HIGHWOODS PROPERTIES, INC., 10-K filed on 2/12/2013
Annual Report
Document and Entity Information Document (USD $)
12 Months Ended
Dec. 31, 2012
Feb. 1, 2013
Jun. 30, 2012
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
HIGHWOODS PROPERTIES INC. 
 
 
Entity Central Index Key
0000921082 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2012 
 
 
Document Fiscal Year Focus
2012 
 
 
Document Fiscal Period Focus
Q4 
 
 
Amendment Flag
false 
 
 
Entity Common Stock, Shares Outstanding
 
80,555,117 
 
Entity Public Float
 
 
$ 2,511,832,112 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2012
Dec. 31, 2011
Real estate assets, at cost:
 
 
Land
$ 374,212 
$ 355,694 
Buildings and tenant improvements
3,304,468 
3,009,155 
Development in process
21,198 
Land held for development
117,784 
105,206 
Total real estate assets
3,817,662 
3,470,055 
Less-accumulated depreciation
(947,567)
(869,046)
Net real estate assets
2,870,095 
2,601,009 
For-sale residential condominiums
4,751 
Real estate and other assets, net, held for sale
124,273 
Cash and cash equivalents
13,783 
11,188 
Restricted cash
19,702 
26,666 
Accounts receivable, net of allowance of $2,848 and $3,548, respectively
23,073 
30,093 
Mortgages and notes receivable, net of allowance of $182 and $61, respectively
25,472 
18,600 
Accrued straight-line rents receivable, net of allowance of $929 and $1,294, respectively
116,992 
99,490 
Investments in and advances to unconsolidated affiliates
66,800 
100,367 
Deferred financing and leasing costs, net of accumulated amortization of $77,383 and $62,319, respectively
170,023 
127,774 
Prepaid expenses and other assets, net of accumulated amortization of $12,318 and $15,089, respectively
44,488 
36,781 
Total Assets
3,350,428 
3,180,992 
Liabilities, Noncontrolling Interests in the Operating Partnership and Equity/Liabilities, Redeemable Operating Partnership Units and Equity:
 
 
Mortgages and notes payable
1,859,162 
1,868,906 
Accounts payable, accrued expenses and other liabilities
172,146 
148,607 
Financing obligations
29,358 
30,150 
Liabilities held for sale
35,815 
Total Liabilities
2,060,666 
2,083,478 
Commitments and contingencies
   
   
Noncontrolling interests in the Operating Partnership
124,869 
110,655 
Equity:
 
 
Preferred Stock, $.01 par value, 50,000,000 authorized shares; 8.625% Series A Cumulative Redeemable Preferred Shares (liquidation preference $1,000 per share), 29,077 shares issued and outstanding
29,077 
29,077 
Common Stock, $.01 par value, 200,000,000 authorized shares; 80,311,437 and 72,647,697 shares issued and outstanding, respectively
803 
726 
Additional paid-in capital
2,040,306 
1,803,997 
Distributions in excess of net income available for common stockholders
(897,418)
(845,853)
Accumulated other comprehensive loss
(12,628)
(5,734)
Total Stockholders’ Equity
1,160,140 
982,213 
Noncontrolling interests in consolidated affiliates
4,753 
4,646 
Total Equity
1,164,893 
986,859 
Total Liabilities, Noncontrolling Interests in the Operating Partnership and Equity/Total Liabilities, Redeemable Operating Partnership Units and Equity
3,350,428 
3,180,992 
Highwoods Realty Limited Partnership [Member]
 
 
Real estate assets, at cost:
 
 
Land
374,212 
355,694 
Buildings and tenant improvements
3,304,468 
3,009,155 
Development in process
21,198 
Land held for development
117,784 
105,206 
Total real estate assets
3,817,662 
3,470,055 
Less-accumulated depreciation
(947,567)
(869,046)
Net real estate assets
2,870,095 
2,601,009 
For-sale residential condominiums
4,751 
Real estate and other assets, net, held for sale
124,273 
Cash and cash equivalents
13,867 
11,151 
Restricted cash
19,702 
26,666 
Accounts receivable, net of allowance of $2,848 and $3,548, respectively
23,073 
30,093 
Mortgages and notes receivable, net of allowance of $182 and $61, respectively
25,472 
18,600 
Accrued straight-line rents receivable, net of allowance of $929 and $1,294, respectively
116,992 
99,490 
Investments in and advances to unconsolidated affiliates
65,813 
99,296 
Deferred financing and leasing costs, net of accumulated amortization of $77,383 and $62,319, respectively
170,023 
127,774 
Prepaid expenses and other assets, net of accumulated amortization of $12,318 and $15,089, respectively
44,488 
36,781 
Total Assets
3,349,525 
3,179,884 
Liabilities, Noncontrolling Interests in the Operating Partnership and Equity/Liabilities, Redeemable Operating Partnership Units and Equity:
 
 
Mortgages and notes payable
1,859,162 
1,868,906 
Accounts payable, accrued expenses and other liabilities
172,026 
148,607 
Financing obligations
29,358 
30,150 
Liabilities held for sale
35,815 
Total Liabilities
2,060,546 
2,083,478 
Commitments and contingencies
   
   
Redeemable Operating Partnership Units:
 
 
Common Units, 3,733,016 and 3,729,518 outstanding, respectively
124,869 
110,655 
Series A Preferred Units (liquidation preference $1,000 per unit), 29,077 units issued and outstanding, respectively
29,077 
29,077 
Total Redeemable Operating Partnership Units
153,946 
139,732 
Equity:
 
 
General partner Common Units, 836,356 and 759,684 outstanding, respectively
11,427 
9,575 
Limited partner Common Units, 79,066,272 and 71,479,204 outstanding, respectively
1,131,481 
948,187 
Accumulated other comprehensive loss
(12,628)
(5,734)
Noncontrolling interests in consolidated affiliates
4,753 
4,646 
Total Equity
1,135,033 
956,674 
Total Liabilities, Noncontrolling Interests in the Operating Partnership and Equity/Total Liabilities, Redeemable Operating Partnership Units and Equity
$ 3,349,525 
$ 3,179,884 
Consolidated Balance Sheets Parentheticals Consolidated Balance Sheets (Parentheticals) (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2012
Dec. 31, 2011
Assets:
 
 
Accounts receivable allowance
$ 2,848 
$ 3,548 
Mortgages and notes receivable allowance
182 
61 
Accrued straight-line rents receivable allowance
929 
1,294 
Deferred financing and leasing costs, accumulated amortization
77,383 
62,319 
Prepaid expenses and other assets, accumulated amortization
12,318 
15,089 
Equity:
 
 
Preferred Stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Preferred Stock, authorized shares (in shares)
50,000,000 
50,000,000 
Preferred Stock, liquidation preference (in dollars per share)
$ 1,000 
$ 1,000 
Preferred Stock, shares issued (in shares)
29,077 
29,077 
Preferred Stock, shares outstanding (in shares)
29,077 
29,077 
Common Stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Common Stock, authorized shares (in shares)
200,000,000 
200,000,000 
Common Stock, shares issued (in shares)
80,311,437 
72,647,697 
Common Stock, shares outstanding (in shares)
80,311,437 
72,647,697 
Highwoods Realty Limited Partnership [Member]
 
 
Assets:
 
 
Accounts receivable allowance
2,848 
3,548 
Mortgages and notes receivable allowance
182 
61 
Accrued straight-line rents receivable allowance
929 
1,294 
Deferred financing and leasing costs, accumulated amortization
77,383 
62,319 
Prepaid expenses and other assets, accumulated amortization
$ 12,318 
$ 15,089 
Equity:
 
 
Common Stock, par value (in dollars per share)
$ 0.01 
 
Redeemable Operating Partnership Units:
 
 
Redeemable Common Units, outstanding (in shares)
3,733,016 
3,729,518 
Preferred Units liquidation preference (in dollars per share)
$ 1,000 
$ 1,000 
Series A Preferred Units, issued (in shares)
29,077 
29,077 
Series A Preferred Units, outstanding (in shares)
29,077 
29,077 
Common Units:
 
 
General partners' capital account, units outstanding (in shares)
836,356 
759,684 
Limited partners' capital account, units outstanding (in shares)
79,066,272 
71,479,204 
Consolidated Statements of Income (USD $)
Share data in Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Rental and other revenues
$ 516,102,000 
$ 463,444,000 
$ 440,836,000 
Operating expenses:
 
 
 
Rental property and other expenses
187,434,000 
167,853,000 
155,771,000 
Depreciation and amortization
156,318,000 
137,890,000 
130,232,000 
Impairments of real estate assets
2,429,000 
General and administrative
37,377,000 
35,727,000 
32,948,000 
Total operating expenses
381,129,000 
343,899,000 
318,951,000 
Interest expense:
 
