Highwoods Properties(HIW) - 2018 Q4 - Annual Report

PART I Highwoods Properties, Inc. operates as an office REIT, focusing on acquisition, development, and management of properties in key U.S. markets ITEM 1. BUSINESS Highwoods Properties, Inc. is an office REIT focused on operating, acquiring, and developing office properties in Best Business Districts - Highwoods Properties, Inc. is a publicly-traded REIT focused on owning, developing, acquiring, leasing, and managing office properties in Best Business Districts (BBDs) of key markets like Atlanta, Nashville, and Raleigh[26] - As of December 31, 2018, office properties accounted for over 97% of the Company's annualized cash rental revenues[28] - The Company's strategic plan emphasizes local market leadership, customer service, geographic diversification, and a conservative, flexible balance sheet to support growth and operational needs[31][32][33][34] ITEM 1A. RISK FACTORS This section outlines various risks that could adversely affect the Company's business, financial condition, and results of operations - Adverse economic conditions, high unemployment, and an oversupply of office space in core markets could lead to lower occupancy and rental rates, negatively impacting operating results[40][41][47] - The Company faces significant competition in the leasing market, potentially leading to difficulties in renewing leases, lower rental rates, increased tenant improvement allowances, and higher leasing commissions[42][43] - Risks associated with debt financing include sufficiency of cash flow, compliance with covenants, availability of capital for refinancing, and increased interest expense from rising rates, which could materially affect financial condition and operations[64][66][68] - Failure to maintain REIT status would result in corporate taxation, significantly impacting stockholders and the Operating Partnership, and could limit business expansion and stock price[75] ITEM 1B. UNRESOLVED STAFF COMMENTS No unresolved staff comments from the SEC were reported - No unresolved staff comments were reported[94] ITEM 2. PROPERTIES This section provides an overview of the Company's property portfolio, including in-service office properties, development projects, and land In-Service Office Properties by Geographic Location (December 31, 2018) | Market | Rentable Square Feet | Occupancy | Percentage of Annualized Cash Rental Revenue | | :--- | :--- | :--- | :--- | | Atlanta | 5,120,000 | 87.4% | 18.5% | | Nashville | 4,190,000 | 92.9% | 17.7% | | Raleigh | 4,655,000 | 89.5% | 16.4% | | Tampa | 3,620,000 | 95.3% | 14.7% | | Pittsburgh | 2,148,000 | 95.0% | 8.9% | | Orlando | 1,976,000 | 91.2% | 7.6% | | Richmond | 2,033,000 | 93.4% | 6.5% | | Memphis | 1,638,000 | 92.0% | 6.2% | | Greensboro | 1,151,000 | 93.0% | 3.5% | | Total | 26,531,000 | 91.6% | 100.0% | Top 20 Customers by Annualized Cash Rental Revenue (December 31, 2018) | Customer | Rentable Square Feet | Annualized Cash Rental Revenue (in thousands) | Percent of Total Annualized Cash Rental Revenue | Weighted Average Remaining Lease Term in Years | | :--- | :--- | :--- | :--- | :--- | | Federal Government | 1,282,516 | $31,589 | 4.86% | 4.2 | | Metropolitan Life Insurance | 624,245 | $16,269 | 2.51% | 9.7 | | Bridgestone Americas | 506,128 | $14,993 | 2.31% | 18.7 | | PPG Industries | 356,215 | $9,728 | 1.50% | 12.3 | | Tivity | 263,598 | $7,672 | 1.18% | 4.2 | | EQT Corporation | 295,241 | $7,037 | 1.08% | 5.8 | | Bass, Berry & Sims | 209,701 | $7,034 | 1.08% | 5.8 | | Vanderbilt University | 251,415 | $6,814 | 1.05% | 3.1 | | International Paper | 278,444 | $6,764 | 1.04% | 9.9 | | State of Georgia | 313,146 | $6,242 | 0.96% | 3.4 | | Laser Spine Institute | 176,089 | $6,156 | 0.95% | 13.8 | | American General Life | 173,834 | $5,992 | 0.92% | 8.1 | | Marsh USA | 177,382 | $5,963 | 0.92% | 3.5 | | Novelis | 168,949 | $5,943 | 0.92% | 5.7 | | Lifepoint Corporate Services | 202,991 | $5,247 | 0.81% | 10.3 | | PNC Bank | 159,142 | $4,803 | 0.74% | 9.1 | | AT&T | 197,826 | $4,780 | 0.74% | 4.5 | | Regus PLC | 172,433 | $4,747 | 0.73% | 4.8 | | Global Payments | 168,051 | $4,453 | 0.69% | 14.2 | | Avanos Medical | 193,199 | $4,453 | 0.69% | 10.2 | | Total | 6,170,545 | $166,679 | 25.68% | 8.1 | In-Process Office Developments (December 31, 