 
$
45,677

 
$
34,995


9.
Disclosure About Fair Value of Financial Instruments

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

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

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

Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.

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

The fair value of mortgages and notes receivable and mortgages and notes payable is estimated by the income approach utilizing contractual cash flows and market-based interest rates to approximate the price that would be paid in an orderly transaction between market participants. The fair value of interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments of interest rate swaps are based on the expectation of future LIBOR interest rates (forward curves) derived from observed market LIBOR interest rate curves. In addition, credit valuation adjustments are incorporated in the fair values to account for potential nonperformance risk, but were concluded to not be significant inputs to the calculation for the periods presented.
 
Level 3. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
Our Level 3 assets include (1) certain of our mortgages and notes receivable, which were estimated by the income approach utilizing internal cash flow projections and market interest rates to estimate the price that would be paid in an orderly transaction between market participants, and (2) our tax increment financing bond, which is not routinely traded but whose fair value is determined by the income approach utilizing contractual cash flows and market-based interest rates to estimate the projected redemption value based on quoted bid/ask prices for similar unrated municipal bonds.
 
Our Level 3 liability is the fair value of our financing obligation, which was estimated by the income approach to approximate the price that would be paid in an orderly transaction between market participants, utilizing: (1) contractual cash flows; (2) market-based interest rates; and (3) a number of other assumptions including demand for space, competition for customers, changes in market rental rates, costs of operation and expected ownership periods.


23

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


9.
Disclosure About Fair Value of Financial Instruments - Continued

The following table sets forth our assets and liabilities and the Company's noncontrolling interests in the Operating Partnership that are measured at fair value within the fair value hierarchy.
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
 
Total
 
Quoted Prices
in Active
Markets for Identical Assets or Liabilities
 
Significant Observable Inputs
 
Significant Unobservable Inputs
Fair Value at June 30, 2015:
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Mortgages and notes receivable, at fair value (1)
 
$
5,943

 
$

 
$
2,167

 
$
3,776

Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)
 
3,512

 
3,512

 

 

Tax increment financing bond (in prepaid expenses and other assets)
 
12,641

 

 

 
12,641

Total Assets
 
$
22,096

 
$
3,512

 
$
2,167

 
$
16,417

Noncontrolling Interests in the Operating Partnership
 
$
116,260

 
$
116,260

 
$

 
$

Liabilities:
 
 
 
 
 
 
 
 
Mortgages and notes payable, at fair value (1)
 
$
2,178,032

 
$

 
$
2,178,032

 
$

Interest rate swaps (in accounts payable, accrued expenses and other liabilities)
 
3,366

 

 
3,366

 

Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)
 
3,512

 
3,512

 

 

Financing obligation, at fair value (1)
 
8,700

 

 

 
8,700

Total Liabilities
 
$
2,193,610

 
$
3,512

 
$
2,181,398

 
$
8,700

Fair Value at December 31, 2014:
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Mortgages and notes receivable, at fair value (1)
 
$
13,142

 
$

 
$
2,247

 
$
10,895

Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)
 
3,635

 
3,635

 

 

Tax increment financing bond (in prepaid expenses and other assets)
 
12,447

 

 

 
12,447

Total Assets
 
$
29,224

 
$
3,635

 
$
2,247

 
$
23,342

Noncontrolling Interests in the Operating Partnership
 
$
130,048

 
$
130,048

 
$

 
$

Liabilities:
 
 
 
 
 
 
 
 
Mortgages and notes payable, at fair value (1)
 
$
2,141,334

 
$

 
$
2,141,334

 
$

Interest rate swaps (in accounts payable, accrued expenses and other liabilities)
 
2,412

 

 
2,412

 

Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)
 
3,635

 
3,635

 

 

Financing obligation, at fair value (as revised) (1)
 
8,623

 

 

 
8,623

Total Liabilities (as revised)
 
$
2,156,004

 
$
3,635

 
$
2,143,746

 
$
8,623

__________
(1)    Amounts recorded at historical cost on our Consolidated Balance Sheets at June 30, 2015 and December 31, 2014.

24

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

 
9.
Disclosure About Fair Value of Financial Instruments - Continued

The following table sets forth the changes in our Level 3 asset, which is recorded at fair value on our Consolidated Balance Sheets:

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Asset:
 
 
 
 
 
 
 
Tax Increment Financing Bond:
 
 
 
 
 
 
 
Beginning balance
$
12,640

 
$
13,568

 
$
12,447

 
$
13,403

Unrealized gains (in AOCL)
1

 
105

 
194

 
270

Ending balance
$
12,641

 
$
13,673

 
$
12,641

 
$
13,673


During 2007, we acquired a tax increment financing bond associated with a parking garage developed by us. This bond amortizes to maturity in 2020. The estimated fair value at June 30, 2015 was $0.2 million below the outstanding principal due on the bond. If the discount rate used to fair value this bond was 100 basis points higher or lower, the fair value of the bond would have been $0.3 million lower or $0.4 million higher, respectively, as of June 30, 2015. 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. We have recorded no credit losses related to the bond during the three and six months ended June 30, 2015 and 2014. 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 quantitative information about the unobservable input of our Level 3 asset, which is recorded at fair value on our Consolidated Balance Sheets:
 
 
Valuation
Technique
 
Unobservable
Input
 
Rate as of
 
 
 
June 30,
2015
 
December 31,
2014
Asset:
 
 
 
 
 
 
 
Tax increment financing bond
Income approach
 
Discount rate
 
8.1%
 
8.4%

10.
Share-Based Payments
 
During the six months ended June 30, 2015, the Company granted 197,408 stock options with an exercise price equal to the closing market price of a share of Common Stock on the date of grant. The fair value of each option 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 $6.19. During the six months ended June 30, 2015, the Company also granted 71,994 shares of time-based restricted stock and 56,957 shares of total return-based restricted stock with weighted average grant date fair values per share of $45.91 and $43.77, respectively. We recorded share-based compensation expense of $1.2 million and $1.1 million during the three months ended June 30, 2015 and 2014, respectively, and $5.1 million and $5.4 million during the six months ended June 30, 2015 and 2014, respectively. At June 30, 2015, there was $6.7 million of total unrecognized share-based compensation costs, which will be recognized over a weighted average remaining contractual term of 2.6 years.

25

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



11.
Accumulated Other Comprehensive Loss
 
The following table sets forth the components of AOCL:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Tax increment financing bond:
 
 
 
 
 
 
 
Beginning balance
$
(252
)
 
$
(864
)
 
$
(445
)
 
$
(1,029
)
Unrealized gains on tax increment financing bond
1

 
105

 
194

 
270

Ending balance
(251
)
 
(759
)
 
(251
)
 
(759
)
Cash flow hedges:
 
 
 
 
 
 
 
Beginning balance
(5,457
)
 
(2,058
)
 
(3,467
)
 
(1,582
)
Unrealized gains/(losses) on cash flow hedges
269

 
(2,846
)
 
(2,645
)
 
(4,250
)
Amortization of cash flow hedges (1)
925

 
944

 
1,849

 
1,872

Ending balance
(4,263
)
 
(3,960
)
 
(4,263
)
 
(3,960
)
Total accumulated other comprehensive loss
$
(4,514
)

$
(4,719
)
 
$
(4,514
)
 
$
(4,719
)
__________
(1)    Amounts reclassified out of AOCL into contractual interest expense.