 
 
Contractual
92,838,000 
91,458,000 
87,409,000 
Amortization of deferred financing costs
3,685,000 
3,312,000 
3,385,000 
Financing obligations
(409,000)
740,000 
2,157,000 
Total interest expense
96,114,000 
95,510,000 
92,951,000 
Other income:
 
 
 
Interest and other income
7,353,000 
7,387,000 
6,362,000 
Losses on debt extinguishment
(973,000)
(24,000)
(705,000)
Total other income
6,380,000 
7,363,000 
5,657,000 
Income from continuing operations before disposition of property, condominiums and investments in unconsolidated affiliates and equity in earnings of unconsolidated affiliates
45,239,000 
31,398,000 
34,591,000 
Gains on disposition of property
764,000 
74,000 
Gains/(losses) on for-sale residential condominiums
444,000 
(316,000)
276,000 
Gains on disposition of investments in unconsolidated affiliates
2,282,000 
25,330,000 
Equity in earnings of unconsolidated affiliates
5,035,000 
4,878,000 
3,821,000 
Income from continuing operations
50,718,000 
39,006,000 
64,092,000 
Discontinued operations:
 
 
 
Income from discontinued operations
4,062,000 
6,392,000 
8,297,000 
Net gains/(losses) on disposition of discontinued operations
29,455,000 
2,573,000 
(86,000)
Total discontinued operations
33,517,000 
8,965,000 
8,211,000 
Net income
84,235,000 
47,971,000 
72,303,000 
Net (income) attributable to noncontrolling interests in the Operating Partnership
(3,854,000)
(2,091,000)
(3,320,000)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(786,000)
(755,000)
(485,000)
Dividends on Preferred Stock
(2,508,000)
(4,553,000)
(6,708,000)
Excess of Preferred Stock redemption/repurchase cost over carrying value
(1,895,000)
Net income available for common stockholders
77,087,000 
38,677,000 
61,790,000 
Earnings per Common Share - basic:
 
 
 
Income from continuing operations available for common stockholders (in dollars per share)
$ 0.60 
$ 0.42 
$ 0.75 
Income from discontinued operations available for common stockholders (in dollars per share)
$ 0.42 
$ 0.12 
$ 0.11 
Net income available for common stockholders (in dollars per share)
$ 1.02 
$ 0.54 
$ 0.86 
Weighted average Common Shares outstanding - basic (in shares)
75,811 1 2
72,281 1 2
71,578 1 2
Earnings per Common Share - diluted:
 
 
 
Income from continuing operations available for common stockholders (in dollars per share)
$ 0.60 
$ 0.42 
$ 0.75 
Income from discontinued operations available for common stockholders (in dollars per share)
$ 0.42 
$ 0.12 
$ 0.11 
Net income available for common stockholders (in dollars per share)
$ 1.02 
$ 0.54 
$ 0.86 
Weighted average Common Shares outstanding - diluted (in shares)
79,678 2
76,189 2
75,578 2
Net income available for common stockholders:
 
 
 
Income from continuing operations available for common stockholders
45,164,000 
30,158,000 
53,994,000 
Income from discontinued operations available for common stockholders
31,923,000 
8,519,000 
7,796,000 
Net income available for common stockholders
77,087,000 
38,677,000 
61,790,000 
Highwoods Realty Limited Partnership [Member]
 
 
 
Rental and other revenues
516,102,000 
463,444,000 
440,836,000 
Operating expenses:
 
 
 
Rental property and other expenses
187,185,000 
167,827,000 
155,411,000 
Depreciation and amortization
156,318,000 
137,890,000 
130,232,000 
Impairments of real estate assets
2,429,000 
General and administrative
37,626,000 
35,753,000 
33,308,000 
Total operating expenses
381,129,000 
343,899,000 
318,951,000 
Interest expense:
 
 
 
Contractual
92,838,000 
91,458,000 
87,409,000 
Amortization of deferred financing costs
3,685,000 
3,312,000 
3,385,000 
Financing obligations
(409,000)
740,000 
2,157,000 
Total interest expense
96,114,000 
95,510,000 
92,951,000 
Other income:
 
 
 
Interest and other income
7,353,000 
7,387,000 
6,362,000 
Losses on debt extinguishment
(973,000)
(24,000)
(705,000)
Total other income
6,380,000 
7,363,000 
5,657,000 
Income from continuing operations before disposition of property, condominiums and investments in unconsolidated affiliates and equity in earnings of unconsolidated affiliates
45,239,000 
31,398,000 
34,591,000 
Gains on disposition of property
764,000 
74,000 
Gains/(losses) on for-sale residential condominiums
444,000 
(316,000)
276,000 
Gains on disposition of investments in unconsolidated affiliates
2,282,000 
25,330,000 
Equity in earnings of unconsolidated affiliates
5,095,000 
4,939,000 
3,794,000 
Income from continuing operations
50,778,000 
39,067,000 
64,065,000 
Discontinued operations:
 
 
 
Income from discontinued operations
4,062,000 
6,392,000 
8,297,000 
Net gains/(losses) on disposition of discontinued operations
29,455,000 
2,573,000 
(86,000)
Total discontinued operations
33,517,000 
8,965,000 
8,211,000 
Net income
84,295,000 
48,032,000 
72,276,000 
Net (income) attributable to noncontrolling interests in consolidated affiliates
(786,000)
(755,000)
(485,000)
Distributions on Preferred Units
(2,508,000)
(4,553,000)
(6,708,000)
Excess of Preferred Unit redemption/repurchase cost over carrying value
(1,895,000)
Net income available for common unitholders
81,001,000 
40,829,000 
65,083,000 
Earnings per Common Unit - basic:
 
 
 
Income from continuing operations available for common unitholders (in dollars per share)
$ 0.60 
$ 0.42 
$ 0.76 
Income from discontinued operations available for common unitholders (in dollars per share)
$ 0.42 
$ 0.12 
$ 0.11 
Net income available for common unitholders (in dollars per share)
$ 1.02 
$ 0.54 
$ 0.87 
Weighted average Common Units outstanding - basic (in shares)
79,147 
75,644 
74,971 
Earnings per Common Unit - diluted:
 
 
 
Income from continuing operations available for common unitholders (in dollars per share)
0.60 
0.42 
0.76 
Income from discontinued operations available for common unitholders (in dollars per share)
0.42 
0.12 
0.11 
Net income available for common unitholders (in dollars per share)
1.02 
0.54 
0.87 
Weighted average Common Units outstanding - diluted (in shares)
79,269 
75,780 
75,169 
Net income available for common unitholders:
 
 
 
Income from continuing operations available for common unitholders
47,484,000 
31,864,000 
56,872,000 
Total discontinued operations
33,517,000 
8,965,000 
8,211,000 
Net income available for common unitholders
$ 81,001,000 
$ 40,829,000 
$ 65,083,000 
Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Comprehensive income/(loss):
 
 
 
Net income
$ 84,235 
$ 47,971 
$ 72,303 
Other comprehensive income/(loss):
 
 
 
Unrealized gains/(losses) on tax increment financing bond
411 
234 
(177)
Unrealized losses on cash flow hedges
(10,358)
(2,202)
Amortization of cash flow hedges
3,053 
(118)
237 
Sale of cash flow hedge related to disposition of investments in unconsolidated affiliate
103 
Total other comprehensive income/(loss)
(6,894)
(2,086)
163 
Total comprehensive income
77,341 
45,885 
72,466 
Less-comprehensive (income) attributable to noncontrolling interests
(4,640)
(2,846)
(3,805)
Comprehensive income attributable to common stockholders
72,701 
43,039 
68,661 
Highwoods Realty Limited Partnership [Member]
 
 
 
Comprehensive income/(loss):
 
 
 
Net income
84,295 
48,032 
72,276 
Other comprehensive income/(loss):
 
 
 
