Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
 
[X]
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2018
 
OR
 
[  ]
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from________ to___________
 
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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)
______________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $.01 par value, of Highwoods Properties, Inc.
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Highwoods Properties, Inc.  Yes  x    No ¨    Highwoods Realty Limited Partnership  Yes  x    No ¨
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act.
Highwoods Properties, Inc.  Yes  ¨    No x    Highwoods Realty Limited Partnership  Yes  ¨    No x
 




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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Highwoods Properties, Inc.  Yes  x    No ¨    Highwoods Realty Limited Partnership  Yes  x    No ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of such registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of 'large accelerated filer,' 'accelerated filer,' 'smaller reporting company,' and 'emerging growth company' in Rule 12b-2 of the Exchange Act.
Highwoods Properties, Inc.
Large accelerated filer x    Accelerated filer ¨    Non-accelerated filer ¨   Smaller reporting company ¨   Emerging growth company ¨
Highwoods Realty Limited Partnership
Large accelerated filer ¨    Accelerated filer ¨    Non-accelerated filer x   Smaller reporting company ¨   Emerging growth company ¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Highwoods Properties, Inc.  ¨        Highwoods Realty Limited Partnership   ¨
 
Indicate by check mark whether the registrant 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 aggregate market value of shares of Common Stock of Highwoods Properties, Inc. held by non-affiliates (based upon the closing sale price on the New York Stock Exchange) on June 30, 2018 was approximately $5.2 billion. At January 25, 2019, there were 103,559,065 shares of Common Stock outstanding.
 
There is no public trading market for the Common Units of Highwoods Realty Limited Partnership. As a result, an aggregate market value of the Common Units of Highwoods Realty Limited Partnership cannot be determined.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Proxy Statement of Highwoods Properties, Inc. to be filed in connection with its Annual Meeting of Stockholders to be held May 8, 2019 are incorporated by reference in Part II, Item 5 and Part III, Items 10, 11, 12, 13 and 14.

 




EXPLANATORY NOTE

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

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

Certain information contained herein is presented as of January 25, 2019, the latest practicable date for financial information prior to the filing of this Annual Report.

This report combines the Annual Reports on Form 10-K for the period ended December 31, 2018 of the Company and the Operating Partnership. We believe combining the annual reports into this single report results in the following benefits:

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

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

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

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

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

Item 6 - Selected Financial Data;

Item 9A - Controls and Procedures;

Item 15 - Certifications of CEO and CFO Pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act;

Consolidated Financial Statements; and

the following Notes to Consolidated Financial Statements:

Note 10 - Equity;

Note 15 - Earnings Per Share and Per Unit; and

Note 18 - Quarterly Financial Data.





HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP

TABLE OF CONTENTS

Item No.
 
Page
 
PART I
 
1.
1A.
1B.
2.
3.
X.
 
 
 
 
PART II
 
5.
6.
7.
7A.
8.
9.
9A.
9B.
 
 
 
 
PART III
 
10.
11.
12.
13.
14.
 
 
 
 
PART IV
 
15.


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PART I

ITEM 1. BUSINESS
 
General
 
Highwoods Properties, Inc., headquartered in Raleigh, is a publicly-traded real estate investment trust ("REIT"). The Company is a fully integrated office REIT that owns, develops, acquires, leases and manages properties primarily in the best business districts (BBDs) of Atlanta, Greensboro, Memphis, Nashville, Orlando, Pittsburgh, Raleigh, Richmond and Tampa. Our Common Stock is traded on the New York Stock Exchange ("NYSE") under the symbol "HIW."

At December 31, 2018, the Company owned all of the Preferred Units and 103.1 million, or 97.4%, of the Common Units in the Operating Partnership. Limited partners owned the remaining 2.7 million Common Units. Generally, the Operating Partnership is obligated to redeem each Common Unit at the request of the holder thereof for cash equal to the value of one share of Common Stock based on the average of the market price for the 10 trading days immediately preceding the notice date of such redemption, provided that the Company, at its option, may elect to acquire any such Common Units presented for redemption for cash or one share of Common Stock. The Common Units owned by the Company are not redeemable.
 
The Company was incorporated in Maryland in 1994. The Operating Partnership was formed in North Carolina in 1994. Our executive offices are located at 3100 Smoketree Court, Suite 600, Raleigh, NC 27604, and our telephone number is (919) 872-4924.
 
Our primary business is the operation, acquisition and development of office properties, which accounted for more than 97% of our annualized cash rental revenues as of December 31, 2018. There are no material inter-segment transactions. See Note 17 to our Consolidated Financial Statements for a summary of the rental and other revenues, net operating income and assets for each reportable segment.

Our website is www.highwoods.com. In addition to this Annual Report, all quarterly and current reports, proxy statements, interactive data and other information are made available, without charge, on our website as soon as reasonably practicable after they are filed or furnished with the Securities and Exchange Commission ("SEC"). Information on our website is not considered part of this Annual Report.
 
During 2018, the Company filed unqualified Section 303A certifications with the NYSE. The Company and the Operating Partnership have also filed the CEO and CFO certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 as exhibits to this Annual Report.
 
Business and Operating Strategy
 
Our Strategic Plan focuses on:
 
owning high-quality, differentiated office buildings in the BBDs of our core markets;

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

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

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

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

Local Market Leadership. We focus our real estate activities in markets where we have extensive local knowledge and own a significant amount of assets. In each of our core markets, we maintain offices that are led by division officers with significant real estate experience. Our real estate professionals are seasoned and have significant experience managing commercial real estate through all aspects of multiple economic cycles. Our senior leadership team has significant experience and maintains important relationships with market participants in each of our core markets.
 

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Customer Service-Oriented Organization. We provide a complete line of real estate services to our customers. We believe that our in-house leasing and asset management, development, acquisition and construction management services generally allow us to respond to the many demands of our existing and potential customer base. We provide our customers with cost-effective services such as build-to-suit construction and space modification, including tenant improvements and expansions. In addition, the breadth of our capabilities and resources provides us with market information not generally available. We believe that operating efficiencies achieved through our fully integrated organization and the strength of our balance sheet also provide a competitive advantage in retaining existing customers and attracting new customers as well as setting our rental rates and pricing other services. In addition, our relationships with our customers may lead to development projects when these customers seek new space.
 
Geographic Diversification. Our core portfolio consists primarily of office properties in Raleigh, Atlanta, Tampa, Nashville, Memphis, Pittsburgh, Richmond and Orlando and office and industrial properties in Greensboro. We do not believe that our operations are significantly dependent upon any particular geographic market.
 
Conservative and Flexible Balance Sheet. We are committed to maintaining a conservative and flexible balance sheet with access to ample liquidity, multiple sources of debt and equity capital and sufficient availability under our revolving credit facility to fund our short and long-term liquidity requirements. Our balance sheet also allows us to proactively assure our existing and prospective customers that we are able to fund tenant improvements and maintain our properties in good condition while retaining the flexibility to capitalize on favorable development and acquisition opportunities as they arise.
 
Competition
 
Our properties compete for customers with similar properties located in our markets primarily on the basis of location, rent, services provided and the design, quality and condition of the facilities. We also compete with other domestic and foreign REITs, financial institutions, pension funds, partnerships, individual investors and others when attempting to acquire, develop and operate properties.

Sustainability

We are firmly committed to our intrinsic and societal responsibility to routinely minimize all environmental impacts resulting from our development and operation of our properties. We are devoted to creating healthy and productive workspaces for our customers and communities. More information regarding our sustainability strategy is available under the “Service Not Space/Sustainability” section of our website. Information on our website is not considered part of this Annual Report.

Employees
 
At December 31, 2018, we had 442 full-time employees.

ITEM 1A. RISK FACTORS
 
An investment in our securities involves various risks. Investors should carefully consider the following risk factors in conjunction with the other information contained in this Annual Report before trading in our securities. If any of these risks actually occur, our business, results of operations, prospects and financial condition could be adversely affected.

Adverse economic conditions in our markets that negatively impact the demand for office space, such as high unemployment, may result in lower occupancy and rental rates for our portfolio, which would adversely affect our results of operations. Our operating results depend heavily on successfully leasing and operating the office space in our portfolio. Economic growth and office employment levels in our core markets are important factors, among others, in predicting our future operating results.

The key components affecting our rental and other revenues are average occupancy, rental rates, cost recovery income, new developments placed in service, acquisitions and dispositions. Average occupancy generally increases during times of improving economic growth, as our ability to lease space outpaces vacancies that occur upon the expirations of existing leases. Average occupancy generally declines during times of slower or negative economic growth, when new vacancies tend to outpace our ability to lease space. In addition, the timing of changes in occupancy levels tends to lag the timing of changes in overall economic activity and employment levels. For additional information regarding our average occupancy and rental rate trends over the past five years, see “Item 2. Properties.” Lower rental revenues that result from lower average occupancy or lower rental rates with respect to our same property portfolio will adversely affect our results of operations unless offset by the impact of any newly acquired or developed properties or lower variable operating expenses, general and administrative expenses and/or interest expense.

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We face considerable competition in the leasing market and may be unable to renew existing leases or re-let space on terms similar to the existing leases, or we may spend significant capital in our efforts to renew and re-let space, which may adversely affect our results of operations. In addition to seeking to increase our average occupancy by leasing current vacant space, we also concentrate our leasing efforts on renewing existing leases. Because we compete with a number of other developers, owners and operators of office and office-oriented, mixed-use properties, we may be unable to renew leases with our existing customers and, if our current customers do not renew their leases, we may be unable to re-let the space to new customers. To the extent that we are able to renew existing leases or re-let such space to new customers, heightened competition resulting from adverse market conditions may require us to utilize rent concessions and tenant improvements to a greater extent than we anticipate or have historically. Further, changes in space utilization by our customers due to technology, economic conditions and business culture also affect the occupancy of our properties. As a result, customers may seek to downsize by leasing less space from us upon any renewal.

If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our customers, we may lose existing and potential customers, and we may be pressured to reduce our rental rates below those we currently charge in order to retain customers upon expiration of their existing leases. Even if our customers renew their leases or we are able to re-let the space, the terms and other costs of renewal or re-letting, including the cost of required renovations, increased tenant improvement allowances, leasing commissions, reduced rental rates and other potential concessions, may be less favorable than the terms of our current leases and could require significant capital expenditures. From time to time, we may also agree to modify the terms of existing leases to incentivize customers to renew their leases. If we are unable to renew leases or re-let space in a reasonable time, or if our rental rates decline or our tenant improvement costs, leasing commissions or other costs increase, our financial condition and results of operations would be adversely affected.

Difficulties or delays in renewing leases with large customers or re-leasing space vacated by large customers could materially impact our results of operations. Our 20 largest customers account for a meaningful portion of our revenues. See “Item 2. Properties - Customers” and “Item 2. Properties - Lease Expirations.” There are no assurances that these customers, or any of our other large customers, will renew all or any of their space upon expiration of their current leases.

Some of our leases provide customers with the right to terminate their leases early, which could have an adverse effect on our financial condition and results of operations. Certain of our leases permit our customers to terminate their leases as to all or a portion of the leased premises prior to their stated lease expiration dates under certain circumstances, such as providing notice by a certain date and, in many cases, paying a termination fee. To the extent that our customers exercise early termination rights, our results of operations will be adversely affected, and we can provide no assurances that we will be able to generate an equivalent amount of net effective rent by leasing the vacated space to others.

Our results of operations and financial condition could be adversely affected by financial difficulties experienced by a major customer, or by a number of smaller customers, including bankruptcies, insolvencies or general downturns in business. Our operations depend on the financial stability of our customers. A default by a significant customer on its lease payments would cause us to lose the revenue and any other amounts due under such lease. In the event of a customer default or bankruptcy, we may experience delays in enforcing our rights as landlord and may incur substantial costs re-leasing the property. We cannot evict a customer solely because of its bankruptcy. On the other hand, a court might authorize the customer to reject and terminate its lease. In such case, our claim against the bankrupt customer for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease. As a result, our claim for unpaid rent would likely not be paid in full and we may be required to write off deferred leasing costs and accrued straight-line rents receivable. These events could adversely impact our financial condition and results of operations.

An oversupply of space in our markets often causes rental rates and occupancies to decline, making it more difficult for us to lease space at attractive rental rates, if at all. Undeveloped land in many of the markets in which we operate is generally more readily available and less expensive than in higher barrier-to-entry markets such as New York and San Francisco. As a result, even during times of positive economic growth, we and/or our competitors could construct new buildings that would compete with our existing properties. Any such oversupply could result in lower occupancy and rental rates in our portfolio, which would have a negative impact on our results of operations.

In order to maintain and/or increase the quality of our properties and successfully compete against other properties, we regularly must spend money to maintain, repair, renovate and improve our properties, which could negatively impact our financial condition and results of operations. If our properties are not as attractive to customers due to physical condition as properties owned by our competitors, we could lose customers or suffer lower rental rates. As a result, we may from time to time make significant capital expenditures to maintain or enhance the competitiveness of our properties. There can be no assurances

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that any such expenditures would result in higher occupancy or higher rental rates or deter existing customers from relocating to properties owned by our competitors.

Costs of complying with governmental laws and regulations may adversely affect our results of operations. All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. Some of these laws and regulations may impose joint and several liability on customers, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may hinder our ability to sell, rent or pledge such property as collateral for future borrowings.

Compliance with new laws or regulations or stricter interpretation of existing laws may require us to incur significant expenditures. Future laws or regulations may impose significant environmental liability. Additionally, our customers' operations, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties may affect our properties. In addition, there are various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply and that may subject us to liability in the form of fines or damages for noncompliance. Any expenditures, fines or damages we must pay would adversely affect our results of operations. Proposed legislation to address climate change could increase utility and other costs of operating our properties.

Discovery of previously undetected environmentally hazardous conditions may adversely affect our financial condition and results of operations. Under various federal, state and local environmental laws and regulations, a current or previous property owner or operator may be liable for the cost to remove or remediate hazardous or toxic substances on such property. These costs could be significant. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require significant expenditures or prevent us from entering into leases with prospective customers that may be impacted by such laws. Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing materials. Third parties may seek recovery from real property owners or operators for personal injury or property damage associated with exposure to released hazardous substances. The cost of defending against claims of liability, of complying with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could adversely affect our financial condition and results of operations.

Our same property results of operations would suffer if costs of operating our properties, such as real estate taxes, utilities, insurance, maintenance and other costs, rise faster than our ability to increase rental revenues and/or cost recovery income. While we receive additional rent from our customers that is based on recovering a portion of operating expenses, increased operating expenses will negatively impact our results of operations. Our revenues, including cost recovery income, are subject to longer-term leases and may not be quickly increased sufficient to recover an increase in operating costs and expenses. Furthermore, the costs associated with owning and operating a property are not necessarily reduced when circumstances such as market factors and competition cause a reduction in rental revenues from the property. Increases in same property operating expenses would adversely affect our results of operations unless offset by higher rental rates, higher cost recovery income, the impact of any newly acquired or developed properties, lower general and administrative expenses and/or lower interest expense.

Recent and future acquisitions and development properties may fail to perform in accordance with our expectations and may require renovation and development costs exceeding our estimates. In the normal course of business, we typically evaluate potential acquisitions, enter into non-binding letters of intent, and may, at any time, enter into contracts to acquire additional properties. Acquired properties may fail to perform in accordance with our expectations due to lease-up risk, renovation cost risks and other factors. In addition, the renovation and improvement costs we incur in bringing an acquired property up to our standards may exceed our original estimates. We may not have the financial resources to make suitable acquisitions or renovations on favorable terms or at all.

Further, we face significant competition for attractive investment opportunities from an indeterminate number of other real estate investors, including investors with significantly greater capital resources and access to capital than we have, such as domestic and foreign corporations and financial institutions, publicly-traded and privately-held REITs, private institutional investment funds, investment banking firms, life insurance companies and pension funds. Moreover, owners of office properties may be reluctant to sell, resulting in fewer acquisition opportunities. As a result of such increased competition and limited opportunities, we may be unable to acquire additional properties or the purchase price of such properties may be significantly elevated, which would reduce our expected return from making any such acquisitions.


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In addition to acquisitions, we periodically consider developing or re-developing properties. Risks associated with development and re-development activities include:

the unavailability of favorable financing;

construction costs exceeding original estimates;

construction and lease-up delays resulting in increased debt service expense and construction costs; and

lower than anticipated occupancy rates and rents causing a property to be unprofitable or less profitable than originally estimated.

Development and re-development activities are also subject to risks relating to our ability to obtain, or delays in obtaining, any necessary zoning, land-use, building, occupancy and other required governmental and utility company authorizations. Further, we hold and expect to continue to acquire non-income producing land for future development. See "Item 2. Properties - Land Held for Development." No assurances can be provided as to when, if ever, we will commence development projects on such land or if any such development projects would be on favorable terms. The fixed costs of acquiring and owning development land, such as the ongoing payment of property taxes, adversely affects our results of operations until such land is either placed in service or sold.

Illiquidity of real estate investments and the tax effect of dispositions could significantly impede our ability to sell assets or respond to favorable or adverse changes in the performance of our properties. Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties in our portfolio in response to changing economic, financial and investment conditions is limited. We intend to continue to sell some of our properties in the future as part of our investment strategy and activities. However, we cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether the price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and close the sale of a property.

Certain of our properties have low tax bases relative to their estimated current market values, and accordingly, the sale of such assets would generate significant taxable gains unless we sold such properties in a tax-deferred exchange under Section 1031 of the Internal Revenue Code or another tax-free or tax-deferred transaction. For an exchange to qualify for tax-deferred treatment under Section 1031, the net proceeds from the sale of a property must be held by an escrow agent until applied toward the purchase of real estate qualifying for gain deferral. Given the competition for properties meeting our investment criteria, there could be a delay in reinvesting such proceeds or we may be unable to reinvest such proceeds at all. Any delay or limitation in using the reinvestment proceeds to acquire additional income producing assets could adversely affect our near-term results of operations. Additionally, in connection with tax-deferred 1031 transactions, our restricted cash balances may be commingled with other funds being held by any such escrow agent, which subjects our balance to the credit risk of the institution. If we sell properties outright in taxable transactions, we may elect to distribute some or all of the taxable gain to our stockholders under the requirements of the Internal Revenue Code for REITs, which in turn could negatively affect our future results of operations and may increase our leverage. If a transaction's gain that is intended to qualify as a Section 1031 deferral is later determined to be taxable, we may face adverse consequences, and if the laws applicable to such transactions are amended or repealed, we may not be able to dispose of properties on a tax-deferred basis.

Our use of joint ventures may limit our flexibility with jointly owned investments. In appropriate circumstances, we own, develop and acquire properties in joint ventures with other persons or entities when circumstances warrant the use of these structures. Types of joint venture investments include noncontrolling ownership interests in entities such as partnerships and limited liability companies and tenant-in-common interests in which we own less than 100% of the undivided interests in a real estate asset. Our participation in joint ventures is subject to the risks that:

we could become engaged in a dispute with any of our joint venture partners that might affect our ability to develop or operate a property;

our joint ventures are subject to debt and the refinancing of such debt may require equity capital calls;

our joint venture partners may default on their obligations necessitating that we fulfill their obligation ourselves;

our joint venture partners may have different objectives than we have regarding the appropriate timing and terms of any renovation, sale or refinancing of properties;


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our joint venture partners may be structured differently than us for tax purposes, which could create conflicts of interest; and

our joint venture partners may have competing interests in our markets that could create conflicts of interest.

Our insurance coverage on our properties may be inadequate. We carry insurance on all of our properties, including insurance for liability, fire, windstorms, floods, earthquakes, environmental concerns and business interruption. Insurance companies, however, limit or exclude coverage against certain types of losses, such as losses due to terrorist acts, named windstorms, earthquakes and toxic mold. Thus, we may not have insurance coverage, or sufficient insurance coverage, against certain types of losses and/or there may be decreases in the insurance coverage available. Should an uninsured loss or a loss in excess of our insured limits occur, we could lose all or a portion of the capital we have invested in a property or properties, as well as the anticipated future operating income from the property or properties. If any of our properties were to experience a catastrophic loss, it could disrupt our operations, delay revenue, result in large expenses to repair or rebuild the property and/or damage our reputation among our customers and investors generally. Further, if any of our insurance carriers were to become insolvent, we would be forced to replace the existing insurance coverage with another suitable carrier, and any outstanding claims would be at risk for collection. In such an event, we cannot be certain that we would be able to replace the coverage at similar or otherwise favorable terms. Such events could adversely affect our results of operations and financial condition.

We have obtained title insurance policies for each of our properties, typically in an amount equal to its original purchase price.  However, these policies may be for amounts less than the current or future values of our properties, particularly for land parcels on which we subsequently construct a building. In such event, if there is a title defect relating to any of our properties, we could lose some of the capital invested in and anticipated profits from such property.

Our use of debt could have a material adverse effect on our financial condition and results of operations. We are subject to risks associated with debt financing, such as the sufficiency of cash flow to meet required payment obligations, ability to comply with financial ratios and other covenants and the availability of capital to refinance existing indebtedness or fund important business initiatives. If we breach covenants in our debt agreements, the lenders can declare a default and, if the debt is secured, can take possession of the property securing the defaulted loan. In addition, certain of our unsecured debt agreements contain cross-default provisions giving the unsecured lenders the right to declare a default if we are in default under more than $30.0 million with respect to other loans in some circumstances. Unwaived defaults under our debt agreements could materially and adversely affect our financial condition and results of operations.

Further, we obtain credit ratings from Moody's Investors Service and Standard and Poor's Rating Services based on their evaluation of our creditworthiness. These agencies' ratings are based on a number of factors, some of which are not within our control. In addition to factors specific to our financial strength and performance, the rating agencies also consider conditions affecting REITs generally. We cannot assure you that our credit ratings will not be downgraded. If our credit ratings are downgraded or other negative action is taken, we could be required, among other things, to pay additional interest and fees on outstanding borrowings under our revolving credit facility and bank term loans.

We generally do not intend to reserve funds to retire existing debt upon maturity. We may not be able to repay, refinance or extend any or all of our debt at maturity or upon any acceleration. If any refinancing is done at higher interest rates, the increased interest expense could adversely affect our cash flow and ability to pay distributions. Any such refinancing could also impose tighter financial ratios and other covenants that restrict our ability to take actions that could otherwise be in our best interest, such as funding new development activity, making opportunistic acquisitions, repurchasing our securities or paying distributions. While we do not currently have significant amounts of mortgage debt, we may in the future mortgage additional properties, which could also restrict our ability to sell any such underlying assets. If we do not meet any such mortgage financing obligations, any properties securing such indebtedness could be foreclosed on.

We depend on our revolving credit facility for working capital purposes and for the short-term funding of our development and acquisition activity and, in certain instances, the repayment of other debt upon maturity. Our ability to borrow under the revolving credit facility also allows us to quickly capitalize on opportunities at short-term interest rates. If our lenders default under their obligations under the revolving credit facility or we become unable to borrow additional funds under the facility for any reason, we would be required to seek alternative equity or debt capital, which could be more costly and adversely impact our financial condition. If such alternative capital were unavailable, we may not be able to make new investments and could have difficulty repaying other debt.

Increases in interest rates would increase our interest expense. At January 25, 2019, we had $766.0 million of variable rate debt outstanding not protected by interest rate hedge contracts. We may incur additional variable rate debt in the future. If interest rates increase, then so would the interest expense on our unhedged variable rate debt, which could adversely affect our

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financial condition and results of operations. From time to time, we manage our exposure to interest rate risk with interest rate hedge contracts that effectively fix or cap a portion of our variable rate debt. In addition, we utilize fixed rate debt at market rates. If interest rates decrease, the fair market value of any existing interest rate hedge contracts or outstanding fixed-rate debt would decline.

Our efforts to manage these exposures may not be successful. Our use of interest rate hedge contracts to manage risk associated with interest rate volatility may expose us to additional risks, including a risk that a counterparty to a hedge contract may fail to honor its obligations. Developing an effective interest rate risk strategy is complex and no strategy can completely insulate us from risks associated with interest rate fluctuations. There can be no assurance that our hedging activities will have the desired beneficial impact on our results of operations or financial condition. Termination of interest rate hedge contracts typically involves costs, such as transaction fees or breakage costs.

Failure to comply with Federal government contractor requirements could result in substantial costs and loss of substantial revenue. We are subject to compliance with a wide variety of complex legal requirements because we are a Federal government contractor. These laws regulate how we conduct business, require us to administer various compliance programs and require us to impose compliance responsibilities on some of our contractors. Our failure to comply with these laws could subject us to fines and penalties, cause us to be in default of our leases and other contracts with the Federal government and bar us from entering into future leases and other contracts with the Federal government.

We face risks associated with security breaches through cyber attacks, cyber intrusions or otherwise, as well as other significant disruptions of our information technology (IT) networks and related systems. We face risks associated with security breaches, whether through cyber attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, and other significant disruptions of our IT networks and related systems. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our IT networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations (including managing our building systems) and, in some cases, may be critical to the operations of certain of our customers. Although we make efforts to maintain the security and integrity of these types of IT networks and related systems, and we have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed not be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is impossible for us to entirely mitigate this risk.

A security breach or other significant disruption involving our IT networks and related systems could:

disrupt the proper functioning of our networks and systems and therefore our operations and/or those of certain of our customers;

result in misstated financial reports, violations of loan covenants, missed reporting deadlines and/or missed permitting deadlines;

result in our inability to properly monitor our compliance with the rules and regulations regarding our qualification as a REIT;

result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of, proprietary, confidential, sensitive or otherwise valuable information of ours or others, which others could use to compete against us or which could expose us to damage claims by third-parties for disruptive, destructive or otherwise harmful purposes and outcomes;

result in our inability to maintain the building systems relied upon by our customers for the efficient use of their leased space;

require significant management attention and resources to remedy any damages that result;

subject us to claims for breach of contract, damages, credits, penalties or termination of leases or other agreements; or

damage our reputation among our customers and investors generally.

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Any or all of the foregoing could have a material adverse effect on our results of operations, financial condition and cash flows.

The Company may be subject to taxation as a regular corporation if it fails to maintain its REIT status, which could have a material adverse effect on the Company's stockholders and on the Operating Partnership. We may be subject to adverse consequences if the Company fails to continue to qualify as a REIT for federal income tax purposes. While we intend to operate in a manner that will allow the Company to continue to qualify as a REIT, we cannot provide any assurances that the Company will remain qualified as such in the future, which could have particularly adverse consequences to the Company's stockholders. Many of the requirements for taxation as a REIT are highly technical and complex and depend upon various factual matters and circumstances that may not be entirely within our control. The fact that the Company holds its assets through the Operating Partnership and its subsidiaries further complicates the application of the REIT requirements. Even a technical or inadvertent mistake could jeopardize our REIT status. Furthermore, Congress and the Internal Revenue Service might change the tax laws and regulations and the courts might issue new rulings that make it more difficult, or impossible, for the Company to remain qualified as a REIT. If the Company fails to qualify as a REIT, it would (a) not be allowed a deduction for dividends paid to stockholders in computing its taxable income, (b) be subject to federal income tax at regular corporate rates (and state and local taxes) and (c) unless entitled to relief under the tax laws, not be able to re-elect REIT status until the fifth calendar year after it failed to qualify as a REIT. Additionally, the Company would no longer be required to make distributions. As a result of these factors, the Company's failure to qualify as a REIT could impair our ability to expand our business and adversely affect the price of our Common Stock.

Even if we remain qualified as a REIT, we may face other tax liabilities that adversely affect our financial condition and results of operations. Even if we remain qualified for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes. In addition, our taxable REIT subsidiary is subject to regular corporate federal, state and local taxes. Any of these taxes would adversely affect our financial condition and results of operations.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive investments. To remain qualified as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our capital stock. In order to meet these tests, we may be required to forego investments we might otherwise make. Thus, compliance with the REIT requirements may hinder our performance.

In particular, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investment in securities (other than government securities, securities of taxable REIT subsidiaries and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities, securities of taxable REIT subsidiaries and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our total assets can be represented by the securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments, which could adversely affect our financial condition and results of operations.

The prohibited transactions tax may limit our ability to sell properties. A REIT's net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property held primarily for sale to customers in the ordinary course of business. We may be subject to the prohibited transaction tax equal to 100% of net gain upon a disposition of real property. Although a safe harbor to the characterization of the sale of real property by a REIT as a prohibited transaction is available, we cannot assure you that we can in all cases comply with the safe harbor or that we will avoid owning property that may be characterized as held primarily for sale to customers in the ordinary course of business. Consequently, we may choose not to engage in certain sales of our properties or may conduct such sales through our taxable REIT subsidiary, which would be subject to federal and state income taxation.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends. Dividends payable by REITs to U.S. stockholders are taxed at a maximum individual rate of 33.4% (including the 3.8% net investment income tax and after factoring in a 20% deduction for pass-through income). The more favorable rates applicable to regular corporate qualified dividends could cause investors who are taxed at individual rates to perceive investments in REITs to be relatively less attractive

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than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our stock.

We face possible tax audits. Because we are organized and qualify as a REIT, we are generally not subject to federal income taxes. We are, however, subject to federal, state and local taxes in certain instances. In the normal course of business, certain entities through which we own real estate have undergone tax audits. Collectively, tax deficiency notices received to date from the jurisdictions conducting previous audits have not been material. However, there can be no assurance that future audits will not occur with increased frequency or that the ultimate result of such audits will not have a material adverse effect on our results of operations.

The price of our Common Stock is volatile and may decline. A number of factors may adversely influence the public market price of our Common Stock. These factors include:

the level of institutional interest in us;

the perceived attractiveness of investment in us, in comparison to other REITs;

the attractiveness of securities of REITs in comparison to other asset classes;

our financial condition and performance;

the market's perception of our growth potential and potential future cash dividends;

government action or regulation, including changes in tax laws;

increases in market interest rates, which may lead investors to expect a higher annual yield from our distributions in relation to the price of our Common Stock;

changes in our credit ratings;

the issuance of additional shares of Common Stock, or the perception that such issuances might occur, including under our equity distribution agreements; and

any negative change in the level or stability of our dividend.

Tax elections regarding distributions may impact the future liquidity of the Company or our stockholders. Under certain circumstances, we may consider making a tax election to treat future distributions to stockholders as distributions in the current year. This election, which is provided for in the Internal Revenue Code, may allow us to avoid increasing our dividends or paying additional income taxes in the current year. However, this could result in a constraint on our ability to decrease our dividends in future years without creating risk of either violating the REIT distribution requirements or generating additional income tax liability.

Tax legislative or regulatory action could adversely affect us or our stockholders. In recent years, numerous legislative, judicial and administrative changes have been made to the U.S. federal income tax laws applicable to investments similar to an investment in our Common Stock. Additional changes to tax laws are likely to continue in the future, and we cannot assure you that any such changes will not adversely affect the taxation of us or our stockholders. Any such changes could have an adverse effect on an investment in our Common Stock, on the market value of our properties or the attractiveness of securities of REITs generally in comparison to other asset classes.

We cannot assure you that we will continue to pay dividends at historical rates. We generally expect to use cash flows from operating activities to fund dividends. For information regarding our dividend payment history as well as a discussion of the factors that influence the decisions of the Company's Board of Directors regarding dividends and distributions, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Dividends and Distributions.” Changes in our future dividend payout level could have a material effect on the market price of our Common Stock.

Cash distributions reduce the amount of cash that would otherwise be available for other business purposes, including funding debt maturities, reducing debt or future growth initiatives. For the Company to maintain its qualification as a REIT, it must annually distribute to its stockholders at least 90% of REIT taxable income, excluding net capital gains. In addition, although capital gains are not required to be distributed to maintain REIT status, taxable capital gains, if any, that are generated as part of

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our capital recycling program are subject to federal and state income tax unless such gains are distributed to our stockholders. Cash distributions made to stockholders to maintain REIT status or to distribute otherwise taxable capital gains limit our ability to accumulate capital for other business purposes, including funding debt maturities, reducing debt or growth initiatives.

Further issuances of equity securities may adversely affect the market price of our Common Stock and may be dilutive to current stockholders. The sales of a substantial number of Common Shares, or the perception that such sales could occur, could adversely affect the market price of our Common Stock. We have filed a registration statement with the SEC allowing us to offer, from time to time, an indefinite amount of equity securities (including Common Stock and Preferred Stock) on an as-needed basis and subject to our ability to effect offerings on satisfactory terms based on prevailing conditions. In addition, the Company’s board of directors has, from time to time, authorized the Company to issue shares of Common Stock pursuant to the Company’s equity sales agreements. The interests of our existing stockholders could be diluted if additional equity securities are issued to finance future developments and acquisitions or repay indebtedness.  Our ability to execute our business strategy depends on our access to an appropriate blend of debt financing, including unsecured lines of credit and other forms of secured and unsecured debt, and equity financing, including common equity.

We may change our policies without obtaining the approval of our stockholders. Our operating and financial policies, including our policies with respect to acquisitions of real estate, growth, operations, indebtedness, capitalization and dividends, are exclusively determined by the Company’s Board of Directors. Accordingly, our stockholders do not control these policies.

Limits on changes in control may discourage takeover attempts beneficial to stockholders. Provisions in the Company's charter and bylaws as well as Maryland general corporation law may have anti-takeover effects that delay, defer or prevent a takeover attempt. For example, these provisions may defer or prevent tender offers for our Common Stock or purchases of large blocks of our Common Stock, thus limiting the opportunities for the Company's stockholders to receive a premium for their shares of Common Stock over then-prevailing market prices. These provisions include the following:

Ownership limit. The Company's charter prohibits direct, indirect or constructive ownership by any person or entity of more than 9.8% of the Company's outstanding capital stock. Any attempt to own or transfer shares of capital stock in excess of the ownership limit without the consent of the Company's board of directors will be void.

Preferred Stock. The Company's charter authorizes the board of directors to issue preferred stock in one or more classes and establish the preferences and rights of any class of preferred stock issued. These actions can be taken without stockholder approval. The issuance of preferred stock could have the effect of delaying or preventing someone from taking control of the Company, even if a change in control were in our best interest.

Business combinations. Pursuant to the Company's charter and Maryland law, the Company cannot merge into or consolidate with another corporation or enter into a statutory share exchange transaction in which the Company is not the surviving entity or sell all or substantially all of its assets unless the board of directors adopts a resolution declaring the proposed transaction advisable and a majority of the stockholders voting together as a single class approve the transaction. Maryland law prohibits stockholders from taking action by written consent unless all stockholders consent in writing. The practical effect of this limitation is that any action required or permitted to be taken by the Company's stockholders may only be taken if it is properly brought before an annual or special meeting of stockholders. The Company's bylaws further provide that in order for a stockholder to properly bring any matter before a meeting, the stockholder must comply with requirements regarding advance notice. The foregoing provisions could have the effect of delaying until the next annual meeting stockholder actions that the holders of a majority of the Company's outstanding voting securities favor. These provisions may also discourage another person from making a tender offer for the Company's common stock, because such person or entity, even if it acquired a majority of the Company's outstanding voting securities, would likely be able to take action as a stockholder, such as electing new directors or approving a merger, only at a duly called stockholders meeting. Maryland law also establishes special requirements with respect to business combinations between Maryland corporations and interested stockholders unless exemptions apply. Among other things, the law prohibits for five years a merger and other similar transactions between a corporation and an interested stockholder and requires a supermajority vote for such transactions after the end of the five-year period. The Company's charter contains a provision exempting the Company from the Maryland business combination statute. However, we cannot assure you that this charter provision will not be amended or repealed at any point in the future.

Control share acquisitions. Maryland general corporation law also provides that control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares owned by the acquirer or by officers or employee directors. The control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction, or to acquisitions approved or exempted by the corporation's charter or bylaws.

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The Company's bylaws contain a provision exempting from the control share acquisition statute any stock acquired by any person. However, we cannot assure you that this bylaw provision will not be amended or repealed at any point in the future.

Maryland unsolicited takeover statute. Under Maryland law, the Company's board of directors could adopt various anti-takeover provisions without the consent of stockholders. The adoption of such measures could discourage offers for the Company or make an acquisition of the Company more difficult, even when an acquisition would be in the best interest of the Company's stockholders.

Anti‑takeover protections of operating partnership agreement. Upon a change in control of the Company, the partnership agreement of the Operating Partnership requires certain acquirers to maintain an umbrella partnership real estate investment trust structure with terms at least as favorable to the limited partners as are currently in place. For instance, the acquirer would be required to preserve the limited partner's right to continue to hold tax-deferred partnership interests that are redeemable for capital stock of the acquirer. Exceptions would require the approval of two-thirds of the limited partners of our Operating Partnership (other than the Company). These provisions may make a change of control transaction involving the Company more complicated and therefore might decrease the likelihood of such a transaction occurring, even if such a transaction would be in the best interest of the Company's stockholders.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

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ITEM 2. PROPERTIES
 
Our core portfolio consists primarily of office properties in Raleigh, Atlanta, Tampa, Nashville, Memphis, Pittsburgh, Richmond and Orlando and office and industrial properties in Greensboro.
 
