10-K 1 hiw1231201310k.htm 10-K HIW 12.31.2013 10K
 
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, 2013
 
OR
 
[  ]
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from________ to___________
 
HIGHWOODS PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
 
Maryland
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  S    No £    Highwoods Realty Limited Partnership  Yes  S    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 S    Highwoods Realty Limited Partnership  Yes  £    No S
 




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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Highwoods Properties, Inc.  Yes  S    No £    Highwoods Realty Limited Partnership  Yes  S    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.   S
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of ‘large accelerated filer,’ ‘accelerated filer’ and ‘smaller reporting company’ in Rule 12b-2 of the Securities Exchange Act.
 
Highwoods Properties, Inc.
Large accelerated filer S    Accelerated filer £      Non-accelerated filer £      Smaller reporting company £
 
Highwoods Realty Limited Partnership
Large accelerated filer £    Accelerated filer £      Non-accelerated filer S      Smaller reporting company £
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).
Highwoods Properties, Inc.  Yes  £    No S    Highwoods Realty Limited Partnership  Yes  £    No S
 
The 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, 2013 was approximately $3.0 billion. At January 31, 2014, there were 89,925,332 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 13, 2014 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 31, 2014, 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, 2013 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 4 - Investments in and Advances to Affiliates;

Note 10 - Noncontrolling Interests;

Note 12 - Equity;

Note 17 - Earnings Per Share and Per Unit;

Note 18 - Income Taxes; and

Note 20 - 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, North Carolina, is a publicly-traded real estate investment trust ("REIT"). The Company is a fully integrated REIT that provides leasing, management, development, construction and other customer-related services for its properties and for third parties. Our Common Stock is traded on the New York Stock Exchange ("NYSE") under the symbol "HIW." At December 31, 2013, we owned or had an interest in 32.2 million rentable square feet of in-service office, industrial and retail properties, 0.9 million rentable square feet of office properties under development and approximately 600 acres of development land. Our properties and development land are located in Florida, Georgia, Missouri, North Carolina, Pennsylvania, South Carolina, Tennessee and Virginia.

At December 31, 2013, the Company owned all of the Preferred Units and 89.5 million, or 96.8%, of the Common Units. Limited partners own the remaining 2.9 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 business is the operation, acquisition and development of rental real estate properties. We operate office, industrial and retail properties. There are no material inter-segment transactions. See Note 19 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"). The information on our website does not constitute part of this Annual Report. Reports filed or furnished with the SEC may also be viewed at www.sec.gov or obtained at the SEC's public reference facilities. Please call the SEC at (800) 732-0330 for further information about the public reference facilities.
 
During 2013, 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 real estate assets in the key infill business districts in our core markets;

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

developing and acquiring office properties in key infill business districts that improve the overall quality of our portfolio and generate attractive returns over the long-term for our stockholders;

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

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

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

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real estate experience. Our real estate professionals are seasoned and cycle-tested. Our senior leadership team has significant experience and maintains important relationships with market participants in each of our core markets.
 
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 lease 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, office and industrial properties in Greensboro and retail and office properties in Kansas City. 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 that allows us to capitalize on favorable development and acquisition opportunities as they arise. 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.
 
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.
 
Employees
 
At December 31, 2013, we had 426 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. While we own and operate a limited number of industrial and retail properties, our results of operations depend heavily on successfully leasing and operating our office properties, which represent over 90% of rental and other revenues. Economic growth and employment levels in our core markets are and will continue to be important determinative factors in predicting our future results of operations.

Key components affecting our rental and other revenues include average occupancy and rental rates. 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 and decreasing office employment because new vacancies tend to outpace our ability to lease space. In addition, the timing of changes in occupancy levels tends to lag the timing of changes in overall economic activity and employment levels. For additional information regarding our average occupancy and rental rate trends over the past five years, see “Item 2. Properties.” Lower rental revenues that result from lower average occupancy or lower rental rates with respect to our same property portfolio will adversely affect our results of operations unless offset by the impact of any newly acquired or developed properties or lower variable operating expenses, general and administrative expenses and/or interest expense.

We face considerable competition in the leasing market and may be unable to renew existing leases or re-let space on terms similar to the existing leases, or we may spend significant capital in our efforts to renew and re-let space, which may adversely affect our results of operations. In addition to seeking to increase our average occupancy by leasing current vacant

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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 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 could be materially adversely affected.

Difficulties or delays in renewing leases with large customers or re-leasing space vacated by large customers would materially impact our results of operations. Our 20 largest customers account for a significant 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 most 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 new third party customers.

An oversupply of space in our markets would typically cause 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, Chicago, Boston, San Francisco and Los Angeles. As a result, even during times of positive economic growth, our competitors could construct new buildings that would compete with our 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 be required to make significant capital expenditures to maintain or enhance the competitiveness of our properties. There can be no assurances that any such expenditures would result in higher occupancy or higher rental rates or deter existing customers from relocating to properties owned by our competitors.

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. The success of our investments and stability of our operations depend on the financial stability of our customers. A default or termination by a significant customer on its lease payments to us would cause us to lose the revenue associated with 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 in protecting our investment and 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. If a customer defaults on or terminates a significant lease, we may not be able to recover the full amount of unpaid rent or be able to lease the property for the rent previously received, if at all. In any of these instances, we may also be required to write off deferred leasing costs and accrued straight-line rents receivable. These events would adversely impact our financial condition and results of operations.

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

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

Discovery of previously undetected environmentally hazardous conditions may adversely affect our financial condition and results of operations. Under various federal, state and local environmental laws and regulations, a current or previous property owner or operator may be liable for the cost to remove or remediate hazardous or toxic substances on such property. These costs could be significant. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require significant expenditures or prevent us from entering into leases with prospective customers that may be impacted by such laws. Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing materials. Third parties may seek recovery from real property owners or operators for personal injury or property damage associated with exposure to released hazardous substances. The cost of defending against claims of liability, of complying with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could adversely affect our financial condition and results of operations.
Our same property results of operations would suffer if costs of operating our properties, such as real estate taxes, utilities, insurance, maintenance and other costs, rise faster than our ability to increase rental revenues and/or cost recovery income. While we receive additional rent from our customers that is based on recovering a portion of operating expenses, increased operating expenses will negatively impact our results of operations. Our revenues, including cost recovery income, are subject to longer-term leases and may not be quickly increased sufficient to recover an increase in operating costs and expenses. Furthermore, the costs associated with owning and operating a property are not necessarily reduced when circumstances such as market factors and competition cause a reduction in rental revenues from the property. Increases in same property operating expenses would adversely affect our results of operations unless offset by higher rental rates, higher cost recovery income, the impact of any newly acquired or developed properties, or lower general and administrative expenses and/or 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 market standards may exceed our 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 and reduce our expected return from making any such acquisitions.