Unrealized gains/(losses) on tax increment financing bond
411 
234 
(177)
Unrealized losses on cash flow hedges
(10,358)
(2,202)
Amortization of cash flow hedges
3,053 
(118)
237 
Sale of cash flow hedge related to disposition of investments in unconsolidated affiliate
103 
Total other comprehensive income/(loss)
(6,894)
(2,086)
163 
Total comprehensive income
77,401 
45,946 
72,439 
Less-comprehensive (income) attributable to noncontrolling interests
(786)
(755)
(485)
Comprehensive income attributable to common stockholders
$ 76,615 
$ 45,191 
$ 71,954 
Consolidated Statements of Equity (USD $)
In Thousands, except Share data, unless otherwise specified
Total
Highwoods Realty Limited Partnership [Member]
Common Stock [Member]
Series A Cumulative Redeemable Preferred Shares [Member]
Series B Cumulative Redeemable Preferred Shares [Member]
General Partner Common Units [Member]
Highwoods Realty Limited Partnership [Member]
Limited Partner Common Units [Member]
Highwoods Realty Limited Partnership [Member]
Additional Paid-in Capital [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Highwoods Realty Limited Partnership [Member]
Noncontrolling Interests in Consolidated Affiliates [Member]
Noncontrolling Interests in Consolidated Affiliates [Member]
Highwoods Realty Limited Partnership [Member]
Distributions in Excess of Net Income Available for Common Stockholders [Member]
Balance at Dec. 31, 2009
$ 1,133,143 
$ 1,050,185 
$ 713 
$ 29,092 
$ 52,500 
$ 10,485 
$ 1,038,328 
$ 1,751,398 
$ (3,811)
$ (3,811)
$ 5,183 
$ 5,183 
$ (701,932)
Balance (in shares) at Dec. 31, 2009
 
 
71,285,303 
 
 
 
 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuances of Common Units, net
 
2,998 
 
 
 
30 
2,968 
 
 
 
 
Distributions paid on Common Units
 
(127,417)
 
 
 
(1,274)
(126,143)
 
 
 
 
Distributions paid on Preferred Units
 
(6,708)
 
 
 
(67)
(6,641)
 
 
 
 
Issuances of Common Stock - Shares
 
 
143,907 
 
 
 
 
 
 
 
 
 
 
Issuances of Common Stock, net
2,998 
 
 
 
2,997 
 
 
Conversion of Common Units to Common Stock - Shares
 
 
97,134 
 
 
 
 
 
 
 
 
 
 
Conversion of Common Units to Common Stock
3,061 
 
 
 
3,060 
 
 
Dividends on Common Stock
(121,643)
 
 
 
 
 
(121,643)
Dividends on Preferred Stock
(6,708)
 
 
 
 
 
(6,708)
Adjustment of noncontrolling interests in the Operating Partnership to fair value
2,721 
 
 
 
2,721 
 
 
Distributions to noncontrolling interests in consolidated affiliates
(568)
(568)
(568)
(568)
Acquisition of noncontrolling interest in consolidated affiliate
(500)
(500)
139 
140 
(640)
(640)
Issuances of restricted stock, net - Shares
 
 
164,143 
 
 
 
 
 
 
 
 
 
 
Issuances of restricted stock, net
 
 
 
 
 
Share-based compensation expense
6,572 
6,572 
66 
6,506 
6,570 
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
 
8,465 
 
 
 
85 
8,380 
 
 
 
 
Net (income) attributable to noncontrolling interests in the Operating Partnership
(3,320)
 
 
 
 
 
(3,320)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(5)
(480)
485 
485 
(485)
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
72,303 
72,276 
723 
71,553 
72,303 
Other comprehensive income/(loss)
163 
163 
163 
163 
Total comprehensive income
72,466 
72,439 
 
 
 
 
 
 
 
 
 
 
 
Balance at Dec. 31, 2010
1,088,222 
1,005,466 
717 
29,092 
52,500 
10,044 
994,610 
1,766,886 
(3,648)
(3,648)
4,460 
4,460 
(761,785)
Balance (in shares) at Dec. 31, 2010
 
 
71,690,487 
 
 
 
 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (income) attributable to noncontrolling interests in the Operating Partnership
(507)
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
12,443 
12,451 
 
 
 
 
 
 
 
 
 
 
 
Balance at Mar. 31, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at Dec. 31, 2010
1,088,222 
1,005,466 
717 
29,092 
52,500 
10,044 
994,610 
1,766,886 
(3,648)
(3,648)
4,460 
4,460 
(761,785)
Balance (in shares) at Dec. 31, 2010
 
 
71,690,487 
 
 
 
 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuances of Common Units, net
 
23,270 
 
 
 
233 
23,037 
 
 
 
 
Distributions paid on Common Units
 
(128,463)
 
 
 
(1,285)
(127,178)
 
 
 
 
Distributions paid on Preferred Units
 
(4,553)
 
 
 
(46)
(4,507)
 
 
 
 
Issuances of Common Stock - Shares
 
 
758,389 
 
 
 
 
 
 
 
 
 
 
Issuances of Common Stock, net
23,270 
 
 
 
23,262 
 
 
Conversion of Common Units to Common Stock - Shares
 
 
64,469 
 
 
 
 
 
 
 
 
 
 
Conversion of Common Units to Common Stock
1,906 
 
 
 
1,906 
 
 
Dividends on Common Stock
(122,745)
 
 
 
 
 
(122,745)
Dividends on Preferred Stock
(4,553)
 
 
 
 
 
(4,553)
Adjustment of noncontrolling interests in the Operating Partnership to fair value
3,955 
 
 
 
3,955 
 
 
Distributions to noncontrolling interests in consolidated affiliates
(569)
(569)
(569)
(569)
Issuances of restricted stock, net - Shares
 
 
134,352 
 
 
 
 
 
 
 
 
 
 
Issuances of restricted stock, net
 
 
 
 
 
Redemptions/repurchases of Preferred Stock
(52,515)
 
(15)
(52,500)
 
 
1,895 
 
 
(1,895)
Share-based compensation expense
6,094 
6,094 
61 
6,033 
6,093 
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
 
9,483 
 
 
 
96 
9,387 
 
 
 
 
Net (income) attributable to noncontrolling interests in the Operating Partnership
(2,091)
 
 
 
 
 
(2,091)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(8)
(747)
755 
755 
(755)
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
47,971 
48,032 
480 
47,552 
47,971 
Other comprehensive income/(loss)
(2,086)
(2,086)
(2,086)
(2,086)
Total comprehensive income
45,885 
45,946 
 
 
 
 
 
 
 
 
 
 
 
Balance at Dec. 31, 2011
986,859 
956,674 
726 
29,077 
9,575 
948,187 
1,803,997 
(5,734)
(5,734)
4,646 
4,646 
(845,853)
Balance (in shares) at Dec. 31, 2011
72,647,697 
 
72,647,697 
 
 
 
 
 
 
 
 
 
 
Balance at Sep. 30, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (income) attributable to noncontrolling interests in the Operating Partnership
(595)
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
12,850 
12,899 
 
 
 
 
 
 
 
 
 
 
 
Balance at Dec. 31, 2011
986,859 
956,674 
 
 
 
 
 
 
 
 
 
 
 
Balance (in shares) at Dec. 31, 2011
72,647,697 
 
 
 
 
 
 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (income) attributable to noncontrolling interests in the Operating Partnership
(827)
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
18,332 
18,334 
 
 
 
 
 
 
 
 
 
 
 
Balance at Mar. 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at Dec. 31, 2011
986,859 
956,674 
726 
29,077 
9,575 
948,187 
1,803,997 
(5,734)
(5,734)
4,646 
4,646 
(845,853)
Balance (in shares) at Dec. 31, 2011
72,647,697 
 
72,647,697 
 
 
 
 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuances of Common Units, net
 
245,467 
 
 
 
2,455 
243,012 
 
 
 
 
Distributions paid on Common Units
 
(134,291)
 
 
 
(1,343)
(132,948)
 
 
 
 
Distributions paid on Preferred Units
 
(2,508)
 
 
 
(25)
(2,483)
 
 
 
 
Issuances of Common Stock - Shares
 
 
7,441,489 
 
 
 
 
 
 
 
 
 
 
Issuances of Common Stock, net
243,168 
 
74 
 
 
243,094 
 
 
Conversion of Common Units to Common Stock - Shares
 
 
63,366 
 
 
 
 
 
 
 
 
 
 
Conversion of Common Units to Common Stock
2,096 
 
 
 
2,096 
 
 
Dividends on Common Stock
(128,652)
 
 
 
 
 
(128,652)
Dividends on Preferred Stock
(2,508)
 
 
 
 
 
(2,508)
Adjustment of noncontrolling interests in the Operating Partnership to fair value
(16,491)
 
 
 
(16,491)
 
 
Distributions to noncontrolling interests in consolidated affiliates
(679)
(679)
(679)
(679)
Issuances of restricted stock, net - Shares
 
 
158,885 
 
 
 
 
 
 
 
 
 
 
Issuances of restricted stock, net
 
 
 
 
 
Share-based compensation expense
7,613 
7,613 
76 
7,537 
7,610 
Adjustment of Redeemable Common Units to fair value and contributions/distributions from/to the General Partner
 
(14,644)
 
 
 
(146)
(14,498)
 
 
 