2018) | Property | Market | Rentable Square Feet | Total Investment ($ in thousands) | Investment As Of December 31, 2018 ($ in thousands) | Pre Leased % | Estimated Completion | Estimated Stabilization | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | MetLife III | Raleigh | 219,000 | $64,500 | $55,753 | 100.0% | 2Q19 | 2Q21 | | Mars Petcare - Ovation | Nashville | 223,700 | $96,200 | $82,012 | 100.0% | 3Q19 | 3Q19 | | GlenLake Seven | Raleigh | 125,700 | $40,970 | $2,718 | 28.2% | 3Q20 | 4Q21 | | Asurion | Nashville | 552,800 | $285,000 | $36,112 | 98.3% | 4Q21 | 1Q22 | | Total | | 1,121,200 | $486,670 | $176,595 | 91.1% | | | ITEM 3. LEGAL PROCEEDINGS The Company is involved in various legal proceedings, claims, and assessments in the ordinary course of business - The Company is a party to various legal proceedings, claims, and assessments arising in the ordinary course of business[111] - Estimated losses are accrued when probable and reasonably estimable[111] - None of the current legal matters are expected to have a material adverse effect on the Company's business, financial condition, results of operations, or cash flows[111] ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT This section lists the executive officers of Highwoods Properties, Inc., highlighting their experience in real estate and finance - Edward J. Fritsch serves as Director and Chief Executive Officer, with a long tenure since 1982 and leadership roles in NAREIT and other boards[113] - Theodore J. Klinck is the President and Chief Operating Officer, appointed in November 2018, bringing experience from Goddard Investment Group and Morgan Stanley Real Estate[113] - Mark F. Mulhern is the Executive Vice President and Chief Financial Officer since September 2014, with a background in finance from Exco Resources, Inc. and Progress Energy, Inc., and is a certified public accountant[113] PART II This part covers market information, selected financial data, management's discussion and analysis, and market risk disclosures ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES This section details the Company's common stock trading, stockholder information, and equity programs - Highwoods Properties, Inc. Common Stock (HIW) is traded on the NYSE, with 103.6 million shares outstanding and 838 common stockholders of record as of December 31, 2018[115] Stock Price Performance (December 31, 2013 to December 31, 2018) | Index | 2014 | 2015 | 2016 | 2017 | 2018 | | :--- | :--- | :--- | :--- | :--- | :--- | | Highwoods Properties, Inc. | 127.68 | 130.75 | 161.11 | 166.49 | 131.79 | | S&P 500 Index | 113.69 | 115.26 | 129.05 | 157.22 | 150.33 | | FTSE NAREIT All Equity REITs Index | 128.03 | 131.64 | 143.00 | 155.41 | 149.12 | - The Company operates a Dividend Reinvestment and Stock Purchase Plan (DRIP) and an Employee Stock Purchase Plan (ESPP), with ESPP shares purchased at 85% of the average closing price[119][120] ITEM 6. SELECTED FINANCIAL DATA This section presents selected financial data for Highwoods Properties, Inc. and Highwoods Realty Limited Partnership from 2014 to 2018 Highwoods Properties, Inc. - Selected Financial Data (2014-2018) | Metric | 2018 ($ in thousands) | 2017 ($ in thousands) | 2016 ($ in thousands) | 2015 ($ in thousands) | 2014 ($ in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Rental and other revenues | $720,035 | $702,737 | $665,634 | $604,671 | $555,871 | | Income from continuing operations | $177,630 | $191,663 | $122,546 | $85,521 | $96,987 | | Net income | $177,630 | $191,663 | $541,139 | $101,260 | $115,972 | | Net income available for common stockholders | $169,343 | $182,873 | $521,789 | $94,572 | $108,457 | | Earnings per Common Share – basic | $1.64 | $1.78 | $5.30 | $1.00 | $1.20 | | Earnings per Common Share – diluted | $1.64 | $1.78 | $5.30 | $1.00 | $1.19 | | Dividends declared per Common Share | $1.85 | $1.76 | $2.50 | $1.70 | $1.70 | | Total assets | $4,675,009 | $4,623,791 | $4,561,050 | $4,485,631 | $3,990,702 | | Mortgages and notes payable, net | $2,085,831 | $2,014,333 | $1,948,047 | $2,491,813 | $2,062,968 | Highwoods Realty Limited Partnership - Selected Financial Data (2014-2018) | Metric | 2018 ($ in thousands) | 2017 ($ in thousands) | 2016 ($ in thousands) | 2015 ($ in thousands) | 2014 ($ in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Rental and other revenues | $720,035 | $702,737 | $665,634 | $604,671 | $555,871 | | Income from continuing operations | $177,630 | $191,663 | $122,546 | $85,521 | $96,987 | | Net income | $177,630 | $191,663 | $541,139 | $101,260 | $115,972 | | Net income available for common unitholders | $173,931 | $187,932 | $537,385 | $97,490 | $111,999 | | Earnings per Common Unit – basic | $1.64 | $1.79 | $5.33 | $1.01 | $1.20 | | Earnings per Common Unit – diluted | $1.64 | $1.79 | $5.32 | $1.01 | $1.20 | | Distributions declared per Common Unit | $1.85 | $1.76 | $2.50 | $1.70 | $1.70 | | Total assets | $4,675,009 | $4,623,791 | $4,561,050 | $4,485,631 | $3,990,808 | | Mortgages and notes payable, net | $2,085,831 | $2,014,333 | $1,948,047 | $2,491,813 | $2,062,968 | ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's analysis of the Company's financial condition, operating results, liquidity, and critical accounting estimates Disclosure Regarding Forward-Looking Statements This subsection cautions readers that the report contains forward-looking statements subject to various risks and uncertainties - Forward-looking statements are subject to risks such as customer financial deterioration, leasing challenges, development delays, market oversupply, economic downturns, and interest rate increases[131][133] - The Company undertakes no obligation to publicly release revisions to forward-looking statements[132] Executive Summary The executive summary reiterates the Company's strategic plan and discusses key components affecting revenues and expenses - The Company's strategic plan centers on high-quality office properties in BBDs, operational improvements, strategic development/acquisition/disposition, and a robust balance sheet[135][138] - Office portfolio occupancy decreased from 92.9% at December 31, 2017, to 91.6% at December 31, 2018[136] - Annual combined GAAP rents for new and renewal leases signed in Q4 2018 were $29.93 per rentable square foot, a 20.2% increase compared to previous leases in the same spaces[138] Results of Operations This section details the Company's results of operations, comparing 2018 to 2017 and 2017 to 2016 - Rental and other revenues increased by $17.3 million (2.5%) in 2018 compared to 2017, primarily due to development properties placed in service and higher same property revenues, partially offset by property dispositions[153] - Operating expenses increased by $5.5 million (2.3%) in 2018 compared to 2017, driven by higher same property operating expenses and development properties placed in service, partially offset by dispositions[154] - Diluted earnings per common share decreased by $0.14 in 2018 compared to 2017, mainly due to a decrease in net income[162] - In 2017, total gains on disposition of property and net gains on disposition of discontinued operations were $375.1 million lower than in 2016, primarily due to the sale of Country Club Plaza assets in 2016[169] Liquidity and Capital Resources The Company aims to maintain a conservative and flexible balance sheet with access to diverse capital sources - The Company's revolving credit facility had $408.8 million of availability at January 25, 2019, for short-term liquidity needs[148][203] - As of December 31, 2018, the leverage ratio (mortgages and notes payable + preferred stock to undepreciated book value of assets) was 35.4%[150][181] Contractual Obligations (December 31, 2018) | Obligation Type | Total ($ in thousands) | 2019 ($ in thousands) | 2020 ($ in thousands) | 2021 ($ in thousands) | 2022 ($ in thousands) | 2023 ($ in thousands) | Thereafter ($ in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Mortgages and Notes Payable: Principal payments | $2,104,179 | $1,876 | $226,952 | $302,032 | $584,115 | $252,201 | $737,003 | | Mortgages and Notes Payable: Interest payments | $401,487 | $74,922 | $71,370 | $63,311 | $46,468 | $29,968 | $115,448 | | Capitalized Lease Obligations | $33 | $18 | $15 | — | — | — | — | | Purchase Obligations | $484,801 | $267,976 | $99,039 | $114,573 | $930 | — | $2,283 | | Operating Lease Obligations: Operating ground leases | $97,860 | $2,184 | $2,223 | $2,263 | $2,305 | $2,308 | $86,577 | | Total | $3,088,360 | $346,976 | $399,599 | $482,179 | $633,818 | $284,477 | $941,311 | - The Company