12.
Real Estate and Other Assets Held For Sale

The following table sets forth the major classes of assets of our real estate and other assets, net, held for sale:

 
June 30,
2015
 
December 31,
2014
Assets:
 
 
 
Land
$
1,450

 
$

Buildings and tenant improvements
11,576

 

Land held for development
2,184

 
995

Less-accumulated depreciation
(5,062
)
 

Net real estate assets
10,148

 
995

Accrued straight-line rents receivable, net
335

 

Deferred leasing costs, net
128

 

Prepaid expenses and other assets
20

 
43

Real estate and other assets, net, held for sale
$
10,631

 
$
1,038




26

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



13.
Earnings Per Share and Per Unit

The following table sets forth the computation of basic and diluted earnings per share of the Company:

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Earnings per Common Share - basic:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
26,891

 
$
24,512

 
$
47,726

 
$
37,704

Net (income) attributable to noncontrolling interests in the Operating Partnership from continuing operations
(782
)
 
(742
)
 
(1,378
)
 
(1,128
)
Net (income) attributable to noncontrolling interests in consolidated affiliates from continuing operations
(328
)
 
(438
)
 
(624
)
 
(861
)
Dividends on Preferred Stock
(626
)
 
(627
)
 
(1,253
)
 
(1,254
)
Income from continuing operations available for common stockholders
25,155

 
22,705

 
44,471

 
34,461

Income from discontinued operations

 

 

 
384

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

 

 

 
(12
)
Income from discontinued operations available for common stockholders

 

 

 
372

Net income available for common stockholders
$
25,155

 
$
22,705

 
$
44,471

 
$
34,833

Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per Common Share – weighted average shares
94,055

 
90,254

 
93,641

 
90,111

Earnings per Common Share - basic:
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
0.27

 
$
0.25

 
$
0.47

 
$
0.38

Income from discontinued operations available for common stockholders

 

 

 
0.01

Net income available for common stockholders
$
0.27

 
$
0.25

 
$
0.47

 
$
0.39

Earnings per Common Share - diluted:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
26,891

 
$
24,512

 
$
47,726

 
$
37,704

Net (income) attributable to noncontrolling interests in consolidated affiliates from continuing operations
(328
)
 
(438
)
 
(624
)
 
(861
)
Dividends on Preferred Stock
(626
)
 
(627
)
 
(1,253
)
 
(1,254
)
Income from continuing operations available for common stockholders before net (income) attributable to noncontrolling interests in the Operating Partnership
25,937

 
23,447

 
45,849

 
35,589

Income from discontinued operations available for common stockholders

 

 

 
384

Net income available for common stockholders before net (income) attributable to noncontrolling interests in the Operating Partnership
$
25,937

 
$
23,447

 
$
45,849

 
$
35,973

Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per Common Share – weighted average shares
94,055

 
90,254

 
93,641

 
90,111

Add:
 
 
 
 
 
 
 
Stock options using the treasury method
84

 
121

 
104

 
123

Noncontrolling interests Common Units
2,910

 
2,937

 
2,921

 
2,938

Denominator for diluted earnings per Common Share – adjusted weighted average shares and assumed conversions (1) (2)
97,049

 
93,312

 
96,666

 
93,172

Earnings per Common Share - diluted:
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
0.27

 
$
0.25

 
$
0.47

 
$
0.38

Income from discontinued operations available for common stockholders

 

 

 
0.01

Net income available for common stockholders
$
0.27

 
$
0.25

 
$
0.47

 
$
0.39

__________

 

27

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

 
13.
Earnings Per Share and Per Unit - Continued
(1)
There were 0.2 million options outstanding during each of the three and six months ended June 30, 2015 and the six months ended June 30, 2014 that were not included in the computation of diluted earnings per share because the impact of including such options would be anti-dilutive. There were no such options outstanding during the three months ended June 30, 2014.
(2)
Includes all unvested restricted stock where dividends on such restricted stock are non-forfeitable.

The following table sets forth the computation of basic and diluted earnings per unit of the Operating Partnership:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Earnings per Common Unit - basic:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
26,891

 
$
24,512

 
$
47,726

 
$
37,704

Net (income) attributable to noncontrolling interests in consolidated affiliates from continuing operations
(328
)
 
(438
)
 
(624
)
 
(861
)
Distributions on Preferred Units
(626
)
 
(627
)
 
(1,253
)
 
(1,254
)
Income from continuing operations available for common unitholders
25,937

 
23,447

 
45,849

 
35,589

Income from discontinued operations available for common unitholders

 

 

 
384

Net income available for common unitholders
$
25,937

 
$
23,447

 
$
45,849

 
$
35,973

Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per Common Unit – weighted average units
96,556

 
92,782

 
96,153

 
92,640

Earnings per Common Unit - basic:
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
0.27

 
$
0.25

 
$
0.48

 
$
0.38

Income from discontinued operations available for common unitholders

 

 

 
0.01

Net income available for common unitholders
$
0.27

 
$
0.25

 
$
0.48

 
$
0.39

Earnings per Common Unit - diluted:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
26,891

 
$
24,512

 
$
47,726

 
$
37,704

Net (income) attributable to noncontrolling interests in consolidated affiliates from continuing operations
(328
)
 
(438
)
 
(624
)
 
(861
)
Distributions on Preferred Units
(626
)
 
(627
)
 
(1,253
)
 
(1,254
)
Income from continuing operations available for common unitholders
25,937

 
23,447

 
45,849

 
35,589

Income from discontinued operations available for common unitholders

 

 

 
384

Net income available for common unitholders
$
25,937

 
$
23,447

 
$
45,849

 
$
35,973

Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per Common Unit – weighted average units
96,556

 
92,782

 
96,153

 
92,640

Add:
 
 
 
 
 
 
 
Stock options using the treasury method
84

 
121

 
104

 
123

Denominator for diluted earnings per Common Unit – adjusted weighted average units and assumed conversions (1) (2)
96,640

 
92,903

 
96,257

 
92,763

Earnings per Common Unit - diluted:
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
0.27

 
$
0.25

 
$
0.48

 
$
0.38

Income from discontinued operations available for common unitholders

 

 

 
0.01

Net income available for common unitholders
$
0.27

 
$
0.25

 
$
0.48

 
$
0.39

__________
(1)
There were 0.2 million options outstanding during each of the three and six months ended June 30, 2015 and the six months ended June 30, 2014 that were not included in the computation of diluted earnings per unit because the impact of including such options would be anti-dilutive. There were no such options outstanding during the three months ended June 30, 2014.
(2)
Includes all unvested restricted stock where dividends on such restricted stock are non-forfeitable.

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

 

14.
Segment Information

The following tables summarize the rental and other revenues and net operating income, the primary industry property-level performance metric used by our chief operating decision maker which is defined as rental and other revenues less rental property and other expenses, for each of our reportable segments. Our segment information for the three and six months ended June 30, 2014 has been retrospectively revised from previously reported amounts to reflect a change in our reportable segments.