 
Net (income) attributable to noncontrolling interests in the Operating Partnership
(3,854)
 
 
 
 
 
(3,854)
Net (income) attributable to noncontrolling interests in consolidated affiliates
(8)
(778)
786 
786 
(786)
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
84,235 
84,295 
843 
83,452 
84,235 
Other comprehensive income/(loss)
(6,894)
(6,894)
(6,894)
(6,894)
Total comprehensive income
77,341 
77,401 
 
 
 
 
 
 
 
 
 
 
 
Balance at Dec. 31, 2012
1,164,893 
1,135,033 
803 
29,077 
11,427 
1,131,481 
2,040,306 
(12,628)
(12,628)
4,753 
4,753 
(897,418)
Balance (in shares) at Dec. 31, 2012
80,311,437 
 
80,311,437 
 
 
 
 
 
 
 
 
 
 
Balance at Sep. 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (income) attributable to noncontrolling interests in the Operating Partnership
(688)
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
15,609 
15,660 
 
 
 
 
 
 
 
 
 
 
 
Balance at Dec. 31, 2012
$ 1,164,893 
$ 1,135,033 
 
 
 
 
 
 
 
 
 
 
 
Balance (in shares) at Dec. 31, 2012
80,311,437 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Operating activities:
 
 
 
Net income
$ 84,235 
$ 47,971 
$ 72,303 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
158,327 
143,146 
136,158 
Amortization of lease incentives and acquisition-related intangible assets and liabilities
355 
1,446 
1,239 
Share-based compensation expense
7,613 
6,094 
6,572 
Allowance for losses on accounts and accrued straight-line rents receivable
1,059 
2,521 
4,009 
Amortization of deferred financing costs
3,685 
3,312 
3,385 
Amortization of cash flow hedges
3,053 
(118)
237 
Impairments of real estate assets
2,429 
Losses on debt extinguishment
973 
24 
705 
Net (gains)/losses on disposition of property
(29,455)
(3,337)
12 
(Gains)/losses on for-sale residential condominiums
(444)
316 
(276)
Gains on disposition of investments in unconsolidated affiliates
(2,282)
(25,330)
Equity in earnings of unconsolidated affiliates
(5,035)
(4,878)
(3,821)
Changes in financing obligations
(1,282)
(476)
708 
Distributions of earnings from unconsolidated affiliates
4,618 
5,029 
4,433 
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
3,132 
(8,498)
(3,290)
Prepaid expenses and other assets
(1,129)
(400)
370 
Accrued straight-line rents receivable
(17,919)
(13,604)
(11,889)
Accounts payable, accrued expenses and other liabilities
(18,370)
16,701 
5,012 
Net cash provided by operating activities
193,416 
195,396 
190,537 
Investing activities:
 
 
 
Investments in acquired real estate and related intangible assets, net of cash acquired
(269,847)
(75,510)
(20,281)
Investments in development in process
(13,288)
(5,835)
(223)
Investments in tenant improvements and deferred leasing costs
(79,639)
(80,934)
(55,858)
Investments in building improvements
(35,799)
(22,287)
(26,355)
Net proceeds from disposition of real estate assets
152,456 
17,717 
6,801 
Net proceeds from disposition of for-sale residential condominiums
5,195 
3,020 
4,952 
Proceeds from disposition of investments in unconsolidated affiliates
4,756 
15,000 
Distributions of capital from unconsolidated affiliates
1,311 
1,577 
1,933 
Investments in mortgage receivable
(8,648)
Repayments of mortgages and notes receivable
1,776 
444 
329 
Investments in and advances to unconsolidated affiliates
8,291 
(39,901)
(2,875)
Changes in restricted cash and other investing activities
(620)
(18,526)
(1,578)
Net cash used in investing activities
(238,812)
(215,479)
(78,155)
Financing activities:
 
 
 
Dividends on Common Stock
(128,652)
(122,745)
(121,643)
Redemptions/repurchases of Preferred Stock
(52,515)
Dividends on Preferred Stock
(2,508)
(4,553)
(6,708)
Distributions to noncontrolling interests in the Operating Partnership
(6,334)
(6,413)
(6,469)
Distributions to noncontrolling interests in consolidated affiliates
(679)
(569)
(568)
Acquisition of noncontrolling interest in consolidated affiliate
(500)
Proceeds from the issuance of Common Stock
249,489 
23,270 
2,998 
Costs paid for the issuance of Common Stock
(3,600)
Repurchase of shares related to tax withholdings
(2,721)
Borrowings on revolving credit facility
524,100 
525,800 
37,500 
Repayments of revolving credit facility
(863,100)
(193,800)
(7,500)
Borrowings on mortgages and notes payable
507,350 
200,000 
10,368 
Repayments of mortgages and notes payable
(219,530)
(344,203)
(27,004)
Borrowings on financing obligations
1,839 
Payments on financing obligations
(1,316)
(1,194)
(1,116)
Payments on debt extinguishment
(908)
(577)
Additions to deferred financing costs and other financing activities
(5,439)
(6,013)
(656)
Net cash provided by/(used in) financing activities
47,991 
17,065 
(121,875)
Net increase/(decrease) in cash and cash equivalents
2,595 
(3,018)
(9,493)
Cash and cash equivalents at beginning of the period
11,188 
14,206 
23,699 
Cash and cash equivalents at end of the period
13,783 
11,188 
14,206 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of amounts capitalized
93,547 
90,838 
86,395 
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Unrealized losses on cash flow hedges
(10,358)
(2,202)
Conversion of Common Units to Common Stock
2,096 
1,906 
3,061 
Changes in accrued capital expenditures
8,116 
11,048 
(1,946)
Write-off of fully depreciated real estate assets
48,978 
48,565 
43,955 
Write-off of fully amortized deferred financing and leasing costs
19,176 
19,987 
15,719 
Unrealized gains/(losses) on marketable securities of non-qualified deferred compensation plan
475 
(119)
382 
Settlement of financing obligation
4,184 
Adjustment of noncontrolling interests in the Operating Partnership to fair value
16,491 
(3,955)
(2,721)
Unrealized gains/(losses) on tax increment financing bond
411 
234 
(177)
Mortgages receivable from seller financing
17,030 
Assumption of mortgages and notes payable related to acquisition activities
7,837 
192,367 
40,306 
Reduction of advances to unconsolidated affiliates related to acquisition activities
26,000 
Issuances of Common Units to noncontrolling interests to acquire real estate assets
2,299 
Highwoods Realty Limited Partnership [Member]
 
 
 
Operating activities:
 
 
 
Net income
84,295 
48,032 
72,276 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
158,327 
143,146 
136,158 
Amortization of lease incentives and acquisition-related intangible assets and liabilities
355 
1,446 
1,239 
Share-based compensation expense
7,613 
6,094 
6,572 
Allowance for losses on accounts and accrued straight-line rents receivable
1,059 
2,521 
4,009 
Amortization of deferred financing costs
3,685 
3,312 
3,385 
Amortization of cash flow hedges
3,053 
(118)
237 
Impairments of real estate assets
2,429 
Losses on debt extinguishment
973 
24 
705 
Net (gains)/losses on disposition of property
(29,455)
(3,337)
12 
(Gains)/losses on for-sale residential condominiums
(444)
316 
(276)
Gains on disposition of investments in unconsolidated affiliates
(2,282)
(25,330)
Equity in earnings of unconsolidated affiliates
(5,095)
(4,939)
(3,794)
Changes in financing obligations
(1,282)
(476)
708 
Distributions of earnings from unconsolidated affiliates
4,592 
5,005 
4,377 
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
3,132 
(8,498)
(3,290)
Prepaid expenses and other assets
(1,129)
(400)
370 
Accrued straight-line rents receivable
(17,919)
(13,604)
(11,889)
Accounts payable, accrued expenses and other liabilities
(18,490)
16,701 
5,012 
Net cash provided by operating activities
193,270 
195,372 
190,481 
Investing activities:
 
 
 
Investments in acquired real estate and related intangible assets, net of cash acquired
(269,847)
(75,510)
(20,281)
Investments in development in process
(13,288)
(5,835)
(223)
Investments in tenant improvements and deferred leasing costs
(79,639)
(80,934)
(55,858)
Investments in building improvements
(35,799)
(22,287)
(26,355)
Net proceeds from disposition of real estate assets
152,456 
17,717 
6,801 
Net proceeds from disposition of for-sale residential condominiums
5,195 
3,020 
4,952 
Proceeds from disposition of investments in unconsolidated affiliates
4,756 
15,000 
Distributions of capital from unconsolidated affiliates
1,311 
1,577 
1,933 
Investments in mortgage receivable
(8,648)
Repayments of mortgages and notes receivable
1,776 
444 
329 
Investments in and advances to unconsolidated affiliates
8,291 
(39,901)
(2,875)
Changes in restricted cash and other investing activities
(620)
(18,526)
(1,576)
Net cash used in investing activities
(238,812)
(215,479)
(78,153)
Financing activities:
 