Properties
 
The following table sets forth information about in-service office properties that we wholly own by geographic location at December 31, 2018:
 
Market
 
Rentable
Square Feet
 
Occupancy
 
Percentage of Annualized Cash Rental Revenue (1)
Atlanta
 
5,120,000

 
87.4
%
 
18.5
%
Nashville
 
4,190,000

 
92.9

 
17.7

Raleigh
 
4,655,000

 
89.5

 
16.4

Tampa
 
3,620,000

 
95.3

 
14.7

Pittsburgh
 
2,148,000

 
95.0

 
8.9

Orlando
 
1,976,000

 
91.2

 
7.6

Richmond
 
2,033,000

 
93.4

 
6.5

Memphis
 
1,638,000

 
92.0

 
6.2

Greensboro
 
1,151,000

 
93.0

 
3.5

Total
 
26,531,000

 
91.6
%
 
100.0
%
__________
(1)
Annualized Cash Rental Revenue is cash rental revenue (base rent plus cost recovery income, excluding straight-line rent) from our office properties for the month of December 2018 multiplied by 12.
 
The following table sets forth the net changes in rentable square footage of in-service properties that we wholly own:
 
 
Year Ended December 31,
 
2018
 
2017
 
2016
 
(rentable square feet in thousands)
Acquisitions

 

 
243

Developments Placed In-Service
351

 
1,014

 
176

Redevelopment/Other
(2
)
 
(7
)
 
(46
)
Dispositions
(491
)
 
(1,077
)
 
(1,429
)
Net Change in Rentable Square Footage
(142
)
 
(70
)
 
(1,056
)
 
The following table sets forth operating information about in-service properties that we wholly own:
 
 
Average
Occupancy
 
Annualized GAAP Rent
Per Square
Foot (1)
 
Annualized Cash Rent
Per Square
Foot (2)
2014
90.4
%
 
$
22.13

 
$
21.29

2015
92.3
%
 
$
23.30

 
$
22.55

2016
92.8
%
 
$
23.24

 
$
22.55

2017
92.5
%
 
$
24.05

 
$
23.46

2018
91.7
%
 
$
24.68

 
$
24.06

__________
(1)
Annualized GAAP Rent Per Square Foot is rental revenue (base rent plus cost recovery income, including straight-line rent) for the month of December of the respective year multiplied by 12, divided by total occupied rentable square footage.
(2)
Annualized Cash Rent Per Square Foot is cash rental revenue (base rent plus cost recovery income, excluding straight-line rent) for the month of December of the respective year multiplied by 12, divided by total occupied rentable square footage.


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Customers

The following table sets forth information concerning the 20 largest customers of properties that we wholly own at December 31, 2018:
 
Customer
 
Rentable Square
Feet
 
Annualized
Cash Rental
Revenue (1)
 
Percent of
Total
Annualized
Cash Rental
Revenue (1)
 
Weighted
Average
Remaining
Lease Term in
Years
 
 
 
 
(in thousands)
 
 
 
 
Federal Government
 
1,282,516

 
$
31,589

 
4.86
%
 
4.2

Metropolitan Life Insurance
 
624,245

 
16,269

 
2.51

 
9.7

Bridgestone Americas
 
506,128

 
14,993

 
2.31

 
18.7

PPG Industries
 
356,215

 
9,728

 
1.50

 
12.3

Tivity
 
263,598

 
7,672

 
1.18

 
4.2

EQT Corporation
 
295,241

 
7,037

 
1.08

 
5.8

Bass, Berry & Sims
 
209,701

 
7,034

 
1.08

 
5.8

Vanderbilt University
 
251,415

 
6,814

 
1.05

 
3.1

International Paper
 
278,444

 
6,764

 
1.04

 
9.9

State of Georgia
 
313,146

 
6,242

 
0.96

 
3.4

Laser Spine Institute
 
176,089

 
6,156

 
0.95

 
13.8

American General Life
 
173,834

 
5,992

 
0.92

 
8.1

Marsh USA
 
177,382

 
5,963

 
0.92

 
3.5

Novelis
 
168,949

 
5,943

 
0.92

 
5.7

Lifepoint Corporate Services
 
202,991

 
5,247

 
0.81

 
10.3

PNC Bank
 
159,142

 
4,803

 
0.74

 
9.1

AT&T
 
197,826

 
4,780

 
0.74

 
4.5

Regus PLC
 
172,433

 
4,747

 
0.73

 
4.8

Global Payments
 
168,051

 
4,453

 
0.69

 
14.2

Avanos Medical
 
193,199

 
4,453

 
0.69

 
10.2

Total
 
6,170,545

 
$
166,679

 
25.68
%
 
8.1

__________
(1)
Annualized Cash Rental Revenue is cash rental revenue (base rent plus cost recovery income, excluding straight-line rent) for the month of December 2018 multiplied by 12.

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Lease Expirations
 
The following tables set forth scheduled lease expirations for existing leases at office properties that we wholly owned at December 31, 2018:

Lease Expiring (1)
 
Number of Leases Expiring
 
Rentable
Square Feet
Subject to
Expiring
Leases
 
Percentage of
Leased Square
Footage
Represented
by Expiring
Leases
 
Annualized
Cash Rental
Revenue
Under Expiring
Leases (2)
 
Average
Annual Cash
Rental Rate
Per Square
Foot for
Expirations
 
Percent of
Annualized
Cash Rental
Revenue
Represented
by Expiring
Leases (2)
 
 
 
 
 
 
 
($ in thousands)
 
 
 
2019 (3)
 
401

 
2,260,503

 
9.3
%
 
$
56,363

 
$
24.93

 
8.9
%
2020
 
366

 
2,859,887

 
11.8

 
79,594

 
27.83

 
12.6

2021
 
340

 
2,734,943

 
11.3

 
72,411

 
26.48

 
11.5

2022
 
275

 
2,428,417

 
10.0

 
60,364

 
24.86

 
9.5

2023
 
271

 
2,244,998

 
9.2

 
57,335

 
25.54

 
9.1

2024
 
152

 
2,267,733

 
9.3

 
61,219

 
27.00

 
9.7

2025
 
90

 
1,707,576

 
7.0

 
45,858

 
26.86

 
7.3

2026
 
83

 
1,483,602

 
6.1

 
37,189

 
25.07

 
5.9

2027
 
44

 
1,142,987

 
4.7

 
31,011

 
27.13

 
4.9

2028
 
58

 
914,319

 
3.8

 
25,113

 
27.47

 
4.0

Thereafter
 
167

 
4,258,674

 
17.5

 
105,642

 
24.81

 
16.6

 
 
2,247

 
24,303,639

 
100.0
%
 
$
632,099

 
$
26.01

 
100.0
%
__________
(1)
Expirations that have been renewed are reflected above based on the renewal expiration date. Expirations include leases related to completed not stabilized development properties but exclude leases related to developments in-process.
(2)
Annualized Cash Rental Revenue is cash rental revenue (base rent plus cost recovery income, excluding straight-line rent) for the month of December 2018 multiplied by 12.
(3)
Includes 87,000 rentable square feet of leases that are on a month-to-month basis, which represent 0.2% of total annualized cash rental revenue.

In-Process Development
 
As of December 31, 2018, we were developing 1.1 million rentable square feet of office properties. The following table summarizes these announced and in-process office developments:
 
Property
 
Market
 
Rentable Square Feet
 
Anticipated Total Investment (1)
 
Investment As Of December 31, 2018 (1)
 
Pre Leased %
 
Estimated Completion
 
Estimated Stabilization
 
 
 
 
 
 
($ in thousands)
 
 
 
 
 
 
MetLife III
 
Raleigh
 
219,000

 
$
64,500

 
$
55,753

 
100.0
%
 
2Q19
 
2Q21
Mars Petcare - Ovation
 
Nashville
 
223,700

 
96,200

 
82,012

 
100.0

 
3Q19
 
3Q19
GlenLake Seven (2) (3)
 
Raleigh
 
125,700

 
40,970

 
2,718

 
28.2

 
3Q20
 
4Q21
Asurion (2)
 
Nashville
 
552,800

 
285,000

 
36,112

 
98.3

 
4Q21
 
1Q22
 
 
 
 
1,121,200

 
$
486,670

 
$
176,595

 
91.1
%
 
 
 
 
__________
(1)
Includes deferred lease commissions which are classified in deferred leasing costs on our Consolidated Balance Sheets.
(2)
Recorded on our Consolidated Balance Sheets in land held for development, not development in-process.
(3)
Our corporate and Raleigh division personnel will occupy approximately 35,500 square feet.

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Land Held for Development
 
We wholly owned 337 acres of development land at December 31, 2018. We estimate that we can develop approximately 4.6 million and 0.2 million rentable square feet of office and industrial space, respectively, on the 181 acres that we consider core assets for our future development needs. Our core development land is zoned and available for development, and nearly all of the land has utility infrastructure in place. We believe that our commercially zoned and unencumbered land gives us a development advantage over other commercial real estate development companies in many of our markets.
 
Joint Venture Investments
 
The following table sets forth information about our joint venture investments by geographic location at December 31, 2018:
 
 
 
Rentable
Square Feet
 
Weighted
Average
Ownership
Interest (1)
 
Occupancy
 
Percentage of
Annualized
Cash Rental
Revenue (2)
Market
 
Kansas City (3)
 
292,000

 
50.0
%
 
97.4
%
 
51.3
%
Richmond (4)
 
345,000

 
50.0

 
100.0

 
28.8

Raleigh
 
636,000

 
25.0

 
64.8

 
19.9

Total
 
1,273,000

 
37.5
%
 
81.8
%
 
100.0
%
__________
(1)
Weighted Average Ownership Interest is calculated using Rentable Square Feet.
(2)
Annualized Cash Rental Revenue is cash rental revenue (base rent plus cost recovery income, excluding straight-line rent) for the month of December 2018 multiplied by 12.
(3)
Excluding our 26.5% ownership interest in a real estate brokerage services company.
(4)
This joint venture is consolidated.

ITEM 3. LEGAL PROCEEDINGS

We are from time to time a party to a variety of legal proceedings, claims and assessments arising in the ordinary course of our business. We regularly assess the liabilities and contingencies in connection with these matters based on the latest information available. For those matters where it is probable that we have incurred or will incur a loss and the loss or range of loss can be reasonably estimated, the estimated loss is accrued and charged to income in our Consolidated Financial Statements. In other instances, because of the uncertainties related to both the probable outcome and amount or range of loss, a reasonable estimate of liability, if any, cannot be made. Based on the current expected outcome of such matters, none of these proceedings, claims or assessments is expected to have a material adverse effect on our business, financial condition, results of operations or cash flows.


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ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT

The Company is the sole general partner of the Operating Partnership. The following table sets forth information with respect to the Company’s executive officers:
 
Name
 
Age
 
Position and Background
Edward J. Fritsch
 
60
 
Director and Chief Executive Officer.
Mr. Fritsch has been a director since January 2001. Mr. Fritsch became our chief executive officer and chair of the investment committee of our board of directors in July 2004. Mr. Fritsch was our president from December 2003 to November 2018, our chief operating officer from January 1998 to July 2004 and was a vice president and secretary from June 1994 to January 1998. Mr. Fritsch joined our predecessor in 1982 and was a partner of that entity at the time of our initial public offering in June 1994. Mr. Fritsch is a director, chair of the governance committee and member of the audit committee of National Retail Properties, Inc., a publicly-traded REIT (NYSE:NNN). Mr. Fritsch is a past chair of the National Association of Real Estate Investment Trusts ("NAREIT"). Mr. Fritsch is also a member of Wells Fargo's central region advisory board, a member of the University of North Carolina at Chapel Hill Foundation board, a director of the University of North Carolina at Chapel Hill Real Estate Holdings and a member of the Dix Park Conservancy board.

Theodore J. Klinck
 
53
 
President and Chief Operating Officer.
Mr. Klinck became president and chief operating officer in November 2018. Prior to that, Mr. Klinck was our executive vice president and chief operating and investment officer from September 2015 to November 2018 and was senior vice president and chief investment officer from March 2012 to August 2015. Before joining us, Mr. Klinck served as principal and chief investment officer with Goddard Investment Group, a privately owned real estate investment firm. Previously, Mr. Klinck had been a managing director at Morgan Stanley Real Estate.

Mark F. Mulhern
 
59
 
Executive Vice President and Chief Financial Officer.
Mr. Mulhern became chief financial officer in September 2014. Prior to that, Mr. Mulhern was a director of the Company since January 2012. Mr. Mulhern served as executive vice president and chief financial officer of Exco Resources, Inc. (NYSE:XCO), an oil and gas exploration and production company, from 2013 until September 2014. Mr. Mulhern served as senior vice president and chief financial officer of Progress Energy, Inc. (NYSE:PGN) from 2008 until its merger with Duke Energy Corporation (NYSE:DUK) in July 2012. Mr. Mulhern first joined Progress Energy in 1996 and served in a number of financial and strategic roles. He also spent eight years at Price Waterhouse. Mr. Mulhern currently serves as a director of McKim and Creed, a private engineering services firm, and Barings BDC, Inc. (NYSE:BBDC), a specialty finance company. Mr. Mulhern is a certified public accountant, a certified management accountant and a certified internal auditor.

Jeffrey D. Miller
 
48
 
Executive Vice President, General Counsel and Secretary.
Prior to joining us in March 2007, Mr. Miller was a partner with DLA Piper US, LLP, where he practiced since 2005. Previously, Mr. Miller had been a partner with Alston & Bird LLP. Mr. Miller is admitted to practice in North Carolina. Mr. Miller served as lead independent director of Hatteras Financial Corp., a publicly-traded mortgage REIT (NYSE:HTS), prior to its merger with Annaly Capital Management, Inc. (NYSE:NLY) in July 2016.


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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our Common Stock is traded on the NYSE under the symbol "HIW." On December 31, 2018, the Company had 838 common stockholders of record. There is no public trading market for the Common Units. On December 31, 2018, the Operating Partnership had 100 holders of record of Common Units (other than the Company). At December 31, 2018, there were 103.6 million shares of Common Stock outstanding and 2.7 million Common Units outstanding not owned by the Company.
 
For information regarding our dividend payment history as well as a discussion of the factors that influence the decisions of the Company's Board of Directors regarding dividends and distributions, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Dividends and Distributions.”
 
The following stock price performance graph compares the performance of our Common Stock to the S&P 500 Index and the FTSE NAREIT All Equity REITs Index. The stock price performance graph assumes an investment of $100 in our Common Stock and the two indices on December 31, 2013 and further assumes the reinvestment of all dividends. The FTSE NAREIT All Equity REITs Index is a free-float adjusted, market capitalization-weighted index of U.S. equity REITs. Constituents of the Index include all tax-qualified REITs with more than 50% of total assets in qualifying real estate assets other than mortgages secured by real property. Stock price performance is not necessarily indicative of future results.

a2018performancegraph.jpg
 
 
 
For the Period from December 31, 2013 to December 31,
Index
 
2014
 
2015
 
2016
 
2017
 
2018
Highwoods Properties, Inc.
 
127.68

 
130.75

 
161.11

 
166.49

 
131.79

S&P 500 Index
 
113.69

 
115.26

 
129.05

 
157.22

 
150.33

FTSE NAREIT All Equity REITs Index
 
128.03

 
131.64

 
143.00

 
155.41

 
149.12

 
The performance graph above is being furnished as part of this Annual Report solely in accordance with the requirement under Rule 14a-3(b)(9) to furnish the Company’s stockholders with such information and, therefore, is not deemed to be filed, or incorporated by reference in any filing, by the Company or the Operating Partnership under the Securities Act of 1933 or the Securities Exchange Act of 1934.
 

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During the fourth quarter of 2018, the Company issued an aggregate of 63,805 shares of Common Stock to holders of Common Units in the Operating Partnership upon the redemption of a like number of Common Units in private offerings exempt from the registration requirements pursuant to Section 4(2) of the Securities Act. Each of the holders of Common Units was an accredited investor under Rule 501 of the Securities Act. The resale of such shares was registered by the Company under the Securities Act.
 
The Company has a Dividend Reinvestment and Stock Purchase Plan (“DRIP”) under which holders of Common Stock may elect to automatically reinvest their dividends in additional shares of Common Stock and make optional cash payments for additional shares of Common Stock. The Company satisfies its DRIP obligations by instructing the DRIP administrator to purchase Common Stock in the open market.
 
The Company has an Employee Stock Purchase Plan ("ESPP") pursuant to which employees may contribute up to 25% of their cash compensation for the purchase of Common Stock. At the end of each quarter, each participant’s account balance, which includes accumulated dividends, is applied to acquire shares of Common Stock at a cost that is calculated at 85% of the average closing price on the NYSE on the five consecutive days preceding the last day of the quarter. Generally, shares purchased under the ESPP must be held at least one year. The Company satisfies its ESPP obligations by issuing additional shares of Common Stock.
 
Information about the Company’s equity compensation plans and other related stockholder matters is incorporated herein by reference to the Company’s Proxy Statement to be filed in connection with its annual meeting of stockholders to be held on May 8, 2019.

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ITEM 6. SELECTED FINANCIAL DATA

Operating results for the year ended December 31, 2014 were retrospectively revised from previously reported amounts to reclassify the operations for those properties classified as discontinued operations. Total assets and mortgages and notes payable, net as of the years ended December 31, 2015 and 2014 were retrospectively revised from previously reported amounts to reclassify debt issuance costs as a direct deduction from the carrying amount of the debt liability to which they relate as opposed to being presented as assets.

The information in the following tables should be read in conjunction with the Company’s Consolidated Financial Statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein ($ in thousands, except per share data):

 
Year Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
Rental and other revenues
$
720,035

 
$
702,737

 
$
665,634

 
$
604,671

 
$
555,871

Income from continuing operations
$
177,630

 
$
191,663

 
$
122,546

 
$
85,521

 
$
96,987

Income from discontinued operations
$

 
$

 
$
418,593

 
$
15,739

 
$
18,985

Income from continuing operations available for common stockholders
$
169,343

 
$
182,873

 
$
115,461

 
$
79,308

 
$
90,069

Net income
$
177,630

 
$
191,663

 
$
541,139

 
$
101,260

 
$
115,972

Net income available for common stockholders
$
169,343

 
$
182,873

 
$
521,789

 
$
94,572

 
$
108,457

Earnings per Common Share – basic:
 
 
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
1.64

 
$
1.78

 
$
1.17

 
$
0.84

 
$
1.00

Net income available for common stockholders
$
1.64

 
$
1.78

 
$
5.30

 
$
1.00

 
$
1.20

Earnings per Common Share – diluted:
 
 
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
1.64

 
$
1.78

 
$
1.17

 
$
0.84

 
$
0.99

Net income available for common stockholders
$
1.64

 
$
1.78

 
$
5.30

 
$
1.00

 
$
1.19

Dividends declared per Common Share (1)
$
1.85

 
$
1.76

 
$
2.50

 
$
1.70

 
$
1.70


 
December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
Total assets
$
4,675,009

 
$
4,623,791

 
$
4,561,050

 
$
4,485,631

 
$
3,990,702

Mortgages and notes payable, net
$
2,085,831

 
$
2,014,333

 
$
1,948,047

 
$
2,491,813

 
$
2,062,968

__________
(1)
Includes a special cash dividend of $0.80 per share declared in the quarter ended December 31, 2016 and paid January 10, 2017.


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The information in the following tables should be read in conjunction with the Operating Partnership’s Consolidated Financial Statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein ($ in thousands, except per unit data):

 
Year Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
Rental and other revenues
$
720,035

 
$
702,737

 
$
665,634

 
$
604,671

 
$
555,871

Income from continuing operations
$
177,630

 
$
191,663

 
$
122,546

 
$
85,521

 
$
96,987

Income from discontinued operations
$

 
$

 
$
418,593

 
$
15,739

 
$
18,985

Income from continuing operations available for common unitholders
$
173,931

 
$
187,932

 
$
118,792

 
$
81,751

 
$
93,014

Net income
$
177,630

 
$
191,663

 
$
541,139

 
$
101,260

 
$
115,972

Net income available for common unitholders
$
173,931

 
$
187,932

 
$
537,385

 
$
97,490

 
$
111,999

Earnings per Common Unit – basic:
 
 
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
1.64

 
$
1.79

 
$
1.18

 
$
0.84

 
$
1.00

Net income available for common unitholders
$
1.64

 
$
1.79

 
$
5.33

 
$
1.01

 
$
1.20

Earnings per Common Unit – diluted:
 
 
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
1.64

 
$
1.79

 
$
1.18

 
$
0.84

 
$
1.00

Net income available for common unitholders
$
1.64

 
$
1.79

 
$
5.32

 
$
1.01

 
$
1.20

Distributions declared per Common Unit (1)
$
1.85

 
$
1.76

 
$
2.50

 
$
1.70

 
$
1.70


 
December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
Total assets
$
4,675,009

 
$
4,623,791

 
$
4,561,050

 
$
4,485,631

 
$
3,990,808

Mortgages and notes payable, net
$
2,085,831

 
$
2,014,333

 
$
1,948,047

 
$
2,491,813

 
$
2,062,968

__________
(1)
Includes a special cash distribution of $0.80 per unit declared in the quarter ended December 31, 2016 and paid January 10, 2017.


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Table of Contents

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis in conjunction with the accompanying Consolidated Financial Statements and related notes contained elsewhere herein.

Disclosure Regarding Forward-Looking Statements

Some of the information in this Annual Report may contain forward-looking statements. Such statements include, in particular, statements about our plans, strategies and prospects under this section and under the heading “Item 1. Business.” You can identify forward-looking statements by our use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “continue” or other similar words. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that our plans, intentions or expectations will be achieved. When considering such forward-looking statements, you should keep in mind 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 newly constructed buildings as quickly or on as favorable terms as originally anticipated;

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

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

our markets may suffer declines in economic and/or office employment growth;

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

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

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

the Company could lose key executive officers.

This list of risks and uncertainties, however, is not intended to be exhaustive. You should also review the other cautionary statements we make in “Item 1A. Business – Risk Factors” set forth in this Annual Report. Given these uncertainties, you should not place undue reliance on forward-looking statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements to reflect any future events or circumstances or to reflect the occurrence of unanticipated events.


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Table of Contents


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

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

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

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

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

Our operating results depend heavily on successfully leasing and operating the office space in our portfolio. Economic growth and office employment levels in our core markets are important factors, among others, in predicting our future operating results.
 
The key components affecting our rental and other revenues are average occupancy, rental rates, cost recovery income, new developments placed in service, acquisitions and dispositions. Average occupancy generally increases during times of improving economic growth, as our ability to lease space outpaces vacancies that occur upon the expirations of existing leases. Average occupancy generally declines during times of slower or negative economic growth, when new vacancies tend to outpace our ability to lease space. Asset acquisitions, dispositions and new developments placed in service directly impact our rental revenues and could impact our average occupancy, depending upon the occupancy rate of the properties that are acquired, sold or placed in service. A further indicator of the predictability of future revenues is the expected lease expirations of our portfolio. As a result, in addition to seeking to increase our average occupancy by leasing current vacant space, we also concentrate our leasing efforts on renewing existing leases prior to expiration. For more information regarding our lease expirations, see “Item 2. Properties - Lease Expirations.” Occupancy in our office portfolio decreased from 92.9% at December 31, 2017 to 91.6% at December 31, 2018.
 
Whether or not our rental revenue tracks average occupancy proportionally depends upon whether GAAP rents under signed new and renewal leases are higher or lower than the GAAP rents under expiring leases. Annualized rental revenues from second generation leases expiring during any particular year are typically less than 15% of our total annual rental revenues. The following table sets forth information regarding second generation office leases signed during the fourth quarter of 2018 (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)
383,985

 
534,509

 
918,494

Average term (in years - rentable square foot weighted)
7.0

 
4.7

 
5.6

Base rents (per rentable square foot) (1)
$
31.97

 
$
29.74

 
$
30.67

Rent concessions (per rentable square foot) (1)
(0.92
)
 
(0.62
)
 
(0.74
)
GAAP rents (per rentable square foot) (1)
$
31.05

 
$
29.12

 
$
29.93

Tenant improvements (per rentable square foot) (1)
$
5.35

 
$
2.52

 
$
3.70

Leasing commissions (per rentable square foot) (1)
$
1.18

 
$
0.93

 
$
1.04

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

Annual combined GAAP rents for new and renewal leases signed in the fourth quarter were $29.93 per rentable square foot, or 20.2%, higher compared to previous leases in the same office spaces.


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We strive to maintain a diverse, stable and creditworthy customer base. We have an internal guideline whereby customers that account for more than 3% of our revenues are periodically reviewed with the Company's Board of Directors. As of December 31, 2018, no customer accounted for more than 3% of our cash revenues other than the Federal Government, which accounted for less than 5% of our cash revenues on an annualized basis. Upon completion of the MetLife III development project in Raleigh, which is scheduled for delivery in the second quarter of 2019, it is expected that MetLife will account for approximately 3.4% of our revenues based on annualized cash revenues for December 2018. See “Item 2. Properties - Customers.”
 
Expenses
 
Our expenses primarily consist of rental property expenses, depreciation and amortization, general and administrative expenses and interest expense. From time to time, expenses also include impairments of real estate assets. Rental property expenses are expenses associated with our ownership and operation of rental properties and include expenses that vary somewhat proportionately to occupancy levels, such as janitorial services and utilities, and expenses that do not vary based on occupancy, such as property taxes and insurance. Depreciation and amortization is a non-cash expense associated with the ownership of real property and generally remains relatively consistent each year, unless we buy, place in service or sell assets, since our properties and related building and tenant improvement assets are depreciated on a straight-line basis over fixed lives. General and administrative expenses consist primarily of management and employee salaries and benefits, corporate overhead and short and long-term incentive compensation.

Net Operating Income

Whether or not we record increasing 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 $5.3 million, or 1.2%, higher in 2018 as compared to 2017 due to an increase in same property revenues of $11.5 million offset by an increase of $6.3 million in same property expenses. We expect same property NOI to be higher in 2019 as compared to 2018 as higher rental revenues, mostly from higher average GAAP rents per rentable square foot, higher parking income and higher cost recovery income, are expected to more than offset lower expected average occupancy and an anticipated increase in same property operating expenses.

In addition to the effect of same property NOI, whether or not NOI increases depends upon whether the NOI from our acquired properties and development properties placed in service exceeds the NOI from property dispositions. NOI was $11.8 million, or 2.5%, higher in 2018 as compared to 2017 due to the impact of development properties placed in service and a restoration fee, partly offset by NOI lost from property dispositions. We expect NOI to be higher in 2019 than 2018 due to the impact of our net investment activity in 2018.

Cash Flows

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

Net cash related to investing activities generally relates to capitalized costs incurred for leasing and major building improvements and our acquisition, development, disposition and joint venture activity. During periods of significant net acquisition and/or development activity, our cash used in such investing activities will generally exceed cash provided by investing activities, which typically consists of cash received upon the sale of properties and distributions from our joint ventures.

Net cash related to financing activities generally relates to distributions, incurrence and repayment of debt, and issuances, repurchases or redemptions of Common Stock, Common Units and Preferred Stock. We use a significant amount of our cash to fund distributions. Whether or not we have increases in the outstanding balances of debt during a period depends generally upon the net effect of our acquisition, disposition, development and joint venture activity. We generally use our revolving credit facility for daily working capital purposes, which means that during any given period, in order to minimize interest expense, we may record significant repayments and borrowings under our revolving credit facility.

For a discussion regarding dividends and distributions, see "Liquidity and Capital Resources - Dividends and Distributions."


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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 revolving credit facility, which had $408.8 million of availability at January 25, 2019. Our short-term liquidity requirements primarily consist of operating expenses, interest and principal amortization on our debt, distributions and capital expenditures, including building improvement costs, tenant improvement costs and lease commissions. Building improvements are capital costs to maintain or enhance existing buildings not typically related to a specific customer. Tenant improvements are the costs required to customize space for the specific needs of customers. We anticipate that our available cash and cash equivalents and cash provided by operating activities and planned financing activities, including borrowings under our revolving credit facility, will be adequate to meet our short-term liquidity requirements. We use our revolving credit facility for working capital purposes and for the short-term funding of our development and acquisition activity and, in certain instances, the repayment of other debt. Continued ability to borrow under the revolving credit facility allows us to quickly capitalize on strategic opportunities at short-term interest rates.
 
Our long-term liquidity uses generally consist of the retirement or refinancing of debt upon maturity, funding of building improvements, new building developments and land infrastructure projects and funding acquisitions of buildings and development land. Our expected future capital expenditures for started and/or committed new development projects were approximately $331 million at December 31, 2018. Additionally, we may, from time to time, retire outstanding equity and/or debt securities through redemptions, open market repurchases, privately negotiated acquisitions or otherwise.
 
We expect to meet our long-term liquidity needs through a combination of:
 
cash flow from operating activities;
 
bank term loans and borrowings under our revolving credit facility;
 
the issuance of unsecured debt;
 
the issuance of secured debt;
 
the issuance of equity securities by the Company or the Operating Partnership; and
 
the disposition of non-core assets.

At December 31, 2018, our leverage ratio, as measured by the ratio of our mortgages and notes payable and outstanding preferred stock to the undepreciated book value of our assets, was 35.4% and there were 106.3 million diluted shares of Common Stock outstanding.

Investment Activity

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



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Results of Operations

Comparison of 2018 to 2017

Rental and Other Revenues

Rental and other revenues were $17.3 million, or 2.5%, higher in 2018 as compared to 2017 primarily due to development properties placed in service, higher same property revenues and a restoration fee, which increased rental and other revenues by $18.3 million, $11.5 million and $2.9 million, respectively. Same property rental and other revenues were higher primarily due to higher average GAAP rents per rentable square foot, higher cost recovery income and higher parking income, partly offset by lower average occupancy and lower termination fees. These increases were partly offset by lost revenue of $14.7 million from property dispositions. We expect rental and other revenues to be higher in 2019 as compared to 2018 due to development properties placed in service and higher same property revenues, partly offset by lost revenue from property dispositions and lower restoration fees.

Operating Expenses

Rental property and other expenses were $5.5 million, or 2.3%, higher in 2018 as compared to 2017 primarily due to higher same property operating expenses and development properties placed in service, which increased operating expenses by $6.3 million and $4.6 million, respectively. Same property operating expenses were higher primarily due to higher property taxes, contract services and utilities, partly offset by lower property insurance. These increases were partly offset by a $5.6 million decrease in operating expenses from property dispositions. We expect rental property and other expenses to be higher in 2019 as compared to 2018 due to development properties placed in service and higher same property operating expenses, partly offset by lower operating expenses from property dispositions.

Depreciation and amortization was $2.1 million, or 0.9%, higher in 2018 as compared to 2017 primarily due to development properties placed in service, partly offset by property dispositions and accelerated depreciation in 2017 related to properties that are expected to be demolished. We expect depreciation and amortization to be similar in 2019 as development properties placed in service are expected to be offset by fully amortized acquisition-related intangible assets and property dispositions.

We recorded aggregate impairments of real estate assets of $0.4 million and $1.4 million in 2018 and 2017, respectively. These impairments resulted from changes in market-based inputs and our assumptions about the use of the assets.

General and administrative expenses were $0.4 million, or 0.9%, higher in 2018 as compared to 2017 primarily due to higher company-wide base salaries and expensed pre-development costs. We expect general and administrative expenses to be higher in 2019 as compared to 2018 due to higher company-wide base salaries and certain previously capitalized leasing related costs that we will begin to expense upon adoption of the new lease accounting standard in 2019, partly offset by lower incentive compensation.

Interest Expense

Interest expense was $2.3 million, or 3.4%, higher in 2018 as compared to 2017 primarily due to lower capitalized interest and higher average debt balances, partly offset by lower average interest rates. We expect interest expense to be higher in 2019 as compared to 2018 due to higher average debt balances, higher average interest rates and lower capitalized interest.

Other Income

Other income was $0.3 million lower in 2018 as compared to 2017 primarily due to losses on deferred compensation plan investments in 2018, which is fully offset by a corresponding decrease in the deferred compensation expense that is recorded in general and administrative expenses.

Gains on Disposition of Property

Gains on disposition of property were $16.5 million lower in 2018 as compared to 2017 due to the net effect of the disposition activity in such periods.


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Equity in Earnings of Unconsolidated Affiliates

Equity in earnings of unconsolidated affiliates was $5.2 million lower in 2018 as compared to 2017 primarily due to our share of the net effect of the disposition activity by certain unconsolidated affiliates in 2017. We expect equity in earnings of unconsolidated affiliates to be higher in 2019 as compared to 2018 due to higher expected average occupancy.

Earnings Per Common Share - Diluted

Diluted earnings per common share was $0.14 lower in 2018 as compared to 2017 primarily due to a decrease in net income for the reasons discussed above.

Comparison of 2017 to 2016
 
Rental and Other Revenues

Rental and other revenues were $37.1 million, or 5.6%, higher in 2017 as compared to 2016 primarily due to development properties placed in service, higher same property revenues and acquisitions, which increased rental and other revenues by $26.5 million, $10.7 million and $4.7 million, respectively. Same property rental and other revenues were higher primarily due to higher average GAAP rents per rentable square foot, higher cost recovery income and higher parking income, partly offset by lower termination fees. These increases were partly offset by lost revenue of $5.6 million from property dispositions.

Operating Expenses

Rental property and other expenses were $5.8 million, or 2.5%, higher in 2017 as compared to 2016 primarily due to development properties placed in service, higher same property operating expenses and acquisitions, which increased operating expenses by $5.2 million, $2.0 million and $1.2 million, respectively. Same property operating expenses were higher primarily due to higher property taxes, contract services and repairs and maintenance, partly offset by lower utilities. These increases were partly offset by a $2.6 million decrease in operating expenses from property dispositions.

Depreciation and amortization was $7.7 million, or 3.5%, higher in 2017 as compared to 2016 primarily due to development properties placed in service, acquisitions and accelerated depreciation related to properties that are expected to be demolished, partly offset by property dispositions.

We recorded aggregate impairments of real estate assets of $1.4 million in 2017, which resulted from a change in market-based inputs and our assumptions about the use of the assets. We recorded no such impairment in 2016.

General and administrative expenses were $1.5 million, or 3.9%, higher in 2017 as compared to 2016 primarily due to higher company-wide base salaries, benefits, incentive compensation and dead deal costs, partly offset by lower acquisition costs.

Interest Expense

Interest expense was $7.5 million, or 9.8%, lower in 2017 as compared to 2016 primarily due to lower average debt balances, lower average interest rates and higher capitalized interest.

Other Income

Other income was relatively unchanged in 2017 as compared to 2016.

Gains on Disposition of Property and Net Gains on Disposition of Discontinued Operations

Total gains were $375.1 million lower in 2017 as compared to 2016 due to the sales of substantially all of our wholly-owned Country Club Plaza assets in Kansas City (which we refer to as the "Plaza assets") in 2016.

Equity in Earnings of Unconsolidated Affiliates

Equity in earnings of unconsolidated affiliates was $1.6 million, or 27.8%, higher in 2017 as compared to 2016 primarily due to our share of the net effect of the disposition activity by certain unconsolidated affiliates in such periods, partly offset by lower occupancy in 2017.

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Income From Discontinued Operations

Income from discontinued operations was $4.1 million lower in 2017 as compared to 2016 due to the sales of the Plaza assets in 2016.

Earnings Per Common Share - Diluted

Diluted earnings per common share was $3.52 lower in 2017 as compared to 2016 due to gains from the sales of the Plaza assets in 2016 and an increase in the weighted average Common Shares outstanding, partly offset by increases in income from continuing operations for the reasons discussed above.

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):

 
Year Ended December 31,
 
 
 
 
 
2018
 
2017
 
2016
 
2018-2017 Change
 
2017-2016 Change
Net Cash Provided By Operating Activities
$
358,628

 
$
352,532

 
$
305,805

 
$
6,096

 
$
46,727

Net Cash Provided By/(Used In) Investing Activities
(306,749
)
 
(200,302
)
 
216,262

 
(106,447
)
 
(416,564
)
Net Cash Used In Financing Activities
(130,069
)
 
(142,528
)
 
(465,241
)
 
12,459

 
322,713

Total Cash Flows
$
(78,190
)
 
$
9,702

 
$
56,826

 
$
(87,892
)
 
$
(47,124
)

Comparison of 2018 to 2017

The increase in net cash provided by operating activities in 2018 as compared to 2017 was primarily due to higher net cash from the operations of development properties placed in service and same properties, partly offset by property dispositions and the timing of cash paid for operating expenses. We expect net cash related to operating activities to be higher in 2019 as compared to 2018 primarily due to the impact of development properties placed in service and same properties, partly offset by property dispositions.

The increase in net cash used in investing activities in 2018 as compared to 2017 was primarily due to acquisition activity in 2018 and higher net proceeds from disposition activity in 2017. We expect uses of cash for investing activities in 2019 to be primarily driven by whether or not we acquire and commence development of additional office buildings in the BBDs of our markets. Additionally, as of December 31, 2018, we have approximately $331 million left to fund of our previously-announced development activity in 2019 and future years. We expect these uses of cash for investing activities will be partly offset by proceeds from property dispositions in 2019.