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


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the unavailability of favorable construction and/or permanent 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, all necessary zoning, land-use, building, occupancy and other required governmental and utility company authorizations.

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. In addition, we have a significant amount of mortgage debt under which we would incur significant prepayment penalties if such loans were paid off in connection with the sale of the underlying real estate assets.

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 fair 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. Any delay in using the reinvestment proceeds to acquire additional income producing assets would adversely affect our 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.

Because holders of Common Units, including one of our directors, may suffer adverse tax consequences upon the sale of some of our properties, they may seek to influence us not to sell certain properties even if such a sale would otherwise be in our best interest. Holders of Common Units may suffer adverse tax consequences upon the sale of certain properties. Therefore, holders of Common Units, including one of our directors, may have different objectives than our stockholders regarding the appropriate pricing and timing of a property's sale. Although the Company is the sole general partner of the Operating Partnership and has the exclusive authority to sell any of our properties, those who hold Common Units may seek to influence us not to sell certain properties even if such sale might be financially advantageous to us or influence us to enter into tax deferred exchanges with the proceeds of such sales when such a reinvestment might not otherwise be in our best interest.

Our use of joint ventures may limit our flexibility with jointly owned investments. In appropriate circumstances, we intend to develop and acquire properties in joint ventures with other persons or entities when circumstances warrant the use of these structures. 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 in the current credit markets 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 sale or refinancing of properties;

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


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

our joint ventures may be unable to repay any amounts that we may loan to it.

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 and business interruption. Insurance companies, however, limit 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 and result in large expenses to repair or rebuild the property. 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. 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 to finance a significant portion of our operations 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, our unsecured debt agreements contain specific cross-default provisions with respect to specified other indebtedness, giving the unsecured lenders the right to declare a default if we are in default under other loans in some circumstances. Defaults under our debt agreements could materially and adversely affect our financial condition and results of operations.

Further, we request corporate 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 term loans.

We generally do not intend to reserve funds to retire existing secured or unsecured 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 financial condition and results of operations. 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. If we do not meet our mortgage financing obligations, any properties securing such indebtedness could be foreclosed on.

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

Increases in interest rates would increase our interest expense. At December 31, 2013, we had $415.7 million of variable rate debt outstanding not protected by interest rate hedge contracts. We may incur additional variable rate debt in the future. If interest rates increase, then so would the interest expense on our unhedged variable rate debt, which would adversely affect our financial condition and results of operations. From time to time, we manage our exposure to interest rate risk with interest rate hedge contracts that effectively fix or cap a portion of our variable rate debt. In addition, we refinance fixed rate debt at times when we believe rates and terms are appropriate. 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

9


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.

The Company may be subject to taxation as a regular corporation if it fails to maintain its REIT status, which would also 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 would 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 potentially the alternative minimum tax and increased 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 would likely impair our ability to expand our business and would 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 dispose of our 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

10


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. The maximum tax rate applicable to “qualified dividend income” payable to U.S. stockholders that are taxed at individual rates is 20%. Dividends payable by REITs, however, generally are not eligible for the reduced rates on qualified dividend income. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are taxed at individual rates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our stock.

We face possible state and local tax audits. Because we are organized and qualify as a REIT, we are generally not subject to federal income taxes, but we are subject to certain state and local taxes. 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. As with any public company, 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; and

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

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. The following factors will affect such cash flows and, accordingly, influence the decisions of the Company's board of directors regarding dividends:

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
 

11


expected cash flows from financing and investing activities.

The decision to declare and pay dividends on our Common Stock in the future, as well as the timing, amount and composition of any such future dividends, will be at the sole discretion of the Company's board of directors. Any change in our dividend policy could have a material adverse 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 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, capital gains, if any, that are generated as part of our capital recycling program are subject to federal and state income tax unless such gains are distributed to our stockholders. Cash distributions made to stockholders to maintain REIT status or to distribute otherwise taxable capital gains limit our ability to accumulate capital for other business purposes, including funding debt maturities or growth initiatives.

Further issuances of equity securities may be dilutive to current stockholders. The interests of our existing stockholders could be diluted if additional equity securities are issued to finance future developments, 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 to 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 company 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.


12


Control share acquisitions. Maryland general corporation law also provides that control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares owned by the acquirer or by officers or employee directors. The control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction, or to acquisitions approved or exempted by the corporation's charter or bylaws. The Company's bylaws contain a provision exempting from the control share acquisition statute any stock acquired by any person. However, we cannot assure you that this bylaw provision will not be amended or repealed at any point in the future.

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

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

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

13


ITEM 2. PROPERTIES

Properties

The following table sets forth information about properties that we wholly own:
 
 
December 31, 2013
 
December 31, 2012
 
Rentable
Square Feet
 
Percent
Occupied/
Leased/
Pre-Leased
 
Rentable
Square Feet
 
Percent
Occupied/
Leased/
Pre-Leased
In-Service (Occupied):
 
 
 
 
 
 
 
Office
25,715,000

 
89.2
%
 
23,361,000

 
90.0
%
Industrial
2,743,000

 
94.1

 
5,474,000

 
93.2

Retail
834,000

 
97.3

 
853,000

 
98.6

Total or Weighted Average
29,292,000

 
89.9
%
 
29,688,000

 
90.9
%
 
 
 
 
 
 
 
 
Development (Leased/pre-leased):
 
 
 
 
 
 
 
Completed—Not Stabilized (1)
 
 
 
 
 
 
 
Office
41,000

 
79.2
%
 

 
%
Total or Weighted Average
41,000

 
79.2
%
 

 
%
In Process (1)
 
 
 
 
 
 
 
Office
852,000

 
85.4
%
 
246,000

 
89.9
%
Total or Weighted Average
852,000

 
85.4
%
 
246,000

 
89.9
%
 
 
 
 
 
 
 
 
Total:
 
 
 
 
 
 
 
Office
26,608,000

 
 
 
23,607,000

 
 
Industrial
2,743,000

 
 
 
5,474,000

 
 
Retail
834,000

 
 
 
853,000

 
 
Total
30,185,000

 
 
 
29,934,000

 
 
__________
(1)
We consider a development project to be stabilized upon the earlier of the original projected stabilization date or the date such project is generally more than 90% occupied.