 
 
Distributions on Common Units
(134,291)
(128,463)
(127,417)
Redemptions/repurchases of Preferred Units
(52,515)
Distributions on Preferred Units
(2,508)
(4,553)
(6,708)
Distributions to noncontrolling interests in consolidated affiliates
(679)
(569)
(568)
Acquisition of noncontrolling interest in consolidated affiliate
(500)
Proceeds from the issuance of Common Units
249,489 
23,270 
2,998 
Costs paid for the issuance of Common Units
3,600 
Repurchase of units related to tax withholdings
2,721 
Borrowings on revolving credit facility
524,100 
525,800 
37,500 
Repayments of revolving credit facility
(863,100)
(193,800)
(7,500)
Borrowings on mortgages and notes payable
507,350 
200,000 
10,368 
Repayments of mortgages and notes payable
(219,530)
(344,203)
(27,004)
Borrowings on financing obligations
1,839 
Payments on financing obligations
(1,316)
(1,194)
(1,116)
Payments on debt extinguishment
(908)
(577)
Additions to deferred financing costs and other financing activities
(5,867)
(6,713)
(1,125)
Net cash provided by/(used in) financing activities
48,258 
17,060 
(121,649)
Net increase/(decrease) in cash and cash equivalents
2,716 
(3,047)
(9,321)
Cash and cash equivalents at beginning of the period
11,151 
14,198 
23,519 
Cash and cash equivalents at end of the period
13,867 
11,151 
14,198 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of amounts capitalized
93,547 
90,838 
86,395 
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Unrealized losses on cash flow hedges
(10,358)
(2,202)
Changes in accrued capital expenditures
8,116 
11,048 
(1,946)
Write-off of fully depreciated real estate assets
48,978 
48,565 
43,955 
Write-off of fully amortized deferred financing and leasing costs
19,176 
19,987 
15,719 
Unrealized gains/(losses) on marketable securities of non-qualified deferred compensation plan
475 
(119)
382 
Settlement of financing obligation
4,184 
Adjustment of Redeemable Common Units to fair value
11,915 
(10,183)
(2,721)
Unrealized gains/(losses) on tax increment financing bond
411 
234 
(177)
Mortgages receivable from seller financing
17,030 
Assumption of mortgages and notes payable related to acquisition activities
7,837 
192,367 
40,306 
Reduction of advances to unconsolidated affiliates related to acquisition activities
26,000 
Issuances of Common Units to noncontrolling interests to acquire real estate assets
$ 2,299 
$ 0 
$ 0 
Description of Business and Significant Accounting Policies
Description of Business and Significant Accounting Policies

Description of Business

Highwoods Properties, Inc., together with its consolidated subsidiaries (the “Company”), is a fully-integrated, self-administered and self-managed equity real estate investment trust (“REIT”) that provides leasing, management, development, construction and other customer-related services for its properties and for third parties. The Company conducts virtually all of its activities through Highwoods Realty Limited Partnership (the “Operating Partnership”). At December 31, 2012, the Company and/or the Operating Partnership wholly owned: 301 in-service office, industrial and retail properties, comprising 29.7 million square feet; 649 acres of undeveloped land suitable for future development, of which 566 acres are considered core assets; and one office development property. In addition, we owned interests (50.0% or less) in 32 in-service office properties, a rental residential development property and 11 acres of undeveloped land suitable for future development, which includes a 12.5% interest in a 261,000 square foot office property directly owned by the Company (not included in the Operating Partnership’s Consolidated Financial Statements).

The Company is the sole general partner of the Operating Partnership. At December 31, 2012, the Company owned all of the Preferred Units and 79.9 million, or 95.6%, of the Common Units in the Operating Partnership. Limited partners, including two directors of the Company, own the remaining 3.7 million Common Units. In the event the Company issues shares of Common Stock, the net proceeds of the issuance are contributed to the Operating Partnership in exchange for additional Common Units. Generally, the Operating Partnership is required to redeem each Common Unit at the request of the holder thereof for cash equal to the value of one share of the Company’s Common Stock, $0.01 par value, based on the average of the market price for the 10 trading days immediately preceding the notice date of such redemption, provided that the Company at its option may elect to acquire any such Common Units presented for redemption for cash or one share of Common Stock. The Common Units owned by the Company are not redeemable. During 2012, the Company redeemed 63,366 Common Units for a like number of shares of Common Stock and the Operating Partnership issued 66,864 Common Units to acquire real estate assets. As a result of this activity, in conjunction with the proceeds from issuances of Common Stock contributed to the Operating Partnership in exchange for additional Common Units, the percentage of Common Units owned by the Company increased from 95.1% at December 31, 2011 to 95.6% at December 31, 2012.

Basis of Presentation

Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Our Consolidated Balance Sheet at December 31, 2011 was 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 which qualified as held for sale during 2012. Our Consolidated Statements of Income for the years ended December 31, 2011 and 2010 were retrospectively revised from previously reported amounts to reflect in discontinued operations the operations for those properties that qualified for discontinued operations during 2012. Prior period amounts related to capital expenditures in our Consolidated Statements of Cash Flows have been disaggregated to conform to the current period presentation.

The Consolidated Financial Statements include the Operating Partnership, wholly owned subsidiaries and those subsidiaries in which we own a majority voting interest with the ability to control operations of the subsidiaries and where no substantive participating rights or substantive kick out rights have been granted to the noncontrolling interests. We consolidate partnerships, joint ventures and limited liability companies when we control the major operating and financial policies of the entity through majority ownership or in our capacity as general partner or managing member. Five of the 50.0% or less owned in-service office properties are consolidated. In addition, we consolidate those entities deemed to be variable interest entities in which we are determined to be the primary beneficiary. At December 31, 2012, we had involvement with, but are not the primary beneficiary in, an entity that we concluded to be a variable interest entity (see Note 3). All intercompany transactions and accounts have been eliminated.

1.    Description of Business and Significant Accounting Policies – Continued

Use of Estimates

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

Real Estate and Related Assets

Real estate and related assets are recorded at cost and stated at cost less accumulated depreciation. Renovations, replacements and other expenditures that improve or extend the life of assets are capitalized and depreciated over their estimated useful lives. Expenditures for ordinary maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful life of 40 years for buildings and depreciable land infrastructure costs, 15 years for building improvements and five to seven years for furniture, fixtures and equipment. Tenant improvements are amortized using the straight-line method over initial fixed terms of the respective leases, which generally are from three to 10 years. Depreciation expense for real estate assets was $129.0 million, $120.8 million and $117.6 million for the years ended December 31, 2012, 2011 and 2010, respectively.

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

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

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

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

1.    Description of Business and Significant Accounting Policies – Continued

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

In-place leases acquired are recorded at fair value in deferred financing and leasing costs and are amortized to depreciation and amortization expense over the remaining term of the respective lease. The value of in-place leases is based on our evaluation of the specific characteristics of each customer's lease. Factors considered include estimates of carrying costs during hypothetical expected lease-up periods, current market conditions, the customer's credit quality and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, we consider tenant improvements, leasing commissions and legal and other related expenses.
 
Real estate and other assets are classified as long-lived assets held for use or as long-lived assets held for sale. Real estate is classified as held for sale when the sale of the asset has been duly approved by the Company, a legally enforceable contract has been executed and the buyer's due diligence period has expired.

Impairments of Real Estate Assets and Investments in Unconsolidated Affiliates

With respect to assets classified as held for use, we perform an impairment analysis if events or changes in circumstances indicate that the carrying value may be impaired, such as a significant decline in occupancy, identification of materially adverse legal or environmental factors, change in our designation of an asset from core to non-core which impacts the anticipated holding period or a decline in market value to an amount less than cost. This analysis is generally performed at the property level, except when an asset is part of an interdependent group such as an office park, and consists of determining whether the asset's carrying amount will be recovered from its undiscounted estimated future operating and residual cash flows. These cash flows are estimated based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for customers, changes in market rental rates, costs to operate each property and expected ownership periods. For properties under development, the cash flows are based on expected service potential of the asset or asset group when development is substantially complete.
 