The decrease in net cash used in financing activities in 2018 as compared to 2017 was primarily due to the payment of a special dividend in 2017, partly offset by higher proceeds from the issuance of Common Stock in 2017. Assuming the net effect of our acquisition, disposition and development activity in 2019 results in an increase to our assets, we would expect outstanding debt and/or Common Stock balances to increase.

Comparison of 2017 to 2016

The increase in net cash provided by operating activities in 2017 as compared to 2016 was primarily due to higher net cash from the operations of development properties placed in service, same properties and acquisitions, the timing of cash paid for operating expenses and the settlement of cash flow hedges.

The change in net cash provided by/(used in) investing activities in 2017 as compared to 2016 was primarily due to the net proceeds from the sales of the Plaza assets in 2016, partly offset by higher acquisition activity and investments in development in-process in 2016.


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The decrease in net cash used in financing activities in 2017 as compared to 2016 was primarily due to higher net debt borrowings in 2017, partly offset by the payment of a special dividend declared in the fourth quarter of 2016, lower proceeds from the issuance of Common Stock in 2017 and a 3.5% increase in our regular cash dividend rate in February 2017.

Capitalization
 
The following table sets forth the Company’s capitalization (in thousands, except per share amounts):
 
 
December 31,
 
2018
 
2017
Mortgages and notes payable, net, at recorded book value
$
2,085,831

 
$
2,014,333

Preferred Stock, at liquidation value
$
28,877

 
$
28,892

Common Stock outstanding
103,557

 
103,267

Common Units outstanding (not owned by the Company)
2,739

 
2,829

Per share stock price at year end
$
38.69

 
$
50.91

Market value of Common Stock and Common Units
$
4,112,592

 
$
5,401,347

Total capitalization
$
6,227,300

 
$
7,444,572

 
At December 31, 2018, our mortgages and notes payable and outstanding preferred stock represented 34.0% of our total capitalization and 35.4% of the undepreciated book value of our assets. See also "Executive Summary - Liquidity and Capital Resources."
 
Our mortgages and notes payable as of December 31, 2018 consisted of $97.2 million of secured indebtedness with a weighted average interest rate of 4.0% and $1,997.8 million of unsecured indebtedness with a weighted average interest rate of 3.55%. The secured indebtedness was collateralized by real estate assets with an undepreciated book value of $147.6 million. As of December 31, 2018, $532.0 million of our debt does not bear interest at fixed rates or is not protected by interest rate hedge contracts. On January 11, 2019, floating-to-fixed interest rate swaps with respect to an aggregate of $225.0 million of LIBOR-based borrowings expired. Subsequently, as of January 25, 2019, we had $766.0 million of variable rate debt outstanding not protected by interest rate hedge contracts.
 
Investment Activity
 
In the normal course of business, we regularly evaluate potential acquisitions. As a result, from time to time, we may have one or more potential acquisitions under consideration that are in varying stages of evaluation, negotiation or due diligence, including potential acquisitions that are subject to non-binding letters of intent or enforceable contracts. Consummation of any transaction is subject to a number of contingencies, including the satisfaction of customary closing conditions. No assurances can be provided that we will acquire any properties in the future. See "Item 1A. Risk Factors - Recent and future acquisitions and development properties may fail to perform in accordance with our expectations and may require renovation and development costs exceeding our estimates."
 
During the first quarter of 2018, we acquired two development parcels totaling approximately nine acres in Nashville for an aggregate purchase price, including capitalized acquisition costs, of $50.6 million.
 
During the fourth quarter of 2018, we sold two buildings for an aggregate sale price of $54.5 million and recorded aggregate gains on disposition of property of $20.7 million.
 
During the third quarter of 2018, we sold various land parcels for an aggregate sale price of $2.1 million and recorded nominal aggregate gains on disposition of property.
 
During the second quarter of 2018, we sold a building and various land parcels for an aggregate sale price of $34.0 million and recorded aggregate gains on disposition of property of $17.0 million.
 
During the fourth quarter of 2018, we recorded an impairment of real estate assets of $0.4 million, which resulted from a change in market-based inputs and our assumptions about the use of the assets.
 
As of December 31, 2018, we were also developing 1.1 million rentable square feet of office properties. For a table summarizing our announced and in-process office developments, see "Item 2. Properties - In-Process Development."
 

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Financing Activity
 
We have entered into separate equity distribution agreements with each of Wells Fargo Securities, LLC, Robert W. Baird & Co. Incorporated, BB&T Capital Markets, a division of BB&T Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, BTIG, LLC, Capital One Securities, Inc., Fifth Third Securities, Inc., Jefferies LLC and J.P. Morgan Securities LLC. Under the terms of the equity distribution agreements, the Company may offer and sell up to $300.0 million in aggregate gross sales price of shares of Common Stock from time to time through such firms, acting as agents of the Company or as principals. Sales of the shares, if any, may be made by means of ordinary brokers’ transactions on the NYSE or otherwise at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices or as otherwise agreed with any of such firms. The Company did not issue any shares of Common Stock under these agreements during 2018.
 
Our $600.0 million unsecured revolving credit facility is scheduled to mature in January 2022 and includes an accordion feature that allows for an additional $400.0 million of borrowing capacity subject to additional lender commitments. Assuming no defaults have occurred, we have an option to extend the maturity for two additional six-month periods. The interest rate at our current credit ratings is LIBOR plus 100 basis points and the annual facility fee is 20 basis points. The interest rate and facility fee are based on the higher of the publicly announced ratings from Moody's Investors Service or Standard & Poor's Ratings Services. There was $182.0 million and $191.0 million outstanding under our revolving credit facility at December 31, 2018 and January 25, 2019, respectively. At both December 31, 2018 and January 25, 2019, we had $0.2 million of outstanding letters of credit, which reduces the availability on our revolving credit facility. As a result, the unused capacity of our revolving credit facility at December 31, 2018 and January 25, 2019 was $417.8 million and $408.8 million, respectively.
 
During the second quarter of 2018, we paid off at maturity $200.0 million principal amount of 7.5% unsecured notes.
 
During the first quarter of 2018, the Operating Partnership issued $350.0 million aggregate principal amount of 4.125% notes due 2028, less original issuance discount of $4.1 million. These notes were priced to yield 4.271%. During 2017, we obtained $150.0 million notional amount of forward-starting swaps. Upon issuance of the notes, we terminated the forward-starting swaps and received cash upon settlement. The unrealized gain of $7.0 million in accumulated other comprehensive income will be reclassified to interest expense as interest payments are made on the debt and a gain of $0.2 million of hedge ineffectiveness was recognized in interest expense. Underwriting fees and other expenses were incurred that aggregated $2.9 million; these costs were deferred and will be amortized over the term of the notes. The net effect of the amortization of these items resulted in an effective fixed interest rate of 4.120%.
 
During the second quarter of 2018, we entered into $150.0 million notional amount of forward-starting swaps that effectively lock the underlying 10-year treasury rate at 2.91% with respect to a planned issuance of debt securities by the Operating Partnership expected to occur prior to June 11, 2019. During the fourth quarter of 2018, we entered into $75.0 million notional amount of forward-starting swaps that effectively lock the underlying 10-year treasury rate at 2.78% with respect to such planned issuance. The counterparties under our swaps are major financial institutions.
 
We regularly evaluate the financial condition of the financial institutions that participate in our credit facilities and as counterparties under interest rate swap agreements using publicly available information. Based on this review, we currently expect these financial institutions to perform their obligations under our existing facilities and swap agreements.
 
For information regarding our interest hedging activities and other market risks associated with our debt financing activities, see "Item 7A. Quantitative and Qualitative Disclosures About Market Risk."
 
Covenant Compliance
 
We are currently in compliance with financial covenants and other requirements with respect to our consolidated debt. Although we expect to remain in compliance with these covenants and ratios for at least the next year, depending upon our future operating performance, property and financing transactions and general economic conditions, we cannot assure you that we will continue to be in compliance.
 
Our revolving credit facility and bank term loans require us to comply with customary operating covenants and various financial requirements. Upon an event of default on the revolving credit facility, the lenders having at least 51.0% of the total commitments under the revolving credit facility can accelerate all borrowings then outstanding, and we could be prohibited from borrowing any further amounts under our revolving credit facility, which would adversely affect our ability to fund our operations. In addition, certain of our unsecured debt agreements contain cross-default provisions giving the unsecured lenders the right to declare a default if we are in default under more than $30.0 million with respect to other loans in some circumstances.
 

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As of December 31, 2018, the Operating Partnership had the following unsecured notes outstanding ($ in thousands):
 
 
Face Amount
 
Carrying Amount
 
Stated Interest Rate
 
Effective Interest Rate
Notes due June 2021
$
300,000

 
$
298,936

 
3.200
%
 
3.363
%
Notes due January 2023
$
250,000

 
$
248,938

 
3.625
%
 
3.752
%
Notes due March 2027
$
300,000

 
$
296,734

 
3.875
%
 
4.038
%
Notes due March 2028
$
350,000

 
$
346,208

 
4.125
%
 
4.271
%
 
The indenture that governs these outstanding notes requires us to comply with customary operating covenants and various financial ratios. The trustee or the holders of at least 25.0% in principal amount of any series of notes can accelerate the principal amount of such series upon written notice of a default that remains uncured after 60 days.
 
We may not be able to repay, refinance or extend any or all of our debt at maturity or upon any acceleration. If any refinancing is done at higher interest rates, the increased interest expense could adversely affect our cash flow and ability to pay distributions. Any such refinancing could also impose tighter financial ratios and other covenants that restrict our ability to take actions that could otherwise be in our best interest, such as funding new development activity, making opportunistic acquisitions, repurchasing our securities or paying distributions.

Contractual Obligations
 
The following table sets forth a summary regarding our known contractual obligations, including required interest payments for those items that are interest bearing, at December 31, 2018 ($ in thousands):
 
 
 
 
Amounts due during the years ending December 31,
 
 
 
Total
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
Mortgages and Notes Payable:
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal payments (1)
$
2,104,179

 
$
1,876

 
$
226,952

 
$
302,032

 
$
584,115

 
$
252,201

 
$
737,003

Interest payments
401,487

 
74,922

 
71,370

 
63,311

 
46,468

 
29,968

 
115,448

Capitalized Lease Obligations
33

 
18

 
15

 

 

 

 

Purchase Obligations:

 
 
 
 
 
 
 
 
 
 
 
 
Lease and contractual commitments and contingent consideration (2)
484,801

 
267,976

 
99,039

 
114,573

 
930

 

 
2,283

Operating Lease Obligations:

 
 
 
 
 
 
 
 
 
 
 
 
Operating ground leases
97,860

 
2,184

 
2,223

 
2,263

 
2,305

 
2,308

 
86,577

Total
$
3,088,360

 
$
346,976

 
$
399,599

 
$
482,179

 
$
633,818

 
$
284,477

 
$
941,311

__________
(1)
Excludes amortization of premiums, discounts, debt issuance costs and/or purchase accounting adjustments.
(2)
Consists primarily of commitments under signed leases and contracts for operating properties, excluding tenant-funded tenant improvements, and contracts for development/redevelopment projects. This includes $362.4 million of contractual commitments related to our in-process development activity, of which $152.0 million is scheduled to be funded in 2019. For a description of our development activity, see "Item 2. Properties - In-Process Development." The timing of these lease and contractual commitments may fluctuate.

The interest payments due on mortgages and notes payable are based on the stated rates for the fixed rate debt and on the rates in effect at December 31, 2018 for the variable rate debt. The weighted average interest rate on our fixed (including debt with a variable rate that is effectively fixed by related interest rate swaps) and variable rate debt was 3.60% and 3.51%, respectively, at December 31, 2018. For additional information about our mortgages and notes payable, see Note 5 to our Consolidated Financial Statements. For additional information about purchase obligations and operating lease obligations, see Note 7 to our Consolidated Financial Statements.

Dividends and Distributions
 
To maintain its qualification as a REIT, the Company must pay dividends to stockholders that are at least 90.0% of its annual REIT taxable income, excluding net capital gains. The partnership agreement requires the Operating Partnership to distribute at least enough cash for the Company to be able to pay such dividends. The Company's REIT taxable income, as determined by the federal tax laws, does not equal its net income under accounting principles generally accepted in the United States of America

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(GAAP). In addition, although capital gains are not required to be distributed to maintain REIT status, capital gains, if any, are subject to federal and state income tax unless such gains are distributed to stockholders. See “Item 1A. Risk Factors - Cash distributions reduce the amount of cash that would otherwise be available for other business purposes, including funding debt maturities, reducing debt or future growth initiatives.”
 
The amount of future distributions that will be made is at the discretion of the Company's Board of Directors. The following factors will affect such cash flows and, accordingly, influence the decisions of the Company’s Board of Directors regarding dividends and distributions:

projections with respect to future REIT taxable income expected to be generated by the Company;

debt service requirements after taking into account debt covenants and the repayment and restructuring of certain indebtedness and the availability of alternative sources of debt and equity capital and their impact on our ability to refinance existing debt and grow our business;

scheduled increases in base rents of existing leases;

changes in rents attributable to the renewal of existing leases or replacement leases;

changes in occupancy rates at existing properties and execution of leases for newly acquired or developed properties;

changes in operating expenses;

anticipated leasing capital expenditures attributable to the renewal of existing leases or replacement leases;

anticipated building improvements; and

expected cash flows from financing and investing activities, including from the sales of assets generating taxable gains to the extent such assets are not sold in a tax-deferred exchange under Section 1031 of the Internal Revenue Code or another tax-free or tax-deferred transaction.

During each quarter of 2018, the Company declared and paid a cash dividend of $0.4625 per share of Common Stock.

On February 5, 2019, the Company declared a cash dividend of $0.475 per share of Common Stock, which is payable on March 5, 2019 to stockholders of record as of February 19, 2019.

Current and Future Cash Needs

We anticipate that our available cash and cash equivalents, cash flows from operating activities and other available financing sources, including the issuance of debt securities by the Operating Partnership, the issuance of secured debt, bank term loans, borrowings under our revolving credit facility, the issuance of equity securities by the Company or the Operating Partnership and the disposition of non-core assets, will be adequate to meet our short-term liquidity requirements.

We had $3.8 million of cash and cash equivalents as of December 31, 2018. The unused capacity of our revolving credit facility at December 31, 2018 and January 25, 2019 was $417.8 million and $408.8 million, respectively, excluding an accordion feature that allows for an additional $400.0 million of borrowing capacity subject to additional lender commitments.

We have a currently effective automatic shelf registration statement on Form S-3 with the SEC pursuant to which, at any time and from time to time, in one or more offerings on an as-needed basis, the Company may sell an indefinite amount of common stock, preferred stock and depositary shares and the Operating Partnership may sell an indefinite amount of debt securities, subject to our ability to effect offerings on satisfactory terms based on prevailing market conditions.

The Company from time to time enters into equity distribution agreements with a variety of firms pursuant to which the Company may offer and sell shares of common stock from time to time through such firms, acting as agents of the Company or as principals. Sales of the shares, if any, may be made by means of ordinary brokers’ transactions on the NYSE or otherwise at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices or as otherwise agreed with any of such firms (which may include block trades).


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During 2019, we also expect to sell $100 million to $150 million of properties no longer considered to be core assets due to location, age, quality and/or overall strategic fit. We can make no assurance, however, that we will sell any non-core assets or, if we do, what the timing or terms of any such sale will be.

Critical Accounting Estimates
 
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from our estimates.
 
The policies used in the preparation of our Consolidated Financial Statements are described in Note 1 to our Consolidated Financial Statements. However, certain of our significant accounting policies contain an increased level of assumptions used or estimates made in determining their impact in our Consolidated Financial Statements. Management has reviewed and determined the appropriateness of our critical accounting policies and estimates with the audit committee of the Company's Board of Directors.
 
We consider our critical accounting estimates to be those used in the determination of the reported amounts and disclosure related to the following:
 
Real estate and related assets;

Impairments of real estate assets and investments in unconsolidated affiliates;

Sales of real estate;

Rental and other revenues; and

Allowance for doubtful accounts.
 
Real Estate and Related Assets
 
Real estate and related assets are recorded at cost and stated at cost less accumulated depreciation. Renovations, replacements and other expenditures that improve or extend the life of assets are capitalized and depreciated over their estimated useful lives. Expenditures for ordinary maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful life of 40 years for buildings and depreciable land infrastructure costs, 15 years for building improvements and five to seven years for furniture, fixtures and equipment. Tenant improvements are amortized using the straight-line method over initial fixed terms of the respective leases, which generally are from three to 10 years.
 
Expenditures directly related to the development and construction of real estate assets are included in net real estate assets and are stated at depreciated cost. Development expenditures include pre-construction costs essential to the development of properties, development and construction costs, interest costs on qualifying assets, real estate taxes, development personnel salaries and related costs and other costs incurred during the period of development. Interest and other carrying costs are capitalized until the building is ready for its intended use, but not later than a year from cessation of major construction activity. We consider a construction project as substantially completed and ready for its intended use upon the completion of tenant improvements. We cease capitalization on the portion that is substantially completed and occupied or held available for occupancy, and capitalize only those costs associated with the portion under construction.
 
Expenditures directly related to the leasing of properties are included in deferred leasing costs and are stated at amortized cost. Such expenditures are part of the investment necessary to execute leases and, therefore, are classified as investment activities in the statement of cash flows. All leasing commissions paid to third parties for new leases or lease renewals are capitalized. Internal leasing costs, which consist primarily of compensation, benefits and other costs, such as legal fees related to leasing activities, that are incurred in connection with successfully obtaining leases of properties are also capitalized. Capitalized leasing costs are amortized on a straight-line basis over the initial fixed terms of the respective leases, which generally are from three to 10 years. Estimated costs related to unsuccessful activities are expensed as incurred.
 
We record liabilities for the performance of asset retirement activities when the obligation to perform such activities is probable even when uncertainty exists about the timing and/or method of settlement.
 

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Upon the acquisition of real estate assets, we assess the fair value of acquired tangible assets such as land, buildings and tenant improvements, intangible assets and liabilities such as above and below market leases, acquired in-place leases, customer relationships and other identifiable intangible assets and assumed liabilities. We assess fair value based on estimated cash flow projections that utilize discount and/or capitalization rates as well as available market information. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.
 
The above and below market rate portions of leases acquired in connection with property acquisitions are recorded in deferred leasing costs and in accounts payable, accrued expenses and other liabilities, respectively, at fair value and amortized into rental revenue over the remaining term of the respective leases as described below. Fair value is calculated as the present value of the difference between (1) the contractual amounts to be paid pursuant to each in-place lease and (2) our estimate of fair market lease rates for each corresponding in-place lease, using a discount rate that reflects the risks associated with the leases acquired and measured over a period equal to the remaining initial term of the lease for above-market leases and the remaining initial term plus the term of any renewal option that the customer would be economically compelled to exercise for below-market leases.
 
In-place leases acquired are recorded at fair value in deferred leasing costs and are amortized to depreciation and amortization expense over the remaining term of the respective lease. The value of in-place leases is based on our evaluation of the specific characteristics of each customer's lease. Factors considered include estimates of carrying costs during hypothetical expected lease-up periods, current market conditions, the customer's credit quality and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, we consider tenant improvements, leasing commissions and legal and other related expenses.
 
Real estate and other assets are classified as long-lived assets held for use or as long-lived assets held for sale. Real estate is classified as held for sale when the sale of the asset is probable, has been duly approved by the Company, a legally enforceable contract has been executed and the buyer's due diligence period, if any, has expired.
 
Impairments of Real Estate Assets and Investments in Unconsolidated Affiliates
 
With respect to assets classified as held for use, we perform an impairment analysis if events or changes in circumstances indicate that the carrying value may be impaired, such as a significant decline in occupancy, identification of materially adverse legal or environmental factors, change in our designation of an asset from core to non-core, which may impact the anticipated holding period, or a decline in market value to an amount less than cost. This analysis is generally performed at the property level, except when an asset is part of an interdependent group such as an office park, and consists of determining whether the asset's carrying amount will be recovered from its undiscounted estimated future operating and residual cash flows. These cash flows are estimated based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for customers, changes in market rental rates, costs to operate each property and expected ownership periods. For properties under development, the cash flows are based on expected service potential of the asset or asset group when development is substantially complete.
 
If the carrying amount of a held for use asset exceeds the sum of its undiscounted future operating and residual cash flows, an impairment loss is recorded for the difference between estimated fair value of the asset and the carrying amount. We generally estimate the fair value of assets held for use by using discounted cash flow analyses. In some instances, appraisal information may be available and is used in addition to a discounted cash flow analysis. As the factors used in generating these cash flows are difficult to predict and are subject to future events that may alter our assumptions, the discounted and/or undiscounted future operating and residual cash flows estimated by us in our impairment analyses or those established by appraisal may not be achieved and we may be required to recognize future impairment losses on properties held for use.
 
We record assets held for sale at the lower of the carrying amount or estimated fair value. Fair value of assets held for sale is equal to the estimated or contracted sales price with a potential buyer, less costs to sell. The impairment loss is the amount by which the carrying amount exceeds the estimated fair value.
 
We also analyze our investments in unconsolidated affiliates for impairment. This analysis consists of determining whether an expected loss in market value of an investment is other than temporary by evaluating the length of time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the investment, and our intent and ability to retain our investment for a period of time sufficient to allow for any anticipated recovery in market value. As the factors used in this analysis are difficult to predict and are subject to future events that may alter our assumptions, we may be required to recognize future impairment losses on our investments in unconsolidated affiliates.
 

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Sales of Real Estate

For sales of real estate where we have collected the consideration to which we are entitled in exchange for transferring the real estate, the related assets and liabilities are removed from the balance sheet and the resultant gain or loss is recorded in the period the transaction closes. Any post sale involvement is accounted for as separate performance obligations and when the separate performance obligations are satisfied, the sales price allocated to each is recognized.

Rental and Other Revenues
 
Minimum contractual rents from leases are recognized on a straight-line basis over the terms of the respective leases. This means that, with respect to a particular lease, actual amounts billed in accordance with the lease during any given period may be higher or lower than the amount of rental revenue recognized for the period. Straight-line rental revenue is commenced when the customer assumes control of the leased premises. Accrued straight-line rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements. Contingent rental revenue, such as percentage rent, is accrued when the contingency is removed. Termination fee income is recognized at the later of when the customer has vacated the space or the lease has expired and a fully executed lease termination agreement has been delivered, the amount of the fee is determinable and collectability of the fee is reasonably assured.
 
Cost recovery income is determined on a calendar year and a lease-by-lease basis. The most common types of cost recovery income in our leases are common area maintenance (“CAM”) and real estate taxes, for which a customer typically pays its pro-rata share of operating and administrative expenses and real estate taxes in excess of the costs incurred during a contractually specified base year. The computation of cost recovery income is complex and involves numerous judgments, including the interpretation of lease provisions. Leases are not uniform in dealing with such cost recovery income and there are many variations in the computation. Many customers make monthly fixed payments of CAM, real estate taxes and other cost reimbursement items. We accrue income related to these payments each month. We make quarterly accrual adjustments, positive or negative, to cost recovery income to adjust the recorded amounts to our best estimate of the final annual amounts to be billed and collected. After the end of the calendar year, we compute each customer's final cost recovery income and, after considering amounts paid by the customer during the year, issue a bill or credit for the appropriate amount to the customer. The differences between the amounts billed less previously received payments and the accrual adjustment are recorded as increases or decreases to cost recovery income when the final bills are prepared, which occurs during the first half of the subsequent year.
 
Allowance for Doubtful Accounts
 
Accounts receivable, accrued straight-line rents receivable and mortgages and notes receivable are reduced by an allowance for amounts that may become uncollectible in the future. We regularly evaluate the adequacy of our allowance for doubtful accounts. The evaluation primarily consists of reviewing past due account balances and considering such factors as the credit quality of our customer, historical trends of the customer and changes in customer payment terms. Additionally, with respect to customers in bankruptcy, we estimate the probable recovery through bankruptcy claims and adjust the allowance for amounts deemed uncollectible. If our assumptions regarding the collectability of receivables prove incorrect, we could experience losses in excess of our allowance for doubtful accounts. The allowance and its related receivable are written-off when we have concluded there is a low probability of collection and we have discontinued collection efforts.

Non-GAAP Information

The Company believes that FFO, FFO available for common stockholders and FFO available for common stockholders per share are beneficial to management and investors and are important indicators of the performance of any equity REIT. Because these FFO calculations exclude such factors as depreciation, amortization and impairments of real estate assets and gains or losses from sales of operating real estate assets, which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful life estimates, they facilitate comparisons of operating performance between periods and between other REITs. Management believes that historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, management believes the use of FFO, FFO available for common stockholders and FFO available for common stockholders per share, together with the required GAAP presentations, provides a more complete understanding of the Company's performance relative to its competitors and a more informed and appropriate basis on which to make decisions involving operating, financing and investing activities.
 

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FFO, FFO available for common stockholders and FFO available for common stockholders per share are non-GAAP financial measures and therefore do not represent net income or net income per share as defined by GAAP. Net income and net income per share as defined by GAAP are the most relevant measures in determining the Company's operating performance because these FFO measures include adjustments that investors may deem subjective, such as adding back expenses such as depreciation, amortization and impairments. Furthermore, FFO available for common stockholders per share does not depict the amount that accrues directly to the stockholders' benefit. Accordingly, FFO, FFO available for common stockholders and FFO available for common stockholders per share should never be considered as alternatives to net income, net income available for common stockholders, or net income available for common stockholders per share as indicators of the Company's operating performance.
 
The Company's presentation of FFO is consistent with FFO as defined by NAREIT, which is calculated as follows:
 
Net income/(loss) computed in accordance with GAAP;
 
Less net income attributable to noncontrolling interests in consolidated affiliates;
 
Plus depreciation and amortization of depreciable operating properties;
 
Less gains, or plus losses, from sales of depreciable operating properties, plus impairments on depreciable operating properties and excluding items that are classified as extraordinary items under GAAP;
 
Plus or minus our share of adjustments, including depreciation and amortization of depreciable operating properties, for unconsolidated joint venture investments (to reflect funds from operations on the same basis); and
 
Plus or minus adjustments for depreciation and amortization and gains/(losses) on sales of depreciable operating properties, plus impairments on depreciable operating properties, and noncontrolling interests in consolidated affiliates related to discontinued operations.
 
In calculating FFO, the Company includes net income attributable to noncontrolling interests in the Operating Partnership, which the Company believes is consistent with standard industry practice for REITs that operate through an UPREIT structure. The Company believes that it is important to present FFO on an as-converted basis since all of the Common Units not owned by the Company are redeemable on a one-for-one basis for shares of its Common Stock.
 
The following table sets forth the Company's FFO, FFO available for common stockholders and FFO available for common stockholders per share ($ in thousands, except per share amounts):

 
Year Ended December 31,
 
2018
 
2017
 
2016
Funds from operations:
 
 
 
 
 
Net income
$
177,630

 
$
191,663

 
$
541,139

Net (income) attributable to noncontrolling interests in consolidated affiliates
(1,207
)
 
(1,239
)
 
(1,253
)
Depreciation and amortization of real estate assets
227,045

 
225,052

 
217,533

(Gains) on disposition of depreciable properties
(37,096
)
 
(53,170
)
 
(8,915
)
Unconsolidated affiliates:
 
 
 
 
 
Depreciation and amortization of real estate assets
2,284

 
2,298

 
2,978

(Gains) on disposition of depreciable properties

 
(4,617
)
 
(2,173
)
Discontinued operations:
 
 
 
 
 
(Gains) on disposition of depreciable properties

 

 
(414,496
)
Funds from operations
368,656

 
359,987

 
334,813

Dividends on Preferred Stock
(2,492
)
 
(2,492
)
 
(2,501
)
Funds from operations available for common stockholders
$
366,164

 
$
357,495

 
$
332,312

Funds from operations available for common stockholders per share
$
3.45

 
$
3.39

 
$
3.28

Weighted average shares outstanding (1)
106,268

 
105,594

 
101,398

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


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

As of December 31, 2018, our same property portfolio consisted of 210 in-service properties encompassing 28.1 million rentable square feet that were wholly owned during the entirety of the periods presented (from January 1, 2017 to December 31, 2018). As of December 31, 2017, our same property portfolio consisted of 210 in-service properties encompassing 28.0 million rentable square feet that were wholly owned during the entirety of the periods presented (from January 1, 2016 to December 31, 2017). The change in our same property portfolio was due to the addition of one property encompassing 0.2 million rentable square feet acquired during 2016 and two newly developed properties encompassing 0.3 million rentable square feet placed in service during 2016. These additions were offset by the removal of three properties encompassing 0.5 million rentable square feet that were sold during 2018.

Rental and other revenues related to properties not in our same property portfolio were $59.9 million and $54.1 million for the years ended December 31, 2018 and 2017, respectively. Rental property and other expenses related to properties not in our same property portfolio were $14.3 million and $15.1 million for the years ended December 31, 2018 and 2017, respectively.

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

 
 
Year Ended December 31,
 
 
2018
 
2017
Income before disposition of investment properties and activity in unconsolidated affiliates
 
$
137,754

 
$
130,102

Other income
 
(1,940
)
 
(2,283
)
Interest expense
 
71,422

 
69,105

General and administrative expenses
 
40,006

 
39,648

Impairments of real estate assets
 
423

 
1,445

Depreciation and amortization
 
229,955

 
227,832

Net operating income
 
477,620

 
465,849

Less – non same property and other net operating income
 
(45,568
)
 
(39,057
)
Same property net operating income
 
$
432,052

 
$
426,792

 
 
 
 
 
Same property net operating income
 
$
432,052

 
$
426,792

Less – lease termination fees, straight-line rent and other non-cash adjustments
 
(17,036
)
 
(14,829
)
Same property cash net operating income
 
$
415,016

 
$
411,963



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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The effects of potential changes in interest rates are discussed below. Our market risk discussion includes “forward-looking statements” and represents an estimate of possible changes in fair value or future earnings that would occur assuming hypothetical future movements in interest rates. Actual future results may differ materially from those presented. See “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” and the Notes to Consolidated Financial Statements for a description of our accounting policies and other information related to these financial instruments.
 
We borrow funds at a combination of fixed and variable rates. Borrowings under our revolving credit facility and bank term loans bear interest at variable rates. Our long-term debt, which consists of secured and unsecured long-term financings, typically bears interest at fixed rates. Our interest rate risk management objectives are to limit generally the impact of interest rate changes on earnings and cash flows and lower our overall borrowing costs. To achieve these objectives, from time to time we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to existing and prospective debt instruments. We generally do not hold or issue these derivative contracts for trading or speculative purposes.
 
At December 31, 2018, we had $1,288.0 million principal amount of fixed rate debt outstanding, a $145.6 million increase as compared to December 31, 2017, excluding debt with a variable rate that is effectively fixed by related interest rate hedge contracts. The estimated aggregate fair market value of this debt was $1,259.9 million. If interest rates had been 100 basis points higher, the aggregate fair market value of our fixed rate debt would have been $68.3 million lower. If interest rates had been 100 basis points lower, the aggregate fair market value of our fixed rate debt would have been $73.8 million higher.
 
At December 31, 2018, we had $532.0 million of variable rate debt outstanding, a $73.0 million decrease as compared to December 31, 2017, not protected by interest rate hedge contracts. If the weighted average interest rate on this variable rate debt had been 100 basis points higher, the annual interest expense would increase $5.3 million. If the weighted average interest rate on this variable rate debt had been 100 basis points lower, the annual interest expense would decrease $5.3 million. On January 11, 2019, floating-to-fixed interest rate swaps with respect to an aggregate of $225.0 million of LIBOR-based borrowings expired. Subsequently, as of January 25, 2019, we had $766.0 million of variable rate debt outstanding not protected by interest rate hedge contracts. If the weighted average interest rate on this variable rate debt is 100 basis points higher, the annual interest expense would increase $7.7 million. If the weighted average interest rate on this variable rate debt is 100 basis points lower, the annual interest expense would decrease $7.7 million.
 
At December 31, 2018, we had $275.0 million of variable rate debt outstanding with $275.0 million of related floating-to-fixed interest rate swaps. These swaps effectively fix the underlying one-month LIBOR rate at a weighted average rate of 1.681%. If the underlying LIBOR interest rates increase or decrease by 100 basis points, the aggregate fair market value of the swaps at December 31, 2018 would increase or decrease by $1.4 million. Of these swaps, $225.0 million notional amount that effectively fixed the underlying one-month LIBOR at a weighted average rate of 1.678% expired on January 11, 2019.

During 2018, we entered into an aggregate of $225.0 million notional amount of forward-starting swaps that effectively lock the underlying 10-year treasury rate at a weighted average of 2.86% with respect to a planned issuance of debt securities by the Operating Partnership expected to occur prior to June 11, 2019. If the underlying treasury rate was to increase or decrease by 100 basis points, the aggregate fair market value of the swaps at December 31, 2018 would increase by $19.1 million or decrease by $21.2 million, respectively, due to the 10-year term of such swaps.

We are exposed to certain losses in the event of nonperformance by the counterparties, which are major financial institutions, under the swaps. We regularly evaluate the financial condition of our counterparties using publicly available information. Based on this review, we currently expect the counterparties to perform fully under the swaps. However, if a counterparty defaults on its obligations under a swap, we could be required to pay the full rates on the applicable debt, even if such rates were in excess of the rate in the contract.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See page 48 for Index to Consolidated Financial Statements of Highwoods Properties, Inc. and Highwoods Realty Limited Partnership.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.


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ITEM 9A. CONTROLS AND PROCEDURES

General

The purpose of this section is to discuss our controls and procedures. The statements in this section represent the conclusions of Edward J. Fritsch, the Company's Chief Executive Officer (“CEO”), and Mark F. Mulhern, the Company's Executive Vice President and Chief Financial Officer (“CFO”).
 
The CEO and CFO evaluations of our controls and procedures include a review of the controls' objectives and design, the controls' implementation by us and the effect of the controls on the information generated for use in this Annual Report. We seek to identify data errors, control problems or acts of fraud and confirm that appropriate corrective action, including process improvements, is undertaken. Our controls and procedures are also evaluated on an ongoing basis by or through the following:
 
activities undertaken and reports issued by employees responsible for testing our internal control over financial reporting;

quarterly sub-certifications by representatives from appropriate business and accounting functions to support the CEO's and CFO's evaluations of our controls and procedures;

other personnel in our finance and accounting organization;

members of our internal disclosure committee; and

members of the audit committee of the Company's Board of Directors.
 
We do not expect that our controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of controls and procedures must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
 
Management's Annual Report on the Company's Internal Control Over Financial Reporting
 
The Company's management is required to establish and maintain internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that:
 
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect transactions and dispositions of assets;

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.
 
Under the supervision of the Company's CEO and CFO, we conducted an evaluation of the effectiveness of the Company's internal control over financial reporting at December 31, 2018 based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
We have concluded that, at December 31, 2018, the Company's internal control over financial reporting was effective. Deloitte & Touche LLP, our independent registered public accounting firm, has issued their attestation report, which is included below, on the effectiveness of the Company's internal control over financial reporting as of December 31, 2018.

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Management's Annual Report on the Operating Partnership's Internal Control Over Financial Reporting
 
The Operating Partnership is also required to establish and maintain internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

Under the supervision of the Company's CEO and CFO, we conducted an evaluation of the effectiveness of the Operating Partnership's internal control over financial reporting at December 31, 2018 based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
We have concluded that, as of December 31, 2018, the Operating Partnership's internal control over financial reporting was effective. SEC rules do not require us to obtain an attestation report of Deloitte & Touche LLP on the effectiveness of the Operating Partnership's internal control over financial reporting.


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  
To the stockholders and the Board of Directors of Highwoods Properties, Inc.

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Highwoods Properties, Inc. and subsidiaries (the “Company”) as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018 of the Company and our report dated February 5, 2019 expressed an unqualified opinion on those financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on the Company's Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 
/s/ Deloitte & Touche LLP
 

Raleigh, North Carolina
February 5, 2019



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Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the fourth quarter of 2018 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. There were also no changes in the Operating Partnership’s internal control over financial reporting during the fourth quarter of 2018 that materially affected, or are reasonably likely to materially affect, the Operating Partnership’s internal control over financial reporting.

Disclosure Controls and Procedures

SEC rules require us to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our annual and periodic reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. As defined in Rule 13a-15(e) under the Exchange Act, disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us is accumulated and communicated to our management, including the Company’s CEO and CFO, to allow for timely decisions regarding required disclosure. The Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective at the end of the period covered by this Annual Report. The Company’s CEO and CFO also concluded that the Operating Partnership’s disclosure controls and procedures were effective at the end of the period covered by this Annual Report.


ITEM 9B. OTHER INFORMATION

None.