declared a cash dividend of $0.475 per share of Common Stock on February 5, 2019, payable March 5, 2019[201] Critical Accounting Estimates This section outlines the critical accounting estimates used in preparing the financial statements, requiring significant judgment and assumptions - Critical accounting estimates include real estate and related assets, impairments, sales of real estate, rental and other revenues, and allowance for doubtful accounts[210][213] - Real estate assets are recorded at cost less accumulated depreciation, with renovations and improvements capitalized; development expenditures, including interest and taxes, are capitalized until the building is ready for its intended use[210][211] - Impairment analysis for held-for-use assets is performed if circumstances indicate carrying value may be impaired, comparing it to undiscounted estimated future cash flows; held-for-sale assets are recorded at the lower of carrying amount or estimated fair value[218][219][220] - Rental revenue is recognized on a straight-line basis over lease terms, and cost recovery income involves complex computations and quarterly accrual adjustments[223][224] Non-GAAP Information This section discusses non-GAAP financial measures, specifically Funds From Operations (FFO) and Net Operating Income (NOI) - FFO, FFO available for common stockholders, and FFO available for common stockholders per share are non-GAAP measures used to compare operating performance among REITs by excluding depreciation, amortization, and real estate asset impairments/gains/losses[227][228] Funds from Operations (FFO) (2016-2018) | Metric | 2018 ($ in thousands) | 2017 ($ in thousands) | 2016 ($ in thousands) | | :--- | :--- | :--- | :--- | | Net income | $177,630 | $191,663 | $541,139 | | Net (income) attributable to noncontrolling interests in consolidated affiliates | $(1,207) | $(1,239) | $(1,253) | | Depreciation and amortization of real estate assets | $227,045 | $225,052 | $217,533 | | (Gains) on disposition of depreciable properties | $(37,096) | $(53,170) | $(8,915) | | Unconsolidated affiliates: Depreciation and amortization of real estate assets | $2,284 | $2,298 | $2,978 | | Unconsolidated affiliates: (Gains) on disposition of depreciable properties | — | $(4,617) | $(2,173) | | Discontinued operations: (Gains) on disposition of depreciable properties | — | — | $(414,496) | | Funds from operations | $368,656 | $359,987 | $334,813 | | Dividends on Preferred Stock | $(2,492) | $(2,492) | $(2,501) | | Funds from operations available for common stockholders | $366,164 | $357,495 | $332,312 | | Funds from operations available for common stockholders per share | $3.45 | $3.39 | $3.28 | | Weighted average shares outstanding | 106,268 | 105,594 | 101,398 | Net Operating Income (NOI) and Same Property NOI (2017-2018) | Metric | 2018 ($ in thousands) | 2017 ($ in thousands) | | :--- | :--- | :--- | | Income before disposition of investment properties and activity in unconsolidated affiliates | $137,754 | $130,102 | | Other income | $(1,940) | $(2,283) | | Interest expense | $71,422 | $69,105 | | General and administrative expenses | $40,006 | $39,648 | | Impairments of real estate assets | $423 | $1,445 | | Depreciation and amortization | $229,955 | $227,832 | | Net operating income | $477,620 | $465,849 | | Less – non same property and other net operating income | $(45,568) | $(39,057) | | Same property net operating income | $432,052 | $426,792 | | Less – lease termination fees, straight-line rent and other non-cash adjustments | $(17,036) | $(14,829) | | Same property cash net operating income | $415,016 | $411,963 | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section discusses the Company's exposure to market risks, primarily interest rate risk, and mitigation strategies - The Company manages interest rate risk using fixed and variable rate debt, and interest rate hedge contracts (collars, swaps, caps, treasury lock agreements)[237] - As of January 25, 2019, $766.0 million of variable rate debt was unhedged; a 100 basis point increase in interest rates would raise annual interest expense by $7.7 million[239] - The Company entered into $225.0 million notional amount of forward-starting swaps in 2018, locking the 10-year treasury rate at 2.86% for a planned debt