The following table sets forth the net changes in rentable square footage of in-service properties that we wholly own:

 
Year Ended December 31,
 
2013
 
2012
 
2011
 
(rentable square feet in thousands)
Office, Industrial and Retail Properties:
 
 
 
 
 
Acquisitions
3,425

 
1,436

 
2,091

Developments Placed In-Service
221

 
116

 
208

Redevelopment/Other
(30
)
 
23

 
(53
)
Dispositions
(4,012
)
 
(1,179
)
 
(136
)
Net Change in Rentable Square Footage
(396
)
 
396

 
2,110


14



The following table sets forth information about in-service properties that we wholly own by segment and by geographic location at December 31, 2013:

 
 
Rentable
Square Feet
 
Occupancy
 
Percentage of Annualized Cash Rental Revenue (1)
Market
 
Office
 
Industrial
 
Retail
 
Total
Raleigh
 
4,411,000

 
90.1
%
 
15.5
%
 
%
 
%
 
15.5
%
Atlanta
 
4,707,000

 
82.2

 
14.3

 
0.1

 

 
14.4

Nashville
 
3,336,000

 
95.2

 
13.0

 

 

 
13.0

Tampa
 
3,108,000

 
83.8

 
10.9

 

 

 
10.9

Pittsburgh
 
2,157,000

 
93.0

 
9.2

 

 

 
9.2

Kansas City
 
1,446,000

 
96.0

 
2.7

 

 
6.2

 
8.9

Piedmont Triad
 
4,147,000

 
94.7

 
4.9

 
2.3

 

 
7.2

Richmond
 
2,229,000

 
93.8

 
7.2

 

 

 
7.2

Memphis
 
1,978,000

 
88.0

 
6.9

 

 

 
6.9

Orlando
 
1,563,000

 
86.6

 
6.1

 

 

 
6.1

Greenville
 
210,000

 
100.0

 
0.7

 

 

 
0.7

Total
 
29,292,000

 
89.9
%
 
91.4
%
 
2.4
%
 
6.2
%
 
100.0
%
__________
(1)
Annualized Cash Rental Revenue is cash rental revenue (base rent plus cost recovery income, excluding straight-line rent) for the month of December 2013 multiplied by 12.

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)
2009
88.2
%
 
$
17.75

 
$
17.53

2010
88.6
%
 
$
18.03

 
$
17.40

2011
89.6
%
 
$
18.58

 
$
17.84

2012
90.3
%
 
$
17.90

 
$
18.42

2013
90.0
%
 
$
21.42

 
$
20.48

__________
(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.


15


Customers

The following table sets forth information concerning the 20 largest customers of properties that we wholly own at December 31, 2013:
 
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
 
1,456,113

 
$
34,324

 
6.36
%
 
4.3

PPG Industries
 
351,308

 
8,975

 
1.66

 
7.4

Healthways
 
290,689

 
7,327

 
1.36

 
8.4

HCA Corporation
 
278,207

 
6,758

 
1.25

 
2.0

State of Georgia
 
364,687

 
6,688

 
1.24

 
5.8

Bass, Berry & Sims
 
195,846

 
5,974

 
1.11

 
11.1

EQT Corporation
 
280,592

 
5,972

 
1.11

 
10.8

AT&T
 
274,533

 
5,864

 
1.09

 
4.6

Marsh USA
 
188,719

 
5,257

 
0.97

 
5.7

Lockton Companies
 
190,916

 
5,158

 
0.96

 
16.2

BB&T
 
291,143

 
4,972

 
0.92

 
2.7

PNC Bank
 
187,288

 
4,943

 
0.92

 
11.9

Aon
 
190,683

 
4,865

 
0.90

 
5.9

Vanderbilt University
 
198,783

 
4,611

 
0.85

 
1.7

Syniverse Technologies
 
198,750

 
4,323

 
0.80

 
2.8

Metropolitan Life Insurance
 
211,189

 
4,230

 
0.78

 
5.5

SCI Services
 
162,784

 
3,967

 
0.73

 
3.6

Global Payments
 
167,801

 
3,852

 
0.71

 
7.2

Jacobs Engineering Group
 
210,126

 
3,782

 
0.70

 
2.4

HDR Engineering
 
111,923

 
3,544

 
0.66

 
3.6

Total
 
5,802,080

 
$
135,386

 
25.08
%
 
5.9

__________
(1)
Annualized Cash Rental Revenue is cash rental revenue (base rent plus cost recovery income, excluding straight-line rent) for the month of December 2013 multiplied by 12.


16


Lease Expirations
 
The following tables set forth scheduled lease expirations for existing leases at in-service and completed – not stabilized properties that we wholly own at December 31, 2013:
 
Office Properties:
 
Lease Expiring
 
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 (1)
 
Average
Annual Cash
Rental Rate
Per Square
Foot for
Expirations
 
Percent of
Annualized
Cash Rental
Revenue
Represented
by Expiring
Leases (1)
 
 
 
 
 
 
 
($ in thousands)
 
 
 
2014 (2)
 
433

 
2,412,631

 
10.5
%
 
$
50,433

 
$
20.90

 
10.2
%
2015
 
344

 
2,398,817

 
10.4

 
54,092

 
22.55

 
11.0

2016
 
317

 
2,783,406

 
12.1

 
58,857

 
21.15

 
11.9

2017
 
281

 
2,780,439

 
12.2

 
63,540

 
22.85

 
12.9

2018
 
261

 
2,371,406

 
10.3

 
51,768

 
21.83

 
10.5

2019
 
149

 
2,294,337

 
10.0

 
48,872

 
21.30

 
9.9

2020
 
73

 
1,405,739

 
6.1

 
32,211

 
22.91

 
6.5

2021
 
49

 
1,836,072

 
8.0

 
37,924

 
20.65

 
7.7

2022
 
36

 
697,554

 
3.0

 
15,769

 
22.61

 
3.2

2023
 
31

 
901,599

 
3.9

 
19,739

 
21.89

 
4.0

Thereafter
 
167

 
3,089,494

 
13.5

 
60,164

 
19.47

 
12.2

 
 
2,141

 
22,971,494

 
100.0
%
 
$
493,369

 
$
21.48

 
100.0
%
 
Industrial Properties:
 
Lease Expiring
 
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 (1)
 
Average
Annual Cash
Rental Rate
Per Square
Foot for
Expirations
 
Percent of
Annualized
Cash Rental
Revenue
Represented
by Expiring
Leases (1)
 
 
 
 
 
 
 
($ in thousands)
 
 
 
2014 (3)
 
31

 
305,575

 
11.8
%
 
$
1,548

 
$
5.07

 
11.7
%
2015
 
23

 
426,160

 
16.5

 
2,263

 
5.31

 
17.1

2016
 
23

 
616,237

 
23.8

 
3,107

 
5.04

 
23.4

2017
 
12

 
273,388

 
10.6

 
1,617

 
5.91

 
12.3

2018
 
12

 
360,891

 
14.0

 
1,665

 
4.61

 
12.6

2019
 
4

 
105,990

 
4.1

 
613

 
5.78

 
4.6

2020
 
5

 
71,078

 
2.8

 
357

 
5.02

 
2.7

2021
 
1

 
117,805

 
4.6

 
445

 
3.78

 
3.4

2022
 
2

 
178,000

 
6.9

 
824

 
4.63

 
6.2

2023
 

 

 

 

 

 

Thereafter
 
5

 
126,736

 
4.9

 
798

 
6.30

 
6.0

 
 
118

 
2,581,860

 
100.0
%
 
$
13,237

 
$
5.13

 
100.0
%
__________
(1)
Annualized Cash Rental Revenue is cash rental revenue (base rent plus cost recovery income, excluding straight-line rent) for the month of December 2013 multiplied by 12.
(2)
Includes 80,000 rentable square feet of leases that are on a month-to-month basis, which represent 0.3% of total annualized cash rental revenue.
(3)
Includes 44,000 rentable square feet of leases that are on a month-to-month basis, which represent less than 0.1% of total annualized cash rental revenue.