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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information about the Company’s executive officers and directors, the code of ethics that applies to the Company’s chief executive officer and senior financial officers, which is posted on our website, and certain corporate governance matters is incorporated herein by reference to the Company’s Proxy Statement to be filed in connection with its annual meeting of stockholders to be held on May 8, 2019. No changes have been made to the procedures by which stockholders may recommend nominees to the Company's board of directors since the 2018 annual meeting, which was held on May 9, 2018. See Item X in Part I of this Annual Report for biographical information regarding the Company’s executive officers. The Company is the sole general partner of the Operating Partnership.

ITEM 11. EXECUTIVE COMPENSATION

Information about the compensation of the Company’s directors and executive officers is incorporated herein by reference to the Company’s Proxy Statement to be filed in connection with its annual meeting of stockholders to be held on May 8, 2019.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information about the beneficial ownership of Common Stock and the Company’s equity compensation plans is incorporated herein by reference to the Company’s Proxy Statement to be filed in connection with its annual meeting of stockholders to be held on May 8, 2019.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Information about certain relationships and related transactions, if any, and the independence of the Company’s directors is incorporated herein by reference to the Company’s Proxy Statement to be filed in connection with its annual meeting of stockholders to be held on May 8, 2019.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information about fees paid to and services provided by our independent registered public accounting firm is incorporated herein by reference to the Company’s Proxy Statement to be filed in connection with its annual meeting of stockholders to be held on May 8, 2019.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Reference is made to the Index to Consolidated Financial Statements on page 48 for a list of the Consolidated Financial Statements of Highwoods Properties, Inc. and Highwoods Realty Limited Partnership included in this report.

Exhibits
Exhibit
Number
 
Description
1.1
 
1.2
 
1.3
 
3.1
 
3.2
 
4.1
 
4.2
 
4.3
 
4.4
 
4.5
 
4.6
 
4.7
 
4.8
 
4.9
 
10.1
 
10.2
 
10.3
 
10.4
*
10.5
 

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Exhibit
Number
 
Description
10.6
*
10.7
*
10.8
*
10.9
*
10.10
*
10.11
*
10.12
*
10.13
*
10.14
 
10.15
 
10.16
 
10.17
 
21
 
23.1
 
23.2
 
31.1
 
31.2
 
31.3
 
31.4
 
32.1
 
32.2
 
32.3
 
32.4
 
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
__________
 
* Represents management contract or compensatory plan.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
Page
 
 
Highwoods Properties, Inc.
 
Consolidated Financial Statements:
 
 
 
Highwoods Realty Limited Partnership:
 
Consolidated Financial Statements:
 
 
 
 
 
 
 
__________

All other schedules are omitted because they are not applicable or because the required information is included in our Consolidated Financial Statements or notes thereto.


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the stockholders and the Board of Directors of Highwoods Properties, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Highwoods Properties, Inc. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 5, 2019, expressed an unqualified opinion on the Company’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 
/s/ Deloitte & Touche LLP
 

Raleigh, North Carolina
February 5, 2019


We have served as the Company’s auditor since 2006.



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HIGHWOODS PROPERTIES, INC.
Consolidated Balance Sheets
(in thousands, except share and per share data)

December 31,
 
2018
 
2017
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
491,441

 
$
485,956

Buildings and tenant improvements
4,676,862

 
4,590,490

Development in-process
165,537

 
88,452

Land held for development
128,248

 
74,765

 
5,462,088

 
5,239,663

Less-accumulated depreciation
(1,296,562
)
 
(1,202,424
)
Net real estate assets
4,165,526

 
4,037,239

Real estate and other assets, net, held for sale

 
14,118

Cash and cash equivalents
3,769

 
3,272

Restricted cash
6,374

 
85,061

Accounts receivable, net of allowance of $1,166 and $753, respectively
25,952

 
24,397

Mortgages and notes receivable, net of allowance of $44 and $72, respectively
5,599

 
6,425

Accrued straight-line rents receivable, net of allowance of $641 and $819, respectively
220,088

 
200,131

Investments in and advances to unconsolidated affiliates
23,585

 
23,897

Deferred leasing costs, net of accumulated amortization of $149,275 and $143,512, respectively
195,273

 
200,679

Prepaid expenses and other assets, net of accumulated depreciation of $18,074 and $19,092,
respectively
28,843

 
28,572

Total Assets
$
4,675,009

 
$
4,623,791

Liabilities, Noncontrolling Interests in the Operating Partnership and Equity:
 
 
 
Mortgages and notes payable, net
$
2,085,831

 
$
2,014,333

Accounts payable, accrued expenses and other liabilities
218,922

 
228,215

Total Liabilities
2,304,753

 
2,242,548

Commitments and contingencies

 

Noncontrolling interests in the Operating Partnership
105,960

 
144,009

Equity:
 
 
 
Preferred Stock, $.01 par value, 50,000,000 authorized shares;
 
 
 
8.625% Series A Cumulative Redeemable Preferred Shares (liquidation preference $1,000 per share), 28,877 and 28,892 shares issued and outstanding, respectively
28,877

 
28,892

Common Stock, $.01 par value, 200,000,000 authorized shares;
 
 
 
103,557,065 and 103,266,875 shares issued and outstanding, respectively
1,036

 
1,033

Additional paid-in capital
2,976,197

 
2,929,399

Distributions in excess of net income available for common stockholders
(769,303
)
 
(747,344
)
Accumulated other comprehensive income
9,913

 
7,838

Total Stockholders’ Equity
2,246,720

 
2,219,818

Noncontrolling interests in consolidated affiliates
17,576

 
17,416

Total Equity
2,264,296

 
2,237,234

Total Liabilities, Noncontrolling Interests in the Operating Partnership and Equity
$
4,675,009

 
$
4,623,791

See accompanying notes to consolidated financial statements.

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

 
Year Ended December 31,
 
2018
 
2017
 
2016
Rental and other revenues
$
720,035

 
$
702,737

 
$
665,634

Operating expenses:
 
 
 
 
 
Rental property and other expenses
242,415

 
236,888

 
231,085

Depreciation and amortization
229,955

 
227,832

 
220,140

Impairments of real estate assets
423

 
1,445

 

General and administrative
40,006

 
39,648

 
38,153

Total operating expenses
512,799

 
505,813

 
489,378

Interest expense:
 
 
 
 
 
Contractual
68,565

 
65,939

 
73,142

Amortization of debt issuance costs
2,857

 
3,166

 
3,506

 
71,422

 
69,105

 
76,648

Other income:
 
 
 
 
 
Interest and other income
1,940

 
2,309

 
2,338

Losses on debt extinguishment

 
(26
)
 

 
1,940

 
2,283

 
2,338

Income from continuing operations before disposition of investment properties and activity in unconsolidated affiliates
137,754

 
130,102

 
101,946

Gains on disposition of property
37,638

 
54,157

 
14,807

Equity in earnings of unconsolidated affiliates
2,238

 
7,404

 
5,793

Income from continuing operations
177,630

 
191,663

 
122,546

Discontinued operations:
 
 
 
 
 
Income from discontinued operations

 

 
4,097

Net gains on disposition of discontinued operations

 

 
414,496

 

 

 
418,593

Net income
177,630

 
191,663

 
541,139

Net (income) attributable to noncontrolling interests in the Operating Partnership
(4,588
)
 
(5,059
)
 
(15,596
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(1,207
)
 
(1,239
)
 
(1,253
)
Dividends on Preferred Stock
(2,492
)
 
(2,492
)
 
(2,501
)
Net income available for common stockholders
$
169,343

 
$
182,873

 
$
521,789

Earnings per Common Share – basic:
 
 
 
 
 
Income from continuing operations available for common stockholders
$
1.64

 
$
1.78

 
$
1.17

Income from discontinued operations available for common stockholders

 

 
4.13

Net income available for common stockholders
$
1.64

 
$
1.78

 
$
5.30

Weighted average Common Shares outstanding – basic
103,439

 
102,682

 
98,439

Earnings per Common Share – diluted:
 
 
 
 
 
Income from continuing operations available for common stockholders
$
1.64

 
$
1.78

 
$
1.17

Income from discontinued operations available for common stockholders

 

 
4.13

Net income available for common stockholders
$
1.64

 
$
1.78

 
$
5.30

Weighted average Common Shares outstanding – diluted
106,268

 
105,594

 
101,398

Net income available for common stockholders:
 
 
 
 
 
Income from continuing operations available for common stockholders
$
169,343

 
$
182,873

 
$
115,461

Income from discontinued operations available for common stockholders

 

 
406,328

Net income available for common stockholders
$
169,343

 
$
182,873

 
$
521,789

See accompanying notes to consolidated financial statements.

51

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HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Comprehensive Income
(in thousands)
 
Year Ended December 31,
 
2018
 
2017
 
2016
Comprehensive income:
 
 
 
 
 
Net income
$
177,630

 
$
191,663

 
$
541,139

Other comprehensive income:
 
 
 
 
 
Unrealized gains on cash flow hedges
4,161

 
1,732

 
5,703

Amortization of cash flow hedges
(2,086
)
 
1,157

 
3,057

Total other comprehensive income
2,075

 
2,889

 
8,760

Total comprehensive income
179,705

 
194,552

 
549,899

Less-comprehensive (income) attributable to noncontrolling interests
(5,795
)
 
(6,298
)
 
(16,849
)
Comprehensive income attributable to common stockholders
$
173,910

 
$
188,254

 
$
533,050

See accompanying notes to consolidated financial statements.



52

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Equity
(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 Income/(Loss)
 
Non-controlling Interests in Consolidated Affiliates
 
Distributions in Excess of Net Income Available for Common Stockholders
 
Total
Balance at December 31, 2015
96,091,932

 
$
961

 
$
29,050

 
$
2,598,242

 
$
(3,811
)
 
$
17,975

 
$
(1,023,135
)
 
$
1,619,282

Issuances of Common Stock, net of issuance costs and tax withholdings
5,390,710

 
54

 

 
256,326

 

 

 

 
256,380

Conversions of Common Units to Common Stock
61,048

 

 

 
3,057

 

 

 

 
3,057

Dividends on Common Stock ($1.70 per share)

 

 

 

 

 

 
(166,861
)
 
(166,861
)
Special dividend on Common Stock ($0.80 per share)

 

 

 

 

 

 
(81,205
)
 
(81,205
)
Dividends on Preferred Stock ($86.25 per share)

 

 

 

 

 

 
(2,501
)
 
(2,501
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value

 

 

 
(12,993
)
 

 

 

 
(12,993
)
Distributions to noncontrolling interests in consolidated affiliates

 

 

 

 

 
(1,267
)
 

 
(1,267
)
Issuances of restricted stock
130,752

 

 

 

 

 

 

 

Redemptions/repurchases of Preferred Stock

 

 
(130
)
 

 

 

 

 
(130
)
Share-based compensation expense, net of forfeitures
(8,888
)
 
2

 

 
6,249

 

 

 

 
6,251

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

 

 

 

 

 

 
(15,596
)
 
(15,596
)
Net (income) attributable to noncontrolling interests in consolidated affiliates

 

 

 

 

 
1,253

 
(1,253
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 

 
541,139

 
541,139

Other comprehensive income

 

 

 

 
8,760

 

 

 
8,760

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
549,899

Balance at December 31, 2016
101,665,554

 
1,017

 
28,920

 
2,850,881

 
4,949

 
17,961

 
(749,412
)
 
2,154,316

Issuances of Common Stock, net of issuance costs and tax withholdings
1,480,573

 
15

 

 
70,962

 

 

 

 
70,977

Conversions of Common Units to Common Stock
10,000

 

 

 
511

 

 

 

 
511

Dividends on Common Stock ($1.76 per share)

 

 

 

 

 

 
(180,805
)
 
(180,805
)
Dividends on Preferred Stock ($86.25 per share)

 

 

 

 

 

 
(2,492
)
 
(2,492
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value

 

 

 
354

 

 

 

 
354

Distributions to noncontrolling interests in consolidated affiliates

 

 

 

 

 
(1,784
)
 

 
(1,784
)
Issuances of restricted stock
110,748

 

 

 

 

 

 

 

Redemptions/repurchases of Preferred Stock

 

 
(28
)
 

 

 

 

 
(28
)
Share-based compensation expense, net of forfeitures

 
1

 

 
6,691

 

 

 

 
6,692

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

 

 

 

 

 

 
(5,059
)
 
(5,059
)
Net (income) attributable to noncontrolling interests in consolidated affiliates

 

 

 

 

 
1,239

 
(1,239
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 

 
191,663

 
191,663

Other comprehensive income

 

 

 

 
2,889

 

 

 
2,889

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
194,552

Balance at December 31, 2017
103,266,875

 
$
1,033

 
$
28,892

 
$
2,929,399

 
$
7,838

 
$
17,416

 
$
(747,344
)
 
$
2,237,234

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

53

Table of Contents

HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Equity - Continued
(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 Income/(Loss)
 
Non-controlling Interests in Consolidated Affiliates
 
Distributions in Excess of Net Income Available for Common Stockholders
 
Total
Balance at December 31, 2017
103,266,875

 
$
1,033

 
$
28,892

 
$
2,929,399

 
$
7,838

 
$
17,416

 
$
(747,344
)
 
$
2,237,234

Issuances of Common Stock, net of issuance costs and tax withholdings
33,652

 

 

 
1,865

 

 

 

 
1,865

Conversions of Common Units to Common Stock
90,001

 

 

 
4,043

 

 

 

 
4,043

Dividends on Common Stock ($1.85 per share)

 

 

 

 

 

 
(191,302
)
 
(191,302
)
Dividends on Preferred Stock ($86.25 per share)

 

 

 

 

 

 
(2,492
)
 
(2,492
)
Adjustment of noncontrolling interests in the Operating Partnership to fair value

 

 

 
33,427

 

 

 

 
33,427

Distributions to noncontrolling interests in consolidated affiliates

 

 

 

 

 
(1,047
)
 

 
(1,047
)
Issuances of restricted stock
172,440

 

 

 

 

 

 

 

Redemptions/repurchases of Preferred Stock

 

 
(15
)
 

 

 

 

 
(15
)
Share-based compensation expense, net of forfeitures
(5,903
)
 
3

 

 
7,463

 

 

 

 
7,466

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

 

 

 

 

 

 
(4,588
)
 
(4,588
)
Net (income) attributable to noncontrolling interests in consolidated affiliates

 

 

 

 

 
1,207

 
(1,207
)
 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 

 
177,630

 
177,630

Other comprehensive income

 

 

 

 
2,075

 

 

 
2,075

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
179,705

Balance at December 31, 2018
103,557,065

 
$
1,036

 
$
28,877

 
$
2,976,197

 
$
9,913

 
$
17,576

 
$
(769,303
)
 
$
2,264,296

See accompanying notes to consolidated financial statements.

54

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HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Cash Flows
(in thousands)
 
Year Ended December 31,
 
2018
 
2017
 
2016
Operating activities:
 
 
 
 
 
Net income
$
177,630

 
$
191,663

 
$
541,139

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
229,955

 
227,832

 
220,140

Amortization of lease incentives and acquisition-related intangible assets and liabilities
(1,943
)
 
(1,172
)
 
(1,996
)
Share-based compensation expense
7,466

 
6,692

 
6,251

Allowance for losses on accounts and accrued straight-line rents receivable
1,212

 
1,508

 
2,001

Accrued interest on mortgages and notes receivable
(451
)
 
(509
)
 
(502
)
Amortization of debt issuance costs
2,857

 
3,166

 
3,506

Amortization of cash flow hedges
(2,086
)
 
1,157

 
3,057

Amortization of mortgages and notes payable fair value adjustments
1,449

 
705

 
(234
)
Impairments of real estate assets
423

 
1,445

 

Losses on debt extinguishment

 
26

 

Net gains on disposition of property
(37,638
)
 
(54,157
)
 
(429,303
)
Equity in earnings of unconsolidated affiliates
(2,238
)
 
(7,404
)
 
(5,793
)
Distributions of earnings from unconsolidated affiliates
2,104

 
5,078

 
4,424

Settlement of cash flow hedges
7,216

 
7,322

 

Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
1,759

 
(4,974
)
 
3,401

Prepaid expenses and other assets
1,217

 
7,908

 
(4,423
)
Accrued straight-line rents receivable
(23,203
)
 
(32,234
)
 
(24,245
)
Accounts payable, accrued expenses and other liabilities
(7,101
)
 
(1,520
)
 
(11,618
)
Net cash provided by operating activities
358,628

 
352,532

 
305,805

Investing activities:
 
 
 
 
 
Investments in acquired real estate and related intangible assets, net of cash acquired
(50,649
)
 
(1,840
)
 
(110,249
)
Investments in development in-process
(150,310
)
 
(150,944
)
 
(177,875
)
Investments in tenant improvements and deferred leasing costs
(121,534
)
 
(109,742
)
 
(91,423
)
Investments in building improvements
(68,256
)
 
(63,780
)
 
(80,672
)
Net proceeds from disposition of real estate assets
88,813

 
129,503

 
684,371

Distributions of capital from unconsolidated affiliates
105

 
11,670

 
2,766

Investments in mortgages and notes receivable

 

 
(7,934
)
Repayments of mortgages and notes receivable
1,312

 
2,917

 
1,699

Investments in and advances to unconsolidated affiliates

 
(10,063
)
 
(105
)
Repayments from unconsolidated affiliates

 

 
448

Changes in other investing activities
(6,230
)
 
(8,023
)
 
(4,764
)
Net cash provided by/(used in) investing activities
$
(306,749
)
 
$
(200,302
)
 
$
216,262


55

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HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Cash Flows – Continued
(in thousands)
 
Year Ended December 31,
 
2018
 
2017
 
2016
Financing activities:
 
 
 
 
 
Dividends on Common Stock
$
(191,302
)
 
$
(180,805
)
 
$
(166,861
)
Special dividend on Common Stock

 
(81,205
)
 

Redemptions/repurchases of Preferred Stock
(15
)
 
(28
)
 
(130
)
Dividends on Preferred Stock
(2,492
)
 
(2,492
)
 
(2,501
)
Distributions to noncontrolling interests in the Operating Partnership
(5,167
)
 
(4,987
)
 
(4,888
)
Special distribution to noncontrolling interests in the Operating Partnership

 
(2,271
)
 

Distributions to noncontrolling interests in consolidated affiliates
(1,047
)
 
(1,784
)
 
(1,267
)
Proceeds from the issuance of Common Stock
3,637

 
76,268

 
264,769

Costs paid for the issuance of Common Stock
(95
)
 
(1,283
)
 
(3,973
)
Repurchase of shares related to tax withholdings
(1,677
)
 
(4,008
)
 
(4,416
)
Borrowings on revolving credit facility
438,900

 
780,300

 
287,600

Repayments of revolving credit facility
(501,900
)
 
(535,300
)
 
(586,600
)
Borrowings on mortgages and notes payable
345,863

 
656,001

 
150,000

Repayments of mortgages and notes payable
(211,803
)
 
(832,553
)
 
(395,993
)
Payments of debt extinguishment costs

 
(57
)
 

Changes in debt issuance costs and other financing activities
(2,971
)
 
(8,324
)
 
(981
)
Net cash used in financing activities
(130,069
)
 
(142,528
)
 
(465,241
)
Net increase/(decrease) in cash and cash equivalents and restricted cash
(78,190
)
 
9,702

 
56,826

Cash and cash equivalents and restricted cash at beginning of the period
88,333

 
78,631

 
21,805

Cash and cash equivalents and restricted cash at end of the period
$
10,143

 
$
88,333

 
$
78,631

 
Reconciliation of cash and cash equivalents and restricted cash:
 
 
Year Ended December 31,
 
2018
 
2017
 
2016
Cash and cash equivalents at end of the period
$
3,769

 
$
3,272

 
$
49,490

Restricted cash at end of the period
6,374

 
85,061

 
29,141

Cash and cash equivalents and restricted cash at end of the period
$
10,143

 
$
88,333

 
$
78,631


Supplemental disclosure of cash flow information:
 
 
Year Ended December 31,
 
2018
 
2017
 
2016
Cash paid for interest, net of amounts capitalized
$
67,235

 
$
68,207

 
$
72,847

 
Supplemental disclosure of non-cash investing and financing activities:
 
 
Year Ended December 31,
 
2018
 
2017
 
2016
Unrealized gains on cash flow hedges
$
4,161

 
$
1,732

 
$
5,703

Conversions of Common Units to Common Stock
4,043

 
511

 
3,057

Changes in accrued capital expenditures
(165
)
 
(1,912
)
 
8,580

Write-off of fully depreciated real estate assets
76,558

 
59,108

 
39,262

Write-off of fully amortized leasing costs
34,191

 
40,517

 
25,569

Write-off of fully amortized debt issuance costs
2,733

 
11,724

 
964

Adjustment of noncontrolling interests in the Operating Partnership to fair value
(33,427
)
 
(354
)
 
12,993

Contingent consideration in connection with the acquisition of land

 
750

 

Special dividend on Common Stock declared

 

 
(81,205
)
Special distribution to noncontrolling interests in the Operating Partnership declared

 

 
(2,271
)
See accompanying notes to consolidated financial statements.

56

Table of Contents


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of the General Partner of Highwoods Realty Limited Partnership

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Highwoods Realty Limited Partnership and subsidiaries (the “Operating Partnership”) as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, capital, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Operating Partnership as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Operating Partnership's management. Our responsibility is to express an opinion on the Operating Partnership’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Operating Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Operating Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Operating Partnership’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 
/s/ Deloitte & Touche LLP
 

Raleigh, North Carolina
February 5, 2019


We have served as the Operating Partnership’s auditor since 2006.



57

Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Balance Sheets
(in thousands, except unit and per unit data)
 
December 31,
 
2018
 
2017
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
491,441

 
$
485,956

Buildings and tenant improvements
4,676,862

 
4,590,490

Development in-process
165,537

 
88,452

Land held for development
128,248

 
74,765

 
5,462,088

 
5,239,663

Less-accumulated depreciation
(1,296,562
)
 
(1,202,424
)
Net real estate assets
4,165,526

 
4,037,239

Real estate and other assets, net, held for sale

 
14,118

Cash and cash equivalents
3,769

 
3,272

Restricted cash
6,374

 
85,061

Accounts receivable, net of allowance of $1,166 and $753, respectively
25,952

 
24,397

Mortgages and notes receivable, net of allowance of $44 and $72, respectively
5,599

 
6,425

Accrued straight-line rents receivable, net of allowance of $641 and $819, respectively
220,088

 
200,131

Investments in and advances to unconsolidated affiliates
23,585

 
23,897

Deferred leasing costs, net of accumulated amortization of $149,275 and $143,512, respectively
195,273

 
200,679

Prepaid expenses and other assets, net of accumulated depreciation of $18,074 and $19,092,
respectively
28,843

 
28,572

Total Assets
$
4,675,009

 
$
4,623,791

Liabilities, Redeemable Operating Partnership Units and Capital:
 
 
 
Mortgages and notes payable, net
$
2,085,831

 
$
2,014,333

Accounts payable, accrued expenses and other liabilities
218,922

 
228,215

Total Liabilities
2,304,753

 
2,242,548

Commitments and contingencies

 

Redeemable Operating Partnership Units:
 
 
 
Common Units, 2,738,703 and 2,828,704 outstanding, respectively
105,960

 
144,009

Series A Preferred Units (liquidation preference $1,000 per unit), 28,877 and 28,892 units
issued and outstanding, respectively
28,877

 
28,892

Total Redeemable Operating Partnership Units
134,837

 
172,901

Capital:
 
 
 
Common Units:
 
 
 
General partner Common Units, 1,058,870 and 1,056,868 outstanding, respectively
22,078

 
21,830

Limited partner Common Units, 102,089,386 and 101,801,198 outstanding, respectively
2,185,852

 
2,161,258

Accumulated other comprehensive income
9,913

 
7,838

Noncontrolling interests in consolidated affiliates
17,576

 
17,416

Total Capital
2,235,419

 
2,208,342

Total Liabilities, Redeemable Operating Partnership Units and Capital
$
4,675,009

 
$
4,623,791

See accompanying notes to consolidated financial statements.

58

Table of Contents

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

 
Year Ended December 31,
 
2018
 
2017
 
2016
Rental and other revenues
$
720,035

 
$
702,737

 
$
665,634

Operating expenses:
 
 
 
 
 
Rental property and other expenses
242,415

 
236,888

 
231,085

Depreciation and amortization
229,955

 
227,832

 
220,140

Impairments of real estate assets
423

 
1,445

 

General and administrative
40,006

 
39,648

 
38,153

Total operating expenses
512,799

 
505,813

 
489,378

Interest expense:
 
 
 
 
 
Contractual
68,565

 
65,939

 
73,142

Amortization of debt issuance costs
2,857

 
3,166

 
3,506

 
71,422

 
69,105

 
76,648

Other income:
 
 
 
 
 
Interest and other income
1,940

 
2,309

 
2,338

Losses on debt extinguishment

 
(26
)
 

 
1,940

 
2,283

 
2,338

Income from continuing operations before disposition of investment properties and activity in unconsolidated affiliates
137,754

 
130,102

 
101,946

Gains on disposition of property
37,638

 
54,157

 
14,807

Equity in earnings of unconsolidated affiliates
2,238

 
7,404

 
5,793

Income from continuing operations
177,630

 
191,663

 
122,546

Discontinued operations:
 
 
 
 
 
Income from discontinued operations

 

 
4,097

Net gains on disposition of discontinued operations

 

 
414,496

 

 

 
418,593

Net income
177,630

 
191,663

 
541,139

Net (income) attributable to noncontrolling interests in consolidated affiliates
(1,207
)
 
(1,239
)
 
(1,253
)
Distributions on Preferred Units
(2,492
)
 
(2,492
)
 
(2,501
)
Net income available for common unitholders
$
173,931

 
$
187,932

 
$
537,385

Earnings per Common Unit – basic:
 
 
 
 
 
Income from continuing operations available for common unitholders
$
1.64

 
$
1.79

 
$
1.18

Income from discontinued operations available for common unitholders

 

 
4.15

Net income available for common unitholders
$
1.64

 
$
1.79

 
$
5.33

Weighted average Common Units outstanding – basic
105,826

 
105,106

 
100,902

Earnings per Common Unit – diluted:
 
 
 
 
 
Income from continuing operations available for common unitholders
$
1.64

 
$
1.79

 
$
1.18

Income from discontinued operations available for common unitholders

 

 
4.14

Net income available for common unitholders
$
1.64

 
$
1.79

 
$
5.32

Weighted average Common Units outstanding – diluted
105,859

 
105,185

 
100,989

Net income available for common unitholders:
 
 
 
 
 
Income from continuing operations available for common unitholders
$
173,931

 
$
187,932

 
$
118,792

Income from discontinued operations available for common unitholders

 

 
418,593

Net income available for common unitholders
$
173,931

 
$
187,932

 
$
537,385

See accompanying notes to consolidated financial statements.

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HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Comprehensive Income
(in thousands)
 
Year Ended December 31,
 
2018
 
2017
 
2016
Comprehensive income:
 
 
 
 
 
Net income
$
177,630

 
$
191,663

 
$
541,139

Other comprehensive income:
 
 
 
 
 
Unrealized gains on cash flow hedges
4,161

 
1,732

 
5,703

Amortization of cash flow hedges
(2,086
)
 
1,157

 
3,057

Total other comprehensive income
2,075

 
2,889

 
8,760

Total comprehensive income
179,705

 
194,552

 
549,899

Less-comprehensive (income) attributable to noncontrolling interests
(1,207
)
 
(1,239
)
 
(1,253
)
Comprehensive income attributable to common unitholders
$
178,498

 
$
193,313

 
$
548,646

See accompanying notes to consolidated financial statements.

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HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Capital
(in thousands)
 
 
Common Units
 
Accumulated
Other
Comprehensive Income/(Loss)
 
Noncontrolling
Interests in
Consolidated
Affiliates
 
Total
 
General
Partners’
Capital
 
Limited
Partners’
Capital
 
Balance at December 31, 2015
$
15,759

 
$
1,560,309

 
$
(3,811
)
 
$
17,975

 
$
1,590,232

Issuances of Common Units, net of issuance costs and tax withholdings
2,564

 
253,816

 

 

 
256,380

Distributions on Common Units ($1.70 per unit)
(1,710
)
 
(169,344
)
 

 

 
(171,054
)
Special distribution on Common Units ($0.80 per unit)
(832
)
 
(82,317
)
 

 

 
(83,149
)
Distributions on Preferred Units ($86.25 per unit)
(25
)
 
(2,476
)
 

 

 
(2,501
)
Share-based compensation expense, net of forfeitures
63

 
6,188

 

 

 
6,251

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(1,267
)
 
(1,267
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
(194
)
 
(19,201
)
 

 

 
(19,395
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(13
)
 
(1,240
)
 

 
1,253

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
5,411

 
535,728

 

 

 
541,139

Other comprehensive income

 

 
8,760

 

 
8,760

Total comprehensive income
 
 
 
 
 
 
 
 
549,899

Balance at December 31, 2016
21,023

 
2,081,463

 
4,949

 
17,961

 
2,125,396

Issuances of Common Units, net of issuance costs and tax withholdings
710

 
70,267

 

 

 
70,977

Distributions on Common Units ($1.76 per unit)
(1,851
)
 
(183,221
)
 

 

 
(185,072
)
Distributions on Preferred Units ($86.25 per unit)
(25
)
 
(2,467
)
 

 

 
(2,492
)
Share-based compensation expense, net of forfeitures
67

 
6,625

 

 

 
6,692

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(1,784
)
 
(1,784
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
1

 
72

 

 

 
73

Net (income) attributable to noncontrolling interests in consolidated affiliates
(12
)
 
(1,227
)
 

 
1,239

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
1,917

 
189,746

 

 

 
191,663

Other comprehensive income

 

 
2,889

 

 
2,889

Total comprehensive income
 
 
 
 
 
 
 
 
194,552

Balance at December 31, 2017
21,830

 
2,161,258

 
7,838

 
17,416

 
2,208,342

Issuances of Common Units, net of issuance costs and tax withholdings
19

 
1,846

 

 

 
1,865

Distributions on Common Units ($1.85 per unit)
(1,957
)
 
(193,755
)
 

 

 
(195,712
)
Distributions on Preferred Units ($86.25 per unit)
(25
)
 
(2,467
)
 

 

 
(2,492
)
Share-based compensation expense, net of forfeitures
75

 
7,391

 

 

 
7,466

Distributions to noncontrolling interests in consolidated affiliates

 

 

 
(1,047
)
 
(1,047
)
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
372

 
36,920

 

 

 
37,292

Net (income) attributable to noncontrolling interests in consolidated affiliates
(12
)
 
(1,195
)
 

 
1,207

 

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
1,776

 
175,854

 

 

 
177,630

Other comprehensive income

 

 
2,075

 

 
2,075

Total comprehensive income
 
 
 
 
 
 
 
 
179,705

Balance at December 31, 2018
$
22,078

 
$
2,185,852

 
$
9,913

 
$
17,576

 
$
2,235,419

See accompanying notes to consolidated financial statements.

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HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
(in thousands)
 
Year Ended December 31,
 
2018
 
2017
 
2016
Operating activities:
 
 
 
 
 
Net income
$
177,630

 
$
191,663

 
$
541,139

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
229,955

 
227,832

 
220,140

Amortization of lease incentives and acquisition-related intangible assets and liabilities
(1,943
)
 
(1,172
)
 
(1,996
)
Share-based compensation expense
7,466

 
6,692

 
6,251

Allowance for losses on accounts and accrued straight-line rents receivable
1,212

 
1,508

 
2,001

Accrued interest on mortgages and notes receivable
(451
)
 
(509
)
 
(502
)
Amortization of debt issuance costs
2,857

 
3,166

 
3,506

Amortization of cash flow hedges
(2,086
)
 
1,157

 
3,057

Amortization of mortgages and notes payable fair value adjustments
1,449

 
705

 
(234
)
Impairments of real estate assets
423

 
1,445

 

Losses on debt extinguishment

 
26

 

Net gains on disposition of property
(37,638
)
 
(54,157
)
 
(429,303
)
Equity in earnings of unconsolidated affiliates
(2,238
)
 
(7,404
)
 
(5,793
)
Distributions of earnings from unconsolidated affiliates
2,104

 
5,078

 
4,011

Settlement of cash flow hedges
7,216

 
7,322

 

Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
1,759

 
(4,974
)
 
3,401

Prepaid expenses and other assets
1,217

 
7,908

 
(4,423
)
Accrued straight-line rents receivable
(23,203
)
 
(32,234
)
 
(24,245
)
Accounts payable, accrued expenses and other liabilities
(7,101
)
 
(1,520
)
 
(11,618
)
Net cash provided by operating activities
358,628

 
352,532

 
305,392

Investing activities:
 
 
 
 
 
Investments in acquired real estate and related intangible assets, net of cash acquired
(50,649
)
 
(1,840
)
 
(110,249
)
Investments in development in-process
(150,310
)
 
(150,944
)
 
(177,875
)
Investments in tenant improvements and deferred leasing costs
(121,534
)
 
(109,742
)
 
(91,423
)
Investments in building improvements
(68,256
)
 
(63,780
)
 
(80,672
)
Net proceeds from disposition of real estate assets
88,813

 
129,503

 
684,371

Distributions of capital from unconsolidated affiliates
105

 
11,670

 
3,179

Investments in mortgages and notes receivable

 

 
(7,934
)
Repayments of mortgages and notes receivable
1,312

 
2,917

 
1,699

Investments in and advances to unconsolidated affiliates

 
(10,063
)
 
(105
)
Repayments from unconsolidated affiliates

 

 
448

Changes in other investing activities
(6,230
)
 
(8,023
)
 
(4,764
)
Net cash provided by/(used in) investing activities
$
(306,749
)
 
$
(200,302
)
 
$
216,675


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HIGHWOODS REALTY LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows - Continued
(in thousands)
 
Year Ended December 31,
 
2018
 
2017
 
2016
Financing activities:
 
 
 
 
 
Distributions on Common Units
$
(195,712
)
 
$
(185,072
)
 
$
(171,054
)
Special distribution on Common Units

 
(83,149
)
 

Redemptions/repurchases of Preferred Units
(15
)
 
(28
)
 
(130
)
Distributions on Preferred Units
(2,492
)
 
(2,492
)
 
(2,501
)
Distributions to noncontrolling interests in consolidated affiliates
(1,047
)
 
(1,784
)
 
(1,267
)
Proceeds from the issuance of Common Units
3,637

 
76,268

 
264,769

Costs paid for the issuance of Common Units
(95
)
 
(1,283
)
 
(3,973
)
Repurchase of units related to tax withholdings
(1,677
)
 
(4,008
)
 
(4,416
)
Borrowings on revolving credit facility
438,900

 
780,300

 
287,600

Repayments of revolving credit facility
(501,900
)
 
(535,300
)
 
(586,600
)
Borrowings on mortgages and notes payable
345,863

 
656,001

 
150,000

Repayments of mortgages and notes payable
(211,803
)
 
(832,553
)
 
(395,993
)
Payments of debt extinguishment costs

 
(57
)
 

Changes in debt issuance costs and other financing activities
(3,728
)
 
(9,371
)
 
(1,676
)
Net cash used in financing activities
(130,069
)
 
(142,528
)
 
(465,241
)
Net increase/(decrease) in cash and cash equivalents and restricted cash
(78,190
)
 
9,702

 
56,826

Cash and cash equivalents and restricted cash at beginning of the period
88,333

 
78,631

 
21,805

Cash and cash equivalents and restricted cash at end of the period
$
10,143

 
$
88,333

 
$
78,631

 
Reconciliation of cash and cash equivalents and restricted cash:
 
 
Year Ended December 31,
 
2018
 
2017
 
2016
Cash and cash equivalents at end of the period
$
3,769

 
$
3,272

 
$
49,490

Restricted cash at end of the period
6,374

 
85,061

 
29,141

Cash and cash equivalents and restricted cash at end of the period
$
10,143

 
$
88,333

 
$
78,631

 
Supplemental disclosure of cash flow information:
 
 
Year Ended December 31,
 
2018
 
2017
 
2016
Cash paid for interest, net of amounts capitalized
$
67,235

 
$
68,207

 
$
72,847

 
Supplemental disclosure of non-cash investing and financing activities:
 
 
Year Ended December 31,
 
2018
 
2017
 
2016
Unrealized gains on cash flow hedges
$
4,161

 
$
1,732

 
$
5,703

Changes in accrued capital expenditures
(165
)
 
(1,912
)
 
8,580

Write-off of fully depreciated real estate assets
76,558

 
59,108

 
39,262

Write-off of fully amortized leasing costs
34,191

 
40,517

 
25,569

Write-off of fully amortized debt issuance costs
2,733

 
11,724

 
964

Adjustment of Redeemable Common Units to fair value
(38,049
)
 
(793
)
 
18,373

Contingent consideration in connection with the acquisition of land

 
750

 

Special distribution on Common Units declared

 

 
(83,149
)
See accompanying notes to consolidated financial statements.