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Rental and Other Revenues:
 
 
 
 
 
 
 
Office:
 
 
 
 
 
 
 
Atlanta, GA
$
25,611

 
$
23,627

 
$
50,393

 
$
46,604

Greensboro, NC
5,398

 
6,580

 
10,838

 
13,030

Greenville, SC

 
767

 

 
1,608

Kansas City, MO
4,142

 
4,086

 
8,358

 
8,183

Memphis, TN
12,050

 
10,055

 
23,784

 
19,890

Nashville, TN
21,770

 
20,182

 
43,586

 
39,787

Orlando, FL
10,948

 
9,148

 
21,782

 
18,068

Pittsburgh, PA
14,719

 
14,014

 
29,268

 
27,771

Raleigh, NC
25,541

 
22,538

 
48,982

 
44,029

Richmond, VA
10,203

 
12,020

 
20,787

 
23,763

Tampa, FL
18,602

 
17,129

 
37,029

 
33,756

Total Office Segment
148,984

 
140,146

 
294,807

 
276,489

Retail:
 
 
 
 
 
 
 
Kansas City, MO
9,140

 
9,366

 
17,703

 
18,584

Total Retail Segment
9,140

 
9,366

 
17,703

 
18,584

Other
3,012

 
3,210

 
5,936

 
6,102

Total Rental and Other Revenues
$
161,136

 
$
152,722

 
$
318,446

 
$
301,175


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


14.
Segment Information - Continued

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Net Operating Income:
 
 
 
 
 
 
 
Office:
 
 
 
 
 
 
 
Atlanta, GA
$
15,663

 
$
14,321

 
$
31,030

 
$
28,018

Greensboro, NC
3,516

 
4,249

 
6,942

 
8,247

Greenville, SC

 
390

 

 
865

Kansas City, MO
2,713

 
2,698

 
5,462

 
5,303

Memphis, TN
7,641

 
5,789

 
15,030

 
11,396

Nashville, TN
15,480

 
13,999

 
30,712

 
27,152

Orlando, FL
6,348

 
5,346

 
12,831

 
10,722

Pittsburgh, PA
8,670

 
7,988

 
16,632

 
15,181

Raleigh, NC
18,358

 
16,326

 
34,629

 
31,358

Richmond, VA
6,932

 
8,265

 
13,812

 
15,941

Tampa, FL
11,020

 
10,031

 
22,240

 
20,066

Total Office Segment
96,341

 
89,402

 
189,320

 
174,249

Retail:
 
 
 
 
 
 
 
Kansas City, MO
5,351

 
5,764

 
10,063

 
11,029

Total Retail Segment
5,351

 
5,764

 
10,063

 
11,029

Other
2,166

 
2,281

 
4,272

 
4,232

Total Net Operating Income
103,858

 
97,447

 
203,655

 
189,510

Reconciliation to income from continuing operations before disposition of investment properties and activity in unconsolidated affiliates:
 
 
 
 
 
 
 
Depreciation and amortization
(51,240
)
 
(50,443
)
 
(101,548
)
 
(98,608
)
Impairments of real estate assets

 
(588
)
 

 
(588
)
General and administrative expenses
(8,892
)
 
(8,733
)
 
(20,329
)
 
(19,447
)
Interest expense
(22,002
)
 
(21,213
)
 
(43,425
)
 
(42,575
)
Other income
979

 
1,428

 
2,217

 
2,827

Income from continuing operations before disposition of investment properties and activity in unconsolidated affiliates
$
22,703

 
$
17,898

 
$
40,570

 
$
31,119


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



15.
Subsequent Events

On July 23, 2015, we sold a building for a sale price of $15.3 million and expect to record a gain on disposition of property of $6.5 million.




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Table of Contents

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

The Company is a fully integrated office REIT that owns, develops, acquires, leases and manages properties primarily in the best business districts (BBDs) of Atlanta, Greensboro, Kansas City, Memphis, Nashville, Orlando, Pittsburgh, Raleigh, Richmond and Tampa. The Company conducts its activities through the Operating Partnership. The Operating Partnership is managed by the Company, its sole general partner. 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. You can identify forward-looking statements by our use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “continue” or other similar words. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that our plans, intentions or expectations will be achieved. When considering such forward-looking statements, you should keep in mind the following important factors that could cause our actual results to differ materially from those contained in any forward-looking statement:

the financial condition of our customers could deteriorate;

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

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

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

development activity by our competitors in our existing markets could result in an excessive supply relative to customer demand;

our markets may suffer declines in economic growth;

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

unanticipated increases in operating expenses could negatively impact our operating results;

we may not be able to meet our liquidity requirements or obtain capital on favorable terms to fund our working capital needs and growth initiatives or repay or refinance outstanding debt upon maturity; and

the Company could lose key executive officers.

This list of risks and uncertainties, however, is not intended to be exhaustive. You should also review the other cautionary statements we make in “Business – Risk Factors” set forth in our 2014 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.


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Table of Contents

Executive Summary
 
Our Strategic Plan focuses on:
 
owning high-quality, differentiated real estate assets in the BBDs of our core markets;

improving the operating results of our existing properties through concentrated leasing, asset management, cost control and customer service efforts;

developing and acquiring office properties in BBDs that improve the overall quality of our portfolio and generate attractive returns over the long term for our stockholders;

disposing of properties no longer considered to be core assets primarily due to location, age, quality and overall strategic fit; and

maintaining a conservative and flexible balance sheet with ample liquidity to meet our funding needs and growth prospects.
 
Revenues

Our operating results depend heavily on successfully leasing and operating the office space in our portfolio. Economic growth and employment levels in our core markets are and will continue to be important factors in predicting our future operating results.
 
The key components affecting our rental and other revenues are average occupancy, rental rates, cost recovery income, new developments placed in service, acquisitions and dispositions. Average occupancy generally increases during times of improving economic growth, as our ability to lease space outpaces vacancies that occur upon the expirations of existing leases. Average occupancy generally declines during times of slower economic growth, when new vacancies tend to outpace our ability to lease space. Asset acquisitions, dispositions and new developments placed in service directly impact our rental revenues and could impact our average occupancy, depending upon the occupancy rate of the properties that are acquired, sold or placed in service. A further indicator of the predictability of future revenues is the expected lease expirations of our portfolio. As a result, in addition to seeking to increase our average occupancy by leasing current vacant space, we also must concentrate our leasing efforts on renewing our existing leases prior to expiration. For more information regarding our lease expirations, see "Properties - Lease Expirations" in our 2014 Annual Report on Form 10-K. Our occupancy for our office portfolio increased from 91.2% at December 31, 2014 to 92.4% at June 30, 2015. We expect average occupancy for our office portfolio to be approximately 92% to 93% for the remainder of 2015.
 
Whether or not our rental revenue tracks average occupancy proportionally depends upon whether GAAP rents under signed new and renewal leases are higher or lower than the GAAP rents under expiring leases. Annualized rental revenues from second generation leases expiring during any particular year are generally less than 15% of our total annual rental revenues. The following table sets forth information regarding second generation office leases signed during the second quarter of 2015 (we define second generation office leases as leases with new customers and renewals of existing customers in office space that has been previously occupied under our ownership and leases with respect to vacant space in acquired buildings):
 
 
New
 
Renewal
 
All Office
Leased space (in rentable square feet)
331,734

 
584,764

 
916,498

Average term (in years - rentable square foot weighted)
6.7

 
4.1

 
5.0

Base rents (per rentable square foot) (1)
$
24.03

 
$
23.95

 
$
23.98

Rent concessions (per rentable square foot) (1)
(1.12
)
 
(0.30
)
 
(0.60
)
GAAP rents (per rentable square foot) (1)
$
22.91

 
$
23.65

 
$
23.38

Tenant improvements (per rentable square foot) (1)
$
3.57

 
$
1.73

 
$
2.39

Leasing commissions (per rentable square foot) (1)
$
0.91

 
$
0.70

 
$
0.77

__________
(1)
Weighted average per rentable square foot on an annual basis over the lease term.

Compared to previous leases in the same office spaces, annual combined GAAP rents for new and renewal leases signed in the second quarter were $23.38 per rentable square foot, or 9.3% higher.