17


Retail Properties:

Lease Expiring
 
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 (1)
 
Average
Annual Cash
Rental Rate
Per Square
Foot for
Expirations
 
Percent of
Annualized
Cash Rental
Revenue
Represented
by Expiring
Leases (1)
 
 
 
 
 
 
 
($ in thousands)
 
 
 
2014 (2)
 
28

 
114,693

 
14.2
%
 
$
2,540

 
$
22.15

 
7.6
%
2015
 
18

 
105,311

 
13.0

 
3,680

 
34.94

 
11.0

2016
 
11

 
61,640

 
7.6

 
3,128

 
50.75

 
9.4

2017
 
7

 
38,316

 
4.7

 
1,613

 
42.10

 
4.8

2018
 
21

 
100,668

 
12.4

 
5,209

 
51.74

 
15.6

2019
 
12

 
90,007

 
11.1

 
3,124

 
34.71

 
9.3

2020
 
10

 
46,972

 
5.8

 
2,040

 
43.43

 
6.1

2021
 
12

 
83,786

 
10.3

 
3,607

 
43.05

 
10.8

2022
 
16

 
91,196

 
11.2

 
4,569

 
50.10

 
13.7

2023
 
10

 
30,906

 
3.8

 
1,749

 
56.59

 
5.2

Thereafter
 
7

 
48,213

 
5.9

 
2,161

 
44.82

 
6.5

 
 
152

 
811,708

 
100.0
%
 
$
33,420

 
$
41.17

 
100.0
%

Total:

Lease Expiring
 
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 (1)
 
Average
Annual Cash
Rental Rate
Per Square
Foot for
Expirations
 
Percent of
Annualized
Cash Rental
Revenue
Represented
by Expiring
Leases (1)
 
 
 
 
 
 
 
($ in thousands)
 
 
 
2014 (3)
 
492

 
2,832,899

 
10.7
%
 
$
54,521

 
$
19.25

 
10.1
%
2015
 
385

 
2,930,288

 
11.1

 
60,035

 
20.49

 
11.1

2016
 
351

 
3,461,283

 
13.2

 
65,092

 
18.81

 
12.1

2017
 
300

 
3,092,143

 
11.7

 
66,770

 
21.59

 
12.4

2018
 
294

 
2,832,965

 
10.7

 
58,642

 
20.70

 
10.9

2019
 
165

 
2,490,334

 
9.4

 
52,609

 
21.13

 
9.7

2020
 
88

 
1,523,789

 
5.8

 
34,608

 
22.71

 
6.4

2021
 
62

 
2,037,663

 
7.7

 
41,976

 
20.60

 
7.8

2022
 
54

 
966,750

 
3.7

 
21,162

 
21.89

 
3.9

2023
 
41

 
932,505

 
3.5

 
21,488

 
23.04

 
4.0

Thereafter
 
179

 
3,264,443

 
12.5

 
63,123

 
19.34

 
11.6

 
 
2,411

 
26,365,062

 
100.0
%
 
$
540,026

 
$
20.48

 
100.0
%
__________
(1)
Annualized Cash Rental Revenue is cash rental revenue (base rent plus cost recovery income, excluding straight-line rent) for the month of December 2013 multiplied by 12.
(2)
Includes 4,000 rentable square feet of leases that are on a month-to-month basis, which represent less than 0.1% of total annualized cash rental revenue.
(3)
Includes 128,000 rentable square feet of leases that are on a month-to-month basis, which represent 0.3% of total annualized cash rental revenue.

Note: 2014 and beyond expirations that have been renewed are reflected above based on the renewal expiration date. Expirations include leases related to completed not stabilized development properties and exclude leases related to developments in process.

18


In Process Development
 
As of December 31, 2013, we were developing 852,000 rentable square feet of office properties. The following table summarizes these developments:
 
Property
 
Market
 
Type
 
Rentable Square Feet
 
Anticipated Total Investment (1)
 
Investment As Of December 31, 2013 (1)
 
Pre Leased %
 
Estimated Completion
 
Estimated Stabilization
 
 
 
 
 
 
 
 
($ in thousands)
 
 
 
 
 
 
International Paper
 
 Memphis
 
O
 
241,000

 
$
56,100

 
$
16,190

 
100
%
 
2Q 15
 
2Q 15
MetLife I
 
 Raleigh
 
O
 
213,500

 
53,000

 
10,611

 
100

 
1Q 15
 
1Q 15
MetLife II
 
 Raleigh
 
O
 
213,500

 
57,000

 
7,053

 
100

 
2Q 15
 
2Q 17
GlenLake V
 
 Raleigh
 
O
 
166,000

 
35,800

 
5,710

 
25

 
2Q 15
 
2Q 17
Crescent Center Restaurants
 
Memphis
 
O
 
18,000

 
7,900

 
7,220

 
100

 
1Q 14
 
1Q 14
 
 
 
 
 
 
852,000

 
$
209,800

 
$
46,784

 
85.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ Weighted %
 
 
87.2
%
 
 
 
 
__________
(1)
Includes deferred lease commissions which are classified in deferred leasing costs on our Consolidated Balance Sheet.
 
Land Held for Development
 
We wholly owned 580 acres of development land at December 31, 2013. We estimate that we can develop approximately 5.2 million and 2.3 million rentable square feet of office and industrial space, respectively, on the 445 acres that we consider core assets for our future development needs. Our core development land is zoned and available for office and industrial development, and nearly all of the land has utility infrastructure in place. We believe that our commercially zoned and unencumbered land in existing business parks gives us a development advantage over other commercial real estate development companies in many of our markets.
 
We consider 135 acres of our wholly owned development land at December 31, 2013 to be non-core assets that are not necessary for our foreseeable future development needs. We intend to dispose of such non-core development land through sales to third parties or contributions to joint ventures.
 