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HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(tabular dollar amounts in thousands, except per share and per unit data)

1.    Description of Business and Significant Accounting Policies

Description of Business

Highwoods Properties, Inc. (the “Company”) is a fully integrated real estate investment trust (“REIT”) that provides leasing, management, development, construction and other customer-related services for its properties and for third parties. The Company conducts its activities through Highwoods Realty Limited Partnership (the “Operating Partnership”). At December 31, 2018, we owned or had an interest in 30.5 million rentable square feet of in-service properties, 1.8 million rentable square feet of properties under development and approximately 350 acres of development land.

The Company is the sole general partner of the Operating Partnership. At December 31, 2018, the Company owned all of the Preferred Units and 103.1 million, or 97.4%, of the Common Units in the Operating Partnership. Limited partners owned the remaining 2.7 million Common Units. In the event the Company issues shares of Common Stock, the net proceeds of the issuance are contributed to the Operating Partnership in exchange for additional Common Units. Generally, the Operating Partnership is obligated to redeem each Common Unit at the request of the holder thereof for cash equal to the value of one share of Common Stock based on the average of the market price for the 10 trading days immediately preceding the notice date of such redemption, provided that the Company, at its option, may elect to acquire any such Common Units presented for redemption for cash or one share of Common Stock. The Common Units owned by the Company are not redeemable. During 2018, the Company redeemed 90,001 Common Units for a like number of shares of Common Stock.

Basis of Presentation

Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

The Company's Consolidated Financial Statements include the Operating Partnership, wholly owned subsidiaries and those entities in which the Company has the controlling interest. The Operating Partnership's Consolidated Financial Statements include wholly owned subsidiaries and those entities in which the Operating Partnership has the controlling interest. We consolidate joint venture investments, such as interests in partnerships and limited liability companies, when we control the major operating and financial policies of the investment through majority ownership, in our capacity as a general partner or managing member or through some other contractual right. At December 31, 2018, three properties owned through a joint venture investment were consolidated.

All intercompany transactions and accounts have been eliminated.

Use of Estimates

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

Insurance

Beginning in 2018, we are primarily self-insured for health care claims for participating employees. We have stop-loss coverage to limit our exposure to significant claims on a per claim and annual aggregate basis. We determine our liabilities for claims, including incurred but not reported losses, based on all relevant information, including actuarial estimates of claim liabilities. At December 31, 2018, a reserve of $0.5 million was recorded to cover estimated reported and unreported claims.


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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)



1.    Description of Business and Significant Accounting Policies – Continued

Real Estate and Related Assets

Real estate and related assets are recorded at cost and stated at cost less accumulated depreciation. Renovations, replacements and other expenditures that improve or extend the life of assets are capitalized and depreciated over their estimated useful lives. Expenditures for ordinary maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful life of 40 years for buildings and depreciable land infrastructure costs, 15 years for building improvements and five to seven years for furniture, fixtures and equipment. Tenant improvements are amortized using the straight-line method over initial fixed terms of the respective leases, which generally are from three to 10 years. Depreciation expense for real estate assets was $191.0 million, $184.4 million and $173.1 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Expenditures directly related to the development and construction of real estate assets are included in net real estate assets and are stated at depreciated cost. Development expenditures include pre-construction costs essential to the development of properties, development and construction costs, interest costs on qualifying assets, real estate taxes, development personnel salaries and related costs and other costs incurred during the period of development. Interest and other carrying costs are capitalized until the building is ready for its intended use, but not later than a year from cessation of major construction activity. We consider a construction project as substantially completed and ready for its intended use upon the completion of tenant improvements. We cease capitalization on the portion that is substantially completed and occupied or held available for occupancy, and capitalize only those costs associated with the portion under construction.

Expenditures directly related to the leasing of properties are included in deferred leasing costs and are stated at amortized cost. Such expenditures are part of the investment necessary to execute leases and, therefore, are classified as investment activities in the statement of cash flows. All leasing commissions paid to third parties for new leases or lease renewals are capitalized. Internal leasing costs, which consist primarily of compensation, benefits and other costs, such as legal fees related to leasing activities, that are incurred in connection with successfully obtaining leases of properties are also capitalized. Capitalized leasing costs are amortized on a straight-line basis over the initial fixed terms of the respective leases, which generally are from three to 10 years. Estimated costs related to unsuccessful activities are expensed as incurred.

We record liabilities for the performance of asset retirement activities when the obligation to perform such activities is probable even when uncertainty exists about the timing and/or method of settlement.

Upon the acquisition of real estate assets, we assess the fair value of acquired tangible assets such as land, buildings and tenant improvements, intangible assets and liabilities such as above and below market leases, acquired in-place leases, customer relationships and other identifiable intangible assets and assumed liabilities. We assess fair value based on estimated cash flow projections that utilize discount and/or capitalization rates as well as available market information. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant. 

The above and below market rate portions of leases acquired in connection with property acquisitions are recorded in deferred leasing costs and in accounts payable, accrued expenses and other liabilities, respectively, at fair value and amortized into rental revenue over the remaining term of the respective leases as described below. Fair value is calculated as the present value of the difference between (1) the contractual amounts to be paid pursuant to each in-place lease and (2) our estimate of fair market lease rates for each corresponding in-place lease, using a discount rate that reflects the risks associated with the leases acquired and measured over a period equal to the remaining initial term of the lease for above-market leases and the remaining initial term plus the term of any renewal option that the customer would be economically compelled to exercise for below-market leases.

In-place leases acquired are recorded at fair value in deferred leasing costs and are amortized to depreciation and amortization expense over the remaining term of the respective lease. The value of in-place leases is based on our evaluation of the specific characteristics of each customer's lease. Factors considered include estimates of carrying costs during hypothetical expected lease-up periods, current market conditions, the customer's credit quality and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, we consider tenant improvements, leasing commissions and legal and other related expenses.

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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)



1.    Description of Business and Significant Accounting Policies – Continued
 
Real estate and other assets are classified as long-lived assets held for use or as long-lived assets held for sale. Real estate is classified as held for sale when the sale of the asset is probable, has been duly approved by the Company, a legally enforceable contract has been executed and the buyer's due diligence period, if any, has expired.

Impairments of Real Estate Assets and Investments in Unconsolidated Affiliates

With respect to assets classified as held for use, we perform an impairment analysis if events or changes in circumstances indicate that the carrying value may be impaired, such as a significant decline in occupancy, identification of materially adverse legal or environmental factors, change in our designation of an asset from core to non-core, which may impact the anticipated holding period, or a decline in market value to an amount less than cost. This analysis is generally performed at the property level, except when an asset is part of an interdependent group such as an office park, and consists of determining whether the asset's carrying amount will be recovered from its undiscounted estimated future operating and residual cash flows. These cash flows are estimated based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for customers, changes in market rental rates, costs to operate each property and expected ownership periods. For properties under development, the cash flows are based on expected service potential of the asset or asset group when development is substantially complete.

If the carrying amount of a held for use asset exceeds the sum of its undiscounted future operating and residual cash flows, an impairment loss is recorded for the difference between estimated fair value of the asset and the carrying amount. We generally estimate the fair value of assets held for use by using discounted cash flow analyses. In some instances, appraisal information may be available and is used in addition to a discounted cash flow analysis. As the factors used in generating these cash flows are difficult to predict and are subject to future events that may alter our assumptions, the discounted and/or undiscounted future operating and residual cash flows estimated by us in our impairment analyses or those established by appraisal may not be achieved and we may be required to recognize future impairment losses on properties held for use.
 
We record assets held for sale at the lower of the carrying amount or estimated fair value. Fair value of assets held for sale is equal to the estimated or contracted sales price with a potential buyer, less costs to sell. The impairment loss is the amount by which the carrying amount exceeds the estimated fair value.
 
We also analyze our investments in unconsolidated affiliates for impairment. This analysis consists of determining whether an expected loss in market value of an investment is other than temporary by evaluating the length of time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the investment, and our intent and ability to retain our investment for a period of time sufficient to allow for any anticipated recovery in market value. As the factors used in this analysis are difficult to predict and are subject to future events that may alter our assumptions, we may be required to recognize future impairment losses on our investments in unconsolidated affiliates.

Sales of Real Estate
 
For sales of real estate where we have collected the consideration to which we are entitled in exchange for transferring the real estate, the related assets and liabilities are removed from the balance sheet and the resultant gain or loss is recorded in the period the transaction closes. Any post sale involvement is accounted for as separate performance obligations and when the separate performance obligations are satisfied, the sales price allocated to each is recognized.


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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)



1.    Description of Business and Significant Accounting Policies – Continued

Rental and Other Revenues
 
Minimum contractual rents from leases are recognized on a straight-line basis over the terms of the respective leases. This means that, with respect to a particular lease, actual amounts billed in accordance with the lease during any given period may be higher or lower than the amount of rental revenue recognized for the period. Straight-line rental revenue is commenced when the customer assumes control of the leased premises. Accrued straight-line rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements. Contingent rental revenue, such as percentage rent, is accrued when the contingency is removed. Termination fee income is recognized at the later of when the customer has vacated the space or the lease has expired and a fully executed lease termination agreement has been delivered, the amount of the fee is determinable and collectability of the fee is reasonably assured.

Cost recovery income is determined on a calendar year and a lease-by-lease basis. The most common types of cost recovery income in our leases are common area maintenance (“CAM”) and real estate taxes, for which a customer typically pays its pro-rata share of operating and administrative expenses and real estate taxes in excess of the costs incurred during a contractually specified base year. The computation of cost recovery income is complex and involves numerous judgments, including the interpretation of lease provisions. Leases are not uniform in dealing with such cost recovery income and there are many variations in the computation. Many customers make monthly fixed payments of CAM, real estate taxes and other cost reimbursement items. We accrue income related to these payments each month. We make quarterly accrual adjustments, positive or negative, to cost recovery income to adjust the recorded amounts to our best estimate of the final annual amounts to be billed and collected. After the end of the calendar year, we compute each customer's final cost recovery income and, after considering amounts paid by the customer during the year, issue a bill or credit for the appropriate amount to the customer. The differences between the amounts billed less previously received payments and the accrual adjustment are recorded as increases or decreases to cost recovery income when the final bills are prepared, which occurs during the first half of the subsequent year.
 
Allowance for Doubtful Accounts
 
Accounts receivable, accrued straight-line rents receivable and mortgages and notes receivable are reduced by an allowance for amounts that may become uncollectible in the future. We regularly evaluate the adequacy of our allowance for doubtful accounts. The evaluation primarily consists of reviewing past due account balances and considering such factors as the credit quality of our customer, historical trends of the customer and changes in customer payment terms. Additionally, with respect to customers in bankruptcy, we estimate the probable recovery through bankruptcy claims and adjust the allowance for amounts deemed uncollectible. If our assumptions regarding the collectability of receivables prove incorrect, we could experience losses in excess of our allowance for doubtful accounts. The allowance and its related receivable are written-off when we have concluded there is a low probability of collection and we have discontinued collection efforts.

Discontinued Operations
 
Properties that are sold or classified as held for sale are classified as discontinued operations provided that the disposal represents a strategic shift that has (or will have) a major effect on our operations and financial results. Interest expense is included in discontinued operations if a related loan securing the sold property is to be paid off or assumed by the buyer in connection with the sale.

Lease Incentives
 
Lease incentive costs, which are payments made to or on behalf of a customer as an incentive to sign a lease, are capitalized in deferred leasing costs and amortized on a straight-line basis over the respective lease terms as a reduction of rental revenues.

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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)



1.    Description of Business and Significant Accounting Policies – Continued

Investments in Unconsolidated Affiliates
 
We account for our joint venture investments using the equity method of accounting when our interests represent a general partnership interest but substantive participating rights or substantive kick out rights have been granted to the limited partners or when our interests do not represent a general partnership interest and we do not control the major operating and financial policies of the investment. These investments are initially recorded at cost as investments in unconsolidated affiliates and are subsequently adjusted for our share of earnings and cash contributions and distributions. To the extent our cost basis at formation of the joint venture is different than the basis reflected at the joint venture level, the basis difference is amortized over the life of the related assets and included in our share of equity in earnings of unconsolidated affiliates.

Cash Equivalents

We consider highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

Restricted Cash
 
Restricted cash represents cash deposits that are legally restricted or held by third parties on our behalf, such as construction-related escrows, property disposition proceeds set aside and designated or intended to fund future tax-deferred exchanges of qualifying real estate investments and escrows and reserves for debt service, real estate taxes and property insurance established pursuant to certain mortgage financing arrangements.

Redeemable Common Units and Preferred Units
 
Limited partners holding Common Units other than the Company (“Redeemable Common Units”) have the right to put any and all of the Common Units to the Operating Partnership and the Company has the right to put any and all of the Preferred Units to the Operating Partnership in exchange for their liquidation preference plus accrued and unpaid distributions in the event of a corresponding redemption by the Company of the underlying Preferred Stock. Consequently, these Redeemable Common Units and Preferred Units are classified outside of permanent partners’ capital in the Operating Partnership's accompanying balance sheets. The recorded value of the Redeemable Common Units is based on fair value at the balance sheet date as measured by the closing price of Common Stock on that date multiplied by the total number of Redeemable Common Units outstanding. The recorded value of the Preferred Units is based on their redemption value.

Income Taxes
 
The Company has elected and expects to continue to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). A corporate REIT is a legal entity that holds real estate assets and, through the payment of dividends to stockholders, is generally permitted to reduce or avoid the payment of federal and state income taxes at the corporate level. To maintain qualification as a REIT, the Company is required to pay dividends to its stockholders equal to at least 90.0% of its annual REIT taxable income, excluding net capital gains. The partnership agreement requires the Operating Partnership to pay economically equivalent distributions on outstanding Common Units at the same time that the Company pays dividends on its outstanding Common Stock.

Other than income taxes related to its taxable REIT subsidiary, the Operating Partnership does not reflect any federal income taxes in its financial statements, since as a partnership the taxable effects of its operations are attributed to its partners. The Operating Partnership does record state income tax for states that tax partnership income directly.
 
We conduct certain business activities through a taxable REIT subsidiary, as permitted under the Code. The taxable REIT subsidiary is subject to federal, state and local income taxes on its taxable income. We record provisions for income taxes based on its income recognized for financial statement purposes, including the effects of differences between such income and the amount recognized for tax purposes.
 

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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)



1.    Description of Business and Significant Accounting Policies – Continued

Concentration of Credit Risk
 
At December 31, 2018, properties that we wholly own were leased to 1,654 customers. The geographic locations that comprise greater than 10.0% of our rental and other revenues are Raleigh, Atlanta, Tampa and Nashville. Our customers engage in a wide variety of businesses. No single customer generated more than 5% of our consolidated revenues during 2018.
 
We maintain our cash and cash equivalents and our restricted cash at financial or other intermediary institutions. The combined account balances at each institution may exceed FDIC insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. Additionally, from time to time in connection with tax-deferred 1031 transactions, our restricted cash balances may be commingled with other funds being held by any such intermediary institution, which would subject our balance to the credit risk of the institution.

Derivative Financial Instruments
 
We borrow funds at a combination of fixed and variable rates. Borrowings under our revolving credit facility and bank term loans bear interest at variable rates. Our long-term debt typically bears interest at fixed rates. Our interest rate risk management objectives are to limit generally the impact of interest rate changes on earnings and cash flows and lower our overall borrowing costs. To achieve these objectives, from time to time, we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to existing and prospective debt instruments. We generally do not hold or issue these derivative contracts for trading or speculative purposes. The interest rate on all of our variable rate debt is generally adjusted at one or three month intervals, subject to settlements under these interest rate hedge contracts.

Interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income/(loss) and is subsequently reclassified into interest expense in the period that the hedged forecasted transaction affects earnings.
 
We account for terminated derivative instruments by recognizing the related accumulated comprehensive income/(loss) balance in current earnings, unless the hedged forecasted transaction continues as originally planned, in which case we continue to amortize the accumulated comprehensive income/(loss) into earnings over the originally designated hedge period.

Earnings Per Share and Per Unit
 
Basic earnings per share of the Company is computed by dividing net income available for common stockholders by the weighted Common Shares outstanding - basic. Diluted earnings per share is computed by dividing net income available to common stockholders (inclusive of noncontrolling interests in the Operating Partnership) by the weighted Common Shares outstanding - basic plus the dilutive effect of options, warrants and convertible securities outstanding, including Common Units, using the treasury stock method. Weighted Common Shares outstanding - basic includes all unvested restricted stock where dividends received on such restricted stock are non-forfeitable.

Basic earnings per unit of the Operating Partnership is computed by dividing net income available for common unitholders by the weighted Common Units outstanding - basic. Diluted earnings per unit is computed by dividing net income available to common unitholders by the weighted Common Units outstanding - basic plus the dilutive effect of options and warrants, using the treasury stock method. Weighted Common Units outstanding - basic includes all of the Company's unvested restricted stock where distributions received on such restricted stock are non-forfeitable.
 

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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)



1.    Description of Business and Significant Accounting Policies – Continued
 
Recently Issued Accounting Standards
 
The Financial Accounting Standards Board ("FASB") issued an accounting standards update ("ASU") that superseded the revenue recognition requirements under previous guidance, which we adopted as of January 1, 2018. Several updates have been issued subsequently that are intended to promote a more consistent interpretation and application of the principles outlined in the ASU. The ASU requires the use of a new five-step model to recognize revenue from contracts with customers. 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 are also required to disclose information regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In analyzing our contracts with customers, we determined that the most material potential impact from the adoption of this ASU would be in how revenue is recognized for sales of real estate with post sale involvement. Prior to the adoption of this ASU, profit for such sales transactions was recognized and then reduced by the maximum exposure to loss related to the nature of the post sale involvement at the time of sale. Upon adoption of this ASU, any post sale involvement must be accounted for as a separate performance obligation in the contract and a portion of the sales price allocated to each performance obligation. When the post sale involvement performance obligation is satisfied, the portion of the sales price allocated to it will be recognized. We had no sales of real estate with continuing involvement during the year ended December 31, 2018 or prior periods; however, we will use such methodology for any future real estate sales with continuing involvement. Our internal controls with respect to accounting for such sales have been updated accordingly. Adoption of this ASU resulted in no other changes with respect to the timing of revenue recognition or internal controls related to contracts such as management, development and construction fees and transient parking income, all of which are not material to our Consolidated Financial Statements. As such, there is no cumulative-effect adjustment from the adoption of this ASU reflected in our Consolidated Financial Statements.
 
The FASB issued an ASU that requires entities to show changes in total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, restricted cash and restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning of period and end of period balances rather than presented as transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. We adopted the ASU as of January 1, 2018 with retrospective application to our Consolidated Statements of Cash Flows. Accordingly, our Consolidated Statements of Cash Flows present a reconciliation of the changes in cash and cash equivalents and restricted cash. The effect of the adoption resulted in a $55.9 million decrease in net cash used in investing activities for the year ended December 31, 2017 and a $12.4 million increase in net cash provided by investing activities for the year ended December 31, 2016.
 
The FASB issued an ASU that clarifies and narrows the definition of a business used in determining whether to account for a transaction as an asset acquisition or business combination. The guidance requires evaluation of the fair value of the assets acquired to determine if it is concentrated in a single identifiable asset or a group of similar identifiable assets. If so, the transferred assets would not be a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs. We adopted the ASU prospectively as of January 1, 2018. We expect that the majority of our future acquisitions would not meet the definition of a business; therefore, the related acquisition costs would be capitalized as part of the purchase price.
 
The FASB issued an ASU that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The guidance requires modification accounting if the value, vesting conditions or classification of the award changes. We adopted the ASU as of January 1, 2018 with no effect on our Consolidated Financial Statements.


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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)



1.    Description of Business and Significant Accounting Policies – Continued
 
The FASB issued an ASU that sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. In addition, the guidance requires lessors to capitalize and amortize only incremental direct leasing costs. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right of use asset and a lease liability for all leases with a term of greater than a year regardless of their classification. Leases with a term of a year or less will be accounted for in the same manner as operating leases today. The guidance supersedes previously issued guidance under ASC Topic 840 “Leases.”

An entity may elect a package of practical expedients, which allows for the following:
 
An entity need not reassess whether any expired or existing contracts are or contain leases;
 
An entity need not reassess the lease classification for any expired or existing leases; and
 
An entity need not reassess initial direct costs for any existing leases.
 
This package of practical expedients is available as a single election that must be consistently applied to all existing leases at the date of adoption.

Furthermore, the FASB finalized an amendment that allows entities to present comparative periods, in the year of adoption, under ASC 840, which effectively allows for an initial date of adoption of January 1, 2019. The amendment also provides a practical expedient to lessors that removes the requirement to separate lease and non-lease components, provided certain conditions are met.

Our analysis of our leases indicates that the lease component is the predominant component, that the timing and pattern of transfer of our material non-lease components (primarily cost recovery income) are the same as the lease components and the lease component, if it were accounted for separately, would be classified as an operating lease. As such, we believe the adoption of the ASU will not significantly change the accounting or the related internal controls for rental and other revenues from operating leases where we are the lessor, and that such leases will be accounted for in a manner similar to existing standards with the underlying leased asset being reported and recognized as a real estate asset. Upon the adoption of the ASU, we will no longer capitalize and amortize certain leasing related costs and instead will expense these costs as incurred. Such capitalized costs have averaged approximately $2.5 million annually.

Leases where we are the lessee include primarily our operating ground leases. We currently believe that existing ground leases executed before the adoption date will continue to be accounted for as operating leases and the new guidance will not have a material impact on our recognition of ground lease expense or our results of operations. However, we will be required to recognize a right of use asset and a lease liability on our Consolidated Balance Sheets equal to the present value of the minimum lease payments required under each ground lease, which we believe will range from $31 million to $36 million. See Note 7 for information regarding our ground lease commitments.

We will adopt the new ASU effective January 1, 2019 using the modified retrospective approach and will elect the use of all practical expedients provided by the ASU and related amendments as mentioned above.

The FASB issued an ASU that eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item when the hedged item affects earnings. The ASU is required to be adopted in 2019 using a modified retrospective approach. We do not expect such adoption to have a material effect on our Consolidated Financial Statements.

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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)



1.    Description of Business and Significant Accounting Policies – Continued
 
The FASB issued an ASU that requires, among other things, the use of a new current expected credit loss ("CECL") model in determining our allowances for doubtful accounts with respect to accounts receivable, accrued straight-line rents receivable and mortgages and notes receivable. The FASB recently finalized its proposal to exclude operating lease receivables from the scope of this ASU. As such, we do not expect the adoption of this ASU in 2020 to have a material effect on our Consolidated Financial Statements.

The FASB issued an ASU that changes certain disclosure requirements for fair value measurements. The ASU is required to be adopted in 2020 and applied prospectively. We do not expect such adoption to have a material effect on our Notes to Consolidated Financial Statements.

2.    Real Estate Assets
 
Acquisitions

During 2018, we acquired two development parcels totaling approximately nine acres in Nashville for an aggregate purchase price, including capitalized acquisition costs, of $50.6 million.

During 2017, we acquired fee simple title to land in Raleigh that was previously subject to a ground lease for a purchase price, including capitalized acquisition costs and contingent consideration, of $2.6 million.

During 2016, we acquired a building in Raleigh, which encompasses 243,000 rentable square feet, for a net purchase price of $76.9 million. We expensed $0.3 million of acquisition costs (included in general and administrative expenses) related to this acquisition. The assets acquired and liabilities assumed were recorded at fair value as determined by management, with the assistance of third party specialists, based on information available at the acquisition date and on current assumptions as to future operations.

During 2016, we also acquired:

fee simple title to the land underneath one of our buildings in Pittsburgh that was previously subject to a ground lease for a purchase price of $18.5 million. We expensed $0.5 million of acquisition costs (included in general and administrative expenses) related to this acquisition;

an acre of development land in Raleigh for a purchase price, including capitalized acquisition costs, of $5.8 million; and

14 acres of development land in Nashville for a purchase price, including capitalized acquisition costs, of $9.1 million.

Dispositions

During 2018, we sold a total of three buildings and various land parcels for an aggregate sale price of $90.6 million and recorded aggregate gains on disposition of property of $37.6 million.
 
During 2017, we sold a total of 15 buildings and land for an aggregate sale price of $135.6 million (before closing credits to buyer of $3.7 million) and recorded aggregate gains on disposition of property of $54.2 million.

During 2016, we sold:

substantially all of our wholly-owned Country Club Plaza assets in Kansas City (which we refer to as the “Plaza assets”) for a sale price of $660.0 million (before closing credits to buyer of $4.8 million). We recorded gains on disposition of discontinued operations of $414.5 million and a gain on disposition of property of $1.3 million related to the land; and

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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)



2.     Real Estate Assets - Continued

a 32,000 square foot building for a sale price of $4.7 million (before closing credits to buyer of $0.1 million) and recorded a gain on disposition of property of $1.1 million. The buyer, which leased 79% of the building, is a family business controlled by a director of the Company. The sale price exceeded the value set forth in an appraisal performed by a reputable independent commercial real estate services firm that has no relationship with the director or any of his affiliates.

During 2016, we also sold two buildings and various land parcels for an aggregate sale price of $31.1 million (before closing credits to buyer of $0.5 million) and recorded aggregate gains on disposition of property of $12.4 million. We deferred $0.4 million of gain related to a land sale for a portion of the sale price that was escrowed for contingent future infrastructure work.

Impairments

We recorded aggregate impairments of real estate assets of $0.4 million and $1.4 million in 2018 and 2017, respectively. These impairments resulted from changes in market-based inputs and our assumptions about the use of the assets.

3.    Investments in and Advances to Affiliates
 
Unconsolidated Affiliates
 
We have equity interests of up to 50.0% in various joint ventures with unrelated third parties that are accounted for using the equity method of accounting because we have the ability to exercise significant influence over the operating and financial policies of the joint venture investment. The difference between the cost of these investments and the net book value of the underlying net assets was $0.6 million and $0.7 million at December 31, 2018 and 2017, respectively.
 
The following table sets forth our ownership in unconsolidated affiliates at December 31, 2018:
 
Joint Venture
 
Location
 
Ownership
Interest
Plaza Colonnade, Tenant-in-Common
 
Kansas City
 
50.0%
Kessinger/Hunter & Company, LC
 
Kansas City
 
26.5%
Highwoods DLF Forum, LLC
 
Raleigh
 
25.0%
Highwoods DLF 98/29, LLC
 
Orlando
 
22.8%
 
We receive development, management and leasing fees for services provided to certain of our joint ventures. These fees are recognized in income to the extent of our respective joint venture partner's interest. During the years ended December 31, 2018, 2017 and 2016, we recognized $0.4 million, $1.4 million and $0.8 million, respectively, of development/construction, management and leasing fees from our unconsolidated joint ventures. At both December 31, 2018 and 2017, we had receivables of $0.1 million related to these fees in accounts receivable.
 
Consolidated Affiliates
 
We have a 50.0% ownership interest in Highwoods-Markel Associates, LLC (“Markel”), a consolidated joint venture. We are the manager and leasing agent for Markel's properties, which are located in Richmond in exchange for customary management and leasing fees. We consolidate Markel since we are the managing member and control the major operating and financial policies of the entity. As controlling member, we have an obligation to cause this property-owning entity to distribute proceeds of liquidation to the noncontrolling interest member in these partially owned properties only if the net proceeds received by the entity from the sale of any of Markel's assets warrant a distribution as determined by the agreement governing the joint venture. We estimate the value of such noncontrolling interest distributions would have been $30.1 million had the entity been liquidated at December 31, 2018. This estimated settlement value is based on the fair value of the underlying properties which is based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for customers, changes in market rental rates and costs to operate each property. If the entity's underlying assets are worth less than the underlying liabilities on the date of such liquidation, we would have no obligation to remit any consideration to the noncontrolling interest holder.

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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)


 
4.    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:
 
 
December 31,
 
2018
 
2017
Assets:
 
 
 
Deferred leasing costs (including lease incentives and above market lease and in-place lease acquisition-related intangible assets)
$
344,548

 
$
344,191

Less accumulated amortization
(149,275
)
 
(143,512
)
 
$
195,273

 
$
200,679

 
 
 
 
Liabilities (in accounts payable, accrued expenses and other liabilities):
 
 
 
Acquisition-related below market lease liabilities
$
57,955

 
$
59,947

Less accumulated amortization
(32,307
)
 
(28,214
)
 
$
25,648

 
$
31,733


The following table sets forth amortization of intangible assets and below market lease liabilities:
 
 
Year Ended December 31,
 
2018
 
2017
 
2016
Amortization of deferred leasing costs and acquisition-related intangible assets (in depreciation and amortization)
$
36,486

 
$
41,187

 
$
44,968

Amortization of lease incentives (in rental and other revenues)
$
1,908

 
$
1,765

 
$
1,779

Amortization of acquisition-related intangible assets (in rental and other revenues)
$
1,677

 
$
2,921

 
$
3,851

Amortization of acquisition-related intangible assets (in rental property and other expenses)
$
557

 
$
557

 
$
557

Amortization of acquisition-related below market lease liabilities (in rental and other revenues)
$
(6,085
)
 
$
(6,415
)
 
$
(8,183
)

The following table sets forth scheduled future amortization of intangible assets and below market lease liabilities:
 
Years Ending December 31,
 
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)
2019
 
$
35,862

 
$
1,730

 
$
1,261

 
$
553

 
$
(5,405
)
2020
 
31,285

 
1,445

 
957

 
514

 
(5,135
)
2021
 
26,702

 
1,205

 
631

 

 
(4,331
)
2022
 
22,392

 
982

 
462

 

 
(3,258
)
2023
 
18,972

 
914

 
308

 

 
(2,878
)
Thereafter
 
43,147

 
4,851

 
1,100

 

 
(4,641
)
 
 
$
178,360

 
$
11,127

 
$
4,719

 
$
1,067

 
$
(25,648
)
Weighted average remaining amortization periods as of December 31, 2018 (in years)
 
7.3

 
10.1

 
6.5

 
2.0

 
5.9


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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)


 
5.    Mortgages and Notes Payable
 
Our mortgages and notes payable consist of the following:
 
 
December 31,
 
2018
 
2017
Secured indebtedness: (1)
 
 
 
4.00% mortgage loan due 2029
$
97,179

 
$
98,981

 
97,179

 
98,981

Unsecured indebtedness:
 
 
 
7.50% notes due 2018 (2)

 
200,000

3.20% (3.363% effective rate) notes due 2021 (3)
298,936

 
298,504

3.625% (3.752% effective rate) notes due 2023 (4)
248,938

 
248,675

3.875% (4.038% effective rate) notes due 2027 (5)
296,734

 
296,334

4.125% (4.271% effective rate) notes due 2028 (6)
346,208

 

Variable rate term loan due 2018 (2)

 
10,000

Variable rate term loan due 2020 (7)
225,000

 
225,000

Variable rate term loan due 2022 (8)
200,000

 
200,000

Variable rate term loan due 2022 (9)
200,000

 
200,000

Revolving credit facility due 2022 (10)
182,000

 
245,000

 
1,997,816

 
1,923,513

Less-unamortized debt issuance costs
(9,164
)
 
(8,161
)
Total mortgages and notes payable, net
$
2,085,831

 
$
2,014,333

__________
(1)
Our secured mortgage loan was collateralized by real estate assets with an undepreciated book value of $147.6 million at December 31, 2018. Our fixed rate mortgage loans generally are either locked out to prepayment for all or a portion of their term or are prepayable subject to certain conditions including prepayment penalties.
(2)
This debt was repaid in 2018.
(3)
Net of unamortized original issuance discount of $1.1 million and $1.5 million as of December 31, 2018 and 2017, respectively.
(4)
Net of unamortized original issuance discount of $1.1 million and $1.3 million as of December 31, 2018 and 2017, respectively.
(5)
Net of unamortized original issuance discount of $3.3 million and $3.7 million as of December 31, 2018 and 2017, respectively.
(6)
Net of unamortized original issuance discount of $3.8 million as of December 31, 2018.
(7)
As more fully described in Note 6, we entered into floating-to-fixed interest rate swaps that effectively fixed LIBOR for $225.0 million of this loan through January 11, 2019. Accordingly, the equivalent fixed rate of this amount was 2.78%.
(8)
As more fully described in Note 6, we entered into floating-to-fixed interest rate swaps that effectively fix LIBOR for $50.0 million of this loan through January 2022. Accordingly, the equivalent fixed rate of this amount is 2.79%. The interest rate on the remaining $150.0 million was 3.45% at December 31, 2018.
(9)
The interest rate was 3.61% at December 31, 2018.
(10)
The interest rate was 3.46% at December 31, 2018.

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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)



5.    Mortgages and Notes Payable - Continued

The following table sets forth scheduled future principal payments, including amortization, due on our mortgages and notes payable at December 31, 2018:

Years Ending December 31,
 
Principal Amount
2019
 
$
367

2020
 
225,444

2021
 
300,757

2022
 
583,038

2023
 
251,376

Thereafter
 
734,013

Less-unamortized debt issuance costs
 
(9,164
)
 
 
$
2,085,831


During 2017, we entered into a new $600.0 million unsecured revolving credit facility, which replaced our previously existing $475.0 million revolving credit facility, and includes an accordion feature that allows for an additional $400.0 million of borrowing capacity subject to additional lender commitments. Our new revolving credit facility is scheduled to mature in January 2022. Assuming no defaults have occurred, we have an option to extend the maturity for two additional six-month periods. The interest rate on the new facility at our current credit ratings is LIBOR plus 100 basis points and the annual facility fee is 20 basis points. The interest rate and facility fee are based on the higher of the publicly announced ratings from Moody's Investors Service or Standard & Poor’s Ratings Services. The financial and other covenants under the new facility are similar to our previous credit facility. We incurred $3.5 million of debt issuance costs, which will be amortized along with certain existing unamortized debt issuance costs over the remaining term of our new revolving credit facility. We recorded $0.1 million of loss on debt extinguishment. There was $182.0 million and $191.0 million outstanding under our new revolving credit facility at December 31, 2018 and January 25, 2019, respectively. At both December 31, 2018 and January 25, 2019, we had $0.2 million of outstanding letters of credit, which reduces the availability on our revolving credit facility. As a result, the unused capacity of our revolving credit facility at December 31, 2018 and January 25, 2019 was $417.8 million and $408.8 million, respectively.

During 2018, we paid off at maturity $200.0 million principal amount of 7.5% unsecured notes. We also paid down $1.8 million of secured loan balances through principal amortization during 2018.
 
During 2018, the Operating Partnership issued $350.0 million aggregate principal amount of 4.125% notes due 2028, less original issuance discount of $4.1 million. These notes were priced to yield 4.271%. Underwriting fees and other expenses were incurred that aggregated $2.9 million; these costs were deferred and will be amortized over the term of the notes.
 
During 2017, we prepaid without penalty a secured mortgage loan with a fair market value of $108.2 million with an effective interest rate of 4.22%. We recorded $0.4 million of gain on debt extinguishment related to this prepayment.

During 2017, we modified our $200.0 million, five-year unsecured bank term loan, which was originally scheduled to mature in January 2019. The modified term loan is now scheduled to mature in November 2022 and the interest rate, based on current credit ratings, was reduced from LIBOR plus 120 basis points to LIBOR plus 110 basis points. We incurred $1.1 million of debt issuance costs, which will be amortized along with certain existing unamortized debt issuance costs over the remaining term of the modified loan. We recorded $0.4 million of loss on debt extinguishment.

During 2017, we obtained a $100.0 million secured mortgage loan from a third party lender with an effective interest rate of 4.0%. This loan is scheduled to mature in May 2029. We incurred $0.8 million of debt issuance costs in connection with this loan, which will be amortized over the term of the loan.

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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)



5.    Mortgages and Notes Payable - Continued
 
During 2017, the Operating Partnership issued $300.0 million aggregate principal amount of 3.875% notes due 2027, less original issuance discount of $4.0 million. These notes were priced to yield 4.038%. Underwriting fees and other expenses were incurred that aggregated $2.5 million; these costs were deferred and will be amortized over the term of the notes.

During 2017, we paid off at maturity $379.7 million principal amount of 5.85% unsecured notes.

We previously amended our $225.0 million, seven-year unsecured bank term loan, which was scheduled to mature in January 2019. We increased the borrowed amount to $350.0 million. The amended term loan is scheduled to mature in June 2020 and the interest rate, based on our current credit ratings, was reduced from LIBOR plus 175 basis points to LIBOR plus 110 basis points. We incurred $1.3 million of debt issuance costs in connection with this amendment, which will be amortized along with existing unamortized debt issuance costs over the remaining term of the new loan. During 2017, we prepaid without penalty $125.0 million on this $350.0 million unsecured bank term loan. We recorded $0.4 million of loss on debt extinguishment related to this prepayment.

We previously acquired our joint venture partner’s 77.2% interest in a building in Orlando. Simultaneously with this acquisition, the joint venture's previously existing mortgage note was restructured into a new $18.0 million first mortgage note and a $10.2 million subordinated note, both of which were scheduled to mature in July 2017. The first mortgage and subordinated notes had effective interest rates of 5.36% and 8.6%, respectively. The subordinated note and accrued interest thereon was satisfied upon payment of a "waterfall payment." During 2017, both notes were retired upon payment of the $18.0 million principal balance on the first mortgage note and a $0.5 million waterfall payment relating to the subordinated note, which resulted in $0.4 million of gain on debt extinguishment.
 