issuance by June 2019[241] ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This item refers to the Consolidated Financial Statements of Highwoods Properties, Inc. and Highwoods Realty Limited Partnership, provided starting on page 48 - The Consolidated Financial Statements and supplementary data for Highwoods Properties, Inc. and Highwoods Realty Limited Partnership are located starting on page 48[244] ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No changes in or disagreements with accountants on accounting and financial disclosure matters were reported - No changes in or disagreements with accountants on accounting and financial disclosure were reported[245] ITEM 9A. CONTROLS AND PROCEDURES This section details the Company's internal controls and procedures, including management's annual report on internal control over financial reporting - The Company's CEO and CFO concluded that internal control over financial reporting was effective as of December 31, 2018, based on the COSO framework[251] - Deloitte & Touche LLP issued an unqualified attestation report on the effectiveness of the Company's internal control over financial reporting as of December 31, 2018[251][258] - No material changes in internal control over financial reporting occurred during the fourth quarter of 2018 for either the Company or the Operating Partnership[266] - The Company's CEO and CFO also concluded that the disclosure controls and procedures were effective at the end of the reporting period[268] ITEM 9B. OTHER INFORMATION No other information required to be disclosed in this item was reported - No other information was reported[270] PART III This part incorporates by reference information on directors, executive compensation, security ownership, related transactions, and accountant fees ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information regarding the Company's directors, executive officers, corporate governance, and code of ethics is incorporated by reference - Information on directors, executive officers, and corporate governance is incorporated by reference from the Proxy Statement for the Annual Meeting of Stockholders on May 8, 2019[273] - No changes have been made to the procedures for stockholder nominee recommendations since the 2018 annual meeting[273] ITEM 11. EXECUTIVE COMPENSATION Details concerning the compensation of the Company's directors and executive officers are incorporated by reference - Executive compensation information is incorporated by reference from the Proxy Statement for the Annual Meeting of Stockholders on May 8, 2019[275] ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information regarding the beneficial ownership of Common Stock and the Company's equity compensation plans is incorporated by reference - Security ownership information for beneficial owners and management, along with equity compensation plans, is incorporated by reference from the Proxy Statement for the Annual Meeting of Stockholders on May 8, 2019[276] ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE Information on certain relationships, related transactions, and the independence of the Company's directors is incorporated by reference - Information on related party transactions and director independence is incorporated by reference from the Proxy Statement for the Annual Meeting of Stockholders on May 8, 2019[277] ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information regarding fees paid to and services provided by the independent registered public accounting firm is incorporated by reference - Information on principal accountant fees and services is incorporated by reference from the Proxy Statement for the Annual Meeting of Stockholders on May 8, 2019[279] PART IV This part lists exhibits and financial statement schedules, including audit reports and detailed financial statements ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES This section lists all exhibits and financial statement schedules, including an index to the Consolidated Financial Statements - The section provides an index to the Consolidated Financial Statements of Highwoods Properties, Inc. and Highwoods Realty Limited Partnership, starting on page 48[283][288] - It includes audit reports, consolidated financial statements (balance sheets, income, comprehensive