19


Other Properties
 
The following table sets forth information about our stabilized in-service office properties in which we own an interest (50.0% or less) by geographic location at December 31, 2013:
 
 
 
Rentable
Square Feet
 
Weighted
Average
Ownership
Interest (1)
 
Occupancy
 
Percentage of
Annualized
Cash Rental
Revenue (2)
Market
 
Office
Kansas City
 
719,000

 
36.2
%
 
82.9
%
 
32.9
%
Raleigh
 
636,000

 
25.0

 
96.4

 
18.6

Richmond (3)
 
411,000

 
50.0

 
96.3

 
17.8

Orlando
 
517,000

 
27.5

 
83.8

 
15.0

Atlanta
 
335,000

 
32.3

 
60.9

 
7.7

Tampa (3)
 
205,000

 
20.0

 
91.2

 
5.3

Piedmont Triad
 
118,000

 
50.0

 
51.8

 
2.7

Total
 
2,941,000

 
33.2
%
 
84.7
%
 
100.0
%
__________
(1)
Weighted Average Ownership Interest is calculated using Rentable Square Feet.
(2)
Annualized Cash Rental Revenue is cash rental revenue (base rent plus cost recovery income, excluding straight-line rent) for the month of December 2013 multiplied by 12.
(3)
This joint venture is consolidated.


20


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.



21


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
 
55
 
Director, President 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 on July 1, 2004 and our president in December 2003. Prior to that, Mr. Fritsch was 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 currently serves as a director and member of the audit and compensation committees of National Retail Properties, Inc., a publicly-traded REIT. Mr. Fritsch is also a member of the board of Governors of the National Association of Real Estate Investment Trusts (NAREIT) and serves as treasurer of its executive committee as well as a member of its audit and investment committees. Mr. Fritsch is also a director and audit committee chair of Capital Associated Industries, Inc., a trustee of Ravenscroft School, a member of Wells Fargo's central regional 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, a member of the University of North Carolina Kenan-Flagler’s Business School board of visitors, a member of Urban Land Institute Triangle governance committee and a member of Catholic Diocese of Raleigh Cathedral steering committee.

Michael E. Harris
 
64
 
Executive Vice President and Chief Operating Officer.
Mr. Harris became chief operating officer in July 2004. Prior to that, Mr. Harris was a senior vice president and was responsible for our operations in Memphis, Nashville, Kansas City, Baltimore and Charlotte. Mr. Harris was executive vice president of Crocker Realty Trust prior to its merger with us in 1996. Before joining Crocker Realty Trust, Mr. Harris served as senior vice president, general counsel and chief financial officer of Towermarc Corporation, a privately owned real estate development firm. Mr. Harris is a full member of the Urban Land Institute and is past president of the Memphis Chapter of Lambda Alpha International Land Economics Society. Mr. Harris currently serves on the Advisory Board of the Graduate School of Real Estate at the University of Mississippi and is a past member of the Advisory Boards of Wachovia Bank- Memphis and Allen & Hoshall Engineering, Inc.
 
Terry L. Stevens
 
65
 
Senior Vice President and Chief Financial Officer.
Prior to joining us in December 2003, Mr. Stevens was executive vice president, chief financial officer and trustee for Crown American Realty Trust, a public REIT. Before joining Crown American Realty Trust, Mr. Stevens was director of financial systems development at AlliedSignal, Inc., a large multi-national manufacturer. Mr. Stevens was also an audit partner with Price Waterhouse for seven years. Mr. Stevens currently serves as trustee, chairman of the Audit Committee and member of the Investment and Finance Committee of First Potomac Realty Trust, a public REIT. Mr. Stevens is a member of the American and the Pennsylvania Institutes of Certified Public Accountants.
 

22


Jeffrey D. Miller
 
43
 
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 has served as lead independent director of Hatteras Financial Corp., a publicly-traded mortgage REIT, since 2009.


Theodore J. Klinck
 
48
 
Vice President and Chief Investment Officer.
Prior to joining us in March 2012, Mr. Klinck served as principal and chief investment officer with Goddard Investment Group, a privately owned real estate investment firm, since September 2009. Previously, Mr. Klinck had been a managing director at Morgan Stanley Real Estate.


Kevin E. Penn
 
42
 
Vice President, Chief Strategy and Administration Officer.
Mr. Penn became chief strategy and administration officer in January 2012. Mr. Penn joined us in 1997 and was our vice president of strategy from August 2005 to January 2012 and chief information officer from April 2002 to August 2005. Mr. Penn is vice chair of the Urban Land Institute Triangle District Council, member of the executive committee of the Office, Technology and Operations Consortium and trustee and executive committee member of the North Carolina Leukemia Lymphoma Society.




23


PART II

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

The following table sets forth high and low stock prices per share reported on the NYSE and dividends paid per share:

 
 
2013
 
2012
Quarter Ended
 
High
 
Low
 
Dividend
 
High
 
Low
 
Dividend
March 31
 
$
39.67

 
$
33.60

 
$
0.425

 
$
33.90

 
$
29.34

 
$
0.425

June 30
 
$
41.22

 
$
32.13

 
$
0.425

 
$
35.78

 
$
31.14

 
$
0.425

September 30
 
$
38.04

 
$
32.90

 
$
0.425

 
$
34.92

 
$
32.30

 
$
0.425

December 31
 
$
39.05

 
$
34.63

 
$
0.425

 
$
34.24

 
$
30.62

 
$
0.425


On December 31, 2013, the last reported stock price of our Common Stock on the NYSE was $36.17 per share and the Company had 939 common stockholders of record. There is no public trading market for the Common Units. On December 31, 2013, the Operating Partnership had 108 holders of record of Common Units (other than the Company). At December 31, 2013, there were 89.9 million shares of Common Stock outstanding and 2.9 million Common Units outstanding, not owned by the Company.

Because the Company is a REIT, the partnership agreement requires the Operating Partnership to distribute at least enough cash for the Company to be able to distribute to its stockholders at least 90.0% of its REIT taxable income, excluding net capital gains. 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 or future growth initiatives.”

We generally expect to use cash flows from operating activities to fund distributions. The following factors will affect such cash flows and, accordingly, influence the decisions of the Company’s Board of Directors regarding dividends and distributions:

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.

The following stock price performance graph compares the performance of our Common Stock to the S&P 500, the Russell 2000 and the FTSE NAREIT All Equity REITs Index. The stock price performance graph assumes an investment of $100 in our Common Stock and the three indices on December 31, 2008 and further assumes the reinvestment of all dividends. Equity REITs are defined as those that derive more than 75.0% of their income from equity investments in real estate assets. The FTSE NAREIT All Equity REITs Index includes all equity REITs not designated as Timber REITs listed on the NYSE, the American Stock Exchange or the NASDAQ National Market System. Stock price performance is not necessarily indicative of future results.