During 2016, we prepaid without penalty the remaining $43.6 million balance on a secured mortgage loan with an effective interest rate of 7.5% that was originally scheduled to mature in August 2016.

During 2016, we borrowed an aggregate of $150.0 million under an unsecured bank term loan that is originally scheduled to mature in January 2022. The interest rate on the term loan at our current credit ratings is LIBOR plus 110 basis points. During 2017, we amended our $150.0 million unsecured bank term loan by increasing the borrowed amount to $200.0 million. We incurred $0.3 million of debt issuance costs in connection with this amendment, which will be amortized along with existing unamortized debt issuance costs over the remaining term.

We previously obtained a $350.0 million, six-month unsecured bridge facility. The interest rate on the bridge facility at our current credit ratings was LIBOR plus 110 basis points. During 2016, we prepaid without penalty the full balance on this unsecured bridge facility.

Our revolving credit facility and bank term loans require us to comply with customary operating covenants and various financial requirements. Upon an event of default on the revolving credit facility, the lenders having at least 51.0% of the total commitments under the revolving credit facility can accelerate all borrowings then outstanding, and we could be prohibited from borrowing any further amounts under our revolving credit facility, which would adversely affect our ability to fund our operations. In addition, certain of our unsecured debt agreements contain cross-default provisions giving the unsecured lenders the right to declare a default if we are in default under more than $30.0 million with respect to other loans in some circumstances.

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


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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)



5.    Mortgages and Notes Payable - Continued

The Operating Partnership has $298.9 million carrying amount of 2021 notes outstanding, $248.9 million carrying amount of 2023 notes outstanding, $296.7 million carrying amount of 2027 notes outstanding and $346.2 million carrying amount of 2028 notes outstanding. The indenture that governs these outstanding notes requires us to comply with customary operating covenants and various financial ratios. The trustee or the holders of at least 25.0% in principal amount of any series of notes can accelerate the principal amount of such series upon written notice of a default that remains uncured after 60 days.
 
We have considered our short-term liquidity needs and the adequacy of our estimated cash flows from operating activities and other available financing sources to meet these needs. We intend to meet these short-term liquidity requirements through a combination of the following:
 
available cash and cash equivalents;
 
cash flows from operating activities;
 
issuance of debt securities by the Operating Partnership (some of which debt securities may be hedged to a fixed interest rate pursuant to the forward-starting swaps referred to in Note 6);
 
issuance of secured debt;
 
bank term loans;
 
borrowings under our revolving credit facility;
 
issuance of equity securities by the Company or the Operating Partnership; and
 
the disposition of non-core assets.

Capitalized Interest
 
Total interest capitalized to development and significant building and tenant improvement projects was $6.7 million, $8.8 million and $8.2 million for the years ended December 31, 2018, 2017 and 2016, respectively.

6.
Derivative Financial Instruments

During 2018, we entered into an aggregate of $225.0 million notional amount of forward-starting swaps that effectively lock the underlying 10-year treasury rate at a weighted average of 2.86% with respect to a planned issuance of debt securities by the Operating Partnership expected to occur prior to June 11, 2019.

During 2017, we entered into $150.0 million notional amount of forward-starting swaps that effectively locked the underlying 10-year treasury rate at 2.44% with respect to a planned issuance of debt securities by the Operating Partnership. Upon issuance of the $350.0 million aggregate principal amount of 4.125% notes due 2028 during 2018, we terminated the forward-starting swaps and received cash upon settlement. The unrealized gain of $7.0 million in accumulated other comprehensive income will be reclassified to interest expense as interest payments are made on the debt and a gain of $0.2 million of hedge ineffectiveness was recognized in interest expense.

During 2017, we also entered into floating-to-fixed interest rate swaps through January 2022 with respect to an aggregate of $50.0 million LIBOR-based borrowings. These swaps effectively fix the underlying one-month LIBOR rate at a weighted average rate of 1.693%.

During 2016, we entered into $150.0 million notional amount of forward-starting swaps that effectively locked the underlying 10-year treasury rate at 1.90% with respect to a planned issuance of debt securities by the Operating Partnership. Upon issuance of the $300.0 million aggregate principal amount of 3.875% notes due 2027 during 2017, we terminated the forward-starting swaps
and received cash upon settlement. The unrealized gain of $7.3 million in accumulated other comprehensive income will be reclassified to interest expense as interest payments are made on the debt.


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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)



6.
Derivative Financial Instruments - Continued

We also had floating-to-fixed interest rate swaps through January 11, 2019 with respect to an aggregate of $225.0 million LIBOR-based borrowings. These swaps effectively fixed the underlying one-month LIBOR rate at a weighted average rate of 1.678%.

The counterparties under our swaps are major financial institutions. The swap agreements contain a provision whereby if we default on certain of our indebtedness and which default results in repayment of such indebtedness being, or becoming capable of being, accelerated by the lender, then we could also be declared in default on our swaps.

Our interest rate swaps have been designated as and are being accounted for as cash flow hedges with the effective portion of changes in fair value recorded in other comprehensive income each reporting period. No significant gain or loss was recognized related to hedge ineffectiveness or to amounts excluded from effectiveness testing on our cash flow hedges during the years ended December 31, 2018 and 2017. We have no collateral requirements related to our interest rate swaps.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on our debt. During 2019, we estimate that $1.6 million will be reclassified as a net decrease to interest expense.

The following table sets forth the gross fair value of our derivatives:

 
December 31,
 
2018
 
2017
Derivatives:
 
 
 
Derivatives designated as cash flow hedges in prepaid expenses and other assets:
 
 
 
Interest rate swaps
$
1,146

 
$
1,286

Derivatives designated as cash flow hedges in accounts payable, accrued expenses and other liabilities:
 
 
 
Interest rate swaps

$
3,581

 
$


The following table sets forth the effect of our cash flow hedges on accumulated other comprehensive income and interest expense:

 
Year Ended December 31,
 
2018
 
2017
 
2016
Derivatives Designated as Cash Flow Hedges:
 
 
 
 
 
Amount of unrealized gains recognized in accumulated other comprehensive income on derivatives (effective portion):
 
 
 
 
 
Interest rate swaps
$
4,161

 
$
1,732

 
$
5,703

Amount of (gains)/losses reclassified out of accumulated other comprehensive income into contractual interest expense (effective portion):
 
 
 
 
 
Interest rate swaps
$
(2,086
)
 
$
1,157

 
$
3,057


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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)


 
7.
Commitments and Contingencies
 
Operating Ground Leases
 
Certain of our properties are subject to operating ground leases. Rental payments on these leases are adjusted periodically based on either the consumer price index or on a pre-determined schedule. Total rental property expense recorded for operating ground leases was $2.5 million, $2.5 million and $2.9 million for the years ended December 31, 2018, 2017 and 2016, respectively.
 
The following table sets forth our scheduled obligations for future minimum payments on operating ground leases at December 31, 2018:
 
Years Ending December 31,
 
Minimum Payments
2019
 
$
2,184

2020
 
2,223

2021
 
2,263

2022
 
2,305

2023
 
2,308

Thereafter
 
86,577

 
 
$
97,860

 
Lease and Contractual Commitments
 
We have $484.8 million of lease and contractual commitments at December 31, 2018. Lease and contractual commitments represent commitments under signed leases and contracts for operating properties (excluding tenant-funded tenant improvements) and contracts for development/redevelopment projects, of which $60.4 million was recorded on our Consolidated Balance Sheets at December 31, 2018.

Contingent Consideration
 
We had $5.0 million at both December 31, 2018 and 2017 of contingent consideration related to certain parcels of acquired development land in Raleigh, Atlanta and Nashville. The contingent consideration for each is payable in cash to a third party if and to the extent future development milestones as outlined in the purchase agreements are met.

Environmental Matters
 
Substantially all of our in-service and development properties have been subjected to Phase I environmental assessments and, in certain instances, Phase II environmental assessments. Such assessments and/or updates have not revealed, nor are we aware of, any environmental liability that we believe would have a material adverse effect on our Consolidated Financial Statements.
 
Litigation, Claims and Assessments
 
We are from time to time a party to a variety of legal proceedings, claims and assessments arising in the ordinary course of our business. We regularly assess the liabilities and contingencies in connection with these matters based on the latest information available. For those matters where it is probable that we have incurred or will incur a loss and the loss or range of loss can be reasonably estimated, the estimated loss is accrued and charged to income in our Consolidated Financial Statements. In other instances, because of the uncertainties related to both the probable outcome and amount or range of loss, a reasonable estimate of liability, if any, cannot be made. Based on the current expected outcome of such matters, none of these proceedings, claims or assessments is expected to have a material effect on our business, financial condition, results of operations or cash flows.

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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)


 
8.
Noncontrolling Interests

Noncontrolling Interests in Consolidated Affiliates

At December 31, 2018, our noncontrolling interests in consolidated affiliates relate to our joint venture partner's 50.0% interest in office properties in Richmond. Our joint venture partner is an unrelated third party.

Noncontrolling Interests in the Operating Partnership

Noncontrolling interests in the Operating Partnership relate to the ownership of Redeemable Common Units. Net income attributable to noncontrolling interests in the Operating Partnership is computed by applying the weighted average percentage of Redeemable Common Units during the period, as a percent of the total number of outstanding Common Units, to the Operating Partnership’s net income for the period after deducting distributions on Preferred Units. When a noncontrolling unitholder redeems a Common Unit for a share of Common Stock or cash, the noncontrolling interests in the Operating Partnership are reduced and the Company’s share in the Operating Partnership is increased by the fair value of each security at the time of redemption.

The following table sets forth the Company's noncontrolling interests in the Operating Partnership:

 
Year Ended December 31,
 
2018
 
2017
Beginning noncontrolling interests in the Operating Partnership
$
144,009

 
$
144,802

Adjustment of noncontrolling interests in the Operating Partnership to fair value
(33,427
)
 
(354
)
Conversions of Common Units to Common Stock
(4,043
)
 
(511
)
Net income attributable to noncontrolling interests in the Operating Partnership
4,588

 
5,059

Distributions to noncontrolling interests in the Operating Partnership
(5,167
)
 
(4,987
)
Total noncontrolling interests in the Operating Partnership
$
105,960

 
$
144,009


The following table sets forth net income available for common stockholders and transfers from the Company's noncontrolling interests in the Operating Partnership:

 
Year Ended December 31,
 
2018
 
2017
 
2016
Net income available for common stockholders
$
169,343

 
$
182,873

 
$
521,789

Increase in additional paid in capital from conversions of Common Units to Common Stock
4,043

 
511

 
3,057

Change from net income available for common stockholders and transfers from noncontrolling interests
$
173,386

 
$
183,384

 
$
524,846


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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)


 
9.
Disclosure About Fair Value of Financial Instruments

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

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

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

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

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

The fair value of mortgages and notes receivable and mortgages and notes payable is estimated by the income approach utilizing contractual cash flows and market-based interest rates to approximate the price that would be paid in an orderly transaction between market participants. The fair value of interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments of interest rate swaps are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves. In addition, credit valuation adjustments are considered in the fair values to account for potential nonperformance risk, but were concluded to not be significant inputs to the calculation for the periods presented.

Level 3. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
Our Level 3 assets include any real estate assets recorded at fair value on a non-recurring basis as a result of our quarterly impairment analysis, which are valued using the terms of definitive sales contracts or the sales comparison approach.

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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)



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 or disclosed 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 December 31, 2018:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Mortgages and notes receivable, at fair value (1)
$
5,599

 
$

 
$
5,599

 
$

Interest rate swaps (in prepaid expenses and other assets)
1,146

 

 
1,146

 

Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)
1,849

 
1,849

 

 

Impaired real estate assets
10,252

 

 

 
10,252

Total Assets
$
18,846

 
$
1,849

 
$
6,745

 
$
10,252

Noncontrolling Interests in the Operating Partnership
$
105,960

 
$
105,960

 
$

 
$

Liabilities:
 
 
 
 
 
 
 
Mortgages and notes payable, net, at fair value (1)
$
2,056,248

 
$

 
$
2,056,248

 
$

Interest rate swaps (in accounts payable, accrued expenses and other liabilities)
3,581

 

 
3,581

 

Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)
1,849

 
1,849

 

 

Total Liabilities
$
2,061,678

 
$
1,849

 
$
2,059,829

 
$

Fair Value at December 31, 2017:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Mortgages and notes receivable, at fair value (1)
$
6,425

 
$

 
$
6,425

 
$

Interest rate swaps (in prepaid expenses and other assets)
1,286

 

 
1,286

 

Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets)
2,388

 
2,388

 

 

Total Assets
$
10,099

 
$
2,388

 
$
7,711

 
$

Noncontrolling Interests in the Operating Partnership
$
144,009

 
$
144,009

 
$

 
$

Liabilities:
 
 
 
 
 
 
 
Mortgages and notes payable, net, at fair value (1)
$
2,015,689

 
$

 
$
2,015,689

 
$

Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities)
2,388

 
2,388

 

 

Total Liabilities
$
2,018,077

 
$
2,388

 
$
2,015,689

 
$

__________
(1)    Amounts recorded at historical cost on our Consolidated Balance Sheets at December 31, 2018 and 2017.

The impaired real estate assets that were measured in the fourth quarter of 2018 and the third quarter of 2017 at fair values of $10.3 million and $5.9 million, respectively, and deemed to be Level 3 assets were valued based primarily on market-based inputs and our assumptions about the use of the assets, as observable inputs were not available. In the absence of observable inputs, we estimate the fair value of real estate using unobservable local and national industry market data such as comparable sales, sales contracts and appraisals to assist us in our estimation of fair value. Significant increases or decreases in any valuation inputs in isolation would result in a significantly lower or higher fair value measurement.

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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)


 
10.
Equity
 
Common Stock Issuances
 
During 2017, the Company issued 1,363,919 shares of Common Stock in public offerings and received net proceeds of $68.3 million. At December 31, 2018, the Company had 96.4 million remaining shares of Common Stock authorized to be issued under its charter.

Common Stock Dividends
 
Dividends of the Company declared per share of Common Stock aggregated $1.85, $1.76 and $2.50 for the years ended December 31, 2018, 2017 and 2016, respectively. Dividends declared in 2016 included a special cash dividend of $0.80 per share declared in the quarter ended December 31, 2016 and paid January 10, 2017. The principal purpose of the special dividend was to distribute taxable capital gains associated with the sales of the Plaza assets in 2016.

The following table sets forth the Company's estimated taxability to the common stockholders of dividends per share for federal income tax purposes:
 
 
Year Ended December 31,
 
2018
 
2017 (1)
 
2016 (1)
Ordinary income
$
1.48

 
$
1.50

 
$
1.15

Capital gains
0.31

 
0.32

 
1.29

Return of capital
0.06

 

 

Total
$
1.85

 
$
1.82

 
$
2.44

__________
(1)
During 2016, cash dividends declared on Common Stock totaled $2.50 per share, of which approximately $0.06 was recognized as a 2017 distribution for federal income tax purposes.

The Company's tax returns have not been examined by the Internal Revenue Service (“IRS”) and, therefore, the taxability of dividends is subject to change.
 
Preferred Stock
 
The following table sets forth the Company's Preferred Stock:
 
 
 
Issue Date
 
Number of Shares Outstanding
 
Carrying Value
 
Liquidation Preference Per Share
 
Optional Redemption Date
 
Annual Dividends Payable Per Share
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
8.625% Series A Cumulative Redeemable
 
2/12/1997
 
29

 
$
28,877

 
$
1,000

 
2/12/2027
 
$
86.25

December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
8.625% Series A Cumulative Redeemable
 
2/12/1997
 
29

 
$
28,892

 
$
1,000

 
2/12/2027
 
$
86.25


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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)



10.
Equity - Continued

The following table sets forth the Company's estimated taxability to the preferred stockholders of dividends per share for federal income tax purposes:
 
 
Year Ended December 31,
 
2018
 
2017
 
2016
8.625% Series A Cumulative Redeemable:
 
 
 
 
 
Ordinary income
$
71.22

 
$
71.00

 
$
40.65

Capital gains
15.03

 
15.25

 
45.60

Total
$
86.25

 
$
86.25

 
$
86.25


The Company's tax returns have not been examined by the IRS and, therefore, the taxability of dividends is subject to change.

Warrants
 
At December 31, 2018 and 2017, we had 15,000 warrants outstanding with an exercise price of $32.50 per share. Upon exercise of a warrant, the Company will contribute the exercise price to the Operating Partnership in exchange for Common Units. Therefore, the Operating Partnership accounts for such warrants as if issued by the Operating Partnership. These warrants have no expiration date.

Common Unit Distributions

Distributions of the Operating Partnership declared per Common Unit aggregated $1.85, $1.76 and $2.50 for the years ended December 31, 2018, 2017 and 2016, respectively. Distributions declared in 2016 included a special cash distribution of $0.80 per unit declared in the quarter ended December 31, 2016 and paid January 10, 2017. The principal purpose of the special distribution was to distribute taxable capital gains associated with the sales of the Plaza assets in 2016.

Redeemable Common Units
 
Generally, the Operating Partnership is obligated to redeem each Redeemable Common Unit at the request of the holder thereof for cash equal to the value of one share of Common Stock based on the average of the market price for the 10 trading days immediately preceding the notice date of such redemption, provided that the Company, at its option, may elect to acquire any such Redeemable Common Unit presented for redemption for cash or one share of Common Stock. When a holder redeems a Redeemable Common Unit for a share of Common Stock or cash, the Company’s share in the Operating Partnership will be increased. The Common Units owned by the Company are not redeemable.
 
Preferred Units
 
The following table sets forth the Operating Partnership's Preferred Units:
 
 
 
Issue Date
 
Number of
Units
Outstanding
 
Carrying
Value
 
Liquidation Preference
Per Unit
 
Optional Redemption
Date
 
Annual
Distributions
Payable
Per Unit
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
8.625% Series A Cumulative Redeemable
 
2/12/1997
 
29

 
$
28,877

 
$
1,000

 
2/12/2027
 
$
86.25

December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
8.625% Series A Cumulative Redeemable
 
2/12/1997
 
29

 
$
28,892

 
$
1,000

 
2/12/2027
 
$
86.25


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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)


 
11.
Employee Benefit Plans
 
Officer, Management and Director Compensation Programs
 
Officers of the Company participate in an annual non-equity incentive program pursuant to which they are eligible to earn cash payments based on a percentage of their annual base salary in effect for December of the applicable year. Under this component of our executive compensation program, officers are eligible to earn additional cash compensation to the extent specific performance-based metrics are achieved during the most recently completed year. The position held by each officer has a target annual incentive percentage that ranges from 35% to 135% of base salary. The more senior the position, the greater the portion of compensation that varies with performance.
 
The percentage amount an officer may earn under the annual non-equity incentive plan is the product of the target annual incentive percentage times an “actual performance factor,” which can range from zero to 200%. The actual performance factor depends upon the relationship between actual performance in specific areas at each of our divisions and predetermined goals. For corporate officers, the actual performance factor is based on the goals and criteria applied to the Company’s performance as a whole. For officers who oversee our divisions, the actual performance factor is based on the goals and criteria applied partly to that division’s performance and partly to the Company’s performance overall. Amounts under our annual non-equity incentive plan are accrued and expensed in the year earned, but are typically paid early in the following year.
 
Certain other employees participate in a similar annual non-equity incentive program. Incentive eligibility ranges from 6% to 30% of annual base salary. The actual incentive payment is determined by a mix of the Company's overall performance, the performance of any applicable division and the individual’s performance during each year. These amounts are also accrued and expensed in the year earned, but are typically paid early in the following year.
 
The Company's officers are eligible to receive a mix of long-term equity incentive awards on or about March 1 of each year. Prior to 2018, the mix generally consisted of stock options, time-based restricted stock and total return-based restricted stock. In 2018, the mix consisted of time-based restricted stock and total return-based restricted stock. Time-based restricted stock grants are also made annually to directors and certain other employees. Dividends received on restricted stock are non-forfeitable and are paid at the same rate and on the same date as on shares of Common Stock, except that, with respect to shares of total return-based restricted stock issued to the Company's chief executive officer, dividends accumulate and are payable only if and to the extent the shares vest. Dividends paid on subsequently forfeited shares are expensed. Additional shares of total return-based restricted stock may be issued at the end of the applicable measurement periods if and to the extent actual performance exceeds certain levels of performance. Such additional shares, if any, would be fully vested when issued. No expense is recorded for additional shares of total return-based restricted stock that may be issued at the end of the applicable measurement period since that possibility is reflected in the grant date fair value. The following table sets forth the number of shares of Common Stock reserved for future issuance under the Company's long-term equity incentive plans:
 
 
December 31,
 
2018
 
2017
Outstanding stock options and warrants
611,518

 
655,822

Possible future issuance under equity incentive plans
2,188,696

 
2,404,131

 
2,800,214

 
3,059,953


Of the possible future issuance under the Company' long-term equity incentive plans at December 31, 2018, no more than an additional 0.6 million shares can be in the form of restricted stock.

During the years ended December 31, 2018, 2017 and 2016, we recognized $7.5 million, $6.7 million and $6.3 million, respectively, of share-based compensation expense. Because REITs generally do not pay income taxes, we do not realize tax benefits on share-based payments. At December 31, 2018, there was $4.7 million of total unrecognized share-based compensation costs, which will be recognized over a weighted average remaining contractual term of 2.2 years.

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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)



11.
Employee Benefit Plans - Continued

- Stock Options

Stock options issued from 2014 through 2017 vest ratably on an annual basis over four years and expire after 10 years. Stock options issued in 2012 and 2013 vest ratably on an annual basis over four years and expire after seven years. All stock options have an exercise price equal to the last reported stock price of our Common Stock on the New York Stock Exchange on the last trading day prior to grant. The value of all options as of the date of grant is calculated using the Black-Scholes option-pricing model and is amortized over the respective vesting period or the service period, if shorter, for employees who are or will become eligible under the Company's retirement plan. The weighted average fair values of options granted during 2017 and 2016 were $6.72 and $4.61, respectively, per option. The fair values of the options granted were determined at the grant dates using the following assumptions:

 
2017
 
2016
Risk free interest rate (1) 
2.0
%
 
1.4
%
Common stock dividend yield (2) 
3.4
%
 
3.9
%
Expected volatility (3) 
19.5
%
 
19.7
%
Average expected option life (years) (4)
5.75

 
5.75

__________
(1)
Represents the interest rate as of the grant date on US treasury bonds having the same life as the estimated life of the option grants.
(2)
The dividend yield is calculated utilizing the then current regular dividend rate for a one-year period and the per share price of Common Stock on the date of grant.
(3)
Based on the historical volatility of Common Stock over a period relevant to the related stock option grant.
(4)
The average expected option life is based on an analysis of the Company's historical data.

The following table sets forth stock option activity:

 
Options Outstanding
 
Number of Options
 
Weighted Average Exercise Price
Stock options outstanding at December 31, 2015
687,228

 
$
37.97

Granted
244,664

 
43.55

Canceled
(14,743
)
 
42.64

Exercised
(330,034
)
 
34.26

Stock options outstanding at December 31, 2016
587,115

 
42.26

Granted
168,748

 
52.49

Exercised
(115,041
)
 
40.41

Stock options outstanding at December 31, 2017
640,822

 
45.29

Exercised
(44,304
)
 
40.15

Stock options outstanding at December 31, 2018 (1) (2)
596,518

 
$
45.67

__________
(1)
The outstanding options at December 31, 2018 had a weighted average remaining life of 6.8 years.
(2)
The Company had 303,674 options exercisable at December 31, 2018 with a weighted average exercise price of $43.67, weighted average remaining life of 6.2 years and intrinsic value of $0.1 million. Of these exercisable options, 217,386 had exercise prices higher than the market price of our Common Stock at December 31, 2018.

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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)



11.
Employee Benefit Plans - Continued

Cash received or receivable from options exercised was $1.9 million, $5.2 million and $13.4 million for the years ended December 31, 2018, 2017 and 2016, respectively. The total intrinsic value of options exercised during the years ended December 31, 2018, 2017 and 2016 was $0.4 million, $1.3 million and $4.8 million, respectively. The total intrinsic value of options outstanding at December 31, 2018, 2017 and 2016 was $0.1 million, $3.9 million and $5.1 million, respectively. The Company generally does not permit the net cash settlement of exercised stock options, but does permit net share settlement so long as the shares received are held for at least a year. The Company has a practice of issuing new shares to satisfy stock option exercises.

- Time-Based Restricted Stock

Shares of time-based restricted stock vest ratably on an annual basis over four years. The value of grants of time-based restricted stock is based on the market value of Common Stock as of the date of grant and is amortized to expense over the respective vesting period or the service period, if shorter, for employees who are or will become eligible under the Company's retirement plan.

The following table sets forth time-based restricted stock activity:
 
 
Number of Shares
 
Weighted Average Grant Date Fair Value
Restricted shares outstanding at December 31, 2015
204,720

 
$
39.74

Awarded and issued (1)
72,698

 
43.59

Vested (2)
(84,212
)
 
37.76

Forfeited
(4,225
)
 
41.96

Restricted shares outstanding at December 31, 2016
188,981

 
42.06

Awarded and issued (1)
61,404

 
52.49

Vested (2)
(78,139
)
 
40.55

Restricted shares outstanding at December 31, 2017
172,246

 
46.46

Awarded and issued (1)
94,984

 
43.01

Vested (2)
(73,307
)
 
44.19

Forfeited
(2,684
)
 
45.89

Restricted shares outstanding at December 31, 2018
191,239

 
$
45.62

__________
(1)
The weighted average fair value at grant date of time-based restricted stock issued during the years ended December 31, 2018, 2017 and 2016 was $4.1 million, $3.2 million and $3.2 million, respectively.
(2)
The vesting date fair value of time-based restricted stock that vested during the years ended December 31, 2018, 2017 and 2016 was $3.2 million, $4.1 million and $3.7 million, respectively. Vested shares include those shares surrendered by employees to satisfy tax withholding obligations in connection with such vesting.
 

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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)



11.
Employee Benefit Plans - Continued
 
- Total Return-Based Restricted Stock
 
Shares of total return-based restricted stock vest to the extent the Company's absolute total returns for certain pre-determined three-year periods exceed predetermined goals. The amount subject to vesting ranges from zero to 150%. Notwithstanding the Company’s absolute total return, if the Company’s total return exceeds 100% of the average peer group total return index, at least 75% of total return-based restricted stock issued will vest at the end of the applicable period. The weighted average grant date fair value of such shares of total return-based restricted stock issued in 2018, 2017 and 2016 was determined to be $40.81, $49.59 and $41.37, respectively, and is amortized over the respective three-year period or the service period, if shorter, for employees who are or will become eligible under the Company's retirement plan. The fair values of the total return-based restricted stock granted were determined at the grant dates using a Monte Carlo simulation model and the following assumptions:
 
 
2018
 
2017
 
2016
Risk free interest rate (1) 
2.3
%
 
1.6
%
 
0.9
%
Common stock dividend yield (2) 
3.9
%
 
3.5
%
 
4.1
%
Expected volatility (3) 
41.1
%
 
42.8
%
 
43.1
%
__________
(1)
Represents the interest rate as of the grant date on US treasury bonds having the same life as the estimated life of the total return-based restricted stock grants.
(2)
The dividend yield is calculated utilizing the then current regular dividend rate for a one-year period and the average per share price of Common Stock during the three-month period preceding the date of grant.
(3)
Based on the historical volatility of Common Stock over a period relevant to the related total return-based restricted stock grant.
 
The following table sets forth total return-based restricted stock activity:
 
 
Number of Shares
 
Weighted Average Grant Date Fair Value
Restricted shares outstanding at December 31, 2015
195,303

 
$
36.66

Awarded and issued (1) (3)
64,701

 
40.87

Vested (2) (3)
(71,617
)
 
36.50

Forfeited
(4,663
)
 
39.91

Restricted shares outstanding at December 31, 2016
183,724

 
39.82

Awarded and issued (1) (3)
84,013

 
44.76

Vested (2) (3)
(107,013
)
 
37.88

Restricted shares outstanding at December 31, 2017
160,724

 
44.72

Awarded and issued (1)
77,456

 
40.81

Vested (2)
(41,160
)
 
45.61

Forfeited (4)
(16,926
)
 
45.24

Restricted shares outstanding at December 31, 2018
180,094

 
$
43.34

__________
(1)
The fair value at grant date of total return-based restricted stock issued during the years ended December 31, 2018, 2017 and 2016 was $3.2 million, $2.4 million and $2.4 million, respectively, at target.
(2)
The vesting date fair value of total return-based restricted stock that vested during the years ended December 31, 2018, 2017 and 2016 was $1.8 million, $5.6 million and $3.1 million, respectively, based on the performance of the specific plans. Vested shares include those shares surrendered by employees to satisfy tax withholding obligations in connection with such vesting.
(3)
The 2017 and 2016 amounts include 34,669 and 6,647 additional shares, respectively, that were issued at the end of the applicable measurement period because actual performance exceeded certain levels of performance.
(4)
Includes 13,707 shares that were forfeited at the end of the applicable measurement period because the applicable total return did not meet the target level.

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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)



11.
Employee Benefit Plans - Continued

401(k) Retirement Savings Plan
 
We have a 401(k) Retirement Savings Plan covering substantially all employees who meet certain age and employment criteria. We contribute amounts for each participant at a rate of 75% of the employee’s contribution (up to 6% of each employee’s bi-weekly salary and cash incentives, subject to statutory limits). During the years ended December 31, 2018, 2017 and 2016, we contributed $1.4 million, $1.4 million and $1.3 million, respectively, to the 401(k) savings plan. The assets of this qualified plan are not included in our Consolidated Financial Statements since the assets are not owned by us.

Retirement Plan

The Company has a retirement plan for employees with at least 30 years of continuous service or are at least 55 years old with at least 10 years of continuous service. Subject to advance written notice and a non-compete agreement, eligible retirees would be entitled to receive a pro rata amount of any annual non-equity incentive compensation earned during the year of retirement and stock options and time-based restricted stock would be non-forfeitable and vest according to the terms of their original grants. Eligible retirees would also be entitled to retain any total return-based restricted stock that subsequently vests after the retirement date according to the terms of their original grants. For employees who meet the age and service eligibility requirements, 100% of their annual grants are expensed at the grant date as if fully vested. For employees who will meet the age and service eligibility requirements within the normal vesting periods, the grants are amortized over the shorter service period.

Deferred Compensation

Prior to 2010, officers could elect to defer all or a portion of their cash compensation, which was then invested in unrelated mutual funds under a non-qualified deferred compensation plan. These investments are recorded at fair value, which aggregated $1.8 million and $2.4 million at December 31, 2018 and 2017, respectively, and are included in prepaid expenses and other assets, with an offsetting deferred compensation liability recorded in accounts payable, accrued expenses and other liabilities. Deferred amounts ultimately payable to the participants are based on the value of the related mutual fund investments. Accordingly, changes in the value of the unrelated mutual funds are recorded in interest and other income and the corresponding offsetting changes in the deferred compensation liability are recorded in general and administrative expense. As a result, there is no effect on our net income.

The following table sets forth our deferred compensation liability:

 
Year Ended December 31,
 
2018
 
2017
 
2016
Beginning deferred compensation liability
$
2,388

 
$
2,451

 
$
2,736

Mark-to-market adjustment to deferred compensation (in general and administrative expenses)
(182
)
 
492

 
222

Distributions from deferred compensation plans
(357
)
 
(555
)
 
(507
)
Total deferred compensation liability
$
1,849

 
$
2,388

 
$
2,451


Employee Stock Purchase Plan

The Company has an Employee Stock Purchase Plan ("ESPP") pursuant to which employees may contribute up to 25% of their cash compensation for the purchase of Common Stock. At the end of each quarter, each participant's account balance, which includes accumulated dividends, is applied to acquire shares of Common Stock at a cost that is calculated at 85% of the average closing price on the New York Stock Exchange on the five consecutive days preceding the last day of the quarter. In the years ended December 31, 2018, 2017 and 2016, the Company issued 38,951, 33,278 and 27,773 shares, respectively, of Common Stock under the ESPP. The 15% discount on newly issued shares, which is taxable income to the participants and is recorded by us as additional compensation expense, aggregated $0.3 million, $0.2 million and $0.2 million in the years ended December 31, 2018, 2017 and 2016, respectively. Generally, shares purchased under the ESPP must be held at least one year. The Company satisfies its ESPP obligations by issuing additional shares of Common Stock.

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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)


 
12.
Accumulated Other Comprehensive Income
 
The following table sets forth the components of accumulated other comprehensive income:
 
 
December 31,
 
2018
 
2017
Cash flow hedges:
 
 
 
Beginning balance
$
7,838

 
$
4,949

Unrealized gains on cash flow hedges
4,161

 
1,732

Amortization of cash flow hedges (1)
(2,086
)
 
1,157

Total accumulated other comprehensive income
$
9,913

 
$
7,838

__________
(1)
Amounts reclassified out of accumulated other comprehensive income into contractual interest expense.

13.
Rental and Other Revenues

Our real estate assets are leased to customers under operating leases. The minimum rental amounts under the leases are generally subject to scheduled fixed increases. Generally, the leases also provide that we receive cost recovery income from customers for increases in certain costs above the costs incurred during a contractually specified base year.
 
The following table sets forth our scheduled future minimum base rents to be received from customers for leases in effect at December 31, 2018 for the properties that we wholly own:
 
2019
$
618,014

2020
581,399

2021
524,381

2022
488,157

2023
428,461

Thereafter
2,068,891

 
$
4,709,303


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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.
Real Estate and Other Assets Held For Sale and Discontinued Operations
 
The following table sets forth the assets held for sale at December 31, 2018 and 2017, which are considered non-core:
 
 
December 31,
 
2018
 
2017
Assets:
 
 
 
Land
$

 
$
870

Buildings and tenant improvements

 
21,318

Land held for development

 
355

Less-accumulated depreciation

 
(9,304
)
Net real estate assets

 
13,239

Accrued straight-line rents receivable

 
591

Deferred leasing costs, net

 
253

Prepaid expenses and other assets

 
35

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

 
$
14,118

 
The following tables set forth the results of operations and cash flows for the years ended December 31, 2018, 2017 and 2016 related to discontinued operations:

 
Year Ended December 31,
 
2018
 
2017
 
2016
Rental and other revenues
$

 
$

 
$
8,484

Operating expenses:
 
 
 
 
 
Rental property and other expenses

 

 
3,334

General and administrative

 

 
1,388

Total operating expenses

 

 
4,722

Interest expense

 

 
85

Other income

 

 
420

Income from discontinued operations

 

 
4,097

Net gains on disposition of discontinued operations

 

 
414,496

Total income from discontinued operations
$

 
$

 
$
418,593

 
 
Year Ended December 31,
 
2018
 
2017
 
2016
Cash flows from operating activities
$

 
$

 
$
2,040

Cash flows from investing activities
$

 
$

 
$
646,738


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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)


 
15.
Earnings Per Share and Per Unit

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

 
Year Ended December 31,
 
2018
 
2017
 
2016
Earnings per Common Share - basic:
 
 
 
 
 
Numerator:
 
 
 
 
 
Income from continuing operations
$
177,630

 
$
191,663

 
$
122,546

Net (income) attributable to noncontrolling interests in the Operating Partnership from continuing operations
(4,588
)
 
(5,059
)
 
(3,331
)
Net (income) attributable to noncontrolling interests in consolidated affiliates from continuing operations
(1,207
)
 
(1,239
)
 
(1,253
)
Dividends on Preferred Stock
(2,492
)
 
(2,492
)
 
(2,501
)
Income from continuing operations available for common stockholders
169,343

 
182,873

 
115,461

Income from discontinued operations

 

 
418,593

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

 

 
(12,265
)
Income from discontinued operations available for common stockholders

 

 
406,328

Net income available for common stockholders
$
169,343

 
$
182,873

 
$
521,789

Denominator:
 
 
 
 
 
Denominator for basic earnings per Common Share – weighted average shares
103,439

 
102,682

 
98,439

Earnings per Common Share - basic:
 
 
 
 
 
Income from continuing operations available for common stockholders
$
1.64

 
$
1.78

 
$
1.17

Income from discontinued operations available for common stockholders

 

 
4.13

Net income available for common stockholders
$
1.64

 
$
1.78

 
$
5.30

Earnings per Common Share - diluted:
 
 
 
 
 
Numerator:
 
 
 
 
 
Income from continuing operations
$
177,630

 
$
191,663

 
$
122,546

Net (income) attributable to noncontrolling interests in consolidated affiliates from continuing operations
(1,207
)
 
(1,239
)
 
(1,253
)
Dividends on Preferred Stock
(2,492
)
 
(2,492
)
 
(2,501
)
Income from continuing operations available for common stockholders before net (income) attributable to noncontrolling interests in the Operating Partnership
173,931

 
187,932

 
118,792

Income from discontinued operations available for common stockholders

 

 
418,593

Net income available for common stockholders before net (income) attributable to noncontrolling interests in the Operating Partnership
$
173,931

 
$
187,932

 
$
537,385

Denominator:
 
 
 
 
 
Denominator for basic earnings per Common Share – weighted average shares
103,439

 
102,682

 
98,439

Add:
 
 
 
 
 
Stock options using the treasury method
33

 
79

 
87

Noncontrolling interests Common Units
2,796

 
2,833

 
2,872

Denominator for diluted earnings per Common Share – adjusted weighted average shares and assumed conversions (1)
106,268

 
105,594

 
101,398

Earnings per Common Share - diluted:
 
 
 
 
 
Income from continuing operations available for common stockholders
$
1.64

 
$
1.78

 
$
1.17

Income from discontinued operations available for common stockholders

 

 
4.13

Net income available for common stockholders
$
1.64

 
$
1.78

 
$
5.30

__________
(1)
Includes all unvested restricted stock where dividends on such restricted stock are non-forfeitable.

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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)



15.
Earnings Per Share and Per Unit - Continued
 
The following table sets forth the computation of basic and diluted earnings per unit of the Operating Partnership:

 
Year Ended December 31,
 
2018
 
2017
 
2016
Earnings per Common Unit - basic:
 
 
 
 
 
Numerator:
 
 
 
 
 
Income from continuing operations
$
177,630

 
$
191,663

 
$
122,546

Net (income) attributable to noncontrolling interests in consolidated affiliates from continuing operations
(1,207
)
 
(1,239
)
 
(1,253
)
Distributions on Preferred Units
(2,492
)
 
(2,492
)
 
(2,501
)
Income from continuing operations available for common unitholders
173,931

 
187,932

 
118,792

Income from discontinued operations available for common unitholders

 

 
418,593

Net income available for common unitholders
$
173,931

 
$
187,932

 
$
537,385

Denominator:
 
 
 
 
 
Denominator for basic earnings per Common Unit – weighted average units
105,826

 
105,106

 
100,902

Earnings per Common Unit - basic:
 
 
 
 
 
Income from continuing operations available for common unitholders
$
1.64

 
$
1.79

 
$
1.18

Income from discontinued operations available for common unitholders

 

 
4.15

Net income available for common unitholders
$
1.64

 
$
1.79

 
$
5.33

Earnings per Common Unit - diluted:
 
 
 
 
 
Numerator:
 
 
 
 
 
Income from continuing operations
$
177,630

 
$
191,663

 
$
122,546

Net (income) attributable to noncontrolling interests in consolidated affiliates from continuing operations
(1,207
)
 
(1,239
)
 
(1,253
)
Distributions on Preferred Units
(2,492
)
 
(2,492
)
 
(2,501
)
Income from continuing operations available for common unitholders
173,931

 
187,932

 
118,792

Income from discontinued operations available for common unitholders

 

 
418,593

Net income available for common unitholders
$
173,931

 
$
187,932

 
$
537,385

Denominator:
 
 
 
 
 
Denominator for basic earnings per Common Unit – weighted average units
105,826

 
105,106

 
100,902

Add:
 
 
 
 
 
Stock options using the treasury method
33

 
79

 
87

Denominator for diluted earnings per Common Unit – adjusted weighted average units and assumed conversions (1)
105,859

 
105,185

 
100,989

Earnings per Common Unit - diluted:
 
 
 
 
 
Income from continuing operations available for common unitholders
$
1.64

 
$
1.79

 
$
1.18

Income from discontinued operations available for common unitholders

 

 
4.14

Net income available for common unitholders
$
1.64

 
$
1.79

 
$
5.32

__________
(1)
Includes all unvested restricted stock where distributions on such restricted stock are non-forfeitable.

94

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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)


 
16.
Income Taxes

Our Consolidated Financial Statements include the operations of the Company's taxable REIT subsidiary, which is not entitled to the dividends paid deduction and is subject to federal, state and local income taxes on its taxable income.