income, equity/capital, cash flows), and detailed notes[288] Index to Consolidated Financial Statements This index provides a detailed list of all consolidated financial statements and related reports for Highwoods Properties, Inc. and Highwoods Realty Limited Partnership - The index lists consolidated financial statements for Highwoods Properties, Inc. and Highwoods Realty Limited Partnership, including balance sheets, income statements, comprehensive income statements, equity/capital statements, cash flow statements, and notes[288] Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting - Deloitte & Touche LLP provided an unqualified opinion on Highwoods Properties, Inc.'s consolidated financial statements for the period ended December 31, 2018[291] - An unqualified opinion was also issued on the effectiveness of the Company's internal control over financial reporting as of December 31, 2018[292] Consolidated Balance Sheets The Consolidated Balance Sheets for Highwoods Properties, Inc. present the Company's financial position as of December 31, 2018, and 2017 Consolidated Balance Sheet Highlights (Highwoods Properties, Inc.) | Metric | December 31, 2018 ($ in thousands) | December 31, 2017 ($ in thousands) | | :--- | :--- | :--- | | Net real estate assets | $4,165,526 | $4,037,239 | | Total Assets | $4,675,009 | $4,623,791 | | Mortgages and notes payable, net | $2,085,831 | $2,014,333 | | Total Liabilities | $2,304,753 | $2,242,548 | | Total Stockholders' Equity | $2,246,720 | $2,219,818 | | Total Equity | $2,264,296 | $2,237,234 | Consolidated Statements of Income The Consolidated Statements of Income for Highwoods Properties, Inc. present the Company's financial performance for the years ended December 31, 2018, 2017, and 2016 Consolidated Statements of Income Highlights (Highwoods Properties, Inc.) | Metric | 2018 ($ in thousands) | 2017 ($ in thousands) | 2016 ($ in thousands) | | :--- | :--- | :--- | :--- | | Rental and other revenues | $720,035 | $702,737 | $665,634 | | Total operating expenses | $512,799 | $505,813 | $489,378 | | Interest expense | $71,422 | $69,105 | $76,648 | | Gains on disposition of property | $37,638 | $54,157 | $14,807 | | Net income | $177,630 | $191,663 | $541,139 | | Net income available for common stockholders | $169,343 | $182,873 | $521,789 | | Earnings per Common Share – diluted | $1.64 | $1.78 | $5.30 | Consolidated Statements of Comprehensive Income The Consolidated Statements of Comprehensive Income for Highwoods Properties, Inc. show the total comprehensive income for the years ended December 31, 2018, 2017, and 2016 Consolidated Statements of Comprehensive Income Highlights (Highwoods Properties, Inc.) | Metric | 2018 ($ in thousands) | 2017 ($ in thousands) | 2016 ($ in thousands) | | :--- | :--- | :--- | :--- | | Net income | $177,630 | $191,663 | $541,139 | | Unrealized gains on cash flow hedges | $4,161 | $1,732 | $5,703 | | Amortization of cash flow hedges | $(2,086) | $1,157 | $3,057 | | Total other comprehensive income | $2,075 | $2,889 | $8,760 | | Total comprehensive income | $179,705 | $194,552 | $549,899 | | Comprehensive income attributable to common stockholders | $173,910 | $188,254 | $533,050 | Consolidated Statements of Equity The Consolidated Statements of Equity for Highwoods Properties, Inc. detail changes in equity for the years ended December 31, 2018, 2017, and 2016 Consolidated Statements of Equity Highlights (Highwoods Properties, Inc.) | Metric | December 31, 2018 ($ in thousands) | December 31, 2017 ($ in thousands) | December 31, 2016 ($ in thousands) | | :--- | :--- | :--- | :--- | | Balance at period end | $2,264,296 | $2,237,234 | $2,154,316 | | Issuances of Common Stock, net | $1,865 | $70,977 | $256,380 | | Dividends on Common Stock | $(191,302) | $(180,805) | $(166,861) | | Special dividend on Common Stock | — | $(81,205) | $(81,205) | | Net income | $177,630 | $191,663 | $541,139 | | Other comprehensive income | $2,075 | $2,889 | $8,760 | Consolidated Statements of Cash Flows The Consolidated Statements of Cash Flows for Highwoods Properties, Inc. present the cash flows from operating, investing, and financing activities Consolidated Statements of Cash Flows Highlights (Highwoods Properties, Inc.) | Metric | 2018 ($ in thousands) | 2017 ($ in thousands) | 