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Table of Contents

We strive to maintain a diverse, stable and creditworthy customer base. We have an internal guideline whereby customers that account for more than 3% of our revenues are periodically reviewed with the Company's Board of Directors. As of June 30, 2015, no customer accounted for more than 3% of our cash revenues other than the Federal Government, which accounted for less than 6% of our cash revenues on an annualized basis. Upon completion of the Bridgestone Americas development project in Nashville, which is scheduled for delivery in mid-to-late 2017, it is expected that Bridgestone Americas, Inc., the U.S. subsidiary of Bridgestone Corporation, will account for approximately 3.1% of our revenues based on annualized cash revenues for June 2015.

Operating Expenses
 
Our expenses primarily consist of rental property expenses, depreciation and amortization, general and administrative expenses and interest expense. From time to time, expenses also include impairments of real estate assets. Rental property expenses are expenses associated with our ownership and operation of rental properties and include expenses that vary somewhat proportionately to occupancy levels, such as janitorial services and utilities, and expenses that do not vary based on occupancy, such as property taxes and insurance. Depreciation and amortization is a non-cash expense associated with the ownership of real property and generally remains relatively consistent each year, unless we buy, place in service or sell assets, since we depreciate our properties and related building and tenant improvement assets on a straight-line basis over fixed lives. General and administrative expenses consist primarily of management and employee salaries and other personnel costs, corporate overhead and short and long-term incentive compensation.

Net Operating Income

Whether or not we record growing same property net operating income (“NOI”) depends upon our ability to garner higher rental revenues, whether from higher average occupancy, higher GAAP rents per rentable square foot or higher cost recovery income, that exceed any corresponding growth in operating expenses. Same property NOI was $3.9 million, or 4.2%, higher in the second quarter of 2015 as compared to 2014 due to an increase in same property revenues of $6.1 million offset by an increase of $2.3 million in same property expenses. We expect same property NOI to be higher in the remainder of 2015 compared to 2014 from higher rental revenues, mostly from increasing average occupancy, higher average GAAP rents per rentable square foot and higher cost recovery income, which are expected to more than offset a corresponding increase in same property operating expenses.

In addition to the effect of same property NOI, whether or not overall NOI increases depends upon whether the NOI from our acquired properties and development properties placed in service exceeds the NOI from sold properties. Overall NOI was $6.4 million, or 6.6%, higher in the second quarter of 2015 as compared to 2014 due to the full year impact of acquisitions and development properties placed in service in 2014 and the partial year impact of development properties placed in service in 2015, offset by NOI lost from sold properties. We expect overall NOI to be higher in the remainder of 2015 compared to 2014 due to the full year impact of our net investment activity in 2014 and 2015.

Cash Flows

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

Net cash related to investing activities generally relates to capitalized costs incurred for leasing and major building improvements and our acquisition, development, disposition and joint venture 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.

Net cash related to financing activities generally relates to distributions, incurrence and repayment of debt, and issuances, repurchases or redemptions of Common Stock, Common Units and Preferred Stock. 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 daily working capital purposes, which means that during any given period, in order to minimize interest expense, we may record significant repayments and borrowings under our revolving credit facility.


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Table of Contents

Liquidity and Capital Resources
 
We intend to maintain a conservative and flexible balance sheet with access to multiple sources of debt and equity capital and sufficient availability under our revolving credit facility that allows us to capitalize on favorable development and acquisition opportunities as they arise.

Rental and other revenues are our principal source of funds to meet our short-term liquidity requirements. Other sources of funds for short-term liquidity needs include available working capital and borrowings under our existing revolving credit facility, which had $316.6 million of availability at July 27, 2015. Our short-term liquidity requirements primarily consist of operating expenses, interest and principal amortization on our debt, distributions and capital expenditures, including building improvement costs, tenant improvement costs and lease commissions. Building improvements are capital costs to maintain or enhance existing buildings not typically related to a specific customer. Tenant improvements are the costs required to customize space for the specific needs of customers. We anticipate that our available cash and cash equivalents and cash provided by operating activities, together with cash available from borrowings under our revolving credit facility, will be adequate to meet our short-term liquidity requirements. We use our revolving credit facility for working capital purposes and for the short-term funding of our development and acquisition activity and, in certain instances, the repayment of other debt. The continued ability to borrow under the revolving credit facility allows us to quickly capitalize on strategic opportunities at short-term interest rates.
 
Our long-term liquidity uses generally consist of the retirement or refinancing of debt upon maturity (including mortgage debt, our revolving credit facility, term loans and other unsecured debt), funding of existing and new building development and land infrastructure projects and funding acquisitions of buildings and development land. Our expected future capital expenditures for started and/or committed new development projects were approximately $390 million at June 30, 2015. Additionally, we may, from time to time, retire some or all of our remaining outstanding Preferred Stock and/or unsecured debt securities through redemptions, open market repurchases, privately negotiated acquisitions or otherwise.
 
We expect to meet our long-term liquidity needs through a combination of:
 
cash flow from operating activities;
 
bank term loans and borrowings under our revolving credit facility;
 
the issuance of unsecured debt;
 
the issuance of secured debt;
 
the issuance of equity securities by the Company or the Operating Partnership; and
 
the disposition of non-core assets.

We generally expect to grow our company on a leverage neutral basis by maintaining a leverage ratio of 40% to 45% as measured by the percentage of the undepreciated book value of our assets represented by our mortgages and notes payable and outstanding preferred stock. At June 30, 2015, our leverage ratio was 42.1% and there were 97.1 million diluted shares outstanding.

Investment Activity

As noted above, a key tenet of our strategic plan is to continuously upgrade the quality of our portfolio through acquisitions, dispositions and development. We generally seek to acquire and develop assets that improve the average quality of our overall portfolio and deliver consistent and sustainable value for our stockholders over the long-term. Whether or not an asset acquisition or new development results in higher per share net income or funds from operations ("FFO") in any given period depends upon a number of factors, including whether the NOI for any such period exceeds the actual cost of capital used to finance the acquisition or development. Additionally, given the length of construction cycles, development projects are not placed in service until, in some cases, several years after commencement. Sales of non-core assets could result in lower per share net income or FFO in any given period in the event the resulting use of proceeds does not exceed the capitalization rate on the sold properties. Forward-looking information regarding 2015 operating performance contained herein and below under "Results of Operations" excludes the impact of any potential acquisitions or dispositions.