The minimum dividend per share of Common Stock required for the Company to maintain its REIT status was $1.26, $1.37 and $0.99 per share in 2018, 2017 and 2016, respectively. Continued qualification as a REIT depends on the Company's ability to satisfy the dividend distribution tests, stock ownership requirements and various other qualification tests. The tax basis of the Company's assets (net of accumulated tax depreciation and amortization) and liabilities was approximately $4.3 billion and $2.3 billion, respectively, at December 31, 2018 and $4.1 billion and $2.3 billion, respectively, at December 31, 2017. The tax basis of the Operating Partnership's assets (net of accumulated tax depreciation and amortization) and liabilities was approximately $4.2 billion and $2.3 billion, respectively, at December 31, 2018 and $4.1 billion and $2.3 billion, respectively, at December 31, 2017.

During the years ended December 31, 2018, 2017 and 2016, the Company qualified as a REIT and incurred no federal income tax expense; accordingly, the only federal income taxes included in the accompanying Consolidated Financial Statements relate to activities of the Company's taxable REIT subsidiary. Due to the passage of federal legislation commonly known as the "Tax Cuts and Jobs Act," which was signed into law on December 22, 2017, the taxable REIT subsidiary was required to decrease the deferred tax asset balance, which resulted in an increase to tax expense of $0.1 million in 2017.

The following table sets forth the Company's income tax expense/(benefit):

 
Year Ended December 31,
 
2018
 
2017
 
2016
Current tax expense/(benefit):
 
 
 
 
 
Federal
$
133

 
$
(177
)
 
$
(38
)
State
112

 
105

 
89

 
245

 
(72
)
 
51

Deferred tax expense/(benefit):
 
 
 
 
 
Federal
(95
)
 
223

 
(160
)
State
(68
)
 
(9
)
 
87

 
(163
)
 
214

 
(73
)
Total income tax expense/(benefit)
$
82

 
$
142

 
$
(22
)

The Company's net deferred tax liability was $0.2 million and $0.3 million as of December 31, 2018 and 2017, respectively. The net deferred tax liability is comprised primarily of tax versus book differences related to property (depreciation, amortization and basis differences).

For the years ended December 31, 2018 and 2017, there were no unrecognized tax benefits. The Company is subject to federal, state and local income tax examinations by taxing authorities for 2015 through 2018. The Company does not expect that the total amount of unrecognized benefits will materially change within the next year.


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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)


 
17.
Segment Information

Our principal business is the operation, acquisition and development of rental real estate properties. We evaluate our business by geographic location. The operating results by geographic grouping are regularly reviewed by our chief operating decision maker for assessing performance and other purposes. There are no material inter-segment transactions.

Our accounting policies of the segments are the same as those used in our Consolidated Financial Statements. All operations are within the United States.

The following tables summarize the rental and other revenues and net operating income, the primary industry property-level performance metric used by our chief operating decision maker and which is defined as rental and other revenues less rental property and other expenses, for each of our reportable segments.

 
Year Ended December 31,
 
2018
 
2017
 
2016
Rental and Other Revenues:
 
 
 
 
 
Office:
 
 
 
 
 
Atlanta
$
141,337

 
$
140,323

 
$
134,601

Greensboro
22,322

 
21,453

 
20,522

Memphis
40,230

 
45,430

 
48,251

Nashville
121,836

 
111,506

 
95,912

Orlando
53,771

 
51,236

 
46,260

Pittsburgh
61,177

 
59,103

 
58,789

Raleigh
118,352

 
119,254

 
112,958

Richmond
45,729

 
43,959

 
44,315

Tampa
102,404

 
97,524

 
89,903

Total Office Segment
707,158

 
689,788

 
651,511

Other
12,877

 
12,949

 
14,123

Total Rental and Other Revenues
$
720,035

 
$
702,737

 
$
665,634


96

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)



17.
Segment Information - Continued

 
Year Ended December 31,
 
2018
 
2017
 
2016
Net Operating Income:
 
 
 
 
 
Office:
 
 
 
 
 
Atlanta
$
87,503

 
$
89,575

 
$
84,733

Greensboro
14,275

 
13,612

 
12,781

Memphis
25,659

 
28,128

 
30,038

Nashville
88,554

 
81,204

 
68,678

Orlando
32,841

 
30,526

 
26,525

Pittsburgh
36,233

 
34,784

 
34,175

Raleigh
86,053

 
86,475

 
80,803

Richmond
31,276

 
29,946

 
30,505

Tampa
65,819

 
62,378

 
56,493

Total Office Segment
468,213

 
456,628

 
424,731

Other
9,407

 
9,221

 
9,818

Total Net Operating Income
477,620

 
465,849

 
434,549

Reconciliation to income from continuing operations before disposition of investment properties and activity in unconsolidated affiliates:
 
 
 
 
 
Depreciation and amortization
(229,955
)
 
(227,832
)
 
(220,140
)
Impairments of real estate assets
(423
)
 
(1,445
)
 

General and administrative expenses
(40,006
)
 
(39,648
)
 
(38,153
)
Interest expense
(71,422
)
 
(69,105
)
 
(76,648
)
Other income
1,940

 
2,283

 
2,338

Income from continuing operations before disposition of investment properties and activity in unconsolidated affiliates
$
137,754

 
$
130,102

 
$
101,946



97

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)



17.
Segment Information - Continued

 
December 31,
 
2018
 
2017
Total Assets:
 
 
 
Office:
 
 
 
Atlanta
$
1,047,850

 
$
1,049,100

Greensboro
118,611

 
134,194

Memphis
213,276

 
218,088

Nashville
937,732

 
806,725

Orlando
306,370

 
306,970

Pittsburgh
329,918

 
334,136

Raleigh
792,464

 
762,331

Richmond
248,669

 
229,468

Tampa
522,263

 
550,375

Total Office Segment
4,517,153

 
4,391,387

Other
157,856

 
232,404

Total Assets
$
4,675,009

 
$
4,623,791



98

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)


 
18.
Quarterly Financial Data (Unaudited)

The following tables set forth quarterly financial information of the Company:

 
Year Ended December 31, 2018
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Total
Rental and other revenues
$
180,438

 
$
178,792

 
$
179,417

 
$
181,388

 
$
720,035

 
 
 
 
 
 
 
 
 
 
Net income
34,246

 
52,998

 
35,009

 
55,377

 
177,630

Net (income) attributable to noncontrolling interests in the Operating Partnership
(888
)
 
(1,381
)
 
(902
)
 
(1,417
)
 
(4,588
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(286
)
 
(308
)
 
(324
)
 
(289
)
 
(1,207
)
Dividends on Preferred Stock
(623
)
 
(623
)
 
(623
)
 
(623
)
 
(2,492
)
Net income available for common stockholders
$
32,449

 
$
50,686

 
$
33,160

 
$
53,048

 
$
169,343

Earnings per Common Share – basic:
 
 
 
 
 
 
 
 
 
Net income available for common stockholders
$
0.31

 
$
0.49

 
$
0.32

 
$
0.51

 
$
1.64

Earnings per Common Share – diluted:
 
 
 
 
 
 
 
 
 
Net income available for common stockholders
$
0.31

 
$
0.49

 
$
0.32

 
$
0.51

 
$
1.64


 
Year Ended December 31, 2017
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Total
Rental and other revenues
$
169,408

 
$
177,283

 
$
180,185

 
$
175,861

 
$
702,737

 
 
 
 
 
 
 
 
 
 
Net income
33,485

 
39,554

 
59,549

 
59,075

 
191,663

Net (income) attributable to noncontrolling interests in the Operating Partnership
(888
)
 
(1,043
)
 
(1,571
)
 
(1,557
)
 
(5,059
)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(300
)
 
(299
)
 
(315
)
 
(325
)
 
(1,239
)
Dividends on Preferred Stock
(623
)
 
(623
)
 
(623
)
 
(623
)
 
(2,492
)
Net income available for common stockholders
$
31,674

 
$
37,589

 
$
57,040

 
$
56,570

 
$
182,873

Earnings per Common Share – basic:
 
 
 
 
 
 
 
 
 
Net income available for common stockholders
$
0.31

 
$
0.37

 
$
0.55

 
$
0.55

 
$
1.78

Earnings per Common Share – diluted:
 
 
 
 
 
 
 
 
 
Net income available for common stockholders
$
0.31

 
$
0.37

 
$
0.55

 
$
0.55

 
$
1.78



99

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)



18.
Quarterly Financial Data (Unaudited) - Continued

The following tables set forth quarterly financial information of the Operating Partnership:

 
Year Ended December 31, 2018
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Total
Rental and other revenues
$
180,438

 
$
178,792

 
$
179,417

 
$
181,388

 
$
720,035

 
 
 
 
 
 
 
 
 
 
Net income
34,246

 
52,998

 
35,009

 
55,377

 
177,630

Net (income) attributable to noncontrolling interests in consolidated affiliates
(286
)
 
(308
)
 
(324
)
 
(289
)
 
(1,207
)
Distributions on Preferred Units
(623
)
 
(623
)
 
(623
)
 
(623
)
 
(2,492
)
Net income available for common unitholders
$
33,337

 
$
52,067

 
$
34,062

 
$
54,465

 
$
173,931

Earnings per Common Unit – basic:
 
 
 
 
 
 
 
 
 
Net income available for common unitholders
$
0.32

 
$
0.49

 
$
0.32

 
$
0.51

 
$
1.64

Earnings per Common Unit – diluted:
 
 
 
 
 
 
 
 
 
Net income available for common unitholders
$
0.32

 
$
0.49

 
$
0.32

 
$
0.51

 
$
1.64


 
Year Ended December 31, 2017
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Total
Rental and other revenues
$
169,408

 
$
177,283

 
$
180,185

 
$
175,861

 
$
702,737

 
 
 
 
 
 
 
 
 
 
Net income
33,485

 
39,554

 
59,549

 
59,075

 
191,663

Net (income) attributable to noncontrolling interests in consolidated affiliates
(300
)
 
(299
)
 
(315
)
 
(325
)
 
(1,239
)
Distributions on Preferred Units
(623
)
 
(623
)
 
(623
)
 
(623
)
 
(2,492
)
Net income available for common unitholders
$
32,562

 
$
38,632

 
$
58,611

 
$
58,127

 
$
187,932

Earnings per Common Unit – basic:
 
 
 
 
 
 
 
 
 
Net income available for common unitholders
$
0.31

 
$
0.37

 
$
0.55

 
$
0.55

 
$
1.79

Earnings per Common Unit – diluted:
 
 
 
 
 
 
 
 
 
Net income available for common unitholders
$
0.31

 
$
0.37

 
$
0.55

 
$
0.55

 
$
1.79


19.
Subsequent Events

On February 5, 2019 the Company declared a cash dividend of $0.475 per share of Common Stock, which is payable on March 5, 2019 to stockholders of record as of February 19, 2019.



100

Table of Contents

HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP

SCHEDULE II
(in thousands)

The following table sets forth the activity of allowance for doubtful accounts:

 
Balance at December 31, 2017
 
Additions
 
Deductions
 
Balance at December 31, 2018
Allowance for Doubtful Accounts - Straight-Line Rent
$
819

 
$
599

 
$
(777
)
 
$
641

Allowance for Doubtful Accounts - Accounts Receivable
753

 
969

 
(556
)
 
1,166

Allowance for Doubtful Accounts - Notes Receivable
72

 

 
(28
)
 
44

Totals
$
1,644

 
$
1,568

 
$
(1,361
)
 
$
1,851



 
Balance at December 31, 2016
 
Additions
 
Deductions
 
Balance at December 31, 2017
Allowance for Doubtful Accounts - Straight-Line Rent
$
692

 
$
1,503

 
$
(1,376
)
 
$
819

Allowance for Doubtful Accounts - Accounts Receivable
624

 
500

 
(371
)
 
753

Allowance for Doubtful Accounts - Notes Receivable
105

 

 
(33
)
 
72

Totals
$
1,421

 
$
2,003

 
$
(1,780
)
 
$
1,644



 
Balance at December 31, 2015
 
Additions
 
Deductions
 
Balance at December 31, 2016
Allowance for Doubtful Accounts - Straight-Line Rent
$
257

 
$
1,501

 
$
(1,066
)
 
$
692

Allowance for Doubtful Accounts - Accounts Receivable
928

 
1,045

 
(1,349
)
 
624

Allowance for Doubtful Accounts - Notes Receivable
287

 

 
(182
)
 
105

Totals
$
1,472

 
$
2,546

 
$
(2,597
)
 
$
1,421

 

101

Table of Contents

HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTE TO SCHEDULE III
(in thousands)

The following table sets forth the activity of real estate assets and accumulated depreciation:
 
 
December 31,
 
2018
 
2017
 
2016
Real estate assets:
 
 
 
 
 
Beginning balance
$
5,173,754

 
$
4,865,103

 
$
4,915,858

Additions:
 
 
 
 
 
Acquisitions, development and improvements
274,863

 
486,755

 
353,236

Cost of real estate sold and retired
(152,066
)
 
(178,104
)
 
(403,991
)
Ending balance (a)
$
5,296,551

 
$
5,173,754

 
$
4,865,103

Accumulated depreciation:
 
 
 
 
 
Beginning balance
$
1,211,728

 
$
1,134,103

 
$
1,138,378

Depreciation expense
191,035

 
184,385

 
173,072

Real estate sold and retired
(106,201
)
 
(106,760
)
 
(177,347
)
Ending balance (b)
$
1,296,562

 
$
1,211,728

 
$
1,134,103


(a)
Reconciliation of total real estate assets to balance sheet caption:
 
2018
 
2017
 
2016
Total per Schedule III
$
5,296,551

 
$
5,173,754

 
$
4,865,103

Development in-process exclusive of land included in Schedule III
165,537

 
88,452

 
279,602

Real estate assets, net, held for sale

 
(22,543
)
 

Total real estate assets
$
5,462,088

 
$
5,239,663

 
$
5,144,705


(b)
Reconciliation of total accumulated depreciation to balance sheet caption:
 
2018
 
2017
 
2016
Total per Schedule III
$
1,296,562

 
$
1,211,728

 
$
1,134,103

Real estate assets, net, held for sale

 
(9,304
)
 

Total accumulated depreciation
$
1,296,562

 
$
1,202,424

 
$
1,134,103




102

Table of Contents

HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
 
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
 
December 31, 2018

 
 
 
 
 
 
Initial Costs
 
Costs Capitalized
Subsequent to
Acquisition
 
Gross Value at Close of Period
 
 
 
 
 
 
Description
 
Property
Type
 
2018
Encumbrance
 
Land
 
Bldg &
Improv
 
Land
 
Bldg &
Improv
 
Land
 
Bldg &
Improv
 
Total
Assets (1)
 
Accumulated
Depreciation
 
Date of
Construction
 
Life on
Which
Depreciation
is
Calculated
Atlanta, GA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1700 Century Circle
 
Office
 
 
 
$

 
$
2,482

 
$
2

 
$
1,466

 
$
2

 
$
3,948

 
$
3,950

 
$
1,505

 
1983
 
 5-40 yrs.
1800 Century Boulevard
 
Office
 
 
 
1,444

 
29,081

 

 
10,260

 
1,444

 
39,341

 
40,785

 
21,007

 
1975
 
 5-40 yrs.
1825 Century Boulevard
 
Office
 
 
 
864

 

 
303

 
14,987

 
1,167

 
14,987

 
16,154

 
5,786

 
2002
 
 5-40 yrs.
1875 Century Boulevard
 
Office
 
 
 

 
8,924

 

 
8,258

 

 
17,182

 
17,182

 
6,865

 
1976
 
 5-40 yrs.
1900 Century Boulevard
 
Office
 
 
 

 
4,744

 

 
710

 

 
5,454

 
5,454

 
4,883

 
1971
 
 5-40 yrs.
2200 Century Parkway
 
Office
 
 
 

 
14,432

 

 
8,639

 

 
23,071

 
23,071

 
10,620

 
1971
 
 5-40 yrs.
2400 Century Parkway
 
Office
 
 
 

 

 
406

 
14,920

 
406

 
14,920

 
15,326

 
6,715

 
1998
 
 5-40 yrs.
2500 Century Parkway
 
Office
 
 
 

 

 
328

 
12,536

 
328

 
12,536

 
12,864

 
3,711

 
2005
 
 5-40 yrs.
2500/2635 Parking Garage
 
Office
 
 
 

 

 

 
6,446

 

 
6,446

 
6,446

 
2,085

 
2005
 
 5-40 yrs.
2600 Century Parkway
 
Office
 
 
 

 
10,679

 

 
4,319

 

 
14,998

 
14,998

 
7,269

 
1973
 
 5-40 yrs.
2635 Century Parkway
 
Office
 
 
 

 
21,643

 

 
14,384

 

 
36,027

 
36,027

 
14,149

 
1980
 
 5-40 yrs.
2800 Century Parkway
 
Office
 
 
 

 
20,449

 

 
12,641

 

 
33,090

 
33,090

 
17,981

 
1983
 
 5-40 yrs.
50 Glenlake
 
Office
 
 
 
2,500

 
20,006

 

 
3,911

 
2,500

 
23,917

 
26,417

 
12,078

 
1997
 
 5-40 yrs.
Century Plaza I
 
Office
 
 
 
1,290

 
8,567

 

 
4,373

 
1,290

 
12,940

 
14,230

 
5,928

 
1981
 
 5-40 yrs.
Century Plaza II
 
Office
 
 
 
1,380

 
7,733

 

 
3,354

 
1,380

 
11,087

 
12,467

 
5,136

 
1984
 
 5-40 yrs.
Charles W. Grant Parkway
 
Office
 
 
 
1,196

 

 
1,416

 
15,178

 
2,612

 
15,178

 
17,790

 
5,770

 
2009
 
 5-40 yrs.
Henry County - Land
 
Industrial
 
 
 
3,010

 

 
(284
)
 

 
2,726

 

 
2,726

 

 
N/A
 
N/A
5405 Windward Parkway
 
Office
 
 
 
3,342

 
32,111

 

 
19,576

 
3,342

 
51,687

 
55,029

 
22,150

 
1998
 
 5-40 yrs.
Riverpoint - Land
 
Industrial
 
 
 
7,250

 

 
1,290

 
2,185

 
8,540

 
2,185

 
10,725

 
452

 
N/A
 
5-40 yrs.
Riverwood 100
 
Office
 
 
 
5,785

 
64,913

 
(29
)
 
20,376

 
5,756

 
85,289

 
91,045

 
18,208

 
1989
 
5-40 yrs.
Tradeport - Land
 
Industrial
 
 
 
5,243

 

 
(4,819
)
 

 
424

 

 
424

 

 
N/A
 
 N/A
Two Alliance Center
 
Office
 
 
 
9,579

 
125,549

 

 
4,620

 
9,579

 
130,169

 
139,748

 
29,951

 
2009
 
5-40 yrs.
One Alliance Center
 
Office
 
 
 
14,775

 
123,071

 

 
17,005

 
14,775

 
140,076

 
154,851

 
23,283

 
2001
 
5-40 yrs.
10 Glenlake North
 
Office
 
 
 
5,349

 
26,334

 

 
11,993

 
5,349

 
38,327

 
43,676

 
7,053

 
2000
 
5-40 yrs.
10 Glenlake South
 
Office
 
 
 
5,103

 
22,811

 

 
3,249

 
5,103

 
26,060

 
31,163

 
5,724

 
1999
 
5-40 yrs.
Riverwood 200
 
Office
 
 
 
4,777

 
89,708

 

 
2,115

 
4,777

 
91,823

 
96,600

 
4,864

 
2017
 
5-40 yrs.

103

Table of Contents

HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
 
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
 
 
 
 
 
 
Initial Costs
 
Costs Capitalized
Subsequent to
Acquisition
 
Gross Value at Close of Period
 
 
 
 
 
 
Description
 
Property
Type
 
2018
Encumbrance
 
Land
 
Bldg &
Improv
 
Land
 
Bldg &
Improv
 
Land
 
Bldg &
Improv
 
Total
Assets (1)
 
Accumulated
Depreciation
 
Date of
Construction
 
Life on
Which
Depreciation
is
Calculated
Riverwood 300 - Land
 
Office
 
 
 
400

 

 

 
710

 
400

 
710

 
1,110

 
34

 
N/A
 
5-40 yrs.
Monarch Tower
 
Office
 
 
 
22,717

 
143,068

 

 
7,573

 
22,717

 
150,641

 
173,358

 
15,432

 
1997
 
5-40 yrs.
Monarch Plaza
 
Office
 
 
 
27,678

 
88,962

 

 
8,302

 
27,678

 
97,264

 
124,942

 
10,163

 
1983
 
5-40 yrs.
Memphis, TN
 
 
 
 
 























 
 
 
 
Triad Centre I
 
Office
 
 
 
2,340

 
11,385

 
(849
)
 
4,733

 
1,491

 
16,118

 
17,609

 
7,681

 
1985
 
 5-40 yrs.
Triad Centre II
 
Office
 
 
 
1,980

 
8,677

 
(404
)
 
5,441

 
1,576

 
14,118

 
15,694

 
6,630

 
1987
 
 5-40 yrs.
Atrium I & II
 
Office
 
 
 
1,570

 
6,253

 

 
3,638

 
1,570

 
9,891

 
11,461

 
5,251

 
1984
 
 5-40 yrs.
Centrum
 
Office
 
 
 
1,013

 
5,580

 

 
3,281

 
1,013

 
8,861

 
9,874

 
4,618

 
1979
 
 5-40 yrs.
Comcast
 
Office
 
 
 
946

 

 

 
6,021

 
946

 
6,021

 
6,967

 
1,581

 
2008
 
 5-40 yrs.
International Place II
 
Office
 
 
 
4,884

 
27,782

 

 
6,815

 
4,884

 
34,597

 
39,481

 
18,218

 
1988
 
 5-40 yrs.
PennMarc Centre
 
Office
 
 
 
3,607

 
10,240

 

 
4,667

 
3,607

 
14,907

 
18,514

 
4,894

 
2008
 
 5-40 yrs.
Colonnade
 
Office
 
 
 
1,300

 
6,481

 
267

 
2,277

 
1,567

 
8,758

 
10,325

 
4,386

 
1998
 
 5-40 yrs.
Crescent Center
 
Office
 
 
 
7,875

 
32,756

 
(547
)
 
11,533

 
7,328

 
44,289

 
51,617

 
11,780

 
1986
 
 5-40 yrs.
Southwind - Land
 
Office
 
 
 
3,662

 

 
(2,475
)
 

 
1,187

 

 
1,187

 

 
N/A
 
 N/A
Triad Centre III
 
Office
 
 
 
1,253

 

 

 
36,844

 
1,253

 
36,844

 
38,097

 
10,500

 
2009
 
 5-40 yrs.
Capital Grille
 
Office
 
 
 
311

 
3,258

 

 
(23
)
 
311

 
3,235

 
3,546

 
1,289

 
2014
 
 5-40 yrs.
Seasons 52
 
Office
 
 
 
320

 
3,741

 

 
(39
)
 
320

 
3,702

 
4,022

 
1,419

 
2014
 
 5-40 yrs.
International Place IV
 
Office
 
 
 
4,940

 
49,141

 

 
(193
)
 
4,940

 
48,948

 
53,888

 
4,787

 
2015
 
 5-40 yrs.
Nashville, TN
 
 
 
 
 























 
 
 
 
3322 West End
 
Office
 
 
 
3,025

 
27,490

 

 
9,413

 
3,025

 
36,903

 
39,928

 
15,815

 
1986
 
 5-40 yrs.
3401 West End
 
Office
 
 
 
5,862

 
22,917

 

 
5,675

 
5,862

 
28,592

 
34,454

 
14,717

 
1982
 
 5-40 yrs.
5310 Maryland Way
 
Office
 
 
 
1,863

 
7,201

 

 
3,641

 
1,863

 
10,842

 
12,705

 
5,544

 
1994
 
 5-40 yrs.
Cool Springs I & II Deck
 
Office
 
 
 

 

 

 
3,990

 

 
3,990

 
3,990

 
1,112

 
2007
 
 5-40 yrs.
Cool Springs III & IV Deck
 
Office
 
 
 

 

 

 
4,463

 

 
4,463

 
4,463

 
1,309

 
2007
 
 5-40 yrs.
Cool Springs I
 
Office
 
 
 
1,583

 

 
15

 
13,657

 
1,598

 
13,657

 
15,255

 
6,634

 
1999
 
 5-40 yrs.
Cool Springs II
 
Office
 
 
 
1,824

 

 
346

 
18,740

 
2,170

 
18,740

 
20,910

 
8,312

 
1999
 
 5-40 yrs.
Cool Springs III
 
Office
 
 
 
1,631

 

 
804

 
15,337

 
2,435

 
15,337

 
17,772

 
5,051

 
2006
 
 5-40 yrs.
Cool Springs IV
 
Office
 
 
 
1,715

 

 

 
19,152

 
1,715

 
19,152

 
20,867

 
5,100

 
2008
 
 5-40 yrs.
Cool Springs V (Healthways)
 
Office
 
 
 
3,688

 

 
295

 
53,000

 
3,983

 
53,000

 
56,983

 
19,412

 
2007
 
 5-40 yrs.
Harpeth On The Green II
 
Office
 
 
 
1,419

 
5,677

 

 
2,287

 
1,419

 
7,964

 
9,383

 
4,012

 
1984
 
 5-40 yrs.
Harpeth On The Green III
 
Office
 
 
 
1,660

 
6,649

 

 
2,533

 
1,660

 
9,182

 
10,842

 
4,865

 
1987
 
 5-40 yrs.

104

Table of Contents

HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
 
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
 
 
 
 
 
 
Initial Costs
 
Costs Capitalized
Subsequent to
Acquisition
 
Gross Value at Close of Period
 
 
 
 
 
 
Description
 
Property
Type
 
2018
Encumbrance
 
Land
 
Bldg &
Improv
 
Land
 
Bldg &
Improv
 
Land
 
Bldg &
Improv
 
Total
Assets (1)
 
Accumulated
Depreciation
 
Date of
Construction
 
Life on
Which
Depreciation
is
Calculated
Harpeth On The Green IV
 
Office
 
 
 
1,713

 
6,842

 

 
2,290

 
1,713

 
9,132

 
10,845

 
4,752

 
1989
 
 5-40 yrs.
Harpeth On The Green V
 
Office
 
 
 
662

 

 
197

 
5,602

 
859

 
5,602

 
6,461

 
3,170

 
1998
 
 5-40 yrs.
Hickory Trace
 
Office
 
 
 
1,164

 

 
164

 
5,085

 
1,328

 
5,085

 
6,413

 
1,981

 
2001
 
5-40 yrs.
Highwoods Plaza I
 
Office
 
 
 
1,552

 

 
307

 
8,854

 
1,859

 
8,854

 
10,713

 
4,936

 
1996
 
 5-40 yrs.
Highwoods Plaza II
 
Office
 
 
 
1,448

 

 
307

 
9,033

 
1,755

 
9,033

 
10,788

 
4,151

 
1997
 
 5-40 yrs.
Seven Springs I
 
Office
 
 
 
2,076

 

 
592

 
13,268

 
2,668

 
13,268

 
15,936

 
5,413

 
2002
 
 5-40 yrs.
SouthPointe
 
Office
 
 
 
1,655

 

 
310

 
7,657

 
1,965

 
7,657

 
9,622

 
3,523

 
1998
 
 5-40 yrs.
Ramparts
 
Office
 
 
 
2,394

 
12,806

 

 
7,425

 
2,394

 
20,231

 
22,625

 
7,209

 
1986
 
 5-40 yrs.
Westwood South
 
Office
 
 
 
2,106

 

 
382

 
11,447

 
2,488

 
11,447

 
13,935

 
4,916

 
1999
 
 5-40 yrs.
100 Winners Circle
 
Office
 
 
 
1,497

 
7,258

 

 
2,332

 
1,497

 
9,590

 
11,087

 
4,972

 
1987
 
 5-40 yrs.
The Pinnacle at Symphony Place
 
Office
 
97,179

 

 
141,469

 

 
6,093

 

 
147,562

 
147,562

 
28,156

 
2010
 
 5-40 yrs.
Seven Springs East (LifePoint)
 
Office
 
 
 
2,525

 
37,587

 

 
143

 
2,525

 
37,730

 
40,255

 
6,111

 
2013
 
 5-40 yrs.
The Shops at Seven Springs
 
Office
 
 
 
803

 
8,223

 

 
526

 
803

 
8,749

 
9,552

 
1,869

 
2013
 
 5-40 yrs.
Seven Springs West
 
Office
 
 
 
2,439

 
51,306

 

 
2,016

 
2,439

 
53,322

 
55,761

 
4,292

 
2016
 
 5-40 yrs.
Seven Springs II
 
Office
 
 
 
2,356

 
30,048

 

 
800

 
2,356

 
30,848

 
33,204

 
1,708

 
2017
 
 5-40 yrs.
Bridgestone Tower
 
Office
 
 
 
15,639

 
169,392

 

 
155

 
15,639

 
169,547

 
185,186

 
6,682

 
2017
 
 5-40 yrs.
5501 Virginia Way
 
Office
 
 
 

 

 
4,534

 
18,714

 
4,534

 
18,714

 
23,248

 
14

 
2018
 
 5-40 yrs.
1100 Broadway - Land
 
Office
 
 
 

 

 
26,137

 

 
26,137

 

 
26,137

 

 
N/A
 
 N/A
Church St/Wine Glass - Land
 
Office
 
 
 

 

 
30,713

 

 
30,713

 

 
30,713

 

 
N/A
 
 N/A
Orlando, FL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Berkshire at MetroCenter
 
Office
 
 
 
1,265

 

 
672

 
10,991

 
1,937

 
10,991

 
12,928

 
3,174

 
2007
 
 5-40 yrs.
Capital Plaza Three - Land
 
Office
 
 
 
2,994

 

 
18

 

 
3,012

 

 
3,012

 

 
N/A
 
 N/A
Eola Park - Land
 
Office
 
 
 
2,027

 

 

 

 
2,027

 

 
2,027

 

 
N/A
 
 N/A
Oxford - Land
 
Office
 
 
 
1,100

 

 
51

 
1,107

 
1,151

 
1,107

 
2,258

 
14

 
N/A
 
 5-40 yrs.
Stratford - Land
 
Office
 
 
 
2,034

 

 
(148
)
 

 
1,886

 

 
1,886

 

 
N/A
 
 N/A
Windsor at MetroCenter
 
Office
 
 
 

 

 
2,060

 
9,380

 
2,060

 
9,380

 
11,440

 
3,220

 
2002
 
 5-40 yrs.
The 1800 Eller Drive Building
 
Office
 
 
 

 
9,851

 

 
3,334

 

 
13,185

 
13,185

 
8,313

 
1983
 
 5-40 yrs.
Seaside Plaza
 
Office
 
 
 
3,893

 
29,541

 

 
6,885

 
3,893

 
36,426

 
40,319

 
6,912

 
1982
 
 5-40 yrs.
Capital Plaza Two
 
Office
 
 
 
4,346

 
43,394

 

 
5,954

 
4,346

 
49,348

 
53,694

 
8,601

 
1999
 
 5-40 yrs.
Capital Plaza One
 
Office
 
 
 
3,482

 
27,321

 

 
5,917

 
3,482

 
33,238

 
36,720

 
5,183

 
1975
 
 5-40 yrs.
Landmark Center Two
 
Office
 
 
 
4,743

 
22,031

 

 
8,090

 
4,743

 
30,121

 
34,864

 
6,234

 
1985
 
 5-40 yrs.