24




 
 
For the Period from December 31, 2008 to December 31,
Index
 
2009
 
2010
 
2011
 
2012
 
2013
Highwoods Properties, Inc.
 
130.41

 
131.74

 
129.41

 
153.65

 
174.04

S&P 500
 
126.46

 
145.51

 
148.59

 
172.37

 
228.19

Russell 2000
 
127.17

 
161.32

 
154.59

 
179.86

 
249.69

FTSE NAREIT All Equity REITs Index
 
127.99

 
163.78

 
177.36

 
209.39

 
214.56


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.

During 2013, cash dividends on Common Stock totaled $1.70 per share, approximately $0.16 of which represented return of capital and approximately $0.26 of which represented capital gains for income tax purposes. The minimum dividend per share of Common Stock required for the Company to maintain its REIT status was $1.08 per share in 2013.

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 may elect to satisfy its DRIP obligations by issuing additional shares of Common Stock or instructing the DRIP administrator to purchase Common Stock in the open market.

The Company has an Employee Stock Purchase Plan pursuant to which employees generally may contribute up to 25.0% of their cash compensation for the purchase of Common Stock. At the end of each three-month offering period, each participant’s account balance, which includes accumulated dividends, is applied to acquire shares of Common Stock at a cost that is calculated at 85.0% of the average closing price on the NYSE on the five consecutive days preceding the last day of the quarter.


25


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 13, 2014.




26


ITEM 6. SELECTED FINANCIAL DATA

The operating results and certain liabilities of the Company as of and for the years ended December 31, 2012, 2011, 2010 and 2009 were retrospectively revised from previously reported amounts to reflect in real estate and other assets, net, held for sale and liabilities held for sale those properties classified as held for sale, and in discontinued operations the operations for those properties classified as discontinued operations. 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,
 
2013
 
2012
 
2011
 
2010
 
2009
Rental and other revenues
$
556,810

 
$
485,046

 
$
431,956

 
$
410,448

 
$
396,761

Income from continuing operations
$
62,723

 
$
40,313

 
$
30,885

 
$
55,125

 
$
31,920

Income from discontinued operations
$
68,374

 
$
43,922

 
$
17,086

 
$
17,178

 
$
29,774

Income from continuing operations available for common stockholders
$
57,081

 
$
35,252

 
$
22,443

 
$
45,483

 
$
23,680

Net income
$
131,097

 
$
84,235

 
$
47,971

 
$
72,303

 
$
61,694

Net income available for common stockholders
$
122,949

 
$
77,087

 
$
38,677

 
$
61,790

 
$
51,778

Earnings per Common Share – basic:
 
 
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
0.67

 
$
0.47

 
$
0.31

 
$
0.63

 
$
0.35

Net income
$
1.44

 
$
1.02

 
$
0.54

 
$
0.86

 
$
0.76

Earnings per Common Share – diluted:
 
 
 
 
 
 
 
 
 
Income from continuing operations available for common stockholders
$
0.67

 
$
0.47

 
$
0.31

 
$
0.63

 
$
0.35

Net income
$
1.44

 
$
1.02

 
$
0.54

 
$
0.86

 
$
0.76

Dividends declared and paid per Common Share
$
1.70

 
$
1.70

 
$
1.70

 
$
1.70

 
$
1.70


 
December 31,
 
2013
 
2012
 
2011
 
2010
 
2009
Total assets
$
3,807,101

 
$
3,350,428

 
$
3,180,992

 
$
2,871,835

 
$
2,887,101

Mortgages and notes payable
$
1,956,299

 
$
1,859,162

 
$
1,868,906

 
$
1,488,638

 
$
1,443,500



27



The operating results and certain liabilities of the Operating Partnership as of and for the years ended December 31, 2012, 2011, 2010 and 2009 were retrospectively revised from previously reported amounts to reflect in real estate and other assets, net, held for sale and liabilities held for sale those properties classified as held for sale, and in discontinued operations the operations for those properties classified as discontinued operations. 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,
 
2013
 
2012
 
2011
 
2010
 
2009
Rental and other revenues
$
556,810

 
$
485,046

 
$
431,956

 
$
410,448

 
$
396,761

Income from continuing operations
$
62,672

 
$
40,373

 
$
30,946

 
$
55,098

 
$
31,866

Income from discontinued operations
$
68,374

 
$
43,922

 
$
17,086

 
$
17,178

 
$
29,774

Income from continuing operations available for common unitholders
$
59,215

 
$
37,079

 
$
23,743

 
$
47,905

 
$
25,147

Net income
$
131,046

 
$
84,295

 
$
48,032

 
$
72,276

 
$
61,640

Net income available for common unitholders
$
127,589

 
$
81,001

 
$
40,829

 
$
65,083

 
$
54,921

Earnings per Common Unit – basic:
 
 
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
0.67

 
$
0.47

 
$
0.31

 
$
0.64

 
$
0.35

Net income
$
1.44

 
$
1.02

 
$
0.54

 
$
0.87

 
$
0.77

Earnings per Common Unit – diluted:
 
 
 
 
 
 
 
 
 
Income from continuing operations available for common unitholders
$
0.67

 
$
0.47

 
$
0.31

 
$
0.64

 
$
0.35

Net income
$
1.44

 
$
1.02

 
$
0.54

 
$
0.87

 
$
0.77

Distributions declared and paid per Common Unit
$
1.70

 
$
1.70

 
$
1.70

 
$
1.70

 
$
1.70


 
December 31,
 
2013
 
2012
 
2011
 
2010
 
2009
Total assets
$
3,807,198

 
$
3,349,525

 
$
3,179,884

 
$
2,870,671

 
$
2,885,738

Mortgages and notes payable
$
1,956,299

 
$
1,859,162

 
$
1,868,906

 
$
1,488,638

 
$
1,443,500



28


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 release second generation space, defined as previously occupied space that becomes available for lease, quickly or on as favorable terms as old leases;

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

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

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

our markets may suffer declines in economic growth;

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

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

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

the Company could lose key executive officers.

This list of risks and uncertainties, however, is not intended to be exhaustive. You should also review the other cautionary statements we make in “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.


29



Executive Summary
 
Our Strategic Plan focuses on:
 
owning high-quality, differentiated real estate assets in the key infill business districts in our core markets;

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

developing and acquiring office properties in key infill business districts that improve the overall quality of our portfolio and generate attractive returns over the long-term for our stockholders;

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

maintaining a conservative and flexible balance sheet with ample liquidity to meet our funding needs and growth prospects.
 
While we own and operate a limited number of industrial and retail properties, our operating results depend heavily on successfully leasing and operating our office properties. Economic growth and employment levels in our core markets are and will continue to be important factors in predicting our future operating results.
 