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Table of Contents

Results of Operations

Three Months Ended June 30, 2015 and 2014
 
Rental and Other Revenues
 
Rental and other revenues were $8.4 million, or 5.5%, higher in the second quarter of 2015 as compared to 2014 primarily due to higher same property revenues, 2014 acquisitions and recent development properties placed in service, which increased rental and other revenues by $6.1 million, $4.1 million and $4.3 million, respectively. Same property rental and other revenues were higher primarily due to an increase in average occupancy to 92.6% in the second quarter of 2015 from 90.2% in the second quarter of 2014, higher average GAAP rents per rentable square foot and higher cost recovery income in the second quarter of 2015. These increases were partly offset by lost revenue from property dispositions of $5.7 million. We expect rental and other revenues for the remainder of 2015 to increase over 2014 primarily due to acquisitions closed in 2014 and 2015 and recent development properties placed in service, partly offset by lost revenue from property dispositions. We also expect increasing average occupancy, higher average GAAP rents per rentable square foot and higher cost recovery income in our same property portfolio.

Operating Expenses
 
Rental property and other expenses were $2.0 million, or 3.6%, higher in the second quarter of 2015 as compared to 2014 primarily due to higher same property operating expenses, 2014 acquisitions and recent development properties placed in service, which increased operating expenses by $2.3 million, $1.5 million and $0.9 million, respectively. Same property operating expenses were higher primarily due to higher property taxes, janitorial and other building-related services and repairs and maintenance, partly offset by lower utilities. These increases were partly offset by a $2.0 million decrease in operating expenses from property dispositions. We expect rental property and other expenses for the remainder of 2015 to increase over 2014 primarily due to acquisitions closed in 2014 and 2015 and recent development properties placed in service, partly offset by lower operating expenses due to property dispositions. We also expect higher same property operating expenses resulting from higher property taxes, janitorial and other building-related services and utilities, partly offset by lower property insurance.
 
Depreciation and amortization was $0.8 million, or 1.6%, higher in the second quarter of 2015 as compared to 2014 primarily due to 2014 acquisitions and recent development properties placed in service, partly offset by lower depreciation and amortization due to property dispositions. We expect depreciation and amortization for the remainder of 2015 to increase over 2014 for similar reasons.

We recorded an impairment of real estate assets of $0.6 million in the second quarter of 2014 on a building in Greensboro, NC, which resulted from a change in the assumed timing of future disposition and leasing assumptions. We recorded no such impairment in the second quarter of 2015.

General and administrative expenses were $0.2 million, or 1.8%, higher in the second quarter of 2015 as compared to 2014 primarily due to higher incentive compensation and company-wide base salaries. We expect general and administrative expenses for the remainder of 2015 to increase slightly over 2014 for similar reasons.

Interest Expense
 
Interest expense was $0.8 million, or 3.7%, higher in the second quarter of 2015 as compared to 2014 primarily due to higher average debt balances and financing obligation interest expense, partly offset by higher capitalized interest. We expect interest expense for the remainder of 2015 to decrease over 2014 primarily due to lower average interest rates and financing obligation interest expense, partly offset by lower capitalized interest.

Other Income

Other income was $0.4 million, or 31.4%, lower in the second quarter of 2015 as compared to 2014 primarily due to a loss on debt extinguishment and the repayment of mortgages receivable in the second quarter of 2015. We expect other income for the remainder of 2015 to decrease over 2014 as a result of this repayment.


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Gains on Disposition of Property

Gains on disposition of property were $3.5 million lower in the second quarter of 2015 as compared to 2014 due to the net effect of the disposition activity in such periods.

Equity in Earnings of Unconsolidated Affiliates

Equity in earnings of unconsolidated affiliates was $1.1 million higher in the second quarter of 2015 as compared to 2014 due to our $1.1 million share of a gain recognized by Highwoods KC Glenridge Land, LLC.

Earnings Per Common Share - Diluted
 
Diluted earnings per common share was $0.02, or 8.0%, higher in the second quarter of 2015 as compared to 2014 due to an increase in net income for the reasons discussed above offset by an increase in the weighted average Common Shares outstanding.

Six Months Ended June 30, 2015 and 2014
 
Rental and Other Revenues
 
Rental and other revenues were $17.3 million, or 5.7%, higher in the first six months of 2015 as compared to 2014 primarily due to higher same property revenues, 2014 acquisitions and recent development properties placed in service, which increased rental and other revenues by $14.1 million, $8.1 million and $6.1 million, respectively. Same property rental and other revenues were higher primarily due to an increase in average occupancy to 92.1% in the first six months of 2015 from 89.9% in the first six months of 2014, higher average GAAP rents per rentable square foot and higher cost recovery income. These increases were partly offset by lost revenue from property dispositions of $10.9 million.

Operating Expenses
 
Rental property and other expenses were $3.1 million, or 2.8%, higher in the first six months of 2015 as compared to 2014 primarily due to higher same property operating expenses, 2014 acquisitions and recent development properties placed in service, which increased operating expenses by $3.7 million, $2.9 million and $1.3 million, respectively. Same property operating expenses were higher primarily due to higher property taxes, janitorial and other building-related services and repairs and maintenance, partly offset by lower utilities and property insurance. These increases were partly offset by a $4.0 million decrease in operating expenses from property dispositions.

Depreciation and amortization was $2.9 million, or 3.0%, higher in the first six months of 2015 as compared to 2014 primarily due to 2014 acquisitions and recent development properties placed in service, partly offset by lower depreciation and amortization due to property dispositions.
 
We recorded an impairment of real estate assets of $0.6 million in the second quarter of 2014 on a building in Greensboro, NC, which resulted from a change in the assumed timing of future disposition and leasing assumptions. We recorded no such impairment in the first six months of 2015.

General and administrative expenses were $0.9 million, or 4.5%, higher in the first six months of 2015 as compared to 2014 primarily due to higher incentive compensation and company-wide base salaries and benefits.

Interest Expense
 
Interest expense was $0.9 million, or 2.0%, higher in the first six months of 2015 as compared to 2014 primarily due to higher average debt balances and financing obligation interest expense, partly offset by higher capitalized interest.

Other Income

Other income was $0.6 million, or 21.6%, lower in the first six months of 2015 as compared to 2014 primarily due to the repayments of mortgages receivable in the first quarter of 2014 and second quarter of 2015 and a loss on debt extinguishment in the second quarter of 2015.


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Gains on Disposition of Property and Net Gains on Disposition of Discontinued Operations
 
With the adoption of the discontinued operations accounting standards update in the second quarter of 2014, gains on disposition of property are now generally included in continuing operations. Prior to adoption, such gains were generally classified as discontinued operations. Total gains were $2.8 million lower in the first six months of 2015 as compared to 2014 due to the net effect of the disposition activity in such periods.

Equity in Earnings of Unconsolidated Affiliates

Equity in earnings of unconsolidated affiliates was $2.9 million higher in the first six months of 2015 as compared to 2014 primarily due to our $1.1 million share of a gain recognized by Highwoods DLF 97/26 DLF 99/32, LP in the first quarter of 2015, our $1.1 million share of a gain recognized by Highwoods KC Glenridge Land, LLC in the second quarter of 2015 and a $0.4 million net impairment of our previous investment in Board of Trade Investment Company in the first quarter of 2014.

Earnings Per Common Share - Diluted

Diluted earnings per common share was $0.08, or 20.5%, higher in the first six months of 2015 as compared to 2014 due to an increase in net income for the reasons discussed above offset by an increase in the weighted average Common Shares outstanding.