105

Table of Contents

HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
 
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
 
 
 
 
 
 
Initial Costs
 
Costs Capitalized
Subsequent to
Acquisition
 
Gross Value at Close of Period
 
 
 
 
 
 
Description
 
Property
Type
 
2018
Encumbrance
 
Land
 
Bldg &
Improv
 
Land
 
Bldg &
Improv
 
Land
 
Bldg &
Improv
 
Total
Assets (1)
 
Accumulated
Depreciation
 
Date of
Construction
 
Life on
Which
Depreciation
is
Calculated
Landmark Center One
 
Office
 
 
 
6,207

 
22,655

 

 
8,599

 
6,207

 
31,254

 
37,461

 
5,742

 
1983
 
 5-40 yrs.
300 South Orange
 
Office
 
 
 
3,490

 
56,079

 

 
7,178

 
3,490

 
63,257

 
66,747

 
8,749

 
2000
 
 5-40 yrs.
Eola Centre
 
Office
 
 
 
3,758

 
11,160

 

 
5,162

 
3,758

 
16,322

 
20,080

 
1,981

 
1969
 
 5-40 yrs.
Greensboro, NC
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6348 Burnt Poplar Road
 
Industrial
 
 
 
724

 
2,900

 

 
327

 
724

 
3,227

 
3,951

 
1,881

 
1990
 
 5-40 yrs.
6350 Burnt Poplar Road
 
Industrial
 
 
 
341

 
1,374

 

 
761

 
341

 
2,135

 
2,476

 
1,027

 
1992
 
 5-40 yrs.
420 Gallimore Dairy Road
 
Office
 
 
 
379

 
1,516

 

 
1,067

 
379

 
2,583

 
2,962

 
1,312

 
1990
 
 5-40 yrs.
418 Gallimore Dairy Road
 
Office
 
 
 
462

 
1,849

 

 
523

 
462

 
2,372

 
2,834

 
1,356

 
1986
 
 5-40 yrs.
416 Gallimore Dairy Road
 
Office
 
 
 
322

 
1,293

 

 
561

 
322

 
1,854

 
2,176

 
989

 
1986
 
 5-40 yrs.
7031 Albert Pick Road
 
Office
 
 
 
510

 
2,921

 

 
2,253

 
510

 
5,174

 
5,684

 
2,684

 
1986
 
 5-40 yrs.
7029 Albert Pick Road
 
Office
 
 
 
739

 
3,237

 

 
1,601

 
739

 
4,838

 
5,577

 
2,542

 
1988
 
 5-40 yrs.
7025 Albert Pick Road
 
Office
 
 
 
2,393

 
9,576

 

 
5,897

 
2,393

 
15,473

 
17,866

 
8,109

 
1990
 
 5-40 yrs.
7027 Albert Pick Road
 
Office
 
 
 
850

 

 
699

 
5,293

 
1,549

 
5,293

 
6,842

 
2,363

 
1997
 
 5-40 yrs.
7009 Albert Pick Road
 
Industrial
 
 
 
224

 
1,068

 

 
263

 
224

 
1,331

 
1,555

 
750

 
1990
 
 5-40 yrs.
426 Gallimore Dairy Road
 
Office
 
 
 
465

 

 
380

 
1,056

 
845

 
1,056

 
1,901

 
470

 
1996
 
 5-40 yrs.
422 Gallimore Dairy Road
 
Industrial
 
 
 
145

 
1,081

 

 
378

 
145

 
1,459

 
1,604

 
908

 
1990
 
 5-40 yrs.
406 Gallimore Dairy Road
 
Office
 
 
 
265

 

 
270

 
883

 
535

 
883

 
1,418

 
391

 
1996
 
 5-40 yrs.
7021 Albert Pick Road
 
Industrial
 
 
 
237

 
1,103

 

 
258

 
237

 
1,361

 
1,598

 
795

 
1985
 
 5-40 yrs.
7019 Albert Pick Road
 
Industrial
 
 
 
192

 
946

 

 
365

 
192

 
1,311

 
1,503

 
799

 
1985
 
 5-40 yrs.
7015 Albert Pick Road
 
Industrial
 
 
 
305

 
1,219

 

 
227

 
305

 
1,446

 
1,751

 
847

 
1985
 
 5-40 yrs.
7017 Albert Pick Road
 
Industrial
 
 
 
225

 
928

 

 
409

 
225

 
1,337

 
1,562

 
741

 
1985
 
 5-40 yrs.
7011 Albert Pick Road
 
Industrial
 
 
 
171

 
777

 

 
320

 
171

 
1,097

 
1,268

 
631

 
1990
 
 5-40 yrs.
424 Gallimore Dairy Road
 
Office
 
 
 
271

 

 
239

 
1,038

 
510

 
1,038

 
1,548

 
481

 
1997
 
 5-40 yrs.
410 Gallimore Dairy Road
 
Industrial
 
 
 
356

 
1,613

 

 
805

 
356

 
2,418

 
2,774

 
1,382

 
1985
 
 5-40 yrs.
412 Gallimore Dairy Road
 
Industrial
 
 
 
374

 
1,523

 

 
578

 
374

 
2,101

 
2,475

 
1,224

 
1985
 
 5-40 yrs.
408 Gallimore Dairy Road
 
Industrial
 
 
 
341

 
1,486

 

 
648

 
341

 
2,134

 
2,475

 
1,092

 
1986
 
 5-40 yrs.
414 Gallimore Dairy Road
 
Industrial
 
 
 
659

 
2,676

 

 
933

 
659

 
3,609

 
4,268

 
2,042

 
1988
 
 5-40 yrs.
237 Burgess Road
 
Industrial
 
 
 
860

 
2,919

 

 
926

 
860

 
3,845

 
4,705

 
2,039

 
1986
 
 5-40 yrs.
235 Burgess Road
 
Industrial
 
 
 
1,302

 
4,392

 

 
1,344

 
1,302

 
5,736

 
7,038

 
3,058

 
1987
 
 5-40 yrs.
241 Burgess Road
 
Industrial
 
 
 
450

 
1,517

 

 
843

 
450

 
2,360

 
2,810

 
1,289

 
1988
 
 5-40 yrs.
243 Burgess Road
 
Industrial
 
 
 
452

 
1,514

 

 
489

 
452

 
2,003

 
2,455

 
1,006

 
1988
 
 5-40 yrs.

106

Table of Contents

HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
 
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
 
 
 
 
 
 
Initial Costs
 
Costs Capitalized
Subsequent to
Acquisition
 
Gross Value at Close of Period
 
 
 
 
 
 
Description
 
Property
Type
 
2018
Encumbrance
 
Land
 
Bldg &
Improv
 
Land
 
Bldg &
Improv
 
Land
 
Bldg &
Improv
 
Total
Assets (1)
 
Accumulated
Depreciation
 
Date of
Construction
 
Life on
Which
Depreciation
is
Calculated
496 Gallimore Dairy Road
 
Industrial
 
 
 
546

 

 

 
3,041

 
546

 
3,041

 
3,587

 
1,219

 
1998
 
 5-40 yrs.
494 Gallimore Dairy Road
 
Industrial
 
 
 
749

 

 

 
3,124

 
749

 
3,124

 
3,873

 
1,366

 
1999
 
 5-40 yrs.
486 Gallimore Dairy Road
 
Industrial
 
 
 
603

 

 

 
3,385

 
603

 
3,385

 
3,988

 
1,351

 
1999
 
 5-40 yrs.
488 Gallimore Dairy Road
 
Industrial
 
 
 
499

 

 

 
2,374

 
499

 
2,374

 
2,873

 
1,029

 
1999
 
 5-40 yrs.
490 Gallimore Dairy Road
 
Industrial
 
 
 
1,733

 

 

 
4,424

 
1,733

 
4,424

 
6,157

 
2,032

 
1999
 
 5-40 yrs.
Brigham Road - Land
 
Industrial
 
 
 
7,059

 

 
(5,510
)
 

 
1,549

 

 
1,549

 

 
N/A
 
 N/A
651 Brigham Road
 
Industrial
 
 
 
453

 

 
360

 
2,931

 
813

 
2,931

 
3,744

 
1,240

 
2002
 
 5-40 yrs.
657 Brigham Road
 
Industrial
 
 
 
2,733

 

 
881

 
10,820

 
3,614

 
10,820

 
14,434

 
3,390

 
2006
 
 5-40 yrs.
653 Brigham Road
 
Industrial
 
 
 
814

 

 

 
3,603

 
814

 
3,603

 
4,417

 
993

 
2007
 
 5-40 yrs.
1501 Highwoods Boulevard
 
Office
 
 
 
1,476

 

 

 
8,957

 
1,476

 
8,957

 
10,433

 
3,485

 
2001
 
 5-40 yrs.
Jefferson Pilot - Land
 
Office
 
 
 
11,759

 

 
(4,311
)
 

 
7,448

 

 
7,448

 

 
N/A
 
 N/A
4200 Tudor Lane
 
Industrial
 
 
 
515

 

 
383

 
2,915

 
898

 
2,915

 
3,813

 
1,379

 
1996
 
 5-40 yrs.
4224 Tudor Lane
 
Industrial
 
 
 
435

 

 
288

 
2,445

 
723

 
2,445

 
3,168

 
1,145

 
1996
 
 5-40 yrs.
7023 Albert Pick Road
 
Office
 
 
 
834

 
3,459

 

 
1,146

 
834

 
4,605

 
5,439

 
2,545

 
1989
 
 5-40 yrs.
370 Knollwood Street
 
Office
 
 
 
1,826

 
7,495

 

 
4,134

 
1,826

 
11,629

 
13,455

 
6,422

 
1994
 
 5-40 yrs.
380 Knollwood Street
 
Office
 
 
 
2,989

 
12,029

 

 
5,301

 
2,989

 
17,330

 
20,319

 
9,223

 
1990
 
 5-40 yrs.
1126 North Church Street
 
Office
 
 
 
2,734

 
9,129

 

 
1,499

 
2,734

 
10,628

 
13,362

 
1,791

 
2003
 
 5-40 yrs.
1130 North Church Street
 
Office
 
 
 
2,376

 
5,451

 

 
(629
)
 
2,376

 
4,822

 
7,198

 
790

 
2007
 
 5-40 yrs.
1132 North Church Street
 
Office
 
 
 
925

 
4,551

 

 
98

 
925

 
4,649

 
5,574

 
1,158

 
2008
 
 5-40 yrs.
628 Green Valley Road
 
Office
 
 
 
2,906

 
12,141

 

 
1,527

 
2,906

 
13,668

 
16,574

 
2,270

 
1998
 
 5-40 yrs.
701 Green Valley Road
 
Office
 
 
 
3,787

 
7,719

 

 
1,183

 
3,787

 
8,902

 
12,689

 
1,751

 
1996
 
 5-40 yrs.
661 Brigham Road
 
Industrial
 
 
 
890

 
5,512

 

 
548

 
890

 
6,060

 
6,950

 
444

 
2016
 
 5-40 yrs.
655 Brigham Road
 
Industrial
 
 
 
899

 
6,538

 

 

 
899

 
6,538

 
7,437

 
303

 
2017
 
 5-40 yrs.
Pittsburgh, PA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One PPG Place
 
Office
 
 
 
9,819

 
107,643

 

 
45,077

 
9,819

 
152,720

 
162,539

 
38,031

 
1983-1985
 
 5-40 yrs.
Two PPG Place
 
Office
 
 
 
2,302

 
10,978

 

 
9,732

 
2,302

 
20,710

 
23,012

 
3,967

 
1983-1985
 
 5-40 yrs.
Three PPG Place
 
Office
 
 
 
501

 
2,923

 

 
4,166

 
501

 
7,089

 
7,590

 
1,905

 
1983-1985
 
 5-40 yrs.
Four PPG Place
 
Office
 
 
 
620

 
3,239

 

 
2,886

 
620

 
6,125

 
6,745

 
1,515

 
1983-1985
 
 5-40 yrs.
Five PPG Place
 
Office
 
 
 
803

 
4,924

 

 
1,950

 
803

 
6,874

 
7,677

 
2,080

 
1983-1985
 
 5-40 yrs.
Six PPG Place
 
Office
 
 
 
3,353

 
25,602

 

 
13,525

 
3,353

 
39,127

 
42,480

 
7,566

 
1983-1985
 
 5-40 yrs.
EQT Plaza
 
Office
 
 
 
16,457

 
83,812

 

 
12,943

 
16,457

 
96,755

 
113,212

 
20,859

 
1987
 
 5-40 yrs.

107

Table of Contents

HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
 
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
 
 
 
 
 
 
Initial Costs
 
Costs Capitalized
Subsequent to
Acquisition
 
Gross Value at Close of Period
 
 
 
 
 
 
Description
 
Property
Type
 
2018
Encumbrance
 
Land
 
Bldg &
Improv
 
Land
 
Bldg &
Improv
 
Land
 
Bldg &
Improv
 
Total
Assets (1)
 
Accumulated
Depreciation
 
Date of
Construction
 
Life on
Which
Depreciation
is
Calculated
Raleigh, NC
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3600 Glenwood Avenue
 
Office
 
 
 

 
10,994

 

 
4,493

 

 
15,487

 
15,487

 
8,798

 
1986
 
 5-40 yrs.
3737 Glenwood Avenue
 
Office
 
 
 

 

 
318

 
16,391

 
318

 
16,391

 
16,709

 
7,641

 
1999
 
 5-40 yrs.
4800 North Park
 
Office
 
 
 
2,678

 
17,630

 

 
4,977

 
2,678

 
22,607

 
25,285

 
14,279

 
1985
 
 5-40 yrs.
5000 North Park
 
Office
 
 
 
1,010

 
4,612

 
(49
)
 
3,214

 
961

 
7,826

 
8,787

 
3,952

 
1980
 
 5-40 yrs.
801 Raleigh Corporate Center
 
Office
 
 
 
828

 

 
272

 
10,657

 
1,100

 
10,657

 
11,757

 
4,154

 
2002
 
 5-40 yrs.
2500 Blue Ridge Road
 
Office
 
 
 
722

 
4,606

 

 
1,412

 
722

 
6,018

 
6,740

 
3,423

 
1982
 
 5-40 yrs.
2418 Blue Ridge Road
 
Office
 
 
 
462

 
1,410

 

 
764

 
462

 
2,174

 
2,636

 
1,404

 
1988
 
 5-40 yrs.
Cape Fear
 
Office
 
 
 
131

 
1,630

 
(2
)
 
(836
)
 
129

 
794

 
923

 
392

 
1979
 
 5-40 yrs.
Catawba
 
Office
 
 
 
125

 
1,635

 
(2
)
 
(1,416
)
 
123

 
219

 
342

 
123

 
1980
 
 5-40 yrs.
2000 CentreGreen
 
Office
 
 
 
1,529

 

 
(391
)
 
11,011

 
1,138

 
11,011

 
12,149

 
5,775

 
2000
 
 5-40 yrs.
4000 CentreGreen
 
Office
 
 
 
1,653

 

 
(389
)
 
10,316

 
1,264

 
10,316

 
11,580

 
4,368

 
2001
 
 5-40 yrs.
5000 CentreGreen
 
Office
 
 
 
1,291

 
34,572

 

 

 
1,291

 
34,572

 
35,863

 
1,534

 
2017
 
 5-40 yrs.
3000 CentreGreen
 
Office
 
 
 
1,779

 

 
(397
)
 
13,966

 
1,382

 
13,966

 
15,348

 
4,072

 
2002
 
 5-40 yrs.
1000 CentreGreen
 
Office
 
 
 
1,280

 

 
55

 
10,851

 
1,335

 
10,851

 
12,186

 
2,782

 
2008
 
 5-40 yrs.
Cottonwood
 
Office
 
 
 
609

 
3,244

 

 
463

 
609

 
3,707

 
4,316

 
2,253

 
1983
 
 5-40 yrs.
Dogwood
 
Office
 
 
 
766

 
2,769

 

 
248

 
766

 
3,017

 
3,783

 
1,781

 
1983
 
 5-40 yrs.
GlenLake - Land
 
Office
 
 
 
13,003

 

 
(8,359
)
 
114

 
4,644

 
114

 
4,758

 
50

 
N/A
 
5-40 yrs.
GlenLake One
 
Office
 
 
 
924

 

 
1,324

 
21,544

 
2,248

 
21,544

 
23,792

 
8,598

 
2002
 
 5-40 yrs.
GlenLake Four
 
Office
 
 
 
1,659

 

 
493

 
21,032

 
2,152

 
21,032

 
23,184

 
7,142

 
2006
 
 5-40 yrs.
GlenLake Six
 
Office
 
 
 
941

 

 
(365
)
 
20,088

 
576

 
20,088

 
20,664

 
5,380

 
2008
 
 5-40 yrs.
701 Raleigh Corporate Center
 
Office
 
 
 
1,304

 

 
540

 
15,213

 
1,844

 
15,213

 
17,057

 
7,471

 
1996
 
 5-40 yrs.
Highwoods Centre
 
Office
 
 
 
531

 

 
(267
)
 
8,028

 
264

 
8,028

 
8,292

 
3,810

 
1998
 
 5-40 yrs.
Inveresk Parcel 2 - Land
 
Office
 
 
 
657

 

 
38

 
103

 
695

 
103

 
798

 
9

 
N/A
 
5-40 yrs.
4201 Lake Boone Trail
 
Office
 
 
 
1,450

 
6,311

 

 
634

 
1,450

 
6,945

 
8,395

 
1,625

 
1998
 
5-40 yrs.
4620 Creekstone Drive
 
Office
 
 
 
149

 

 
107

 
3,091

 
256

 
3,091

 
3,347

 
1,325

 
2001
 
 5-40 yrs.
4825 Creekstone Drive
 
Office
 
 
 
398

 

 
293

 
11,325

 
691

 
11,325

 
12,016

 
5,321

 
1999
 
 5-40 yrs.
Pamlico
 
Office
 
 
 
289

 

 

 
10,478

 
289

 
10,478

 
10,767

 
8,166

 
1980
 
 5-40 yrs.
Progress Center Renovation
 
Office
 
 
 

 

 

 
3

 

 
3

 
3

 
2

 
2003
 
 5-40 yrs.
751 Corporate Center
 
Office
 
 
 
1,211

 

 
1,454

 
15,520

 
2,665

 
15,520

 
18,185

 
257

 
2018
 
 5-40 yrs.
PNC Plaza
 
Office
 
 
 
1,206

 

 

 
70,992

 
1,206

 
70,992

 
72,198

 
23,054

 
2008
 
5-40 yrs.

108

Table of Contents

HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
 
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
 
 
 
 
 
 
Initial Costs
 
Costs Capitalized
Subsequent to
Acquisition
 
Gross Value at Close of Period
 
 
 
 
 
 
Description
 
Property
Type
 
2018
Encumbrance
 
Land
 
Bldg &
Improv
 
Land
 
Bldg &
Improv
 
Land
 
Bldg &
Improv
 
Total
Assets (1)
 
Accumulated
Depreciation
 
Date of
Construction
 
Life on
Which
Depreciation
is
Calculated
4301 Lake Boone Trail
 
Office
 
 
 
878

 
3,730

 

 
2,269

 
878

 
5,999

 
6,877

 
3,535

 
1990
 
5-40 yrs.
4207 Lake Boone Trail
 
Office
 
 
 
362

 
1,818

 

 
1,421

 
362

 
3,239

 
3,601

 
1,791

 
1993
 
5-40 yrs.
2301 Rexwoods Drive
 
Office
 
 
 
919

 
2,816

 

 
1,759

 
919

 
4,575

 
5,494

 
2,413

 
1992
 
5-40 yrs.
4325 Lake Boone Trail
 
Office
 
 
 
586

 

 

 
4,465

 
586

 
4,465

 
5,051

 
2,159

 
1995
 
5-40 yrs.
2300 Rexwoods Drive
 
Office
 
 
 
1,301

 

 
184

 
6,515

 
1,485

 
6,515

 
8,000

 
3,161

 
1998
 
5-40 yrs.
4709 Creekstone Drive
 
Office
 
 
 
469

 
4,038

 
23

 
5,277

 
492

 
9,315

 
9,807

 
2,423

 
1987
 
5-40 yrs.
4700 Six Forks Road
 
Office
 
 
 
666

 
2,665

 

 
1,427

 
666

 
4,092

 
4,758

 
2,328

 
1982
 
5-40 yrs.
4700 Homewood Court
 
Office
 
 
 
1,086

 
4,533

 

 
2,106

 
1,086

 
6,639

 
7,725

 
3,488

 
1983
 
5-40 yrs.
4800 Six Forks Road
 
Office
 
 
 
862

 
4,411

 

 
2,391

 
862

 
6,802

 
7,664

 
3,803

 
1987
 
5-40 yrs.
Smoketree Tower
 
Office
 
 
 
2,353

 
11,743

 

 
6,967

 
2,353

 
18,710

 
21,063

 
9,794

 
1984
 
5-40 yrs.
4601 Creekstone Drive
 
Office
 
 
 
255

 

 
217

 
6,288

 
472

 
6,288

 
6,760

 
3,176

 
1997
 
5-40 yrs.
Weston - Land
 
Office
 
 
 
22,771

 

 
(19,894
)
 

 
2,877

 

 
2,877

 

 
N/A
 
N/A
4625 Creekstone Drive
 
Office
 
 
 
458

 

 
268

 
6,410

 
726

 
6,410

 
7,136

 
3,440

 
1995
 
5-40 yrs.
11000 Weston Parkway
 
Office
 
 
 
2,651

 
18,850

 

 
4,934

 
2,651

 
23,784

 
26,435

 
3,106

 
1998
 
5-40 yrs.
GlenLake Five
 
Office
 
 
 
2,263

 
30,264

 

 
3,530

 
2,263

 
33,794

 
36,057

 
5,482

 
2014
 
5-40 yrs.
11800 Weston Parkway
 
Office
 
 
 
826

 
13,188

 

 
21

 
826

 
13,209

 
14,035

 
1,831

 
2014
 
5-40 yrs.
CentreGreen Café
 
Office
 
 
 
41

 
3,509

 

 

 
41

 
3,509

 
3,550

 
360

 
2014
 
5-40 yrs.
CentreGreen Fitness Center
 
Office
 
 
 
27

 
2,322

 

 

 
27

 
2,322

 
2,349

 
238

 
2014
 
5-40 yrs.
One City Plaza
 
Office
 
 
 
11,288

 
68,375

 

 
23,766

 
11,288

 
92,141

 
103,429

 
12,567

 
1986
 
5-40 yrs.
Edison - Land
 
Office
 
 
 
5,984

 

 
2,494

 

 
8,478

 

 
8,478

 

 
N/A
 
N/A
Charter Square
 
Office
 
 
 
7,267

 
65,881

 

 
4,809

 
7,267

 
70,690

 
77,957

 
5,067

 
2015
 
5-40 yrs.
MetLife Global Technology Campus
 
Office
 
 
 
17,044

 
88,137

 

 
345

 
17,044

 
88,482

 
105,526

 
10,558

 
2015
 
5-40 yrs.
Other Property
 
Other
 
 
 
39,376

 
20,868

 
(32,414
)
 
(106
)
 
6,962

 
20,762

 
27,724

 
11,145

 
N/A
 
5-40 yrs.
Richmond, VA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4900 Cox Road
 
Office
 
 
 
1,324

 
5,311

 
15

 
3,110

 
1,339

 
8,421

 
9,760

 
4,717

 
1991
 
 5-40 yrs.
Colonnade Building
 
Office
 
 
 
1,364

 
6,105

 

 
2,461

 
1,364

 
8,566

 
9,930

 
3,332

 
2003
 
 5-40 yrs.
Dominion Place - Pitts Parcel - Land
 
Office
 
 
 
1,101

 

 
(343
)
 

 
758

 

 
758

 

 
N/A
 
 N/A
Markel 4521
 
Office
 
 
 
1,581

 
13,299

 
168

 
(879
)
 
1,749

 
12,420

 
14,169

 
5,501

 
1999
 
 5-40 yrs.
Hamilton Beach
 
Office
 
 
 
1,086

 
4,345

 
10

 
2,722

 
1,096

 
7,067

 
8,163

 
3,269

 
1986
 
 5-40 yrs.
Highwoods Commons
 
Office
 
 
 
521

 

 
458

 
4,276

 
979

 
4,276

 
5,255

 
1,875

 
1999
 
 5-40 yrs.
Highwoods One
 
Office
 
 
 
1,688

 

 
22

 
14,330

 
1,710

 
14,330

 
16,040

 
6,771

 
1996
 
 5-40 yrs.

109

Table of Contents

HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
 
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
 
 
 
 
 
 
Initial Costs
 
Costs Capitalized
Subsequent to
Acquisition
 
Gross Value at Close of Period
 
 
 
 
 
 
Description
 
Property
Type
 
2018
Encumbrance
 
Land
 
Bldg &
Improv
 
Land
 
Bldg &
Improv
 
Land
 
Bldg &
Improv
 
Total
Assets (1)
 
Accumulated
Depreciation
 
Date of
Construction
 
Life on
Which
Depreciation
is
Calculated
Highwoods Two
 
Office
 
 
 
786

 

 
226

 
9,632

 
1,012

 
9,632

 
10,644

 
3,114

 
1997
 
 5-40 yrs.
Highwoods Five
 
Office
 
 
 
783

 

 
11

 
7,478

 
794

 
7,478

 
8,272

 
3,115

 
1998
 
 5-40 yrs.
Highwoods Plaza
 
Office
 
 
 
909

 

 
187

 
5,437

 
1,096

 
5,437

 
6,533

 
2,447

 
2000
 
 5-40 yrs.
Innslake Center
 
Office
 
 
 
845

 

 
195

 
7,892

 
1,040

 
7,892

 
8,932

 
2,874

 
2001
 
 5-40 yrs.
Highwoods Centre
 
Office
 
 
 
1,205

 
4,825

 

 
1,215

 
1,205

 
6,040

 
7,245

 
3,230

 
1990
 
 5-40 yrs.
Markel 4501
 
Office
 
 
 
1,300

 
13,259

 
213

 
(3,720
)
 
1,513

 
9,539

 
11,052

 
3,382

 
1998
 
 5-40 yrs.
4600 Cox Road
 
Office
 
 
 
1,700

 
17,081

 
169

 
(3,599
)
 
1,869

 
13,482

 
15,351

 
4,757

 
1989
 
 5-40 yrs.
North Park
 
Office
 
 
 
2,163

 
8,659

 
6

 
2,940

 
2,169

 
11,599

 
13,768

 
6,170

 
1989
 
 5-40 yrs.
North Shore Commons I
 
Office
 
 
 
951

 

 
17

 
12,645

 
968

 
12,645

 
13,613

 
5,536

 
2002
 
 5-40 yrs.
North Shore Commons II
 
Office
 
 
 
2,067

 

 
(89
)
 
11,074

 
1,978

 
11,074

 
13,052

 
3,345

 
2007
 
 5-40 yrs.
North Shore Commons C - Land
 
Office
 
 
 
1,497

 

 
15

 

 
1,512

 

 
1,512

 

 
N/A
 
 N/A
North Shore Commons D - Land
 
Office
 
 
 
1,261

 

 

 

 
1,261

 

 
1,261

 

 
N/A
 
N/A
Nuckols Corner - Land
 
Office
 
 
 
1,259

 

 
203

 

 
1,462

 

 
1,462

 

 
N/A
 
N/A
One Shockoe Plaza
 
Office
 
 
 

 

 
356

 
20,560

 
356

 
20,560

 
20,916

 
8,690

 
1996
 
 5-40 yrs.
Pavilion - Land
 
Office
 
 
 
181

 
46

 
20

 
(46
)
 
201

 

 
201

 

 
N/A
 
N/A
Lake Brook Commons
 
Office
 
 
 
1,600

 
8,864

 
21

 
2,211

 
1,621

 
11,075

 
12,696

 
4,446

 
1996
 
 5-40 yrs.
Sadler & Cox - Land
 
Office
 
 
 
1,535

 

 
343

 

 
1,878

 

 
1,878

 

 
N/A
 
 N/A
Highwoods Three
 
Office
 
 
 
1,918

 

 
358

 
11,319

 
2,276

 
11,319

 
13,595

 
3,486

 
2005
 
 5-40 yrs.
Stony Point VI (Virginia Urology)
 
Office
 
 
 
1,841

 

 
84

 
25,638

 
1,925

 
25,638

 
27,563

 
294

 
2018
 
 5-40 yrs.
Stony Point I
 
Office
 
 
 
1,384

 
11,630

 
(267
)
 
4,165

 
1,117

 
15,795

 
16,912

 
7,823

 
1990
 
 5-40 yrs.
Stony Point II
 
Office
 
 
 
1,240

 

 
103

 
12,643

 
1,343

 
12,643

 
13,986

 
5,637

 
1999
 
 5-40 yrs.
Stony Point III
 
Office
 
 
 
995

 

 

 
10,408

 
995

 
10,408

 
11,403

 
4,494

 
2002
 
 5-40 yrs.
Stony Point IV
 
Office
 
 
 
955

 

 

 
11,052

 
955

 
11,052

 
12,007

 
3,616

 
2006
 
 5-40 yrs.
Virginia Mutual
 
Office
 
 
 
1,301

 
6,036

 
15

 
1,492

 
1,316

 
7,528

 
8,844

 
3,512

 
1996
 
 5-40 yrs.
Waterfront Plaza
 
Office
 
 
 
585

 
2,347

 
8

 
1,946

 
593

 
4,293

 
4,886

 
1,776

 
1988
 
 5-40 yrs.
Innsbrook Centre
 
Office
 
 
 
914

 
8,249

 

 
1,016

 
914

 
9,265

 
10,179

 
3,561

 
1987
 
 5-40 yrs.
Tampa, FL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Meridian Three
 
Office
 
 
 
2,673

 
16,470

 

 
6,198

 
2,673

 
22,668

 
25,341

 
5,928

 
1989
 
5-40 yrs.
Bayshore Place
 
Office
 
 
 
2,276

 
11,817

 

 
3,834

 
2,276

 
15,651

 
17,927

 
6,498

 
1990
 
 5-40 yrs.
5525 Gray Street
 
Office
 
 
 
4,054

 

 
406

 
28,198

 
4,460

 
28,198

 
32,658

 
11,808

 
2005
 
 5-40 yrs.
Highwoods Preserve Building V
 
Office
 
 
 
881

 

 

 
23,684

 
881

 
23,684

 
24,565

 
10,835

 
2001
 
 5-40 yrs.

110

Table of Contents

HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP
 
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
 
 
 
 
 
 
Initial Costs
 
Costs Capitalized
Subsequent to
Acquisition
 
Gross Value at Close of Period
 
 
 
 
 
 
Description
 
Property
Type
 
2018
Encumbrance
 
Land
 
Bldg &
Improv
 
Land
 
Bldg &
Improv
 
Land
 
Bldg &
Improv
 
Total
Assets (1)
 
Accumulated
Depreciation
 
Date of
Construction
 
Life on
Which
Depreciation
is
Calculated
Highwoods Bay Center I
 
Office
 
 
 
3,565

 

 
(64
)
 
36,529

 
3,501

 
36,529

 
40,030

 
10,116

 
2007
 
 5-40 yrs.
HIW Bay Center II - Land
 
Office
 
 
 
3,482

 

 

 

 
3,482

 

 
3,482

 

 
N/A
 
N/A
Highwoods Preserve Building VII
 
Office
 
 
 
790

 

 

 
12,498

 
790

 
12,498

 
13,288

 
3,678

 
2007
 
 5-40 yrs.
HIW Preserve VII Garage
 
Office
 
 
 

 

 

 
6,797

 

 
6,797

 
6,797

 
2,023

 
2007
 
 5-40 yrs.
Horizon
 
Office
 
 
 

 
6,257

 

 
3,807

 

 
10,064

 
10,064

 
4,633

 
1980
 
 5-40 yrs.
LakePointe One
 
Office
 
 
 
2,106

 
89

 

 
44,999

 
2,106

 
45,088

 
47,194

 
23,281

 
1986
 
 5-40 yrs.
LakePointe Two
 
Office
 
 
 
2,000

 
15,848

 
672

 
15,689

 
2,672

 
31,537

 
34,209

 
14,301

 
1999
 
 5-40 yrs.
Lakeside
 
Office
 
 
 

 
7,369

 

 
7,139

 

 
14,508

 
14,508

 
6,023

 
1978
 
 5-40 yrs.
Lakeside/Parkside Garage
 
Office
 
 
 

 

 

 
5,630

 

 
5,630

 
5,630

 
1,972

 
2004
 
 5-40 yrs.
One Harbour Place
 
Office
 
 
 
2,016

 
25,252

 

 
12,157

 
2,016

 
37,409

 
39,425

 
15,625

 
1985
 
 5-40 yrs.
Parkside
 
Office
 
 
 

 
9,407

 

 
4,049

 

 
13,456

 
13,456

 
7,384

 
1979
 
 5-40 yrs.
Pavilion
 
Office
 
 
 

 
16,394

 

 
4,355

 

 
20,749

 
20,749

 
10,942

 
1982
 
 5-40 yrs.
Pavilion Parking Garage
 
Office
 
 
 

 

 

 
5,734

 

 
5,734

 
5,734

 
2,734

 
1999
 
 5-40 yrs.
Spectrum
 
Office
 
 
 
1,454

 
14,502

 

 
6,806

 
1,454

 
21,308

 
22,762

 
12,289

 
1984
 
 5-40 yrs.
Tower Place
 
Office
 
 
 
3,218

 
19,898

 

 
4,294

 
3,218

 
24,192

 
27,410

 
13,046

 
1988
 
 5-40 yrs.
Westshore Square
 
Office
 
 
 
1,126

 
5,186

 

 
1,143

 
1,126

 
6,329

 
7,455

 
3,239

 
1976
 
 5-40 yrs.
Independence Park - Land
 
Office
 
 
 
4,943

 

 
4,891

 
2,234

 
9,834

 
2,234

 
12,068

 
102

 
N/A
 
5-40 yrs.
Independence One
 
Office
 
 
 
2,531

 
4,526

 

 
5,519

 
2,531

 
10,045

 
12,576

 
3,887

 
1983
 
 5-40 yrs.
Meridian One
 
Office
 
 
 
1,849

 
22,363

 

 
2,076

 
1,849

 
24,439

 
26,288

 
4,533

 
1984
 
 5-40 yrs.
Meridian Two
 
Office
 
 
 
1,302

 
19,588

 

 
3,252

 
1,302

 
22,840

 
24,142

 
4,314

 
1986
 
 5-40 yrs.
Laser Spine Institute
 
Office
 
 
 

 

 
6,310

 
44,655

 
6,310

 
44,655

 
50,965

 
4,401

 
2016
 
 5-40 yrs.
Suntrust Financial Centre
 
Office
 
 
 
1,980

 
102,138

 

 
14,989

 
1,980

 
117,127

 
119,107

 
12,240

 
1992
 
 5-40 yrs.
Suntrust Financial - Land
 
Office
 
 
 
2,225

 

 

 

 
2,225

 

 
2,225

 

 
N/A
 
N/A
 
 
 
 

 
$
603,359

 
$
2,993,752

 
$
16,330

 
$
1,683,110

 
$
619,689

 
$
4,676,862

 
$
5,296,551

 
$
1,296,562

 
 
 
 
__________
(1)
The tax basis of aggregate land and buildings and tenant improvements as of December 31, 2018 is $4.9 billion.



111

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Raleigh, State of North Carolina, on February 5, 2019.
Highwoods Properties, Inc.
 
By: 
 
/s/ Edward J. Fritsch
 
Edward J. Fritsch
 
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the dates indicated.

Signature
 
Title
 
Date
 
 
 
 
 
/s/ Carlos E. Evans
 
Chairman of the Board of Directors
 
February 5, 2019
Carlos E. Evans
 
 
 
 
 
 
 
 
 
/s/ Edward J. Fritsch
 
Chief Executive Officer and Director
 
February 5, 2019
Edward J. Fritsch
 
 
 
 
 
 
 
 
 
/s/ Charles A. Anderson
 
Director
 
February 5, 2019
Charles A. Anderson
 
 
 
 
 
 
 
 
 
/s/ Gene H. Anderson
 
Director
 
February 5, 2019
Gene H. Anderson
 
 
 
 
 
 
 
 
 
/s/ David J. Hartzell
 
Director
 
February 5, 2019
David J. Hartzell
 
 
 
 
 
 
 
 
 
/s/ Sherry A. Kellett
 
Director
 
February 5, 2019
Sherry A. Kellett
 
 
 
 
 
 
 
 
 
/s/ Anne H. Lloyd
 
Director
 
February 5, 2019
Anne H. Lloyd
 
 
 
 
 
 
 
 
 
/s/ Mark F. Mulhern
 
Executive Vice President and Chief Financial Officer
 
February 5, 2019
Mark F. Mulhern
 
 
 
 
 
 
 
 
 
/s/ Daniel L. Clemmens
 
Vice President and Chief Accounting Officer
 
February 5, 2019
Daniel L. Clemmens
 
 
 
 


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Table of Contents


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Raleigh, State of North Carolina, on February 5, 2019.

Highwoods Realty Limited Partnership
 
By:
Highwoods Properties, Inc., its sole general partner
By: 
 
/s/ Edward J. Fritsch
 
Edward J. Fritsch
 
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the dates indicated.

Signature
 
Title
 
Date
 
 
 
 
 
/s/ Carlos E. Evans
 
Chairman of the Board of Directors of the General Partner
 
February 5, 2019
Carlos E. Evans
 
 
 
 
 
 
 
 
 
/s/ Edward J. Fritsch
 
Chief Executive Officer and Director of the General Partner
 
February 5, 2019
Edward J. Fritsch
 
 
 
 
 
 
 
 
 
/s/ Charles A. Anderson
 
Director of the General Partner
 
February 5, 2019
Charles A. Anderson
 
 
 
 
 
 
 
 
 
/s/ Gene H. Anderson
 
Director of the General Partner
 
February 5, 2019
Gene H. Anderson
 
 
 
 
 
 
 
 
 
/s/ David J. Hartzell
 
Director of the General Partner
 
February 5, 2019
David J. Hartzell
 
 
 
 
 
 
 
 
 
/s/ Sherry A. Kellett
 
Director of the General Partner
 
February 5, 2019
Sherry A. Kellett
 
 
 
 
 
 
 
 
 
/s/ Anne H. Lloyd
 
Director of the General Partner
 
February 5, 2019
Anne H. Lloyd
 
 
 
 
 
 
 
 
 
/s/ Mark F. Mulhern
 
Executive Vice President and Chief Financial Officer of the General Partner
 
February 5, 2019
Mark F. Mulhern
 
 
 
 
 
 
 
 
 
/s/ Daniel L. Clemmens
 
Vice President and Chief Accounting Officer of the General Partner
 
February 5, 2019
Daniel L. Clemmens
 
 
 
 

113