2016 ($ in thousands) | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $358,628 | $352,532 | $305,805 | | Net cash provided by/(used in) investing activities | $(306,749) | $(200,302) | $216,262 | | Net cash used in financing activities | $(130,069) | $(142,528) | $(465,241) | | Net increase/(decrease) in cash and cash equivalents and restricted cash | $(78,190) | $9,702 | $56,826 | | Cash and cash equivalents and restricted cash at end of the period | $10,143 | $88,333 | $78,631 | Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on the consolidated financial statements of Highwoods Realty Limited Partnership - Deloitte & Touche LLP provided an unqualified opinion on Highwoods Realty Limited Partnership's consolidated financial statements for the period ended December 31, 2018[317] - The Operating Partnership was not required to have an audit of its internal control over financial reporting[319] Consolidated Balance Sheets The Consolidated Balance Sheets for Highwoods Realty Limited Partnership present its financial position as of December 31, 2018, and 2017 Consolidated Balance Sheet Highlights (Highwoods Realty Limited Partnership) | Metric | December 31, 2018 ($ in thousands) | December 31, 2017 ($ in thousands) | | :--- | :--- | :--- | | Net real estate assets | $4,165,526 | $4,037,239 | | Total Assets | $4,675,009 | $4,623,791 | | Mortgages and notes payable, net | $2,085,831 | $2,014,333 | | Total Liabilities | $2,304,753 | $2,242,548 | | Total Capital | $2,235,419 | $2,208,342 | Consolidated Statements of Income The Consolidated Statements of Income for Highwoods Realty Limited Partnership present its financial performance for the years ended December 31, 2018, 2017, and 2016 Consolidated Statements of Income Highlights (Highwoods Realty Limited Partnership) | Metric | 2018 ($ in thousands) | 2017 ($ in thousands) | 2016 ($ in thousands) | | :--- | :--- | :--- | :--- | | Rental and other revenues | $720,035 | $702,737 | $665,634 | | Total operating expenses | $512,799 | $505,813 | $489,378 | | Interest expense | $71,422 | $69,105 | $76,648 | | Gains on disposition of property | $37,638 | $54,157 | $14,807 | | Net income | $177,630 | $191,663 | $541,139 | | Net income available for common unitholders | $173,931 | $187,932 | $537,385 | | Earnings per Common Unit – diluted | $1.64 | $1.79 | $5.32 | Consolidated Statements of Comprehensive Income The Consolidated Statements of Comprehensive Income for Highwoods Realty Limited Partnership show the total comprehensive income for the years ended December 31, 2018, 2017, and 2016 Consolidated Statements of Comprehensive Income Highlights (Highwoods Realty Limited Partnership) | Metric | 2018 ($ in thousands) | 2017 ($ in thousands) | 2016 ($ in thousands) | | :--- | :--- | :--- | :--- | | Net income | $177,630 | $191,663 | $541,139 | | Unrealized gains on cash flow hedges | $4,161 | $1,732 | $5,703 | | Amortization of cash flow hedges | $(2,086) | $1,157 | $3,057 | | Total other comprehensive income | $2,075 | $2,889 | $8,760 | | Total comprehensive income | $179,705 | $194,552 | $549,899 | | Comprehensive income attributable to common unitholders | $178,498 | $193,313 | $548,646 | Consolidated Statements of Capital The Consolidated Statements of Capital for Highwoods Realty Limited Partnership detail changes in capital for the years ended December 31, 2018, 2017, and 2016 Consolidated Statements of Capital Highlights (Highwoods Realty Limited Partnership) | Metric | December 31, 2018 ($ in thousands) | December 31, 2017 ($ in thousands) | December 31, 2016 ($ in thousands) | | :--- | :--- | :--- | :--- | | Balance at period end | $2,235,419 | $2,208,342 | $2,125,396 | | Issuances of Common Units, net | $1,865 | $70,977 | $256,380 | | Distributions on Common Units | $(195,712) | $(185,072) | $(171,054) | | Special distribution on Common Units | — | $(83,149) | $(83,149) | | Net income | $177,630 | $191,663 | $541,139 | | Other comprehensive income | $2,075 | $2,889 | $8,760 | Consolidated Statements of Cash Flows The Consolidated Statements of Cash Flows for Highwoods Realty Limited Partnership present the cash flows from operating, investing, and financing activities Consolidated Statements of Cash Flows Highlights (Highwoods Realty Limited Partnership) | Metric | 2018 ($ in