Liquidity and Capital Resources

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):
 
 
Six Months Ended
June 30,
 
 
 
2015
 
2014
 
Change
Net Cash Provided By Operating Activities
$
122,295

 
$
114,534

 
$
7,761

Net Cash Used In Investing Activities
(116,818
)
 
(133,112
)
 
16,294

Net Cash Provided By/(Used In) Financing Activities
(9,370
)
 
27,093

 
(36,463
)
Total Cash Flows
$
(3,893
)
 
$
8,515

 
$
(12,408
)

The increase in net cash provided by operating activities in the first six months of 2015 as compared to 2014 was primarily due to higher net cash from the operations of properties acquired in 2014 and recent development properties placed in service, partly offset by higher cash paid for operating expenses in 2015. We expect net cash related to operating activities for the remainder of 2015 to be higher as compared to 2014 due to the full year impact of properties acquired in 2014 and 2015, recent development properties placed in service and higher cash flows from leases signed in prior years as free rent periods expire.

The decrease in net cash used in investing activities in the first six months of 2015 as compared to 2014 was primarily due to lower development activity, higher distributions of capital from unconsolidated affiliates and lower investments in unconsolidated affiliates in 2015, partly offset by higher investments in tenant improvements and deferred leasing costs and lower repayments of mortgages and notes receivable in 2015. We expect uses of cash for investing activities for the remainder of 2015 to be primarily driven by our plans to acquire and commence development of office buildings. Additionally, as of June 30, 2015, we have $390 million left to fund of our previously-announced development activity. We expect these uses of cash for investing activities will be partially offset by proceeds from non-core dispositions during the remainder of 2015.

The change in net cash provided by/used in financing activities in the first six months of 2015 as compared to 2014 was primarily due to lower net debt borrowings in 2015, partly offset by higher proceeds from the issuance of Common Stock in 2015. Assuming the net effect of our acquisition, disposition and development activity in the remainder of 2015 results in an increase in our assets, we would expect outstanding debt balances to increase. However, because we plan to continue to maintain a flexible and conservative balance sheet with mortgages and notes payable and outstanding preferred stock representing around 40% to 45% of the undepreciated book value of our assets, we would also expect higher outstanding balances of Common Stock in such event.


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Capitalization

The following table sets forth the Company’s capitalization (in thousands, except per share amounts):
 
 
June 30,
2015
 
December 31,
2014
 
 
 
(as revised)
Mortgages and notes payable, at recorded book value
$
2,124,028

 
$
2,071,389

Financing obligation
$
8,962

 
$
8,962

Preferred Stock, at liquidation value
$
29,050

 
$
29,060

Common Stock outstanding
94,118

 
92,907

Common Units outstanding (not owned by the Company)
2,910

 
2,937

Per share stock price at period end
$
39.95

 
$
44.28

Market value of Common Stock and Common Units
$
3,876,269

 
$
4,243,972

Total capitalization
$
6,038,309

 
$
6,353,383

 
At June 30, 2015, our mortgages and notes payable and outstanding preferred stock represented 35.7% of our total capitalization and 42.1% of the undepreciated book value of our assets.
 
Our mortgages and notes payable as of June 30, 2015 consisted of $290.1 million of secured indebtedness with a weighted average interest rate of 5.82% and $1,833.9 million of unsecured indebtedness with a weighted average interest rate of 3.78%. The secured indebtedness was collateralized by real estate assets with an aggregate undepreciated book value of $545.5 million. As of June 30, 2015, all but $484.0 million of our debt bears interest at fixed rates or is protected by interest rate hedge contracts.
 
Investment Activity

During the second quarter of 2015, we acquired:

land in Atlanta, GA for a purchase price and related transaction costs of $5.2 million (including contingent consideration of $0.9 million); and

our Highwoods DLF 98/29, LLC joint venture partner’s 77.2% interest in a building in Orlando, FL encompassing 168,000 rentable square feet in exchange for the assumption of secured debt recorded at fair value of $19.3 million. See "Financing Activity." We expensed $0.1 million of acquisition costs (included in general and administrative expenses) related to this acquisition.

The assets acquired and liabilities assumed were recorded at fair value as determined by management based on information available at the acquisition date and on current assumptions as to future operations.

In the normal course of business, we regularly evaluate potential acquisitions. As a result, from time to time, we may have one or more potential acquisitions under consideration that are in varying stages of evaluation, negotiation or due diligence, including potential acquisitions that are subject to non-binding letters of intent or enforceable contracts. Consummation of any transaction is subject to a number of contingencies, including the satisfaction of customary closing conditions. No assurances can be provided that we will acquire any properties in the future. See "Item 1A. Risk Factors - Recent and future acquisitions and development properties may fail to perform in accordance with our expectations and may require renovation and development costs exceeding our estimates" in our 2014 Annual Report on Form 10-K.

During the second quarter of 2015, we sold land for a sale price of $0.5 million and recorded a gain on disposition of property of $0.2 million.

On July 23, 2015, we sold a building for a sale price of $15.3 million and expect to record a gain on disposition of property of $6.5 million.
 
During the second quarter of 2015, $9.9 million of secured acquisition financing provided to a third party in 2012 was repaid, including accrued interest.


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As of June 30, 2015, we were developing 1,482,200 rentable square feet of properties. The following table summarizes these developments:
 
Property
 
Market
 
Rentable Square Feet
 
Anticipated Total Investment (1)
 
Investment As Of June 30, 2015 (1)
 
Pre Leased %
 
Estimated Completion
 
Estimated Stabilization
 
 
 
 
 
 
($ in thousands)
 
 
 
 
 
 
Laser Spine Institute
 
 Tampa
 
176,000

 
$
56,000

 
$
25,676

 
100.0
%
 
1Q 16
 
1Q 16
Seven Springs West
 
 Nashville
 
203,000

 
59,000

 
20,212

 
85.6
%
 
3Q 16
 
1Q 17
Bridgestone Americas
 
 Nashville
 
514,000

 
200,000

 
34,562

 
98.5
%
 
3Q 17
 
3Q 17
Riverwood 200 (2)
 
 Atlanta
 
299,000

 
107,000

 
6,080

 
66.2
%
 
2Q 17
 
2Q 19
Plaza 211
 
 Kansas City
 
28,000

 
17,000

 
9,322

 
%
 
3Q 15
 
3Q 16
Enterprise V (2)
 
 Greensboro
 
131,200

 
7,600

 
893

 
%
 
2Q 16
 
2Q 17
Seven Springs II (2)
 
 Nashville
 
131,000

 
38,100

 
2,425

 
%
 
2Q 17
 
3Q 18
 
 
 
 
1,482,200

 
$
484,700

 
$
99,170

 
71.1
%
 
 
 
 
__________
(1)
Includes deferred lease commissions which are classified in deferred leasing costs on the Consolidated Balance Sheet.
(2)
Recorded on the Consolidated Balance Sheet in land held for development, not development in process.