If the carrying amount of a held for use asset exceeds the sum of its undiscounted future operating and residual cash flows, an impairment loss is recorded for the difference between estimated fair value of the asset and the carrying amount. We generally estimate the fair value of assets held for use by using discounted cash flow analyses. In some instances, appraisal information may be available and is used in addition to a discounted cash flow analysis. As the factors used in generating these cash flows are difficult to predict and are subject to future events that may alter our assumptions, the discounted and/or undiscounted future operating and residual cash flows estimated by us in our impairment analyses or those established by appraisal may not be achieved and we may be required to recognize future impairment losses on our properties held for use.
 
We record assets held for sale, including for-sale residential condominiums, at the lower of the carrying amount or estimated fair value. Fair value of assets held for sale is equal to the estimated or contracted sales price with a potential buyer, less costs to sell. The impairment loss is the amount by which the carrying amount exceeds the estimated fair value.
 
We also analyze our investments in unconsolidated affiliates for impairment. This analysis consists of determining whether an expected loss in market value of an investment is other than temporary by evaluating the length of time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the investee, and our intent and ability to retain our investment for a period of time sufficient to allow for any anticipated recovery in market value. As the factors used in this analysis are difficult to predict and are subject to future events that may alter our assumptions, we may be required to recognize future impairment losses on our investments in unconsolidated affiliates.


1.    Description of Business and Significant Accounting Policies – Continued

Sales of Real Estate
 
For sales transactions meeting the requirements for full profit recognition, the related assets and liabilities are removed from the balance sheet and the resultant gain or loss is recorded in the period the transaction closes. For sales transactions with continuing involvement after the sale, if the continuing involvement with the property is limited by the terms of the sales contract, profit is recognized at the time of sale and is reduced by the maximum exposure to loss related to the nature of the continuing involvement. Sales to entities in which we have or receive an interest are accounted for using partial sale accounting.
 
For transactions that do not meet the criteria for a sale, we evaluate the nature of the continuing involvement, including put and call provisions, if present, and account for the transaction as a financing arrangement, profit-sharing arrangement, leasing arrangement or other alternate method of accounting, rather than as a sale, based on the nature and extent of the continuing involvement. Some transactions may have numerous forms of continuing involvement. In those cases, we determine which method is most appropriate based on the substance of the transaction.

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

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


1.    Description of Business and Significant Accounting Policies – Continued
 
Discontinued Operations
 
Properties that are sold or classified as held for sale are classified as discontinued operations provided that (1) the operations and cash flows of the property will be eliminated from our ongoing operations and (2) we will not have any significant continuing involvement in the operations of the property after it is sold. Interest expense is included in discontinued operations if the related loan securing the sold property is to be paid off or assumed by the buyer in connection with the sale. If the property is sold to a joint venture in which we retain an interest, the property will not be accounted for as a discontinued operation due to our significant ongoing interest in the operations through our joint venture interest. If we are retained to provide property management, leasing and/or other services for the property owner after the sale, the property generally will be accounted for as a discontinued operation because the expected cash flows related to our management and leasing activities generally will not be significant in comparison to the cash flows from the property prior to sale.
 
Lease Incentives
 
Lease incentive costs, which are payments made to or on behalf of a customer as an incentive to sign the lease, are capitalized in deferred financing and leasing costs and amortized on a straight-line basis over the respective lease terms as a reduction of rental revenues.
 
For-Sale Residential Condominiums
 
For-sale residential condominiums include completed, but unsold, condominium inventory. We initially record receipts of earnest money deposits in accounts payable, accrued expenses and other liabilities in accordance with the deposit method. We then record completed sales when units close and the remaining net cash is received. All for-sale residential condominiums were sold as of December 31, 2012.

Investments in Unconsolidated Affiliates
 
We account for our investments in less than majority owned joint ventures, partnerships and limited liability companies using the equity method of accounting when our interests represent a general partnership interest but substantive participating rights or substantive kick out rights have been granted to the limited partners or when our interests do not represent a general partnership interest and we do not control the major operating and financial policies of the entity. These investments are initially recorded at cost in investments in unconsolidated affiliates and are subsequently adjusted for our share of earnings and cash contributions and distributions. To the extent our cost basis at formation of the joint venture is different than the basis reflected at the joint venture level, the basis difference is amortized over the life of the related assets and included in our share of equity in earnings of unconsolidated affiliates.
 
Cash Equivalents
 
We consider highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Restricted Cash
 
Restricted cash represents cash deposits that are legally restricted or held by third parties on our behalf, such as construction-related escrows, property disposition proceeds set aside and designated or intended to fund future tax-deferred exchanges of qualifying real estate investments, escrows and reserves for debt service, real estate taxes and property insurance established pursuant to certain mortgage financing arrangements and any deposits made with lenders to unencumber secured properties.
 
Income Taxes
 
We have elected and expect to continue to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). A corporate REIT is a legal entity that holds real estate assets and, through the payment of dividends to stockholders, is generally permitted to reduce or avoid the payment of federal and state income taxes at the corporate level. To maintain qualification as a REIT, we are required to pay dividends to our stockholders equal to at least 90.0% of our annual REIT taxable income, excluding net capital gains.

1.    Description of Business and Significant Accounting Policies – Continued
We conduct certain business activities through a taxable REIT subsidiary, as permitted under the Code. The taxable REIT subsidiary is subject to federal, state and local income taxes on its taxable income. We record provisions for income taxes based on its income recognized for financial statement purposes, including the effects of temporary differences between such income and the amount recognized for tax purposes.
 
Concentration of Credit Risk
 
At December 31, 2012, our Wholly Owned Properties were leased to 1,711 customers. The geographic locations that comprise greater than 10.0% of our rental and other revenues are Raleigh, NC, Atlanta, GA, Tampa, FL, Nashville, TN and Kansas City, MO. Our customers engage in a wide variety of businesses. No single customer of the Wholly Owned Properties generated more than 10.0% of our consolidated revenues during 2012.

We maintain our cash and cash equivalents and our restricted cash at financial or other intermediary institutions. The combined account balances at each institution may exceed FDIC insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. Additionally, from time to time in connection with tax-deferred 1031 transactions, our restricted cash balances may be commingled with other funds being held by any such intermediary institution which subjects our balance to the credit risk of the institution.

Derivative Financial Instruments
 
We borrow funds at a combination of fixed and variable rates. Borrowings under our revolving credit facility and bank term loans bear interest at variable rates. Our long-term debt, which consists of secured and unsecured long-term financings and the issuance of unsecured debt securities, typically bears interest at fixed rates although some loans bear interest at variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not hold or issue these derivative contracts for trading or speculative purposes. The interest rate on all of our variable rate debt is generally adjusted at one or three month intervals, subject to settlements under these interest rate hedge contracts. We also enter into treasury lock and similar agreements from time to time in order to limit our exposure to an increase in interest rates with respect to future debt offerings.
 
Interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive loss ("AOCL") and is subsequently reclassified into interest expense in the period that the hedged forecasted transaction affects earnings. Interest rate hedge contracts typically contain a provision whereby if we default on any of our indebtedness, we could also be declared in default on our hedge contracts.

We account for terminated derivative instruments by recognizing the related accumulated comprehensive income/loss balance in current earnings, unless the hedged forecasted transaction continues as originally planned, in which case we continue to amortize the accumulated comprehensive income/loss into earnings over the originally designated hedge period.
Earnings Per Share
 
Basic earnings per share is computed by dividing net income available for common stockholders by the weighted Common Shares outstanding - basic. Diluted earnings per share is computed by dividing net income available to common stockholders plus noncontrolling interests in the Operating Partnership by the weighted Common Shares outstanding - basic plus the dilutive effect of options, warrants and convertible securities outstanding, including Common Units, using the treasury stock method. Weighted Common Shares outstanding - basic includes all unvested restricted stock since dividends received on such restricted stock are non-forfeitable.


1.    Description of Business and Significant Accounting Policies – Continued
Recently Issued Accounting Standards
 
As a result of adopting certain new or amended accounting pronouncements in the first quarter of 2012, we have enhanced our disclosure of assets and liabilities measured at fair value and elected to continue use of credit valuation adjustments on a net basis by counterparty as part of the calculation to determine the fair value of our derivatives. Our disclosures now include: (1) significant transfers between Levels 1 and 2 of the fair value hierarchy, if any; (2) additional quantitative and qualitative information regarding fair value measurements categorized as Level 3 of the fair value hierarchy; and (3) the hierarchy classification for items whose fair value is not recorded on our Consolidated Balance Sheets but was disclosed previously in our Notes to Consolidated Financial Statements. Additionally, we have presented comprehensive income in a separate financial statement entitled Consolidated Statements of Comprehensive Income.
Description of Business and Significant Accounting Policies

Highwoods Properties, Inc., together with its consolidated subsidiaries (the “Company”), is a fully-integrated, self-administered and self-managed equity real estate investment trust (“REIT”) that provides leasing, management, development, construction and other customer-related services for its properties and for third parties. The Company conducts virtually all of its activities through Highwoods Realty Limited Partnership (the “Operating Partnership”). At December 31, 2012, the Company and/or the Operating Partnership wholly owned: 301 in-service office, industrial and retail properties, comprising 29.7 million square feet; 649 acres of undeveloped land suitable for future development, of which 566 acres are considered core assets; and one office development property. In addition, we owned interests (50.0% or less) in 32 in-service office properties, a rental residential development property and 11 acres of undeveloped land suitable for future development, which includes a 12.5% interest in a 261,000 square foot office property directly owned by the Company (not included in the Operating Partnership’s Consolidated Financial Statements).