The key components affecting our rental and other revenues are average occupancy, rental rates, cost recovery income, new developments placed in service, acquisitions and dispositions. Average occupancy generally increases during times of improving economic growth, as our ability to lease space outpaces vacancies that occur upon the expirations of existing leases. Average occupancy generally declines during times of slower economic growth, when new vacancies tend to outpace our ability to lease space. Asset acquisitions, dispositions and new developments placed in service directly impact our rental revenues and could impact our average occupancy, depending upon the occupancy rate of the properties that are acquired, sold or placed in service. A further indicator of the predictability of future revenues is the expected lease expirations of our portfolio. As a result, in addition to seeking to increase our average occupancy by leasing current vacant space, we also must concentrate our leasing efforts on renewing our existing leases prior to expiration. For more information regarding our lease expirations, see “Item 2. Properties - Lease Expirations.” Our occupancy declined from 90.9% at December 31, 2012 to 89.9% at December 31, 2013 primarily due to a scheduled expiration of a large customer in Tampa, FL and the acquisition of relatively low occupied buildings in Atlanta, GA, Nashville, TN and Orlando, FL and the disposition of relatively high occupied industrial buildings in Atlanta, GA.
 
Whether or not our rental revenue tracks average occupancy proportionally depends upon whether rents under signed new and renewal leases are higher or lower than the rents under the previous leases. Annualized rental revenues from second generation leases expiring during any particular year are generally less than 15% of our total annual rental revenues. The following table sets forth information regarding second generation leases signed during the fourth quarter of 2013 (we define second generation leases as leases with new customers and renewals of existing customers in space that has been previously occupied under our ownership and leases with respect to vacant space in acquired buildings):
 
 
Office
 
Industrial
 
Retail
 
New
 
Renewal
 
New
 
Renewal
 
New
 
Renewal
Leased space (in rentable square feet)
407,513

 
383,286

 
18,000

 
172,022

 

 
5,304

Rentable square foot weighted average term (in years)
6.3

 
5.7

 
3.2

 
2.8

 

 
3.4

Base rents (per rentable square foot) (1)
$
24.23

 
$
22.20

 
$
4.23

 
$
3.28

 
$

 
$
37.77

Rent concessions (per rentable square foot) (1)
(0.91
)
 
(0.56
)
 
(0.28
)
 
(0.23
)
 

 

GAAP rents (per rentable square foot) (1)
$
23.32

 
$
21.64

 
$
3.95

 
$
3.05

 
$

 
$
37.77

Tenant improvements (per rentable square foot) (1)
$
3.73

 
$
1.16

 
$
0.09

 
$
0.07

 
$

 
$
3.61

Leasing commissions (per rentable square foot) (1)
$
0.90

 
$
0.55

 
$
0.16

 
$
0.05

 
$

 
$
1.21

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


30


Compared to previous leases in the same spaces, annual combined GAAP rents for new and renewal leases signed in the fourth quarter were $22.51 per rentable square foot, or 8.5% higher, for office leases, $3.14 per rentable square foot, or 8.3% higher, for industrial leases and $37.77 per rentable square foot, or 9.7% lower, for retail leases.

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. Currently, no customer accounts for more than 3% of our revenues other than the Federal Government, which accounted for less than 10.0% of our revenues on an annualized basis, as of December 31, 2013. See “Item 2. Properties - Customers.”
 
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 maintenance, repairs and utilities, and expenses that do not vary based on occupancy, such as property taxes and insurance. Depreciation and amortization is a non-cash expense associated with the ownership of real property and generally remains relatively consistent each year, unless we buy, place in service or sell assets, since we depreciate our properties and related building and tenant improvement assets on a straight-line basis over fixed lives. General and administrative expenses consist primarily of management and employee salaries and other personnel costs, corporate overhead and short and long-term incentive compensation.

We intend to maintain a conservative and flexible balance sheet that allows us to capitalize on favorable development and acquisition opportunities as they arise. We anticipate commencing up to $150 million of new development in 2014. Such projects would likely not be placed in service until 2015 or beyond. We also anticipate acquiring up to $300 million of new properties and selling up to $175 million of non-core properties in 2014. We generally seek to acquire and develop assets that improve the average quality of our overall portfolio and deliver consistent and sustainable value for our stockholders over the long-term. Whether or not an asset acquisition or new development results in higher per share net income or funds from operations ("FFO") in any given period depends upon a number of factors, including whether the net operating income for any such period exceeds the actual cost of capital used to finance the acquisition. Forward-looking information regarding 2014 operating performance contained below under "Results of Operations" excludes the impact of any potential acquisitions or dispositions.

Results of Operations

Comparison of 2013 to 2012

Rental and Other Revenues

Rental and other revenues from continuing operations were $71.8 million, or 14.8%, higher in 2013 as compared to 2012 primarily due to recent acquisitions and development properties placed in service, which accounted for $70.9 million of the increase. Same property rental and other revenues in 2013 were flat with 2012 as average occupancy in the same property portfolio was substantially unchanged as well. We expect 2014 rental and other revenues to increase over 2013 primarily due to the full year contribution of acquisitions closed in 2013, contribution of development properties and slightly higher same property revenues resulting from higher expected cost recovery income and higher average GAAP rents per rentable square foot.

Operating Expenses

Rental property and other expenses were $26.6 million, or 15.1%, higher in 2013 as compared to 2012 primarily due to recent acquisitions, which contributed $27.1 million to the net increase. Same property operating expenses in 2013 were flat with 2012 as average occupancy was substantially unchanged and lower utility costs and property taxes offset inflationary effects on other costs. We expect 2014 rental property and other expenses to increase over 2013 primarily due to the full year contribution of acquisitions closed in 2013 and slightly higher same property operating expenses resulting from higher expected utility costs and higher property taxes.
 
Operating margin, defined as rental and other revenues less rental property and other expenses expressed as a percentage of rental and other revenues, was slightly lower at 63.5% for 2013, as compared to 63.6% for 2012. Operating margin is expected to be slightly lower in 2014 as compared to 2013.

Depreciation and amortization was $30.6 million, or 20.9%, higher in 2013 as compared to 2012 primarily due to recent acquisitions. We expect 2014 depreciation and amortization to increase over 2013 primarily due to the full year contribution of acquisitions closed and developments placed in service in 2013.
 

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General and administrative expenses were $0.2 million, or 0.5%, lower in 2013 as compared to 2012 primarily due to lower incentive compensation, partly offset by higher salaries and acquisition costs. We expect 2014 general and administrative expenses to slightly decrease relative to 2013 primarily due to lower incentive compensation, partially offset by higher company-wide base salaries and employee benefit costs.