Financing Activity

We have entered into separate sales agreements with each of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Robert W. Baird & Co. Incorporated, BB&T Capital Markets, a division of BB&T Securities, LLC, Capital One Securities, Inc., Comerica Securities, Inc., Jefferies LLC, Mitsubishi UFJ Securities (USA), Inc., Morgan Stanley & Co. LLC, Piper Jaffray & Co., RBC Capital Markets, LLC and Wells Fargo Securities, LLC. During the second quarter of 2015, the Company issued 58,533 shares of Common Stock at an average gross sales price of $41.72 per share and received net proceeds, after sales commissions, of $2.4 million. We paid less than $0.1 million in sales commissions to Jefferies LLC during the second quarter of 2015.

Our $475.0 million unsecured revolving credit facility is scheduled to mature in January 2018 and includes an accordion feature that allows for an additional $75.0 million of borrowing capacity subject to additional lender commitments. Assuming no defaults have occurred, we have an option to extend the maturity for two additional six month periods. The interest rate at our current credit ratings is LIBOR plus 110 basis points and the annual facility fee is 20 basis points. The interest rate and facility fee are based on the higher of the publicly announced ratings from Moody's Investors Service or Standard & Poor's Ratings Services. There was $159.0 million and $158.0 million outstanding under our revolving credit facility at June 30, 2015 and July 27, 2015, respectively. At both June 30, 2015 and July 27, 2015, we had $0.4 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 June 30, 2015 and July 27, 2015 was $315.6 million and $316.6 million, respectively.
 
During the second quarter of 2015, we amended our $225.0 million, seven-year unsecured bank term loan, which was scheduled to mature in January 2019. We increased the borrowed amount to $350.0 million and used the $125.0 million of incremental new proceeds to repay amounts outstanding under our $475.0 million unsecured revolving credit facility. The amended term loan is now scheduled to mature in June 2020 and the interest rate, based on our current credit ratings, was reduced from LIBOR plus 175 basis points to LIBOR plus 110 basis points. The interest rate is based on the higher of the publicly announced ratings from Moody’s Investors Service or Standard & Poor’s Ratings Services. The financial and other covenants under the amended term loan are unchanged.

During the second quarter of 2015, we prepaid without penalty the remaining $39.4 million balance on a secured mortgage loan with an effective interest rate of 6.43% that was originally scheduled to mature in November 2015.

During the second quarter of 2015, we acquired our joint venture partner’s 77.2% interest in a building in Orlando, FL. Simultaneously with this acquisition, the joint venture's previously existing mortgage note was restructured into a new $18.0 million first mortgage note and a $10.2 million subordinated note, both of which are scheduled to mature in July 2017. The first mortgage note is interest only with an effective interest rate of 5.36%, payable monthly. The subordinated note has an effective interest rate of 8.6%. Additionally, we deposited $3.0 million into escrow to fund tenant improvements, leasing commissions and building improvements. The first mortgage note and subordinated note can be prepaid at any time commencing October 2016 upon a sale or refinancing of the property. In such event, the subordinated note and any and all accrued interest thereon would be deemed fully satisfied upon payment of a "waterfall payment," if any. Such "waterfall payment" would be a cash payment equal

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to 50.0% of the amount, if any, by which the net sale proceeds or appraised value in the event of a refinancing exceeds (1) the outstanding principal of the first mortgage note, (2) the funds deposited by us into escrow to fund tenant improvements, leasing commissions and building improvements and (3) a 10.0% return on such funds deposited by us into escrow. As of June 30, 2015, the fair value of the first mortgage note was $18.3 million and the fair value of the subordinated note equaled the projected waterfall payment of $1.0 million.

We are currently in compliance with financial covenants and other requirements with respect to our consolidated debt. Although we expect to remain in compliance with these covenants and ratios for at least the next year, depending upon our future operating performance, property and financing transactions and general economic conditions, we cannot assure you that we will continue to be in compliance.

Our revolving credit facility and bank term loans require us to comply with customary operating covenants and various financial requirements.
 
Off Balance Sheet Arrangements

We have a 20.0% interest in SF-HIW Harborview Plaza, LP (“Harborview”). We are the manager and leasing agent for Harborview’s property in Tampa, FL and receive customary management and leasing fees. During 2012, we also provided a three-year $20.8 million interest-only secured loan to Harborview that is scheduled to mature in September 2015. The loan bears interest at LIBOR plus 500 basis points, subject to a LIBOR floor of 0.5%. Previously, we accounted for the original contribution transaction as a financing obligation since our partner had the right to put its 80.0% equity interest back to us any time during the one-year period prior to September 11, 2015. During the second quarter of 2015, as a result of our partner’s irrevocable exercise of a buy-sell provision in our joint venture agreement, our partner’s right to put its 80.0% equity interest back to us became no longer exercisable, which resulted in recording the original contribution transaction as a partial sale. Harborview is now accounted for using the equity method of accounting.

See "Investment Activity "for a description of our acquisition of a building in Orlando, FL from Highwoods DLF 98/29, LLC during the second quarter of 2015. The joint venture recorded a gain on disposition of property of $13.7 million. Our share of $3.1 million was recorded as a reduction to real estate assets.

During the second quarter of 2015, Highwoods KC Glenridge Office, LLC and Highwoods KC Glenridge Land, LLC collectively sold two buildings and land to an unrelated third party for an aggregate sale price of $24.5 million (before closing credits to buyer of $0.3 million for unfunded tenant improvements) and recorded gains on disposition of property of $2.4 million. We recorded $0.9 million as our share of these gains through equity in earnings of unconsolidated affiliates.

Critical Accounting Estimates
 
There were no changes made by management to the critical accounting policies in the six months ended June 30, 2015. 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 2014 Annual Report on Form 10-K.

Non-GAAP Information
 
The Company believes that FFO, FFO available for common stockholders and FFO available for common stockholders per share are beneficial to management and investors and are important indicators of the performance of any equity REIT. Because these FFO calculations exclude such factors as depreciation, amortization and impairments of real estate assets and gains or losses from sales of operating real estate assets, which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful life estimates, they facilitate comparisons of operating performance between periods and between other REITs. Management believes that historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, 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, FFO available for common stockholders and FFO available for common stockholders per share, together with the required GAAP presentations, provides a more complete understanding of the Company's performance relative to its competitors and a more informed and appropriate basis on which to make decisions involving operating, financing and investing activities.
 
FFO, FFO available for common stockholders and FFO available for common stockholders per share are non-GAAP financial measures and therefore do not represent net income or net income per share as defined by GAAP. Net income and net income per share as defined by GAAP are the most relevant measures in determining the Company's operating performance because these FFO measures include adjustments that investors may deem subjective, such as adding back expenses such as depreciation,

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amortization and impairments. Furthermore, FFO available for common stockholders per share does not depict the amount that accrues directly to the stockholders' benefit. Accordingly, FFO, FFO available for common stockholders and FFO available for common stockholders per share should never be considered as alternatives to net income, net income available for common stockholders, or net income available for common stockholders per share as indicators of the Company's operating performance.
 
The Company's presentation of FFO is consistent with FFO as defined by the National Association of Real Estate Investment Trusts, which is calculated as follows:
 
Net income/(loss) computed in accordance with GAAP;
 
Less net income attributable to noncontrolling interests in consolidated affiliates;
 
Plus depreciation and amortization of depreciable operating properties;
 
Less gains, or plus losses, from sales of depreciable operating properties, plus impairments on depreciable operating properties and excluding items that are classified as extraordinary items under GAAP;
 
Plus or minus our share of adjustments, including depreciation and amortization of depreciable operating properties, for unconsolidated 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 of depreciable operating properties, plus impairments on depreciable operating properties, and noncontrolling interests in consolidated affiliates related to discontinued operations.
 