The Company is the sole general partner of the Operating Partnership. At December 31, 2012, the Company owned all of the Preferred Units and 79.9 million, or 95.6%, of the Common Units in the Operating Partnership. Limited partners, including two directors of the Company, own the remaining 3.7 million Common Units. In the event the Company issues shares of Common Stock, the net proceeds of the issuance are contributed to the Operating Partnership in exchange for additional Common Units. Generally, the Operating Partnership is required to redeem each Common Unit at the request of the holder thereof for cash equal to the value of one share of the Company’s Common Stock, $0.01 par value, based on the average of the market price for the 10 trading days immediately preceding the notice date of such redemption, provided that the Company at its option may elect to acquire any such Common Units presented for redemption for cash or one share of Common Stock. The Common Units owned by the Company are not redeemable. During 2012, the Company redeemed 63,366 Common Units for a like number of shares of Common Stock and the Operating Partnership issued 66,864 Common Units to acquire real estate assets. As a result of this activity, in conjunction with the proceeds from issuances of Common Stock contributed to the Operating Partnership in exchange for additional Common Units, the percentage of Common Units owned by the Company increased from 95.1% at December 31, 2011 to 95.6% at December 31, 2012.

Basis of Presentation

Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Our Consolidated Balance Sheet at December 31, 2011 was 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 which qualified as held for sale during 2012. Our Consolidated Statements of Income for the years ended December 31, 2011 and 2010 were retrospectively revised from previously reported amounts to reflect in discontinued operations the operations for those properties that qualified for discontinued operations during 2012. Prior period amounts related to capital expenditures in our Consolidated Statements of Cash Flows have been disaggregated to conform to the current period presentation.

The Consolidated Financial Statements include wholly owned subsidiaries and those subsidiaries in which we own a majority voting interest with the ability to control operations of the subsidiaries and where no substantive participating rights or substantive kick out rights have been granted to the noncontrolling interests. We consolidate partnerships, joint ventures and limited liability companies when we control the major operating and financial policies of the entity through majority ownership or in our capacity as general partner or managing member. Five of the 50.0% or less owned in-service office properties are consolidated. In addition, we consolidate those entities deemed to be variable interest entities in which we are determined to be the primary beneficiary. At December 31, 2012, we had involvement with, but are not the primary beneficiary in, an entity that we concluded to be a variable interest entity (see Note 3). All intercompany transactions and accounts have been eliminated.


1.    Description of Business and Significant Accounting Policies – Continued

Use of Estimates

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

Real Estate and Related Assets

Real estate and related assets are recorded at cost and stated at cost less accumulated depreciation. Renovations, replacements and other expenditures that improve or extend the life of assets are capitalized and depreciated over their estimated useful lives. Expenditures for ordinary maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful life of 40 years for buildings and depreciable land infrastructure costs, 15 years for building improvements and five to seven years for furniture, fixtures and equipment. Tenant improvements are amortized using the straight-line method over initial fixed terms of the respective leases, which generally are from three to 10 years. Depreciation expense for real estate assets was $129.0 million, $120.8 million and $117.6 million for the years ended December 31, 2012, 2011 and 2010, respectively.

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

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

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

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

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


1.    Description of Business and Significant Accounting Policies – Continued

In-place leases acquired are recorded at fair value in deferred financing and leasing costs and are amortized to depreciation and amortization expense over the remaining term of the respective lease. The value of in-place leases is based on our evaluation of the specific characteristics of each customer's lease. Factors considered include estimates of carrying costs during hypothetical expected lease-up periods, current market conditions, the customer's credit quality and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, we consider tenant improvements, leasing commissions and legal and other related expenses.
 
Real estate and other assets are classified as long-lived assets held for use or as long-lived assets held for sale. Real estate is classified as held for sale when the sale of the asset has been duly approved by the Company, a legally enforceable contract has been executed and the buyer's due diligence period has expired.

Impairments of Real Estate Assets and Investments in Unconsolidated Affiliates

With respect to assets classified as held for use, we perform an impairment analysis if events or changes in circumstances indicate that the carrying value may be impaired, such as a significant decline in occupancy, identification of materially adverse legal or environmental factors, change in our designation of an asset from core to non-core which impacts the anticipated holding period or a decline in market value to an amount less than cost. This analysis is generally performed at the property level, except when an asset is part of an interdependent group such as an office park, and consists of determining whether the asset's carrying amount will be recovered from its undiscounted estimated future operating and residual cash flows. These cash flows are estimated based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for customers, changes in market rental rates, costs to operate each property and expected ownership periods. For properties under development, the cash flows are based on expected service potential of the asset or asset group when development is substantially complete.
 
If the carrying amount of a held for use asset exceeds the sum of its undiscounted future operating and residual cash flows, an impairment loss is recorded for the difference between estimated fair value of the asset and the carrying amount. We generally estimate the fair value of assets held for use by using discounted cash flow analyses. In some instances, appraisal information may be available and is used in addition to a discounted cash flow analysis. As the factors used in generating these cash flows are difficult to predict and are subject to future events that may alter our assumptions, the discounted and/or undiscounted future operating and residual cash flows estimated by us in our impairment analyses or those established by appraisal may not be achieved and we may be required to recognize future impairment losses on our properties held for use.
 
We record assets held for sale, including for-sale residential condominiums, at the lower of the carrying amount or estimated fair value. Fair value of assets held for sale is equal to the estimated or contracted sales price with a potential buyer, less costs to sell. The impairment loss is the amount by which the carrying amount exceeds the estimated fair value.
 
We also analyze our investments in unconsolidated affiliates for impairment. This analysis consists of determining whether an expected loss in market value of an investment is other than temporary by evaluating the length of time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the investee, and our intent and ability to retain our investment for a period of time sufficient to allow for any anticipated recovery in market value. As the factors used in this analysis are difficult to predict and are subject to future events that may alter our assumptions, we may be required to recognize future impairment losses on our investments in unconsolidated affiliates.

Sales of Real Estate
 
For sales transactions meeting the requirements for full profit recognition, the related assets and liabilities are removed from the balance sheet and the resultant gain or loss is recorded in the period the transaction closes. For sales transactions with continuing involvement after the sale, if the continuing involvement with the property is limited by the terms of the sales contract, profit is recognized at the time of sale and is reduced by the maximum exposure to loss related to the nature of the continuing involvement. Sales to entities in which we have or receive an interest are accounted for using partial sale accounting.


1.    Description of Business and Significant Accounting Policies – Continued
 
For transactions that do not meet the criteria for a sale, we evaluate the nature of the continuing involvement, including put and call provisions, if present, and account for the transaction as a financing arrangement, profit-sharing arrangement, leasing arrangement or other alternate method of accounting, rather than as a sale, based on the nature and extent of the continuing involvement. Some transactions may have numerous forms of continuing involvement. In those cases, we determine which method is most appropriate based on the substance of the transaction.

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

Cost recovery income is determined on a calendar year and a lease-by-lease basis. The most common types of cost recovery income in our leases are common area maintenance (“CAM”) and real estate taxes, for which the customer pays its pro-rata share of operating and administrative expenses and real estate taxes in excess of a base year amount. The computation of cost recovery income is complex and involves numerous judgments, including the interpretation of terms and other customer lease provisions. Leases are not uniform in dealing with such cost recovery income and there are many variations in the computation. Many customers make monthly fixed payments of CAM, real estate taxes and other cost reimbursement items. We accrue income related to these payments each month. We make quarterly accrual adjustments, positive or negative, to cost recovery income to adjust the recorded amounts to our best estimate of the final annual amounts to be billed and collected. After the end of the calendar year, we compute each customer's final cost recovery income and, after considering amounts paid by the customer during the year, issue a bill or credit for the appropriate amount to the customer. The differences between the amounts billed less previously received payments and the accrual adjustment are recorded as increases or decreases to cost recovery income when the final bills are prepared, which occurs during the first half of the subsequent year.
 