Interest Expense

Interest expense was $3.4 million, or 3.5%, lower in 2013 as compared to 2012 primarily due to lower average interest rates and higher capitalized interest, partly offset by higher average debt balances. We expect 2014 interest expense to decrease over 2013 primarily due to lower average interest rates and higher capitalized interest, partially offset by higher average debt balances.

Other Income

Other income was relatively unchanged in 2013 as compared to 2012 primarily due to a decrease in interest income on notes receivable in 2013 resulting from the 2012 repayment of a secured loan made to our Highwoods DLF 98/29, LLC joint venture and a bankruptcy settlement in 2012, offset by a higher loss on debt extinguishment in 2012. We expect 2014 other income to decrease over 2013 primarily due to lower interest income as a result of the January 2014 repayment of seller financing provided in conjunction with a 2010 disposition transaction.

Gain on Acquisition of Controlling Interest in Unconsolidated Affiliate

We recorded a gain on acquisition of controlling interest in unconsolidated affiliate of $7.5 million in 2013 due to the acquisition of our joint venture partner's 60.0% interest in our HIW-KC Orlando, LLC joint venture. We had no similar transactions in 2012.

Equity in Earnings of Unconsolidated Affiliates

Equity in earnings of unconsolidated affiliates was $2.8 million lower in 2013 as compared to 2012 primarily due to our $4.5 million share of impairments of real estate assets on certain office properties in our Highwoods DLF 98/29, LLC joint venture, the acquisition of our joint venture partner’s 60.0% interest in our HIW-KC Orlando, LLC joint venture in 2013 and the sale of office properties in our Highwoods DLF 98/29, LLC and Highwoods DLF 97/26 DLF 99/32, LP joint ventures in late 2012 and early 2013. Partly offsetting this decrease was $3.2 million, net of taxes, that we recorded as our share of a gain recognized by the Lofts at Weston, LLC joint venture upon the sale of 215 residential units to an unrelated third party. Additionally offsetting this decrease was our $1.0 million share of impairments of real estate assets on two office properties in our Highwoods DLF 98/29, LLC joint venture in 2012. The impairments in 2013 and 2012 were due to a change in the assumed timing of future dispositions and/or leasing assumptions. We expect 2014 equity in earnings of unconsolidated affiliates to remain consistent to 2013 due to impairments of real estate assets recorded in 2013 offset by the reduction of our overall joint venture investments in 2013.

Impairments of Real Estate Assets in Discontinued Operations

We recorded impairments of real estate assets of $1.1 million on seven industrial properties in Atlanta, GA and $1.1 million on four properties in a single office park in Winston-Salem, NC in 2013. These impairments were due to a change in the assumed timing of future dispositions and leasing assumptions. We recorded no such impairments in 2012.

Net Gains on Disposition of Discontinued Operations

Net gains on disposition of discontinued operations were $34.3 million higher in 2013 as compared to 2012 due to higher disposition activity in 2013.

Earnings Per Common Share - Diluted

Diluted earnings per common share was $0.42, or 41.2%, higher in 2013 as compared to 2012 due to an increase in net income for the reasons discussed above, offset by an increase in the weighted average Common Shares outstanding from the 2012 and 2013 issuances under our equity sales agreements and the August 2013 Common Stock offering.


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Comparison of 2012 to 2011

Rental and Other Revenues

Rental and other revenues from continuing operations were $53.1 million, or 12.3%, higher in 2012 as compared to 2011 primarily due to recent acquisitions, which accounted for $43.8 million of the increase, and higher same property revenues of $10.7 million, partly offset by lower construction income of $1.7 million. Same property revenues were higher primarily due to an increase in average occupancy to 91.0% in 2012 from 90.5% in 2011, an increase in annualized GAAP rent per rentable square foot to $20.45 in 2012 from $20.07 in 2011, higher cost recovery income, higher net termination fees and lower bad debt expense.

Operating Expenses

Rental property and other expenses were $19.4 million, or 12.4%, higher in 2012 as compared to 2011 primarily due to recent acquisitions, which accounted for $18.8 million of the increase and higher same property operating expenses of $1.6 million, partly offset by $1.7 million lower cost of construction expense. Same property operating expenses were higher primarily due to higher repairs and maintenance and insurance costs, partly offset by lower utilities and real estate taxes.

Operating margin, defined as rental and other revenues less rental property and other expenses expressed as a percentage of rental and other revenues, remained constant at 63.6% at both 2012 and 2011.

Depreciation and amortization was $18.9 million, or 14.8%, higher in 2012 as compared to 2011 primarily due to recent acquisitions, which accounted for $16.5 million of the increase, and higher same property depreciation and amortization of $2.3 million.

General and administrative expenses were $1.7 million, or 4.6%, higher in 2012 as compared to 2011 primarily due to higher salaries and incentive compensation, partly offset by lower acquisition and dead deal costs.

Interest Expense

Interest expense was $0.6 million, or 0.6%, higher in 2012 as compared to 2011 primarily due to higher average debt balances, partly offset by lower average interest rates and lower financing obligation interest expense.

Other Income

Other income was $1.0 million, or 13.4%, lower in 2012 as compared to 2011 primarily due to recording a loss on debt extinguishment in 2012.

Gains on Disposition of Investments in Unconsolidated Affiliates

We recorded a gain on disposition of investment in unconsolidated affiliate of $2.3 million in 2011 due to our partner exercising its option to acquire our 10.0% equity interest in one of our unconsolidated joint ventures. We recorded no such gain in 2012.

Impairments of Real Estate Assets in Discontinued Operations

We recorded impairments of real estate assets of $2.4 million in 2011 related to two office properties in Orlando, FL which resulted from a change in the assumed timing of future dispositions. We recorded no such impairments in 2012.

Net Gains on Disposition of Discontinued Operations

Net gains on disposition of discontinued operations were $26.9 million higher in 2012 as compared to 2011 due to higher disposition activity in 2012.

Dividends on Preferred Stock and Excess of Preferred Stock Redemption/Repurchase Cost Over Carrying Value

Dividends on Preferred Stock and excess of Preferred Stock redemption/repurchase cost over carrying value were $2.0 million and $1.9 million lower, respectively, in 2012 as compared to 2011 due to the redemption of all remaining Series B Preferred Shares in 2011.


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Liquidity and Capital Resources

Overview

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

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,
 
 
 
2013
 
2012
 
Change
Net Cash Provided By Operating Activities
$
256,437

 
$
193,416

 
$
63,021

Net Cash (Used In) Investing Activities
(356,603
)
 
(238,812
)
 
(117,791
)
Net Cash Provided By Financing Activities
96,567

 
47,991

 
48,576

Total Cash Flows
$
(3,599
)
 
$
2,595

 
$
(6,194
)

In calculating net cash related to operating activities, depreciation and amortization, which are non-cash expenses, are added back