In calculating FFO, the Company includes net income attributable to noncontrolling interests in the Operating Partnership, which the Company believes is consistent with standard industry practice for REITs that operate through an UPREIT structure. The Company believes that it is important to present FFO on an as-converted basis since all of the Common Units not owned by the Company are redeemable on a one-for-one basis for shares of its Common Stock.
 
The following table sets forth the Company's FFO, FFO available for common stockholders and FFO available for common stockholders per share ($ in thousands, except per share amounts):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Funds from operations:
 
 
 
 
 
 
 
Net income
$
26,891

 
$
24,512

 
$
47,726

 
$
38,088

Net (income) attributable to noncontrolling interests in consolidated affiliates
(328
)
 
(438
)
 
(624
)
 
(861
)
Depreciation and amortization of real estate assets
50,594

 
49,600

 
100,272

 
97,193

Impairments of depreciable properties

 
588

 

 
588

(Gains) on disposition of depreciable properties
(2,232
)
 

 
(2,626
)
 

Unconsolidated affiliates:
 
 
 
 
 
 
 
Depreciation and amortization of real estate assets
731

 
923

 
1,577

 
1,954

Impairment of investment in unconsolidated affiliate

 

 

 
1,353

(Gains)/losses on disposition of depreciable properties
125

 

 
(946
)
 
(955
)
Discontinued operations:
 
 
 
 
 
 
 
(Gains) on disposition of depreciable properties

 

 

 
(384
)
Funds from operations
75,781

 
75,185

 
145,379

 
136,976

Dividends on Preferred Stock
(626
)
 
(627
)
 
(1,253
)
 
(1,254
)
Funds from operations available for common stockholders
$
75,155

 
$
74,558

 
$
144,126

 
$
135,722

Funds from operations available for common stockholders per share
$
0.77

 
$
0.80

 
$
1.49

 
$
1.46

Weighted average shares outstanding (1)
97,049

 
93,312

 
96,666

 
93,172

__________
(1)
Includes assumed conversion of all potentially dilutive Common Stock equivalents.


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In addition, the Company believes NOI from continuing operations and same property NOI are useful supplemental measures of the Company’s property operating performance because such metrics provide a performance measure of the revenues and expenses directly involved in owning real estate assets and a perspective not immediately apparent from net income or FFO. The Company defines NOI as rental and other revenues from continuing operations, less rental property and other expenses from continuing operations. The Company defines cash NOI as NOI less straight-line rent and lease termination fees. Other REITs may use different methodologies to calculate NOI and same property NOI.

As of June 30, 2015, our same property portfolio consisted of 235 in-service properties encompassing 27.6 million rentable square feet that were wholly owned during the entirety of the periods presented (from January 1, 2014 to June 30, 2015). As of December 31, 2014, our same property portfolio consisted of 223 in-service properties encompassing 24.2 million rentable square feet that were wholly owned during the entirety of the periods presented (from January 1, 2013 to December 31, 2014). The change in our same property portfolio was due to the addition of 11 properties encompassing 3.2 million rentable square feet acquired during 2013 and three newly developed properties encompassing 0.2 million rentable square feet placed in service during 2013. These additions were offset by the removal of two properties encompassing 0.1 million rentable square feet that were sold during 2015.

Rental and other revenues related to properties not in our same property portfolio were $11.7 million and $9.4 million for the three months ended June 30, 2015 and 2014, respectively, and $21.1 million and $17.9 million for the six months ended June 30, 2015 and 2014, respectively. Rental property and other expenses related to properties not in our same property portfolio were $3.4 million and $3.7 million for the three months ended June 30, 2015 and 2014, respectively, and $6.7 million and $7.3 million for the six months ended June 30, 2015 and 2014, respectively.

The following table sets forth the Company’s NOI and same property NOI:

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Income from continuing operations before disposition of investment properties and activity in unconsolidated affiliates
$
22,703

 
$
17,898

 
$
40,570

 
$
31,119

Other income
(979
)
 
(1,428
)
 
(2,217
)
 
(2,827
)
Interest expense
22,002

 
21,213

 
43,425

 
42,575

General and administrative expenses
8,892

 
8,733

 
20,329

 
19,447

Impairments of real estate assets

 
588

 

 
588

Depreciation and amortization
51,240

 
50,443

 
101,548

 
98,608

Net operating income from continuing operations
103,858

 
97,447

 
203,655

 
189,510

Less – non same property and other net operating income
(8,310
)
 
(5,750
)
 
(14,384
)
 
(10,620
)
Total same property net operating income from continuing operations
$
95,548

 
$
91,697

 
$
189,271

 
$
178,890

 
 
 
 
 
 
 
 
Rental and other revenues
$
161,136

 
$
152,722

 
$
318,446

 
$
301,175

Rental property and other expenses
57,278

 
55,275

 
114,791

 
111,665

Total net operating income from continuing operations
103,858

 
97,447

 
203,655

 
189,510

Less – non same property and other net operating income
(8,310
)
 
(5,750
)
 
(14,384
)
 
(10,620
)
Total same property net operating income from continuing operations
$
95,548

 
$
91,697

 
$
189,271

 
$
178,890

 
 
 
 
 
 
 
 
Total same property net operating income from continuing operations
$
95,548

 
$
91,697

 
$
189,271

 
$
178,890

Less – straight-line rent and lease termination fees
(3,472
)
 
(4,218
)
 
(7,480
)
 
(10,241
)
Same property cash net operating income from continuing operations
$
92,076

 
$
87,479

 
$
181,791

 
$
168,649



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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For information regarding our market risk as of December 31, 2014, see "Quantitative and Qualitative Disclosures About Market Risk" in our 2014 Annual Report on Form 10-K.

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. 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 accepted accounting principles. There were no changes in internal control over financial reporting during the three months ended June 30, 2015 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 June 30, 2015 that materially affected, or are reasonably likely to materially affect, the Operating Partnership's internal control over financial reporting.


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PART II - OTHER INFORMATION

ITEM 6. EXHIBITS

Exhibit
Number
Description
10.1
2015 Long-Term Equity Incentive Plan (filed as part of the Company's Current Report on Form 8-K dated May 13, 2015)
10.2
First Amendment to Amended and Restated Seven-Year Term Loan Agreement (filed as part of the Company's Current Report on Form 8-K dated June 11, 2015)
12.1
Statement re: Computation of Ratios of the Company
12.2
Statement re: Computation of Ratios of the Operating Partnership
31.1
Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act for the Company
31.2
Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act for the Company
31.3
Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act for the Operating Partnership
31.4
Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act for the Operating Partnership
32.1
Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act for the Company
32.2
Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act for the Company
32.3
Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act for the Operating Partnership
32.4
Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act for the Operating Partnership
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Extension Labels Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document


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Table of Contents

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/ Mark F. Mulhern
 
Mark F. Mulhern
 
Senior Vice President and Chief Financial Officer


Highwoods Realty Limited Partnership
 
By:
Highwoods Properties, Inc., its sole general partner
By: 

/s/ Mark F. Mulhern
 
Mark F. Mulhern
 
Senior Vice President and Chief Financial Officer

Date: August 4, 2015



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