Allowance for Doubtful Accounts
 
Accounts receivable, accrued straight-line rents receivable and mortgages and notes receivable are reduced by an allowance for amounts that may become uncollectible in the future. We regularly evaluate the adequacy of our allowance for doubtful accounts. The evaluation primarily consists of reviewing past due account balances and considering such factors as the credit quality of our customer, historical trends of the customer and changes in customer payment terms. Additionally, with respect to customers in bankruptcy, we estimate the probable recovery through bankruptcy claims and adjust the allowance for amounts deemed uncollectible. If our assumptions regarding the collectability of receivables prove incorrect, we could experience losses in excess of our allowance for doubtful accounts. The allowance and its related receivable are written-off when we have concluded there is a low probability of collection and we have discontinued collection efforts.
 
Discontinued Operations
 
Properties that are sold or classified as held for sale are classified as discontinued operations provided that (1) the operations and cash flows of the property will be eliminated from our ongoing operations and (2) we will not have any significant continuing involvement in the operations of the property after it is sold. Interest expense is included in discontinued operations if the related loan securing the sold property is to be paid off or assumed by the buyer in connection with the sale. If the property is sold to a joint venture in which we retain an interest, the property will not be accounted for as a discontinued operation due to our significant ongoing interest in the operations through our joint venture interest. If we are retained to provide property management, leasing and/or other services for the property owner after the sale, the property generally will be accounted for as a discontinued operation because the expected cash flows related to our management and leasing activities generally will not be significant in comparison to the cash flows from the property prior to sale.

1.    Description of Business and Significant Accounting Policies – Continued
 
Lease Incentives
 
Lease incentive costs, which are payments made to or on behalf of a customer as an incentive to sign the lease, are capitalized in deferred financing and leasing costs and amortized on a straight-line basis over the respective lease terms as a reduction of rental revenues.
 
For-Sale Residential Condominiums
 
For-sale residential condominiums include completed, but unsold, condominium inventory. We initially record receipts of earnest money deposits in accounts payable, accrued expenses and other liabilities in accordance with the deposit method. We then record completed sales when units close and the remaining net cash is received. All for-sale residential condominiums were sold as of December 31, 2012.
 
Investments in Unconsolidated Affiliates
 
We account for our investments in less than majority owned joint ventures, partnerships and limited liability companies using the equity method of accounting when our interests represent a general partnership interest but substantive participating rights or substantive kick out rights have been granted to the limited partners or when our interests do not represent a general partnership interest and we do not control the major operating and financial policies of the entity. These investments are initially recorded at cost in investments in unconsolidated affiliates and are subsequently adjusted for our share of earnings and cash contributions and distributions. To the extent our cost basis at formation of the joint venture is different than the basis reflected at the joint venture level, the basis difference is amortized over the life of the related assets and included in our share of equity in earnings of unconsolidated affiliates.
 
Cash Equivalents
 
We consider highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
 
Restricted Cash
 
Restricted cash represents cash deposits that are legally restricted or held by third parties on our behalf, such as construction-related escrows, property disposition proceeds set aside and designated or intended to fund future tax-deferred exchanges of qualifying real estate investments, escrows and reserves for debt service, real estate taxes and property insurance established pursuant to certain mortgage financing arrangements and any deposits made with lenders to unencumber secured properties.
 
Redeemable Common Units and Preferred Units
 
Limited partners holding Common Units other than the Company (“Redeemable Common Units”) have the right to put any and all of the Common Units to the Operating Partnership and the Company has the right to put any and all of the Preferred Units to the Operating Partnership in exchange for their liquidation preference plus accrued and unpaid distributions in the event of a corresponding redemption by the Company of the underlying Preferred Stock. Consequently, these Redeemable Common Units and Preferred Units are classified outside of permanent partners’ capital in the accompanying balance sheet. The recorded value of the Redeemable Common Units is based on fair value at the balance sheet date as measured by the closing price of Common Stock on that date multiplied by the total number of Redeemable Common Units outstanding. The recorded value of the Preferred Units is based on their redemption value.

Income Taxes

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


1.    Description of Business and Significant Accounting Policies – Continued

Other than income taxes related to its taxable REIT subsidiary, the Operating Partnership does not reflect any federal income taxes in its financial statements, since as a partnership the taxable effects of its operations are attributed to its partners. The Operating Partnership does record state income tax for states that tax partnership income directly.

Concentration of Credit Risk
  
At December 31, 2012, our Wholly Owned Properties were leased to 1,711 customers. The geographic locations that comprise greater than 10.0% of our rental and other revenues are Raleigh, NC, Atlanta, GA, Tampa, FL, Nashville, TN and Kansas City, MO. Our customers engage in a wide variety of businesses. No single customer of the Wholly Owned Properties generated more than 10.0% of our consolidated revenues during 2012.

We maintain our cash and cash equivalents and our restricted cash at financial or other intermediary institutions. The combined account balances at each institution may exceed FDIC insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. Additionally, from time to time in connection with tax-deferred 1031 transactions, our restricted cash balances may be commingled with other funds being held by any such intermediary institution which subjects our balance to the credit risk of the institution.

Derivative Financial Instruments
 
We borrow funds at a combination of fixed and variable rates. Borrowings under our revolving credit facility and bank term loans bear interest at variable rates. Our long-term debt, which consists of secured and unsecured long-term financings and the issuance of unsecured debt securities, typically bears interest at fixed rates although some loans bear interest at variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not hold or issue these derivative contracts for trading or speculative purposes. The interest rate on all of our variable rate debt is generally adjusted at one or three month intervals, subject to settlements under these interest rate hedge contracts. We also enter into treasury lock and similar agreements from time to time in order to limit our exposure to an increase in interest rates with respect to future debt offerings.
 
Interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive loss ("AOCL") and is subsequently reclassified into interest expense in the period that the hedged forecasted transaction affects earnings. Interest rate hedge contracts typically contain a provision whereby if we default on any of our indebtedness, we could also be declared in default on our hedge contracts.

We account for terminated derivative instruments by recognizing the related accumulated comprehensive income/loss balance in current earnings, unless the hedged forecasted transaction continues as originally planned, in which case we continue to amortize the accumulated comprehensive income/loss into earnings over the originally designated hedge period.

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


1.    Description of Business and Significant Accounting Policies – Continued
 
Recently Issued Accounting Standards
 
As a result of adopting certain new or amended accounting pronouncements in the first quarter of 2012, we have enhanced our disclosure of assets and liabilities measured at fair value and elected to continue use of credit valuation adjustments on a net basis by counterparty as part of the calculation to determine the fair value of our derivatives. Our disclosures now include: (1) significant transfers between Levels 1 and 2 of the fair value hierarchy, if any; (2) additional quantitative and qualitative information regarding fair value measurements categorized as Level 3 of the fair value hierarchy; and (3) the hierarchy classification for items whose fair value is not recorded on our Consolidated Balance Sheets but was disclosed previously in our Notes to Consolidated Financial Statements. Additionally, we have presented comprehensive income in a separate financial statement entitled Consolidated Statements of Comprehensive Income.
Real Estate Assets
Real Estate Assets

Acquisitions

During 2012, we acquired:

a 492,000 square foot office property in Atlanta, GA for a purchase price of $144.9 million;

a 616,000 square foot office property in Pittsburgh, PA for a purchase price of $91.2 million;

three medical office properties in Greensboro, NC for a purchase price of $29.6 million, which consisted of the issuance of 66,864 Common Units to noncontrolling interests, contingent consideration with fair value at the acquisition date of $0.7 million, and the assumption of secured debt due August 2014 recorded at fair value of $7.9 million, with an effective interest rate of 4.06%;

a 178,300 square foot office property in Cary, NC from our DLF I joint venture for an agreed upon value of $26.0 million, the net proceeds of which were used to reduce the balance of the advance due to us from the joint venture; and

68 acres of development land currently zoned for 1.3 million square feet of future office development in Nashville, TN for a purchase price of $15.0 million.

We expensed $1.5 million of acquisition costs (included in general and administrative expenses) in 2012 related to these acquisitions. The assets acquired and liabilities assumed were recorded at fair value as determined by management based on information available at the acquisition date and on current assumptions as to future operations.  

The following table sets forth a summary of the assets acquired and liabilities assumed in the acquisition of the 492,000 square foot office building in Atlanta, GA discussed in the preceding paragraph:
 
 
Total
Purchase Price Allocation
Real estate assets
$
135,128

Acquisition-related intangible assets (in deferred financing and leasing costs)
21,637

Acquisition-related below market lease liabilities (in accounts payable, accrued expenses and other liabilities)
(11,875
)
Total allocation
$
144,890




2.     Real Estate Assets - Continued