thousands) | 2017 ($ in thousands) | 2016 ($ in thousands) | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $358,628 | $352,532 | $305,392 | | Net cash provided by/(used in) investing activities | $(306,749) | $(200,302) | $216,675 | | Net cash used in financing activities | $(130,069) | $(142,528) | $(465,241) | | Net increase/(decrease) in cash and cash equivalents and restricted cash | $(78,190) | $9,702 | $56,826 | | Cash and cash equivalents and restricted cash at end of the period | $10,143 | $88,333 | $78,631 | Notes to Consolidated Financial Statements These notes provide detailed information supporting the consolidated financial statements of Highwoods Properties, Inc. and Highwoods Realty Limited Partnership 1. Description of Business and Significant Accounting Policies This note describes the Company's business as a REIT and outlines its significant accounting policies - Highwoods Properties, Inc. is a REIT that conducts activities through Highwoods Realty Limited Partnership, owning 97.4% of its Common Units as of December 31, 2018[339][340] - The Company's accounting policies include straight-line recognition of minimum contractual rents, accrual of cost recovery income, and capitalization of development and leasing costs[348][349][363][364] - The Company adopted new ASUs in 2018 for revenue recognition and cash flow statement presentation, with no material effect on financial statements, and expects no material effect from future ASUs on credit losses and fair value measurements[386][387][388][389][396][397][399][400] 2. Real Estate Assets This note details the Company's real estate asset activities, including acquisitions, dispositions, and impairments - In 2018, the Company acquired two development parcels in Nashville for $50.6 million[401] - In 2018, the Company sold three buildings and various land parcels for $90.6 million, realizing aggregate gains of $37.6 million[403] - Real estate asset impairments were $0.4 million in 2018 and $1.4 million in 2017, resulting from changes in market-based inputs and asset use assumptions[407] 3. Investments in and Advances to Affiliates This note describes the Company's equity method investments in unconsolidated joint ventures and its consolidated joint venture - The Company holds equity interests of up to 50.0% in various unconsolidated joint ventures, accounted for using the equity method[408] Ownership in Unconsolidated Affiliates (December 31, 2018) | Joint Venture | Location | Ownership Interest | | :--- | :--- | :--- | | Plaza Colonnade, Tenant-in-Common | Kansas City | 50.0% | | Kessinger/Hunter & Company, LC | Kansas City | 26.5% | | Highwoods DLF Forum, LLC | Raleigh | 25.0% | | Highwoods DLF 98/29, LLC | Orlando | 22.8% | - The Company consolidates Highwoods-Markel Associates, LLC, a 50.0% owned joint venture in Richmond, due to its role as managing member controlling major operating and financial policies[410] 4. Intangible Assets and Below Market Lease Liabilities This note details the Company's intangible assets and acquisition-related below market lease liabilities, net of accumulated amortization Intangible Assets and Below Market Lease Liabilities (December 31, 2018 & 2017) | Metric | December 31, 2018 ($ in thousands) | December 31, 2017 ($ in thousands) | | :--- | :--- | :--- | | Deferred leasing costs (net) | $195,273 | $200,679 | | Acquisition-related below market lease liabilities (net) | $25,648 | $31,733 | Amortization of Intangible Assets and Below Market Lease Liabilities (2016-2018) | Metric | 2018 ($ in thousands) | 2017 ($ in thousands) | 2016 ($ in thousands) | | :--- | :--- | :--- | :--- | | Amortization of deferred leasing costs and acquisition-related intangible assets (in depreciation and amortization) | $36,486 | $41,187 | $44,968 | | Amortization of lease incentives (in rental and other revenues) | $1,908 | $1,765 | $1,779 | | Amortization of acquisition-related below market lease liabilities (in rental and other revenues) | $(6,085) | $(6,415) | $(8,183) | 5. Mortgages and Notes Payable This note details the Company's mortgages and notes payable, comprising secured and unsecured indebtedness Mortgages and Notes Payable, Net (December 31, 2018 & 2017) | Type | December 31, 2018 ($ in thousands) | December 31, 2017 ($ in thousands) | | :--- | :--- | :--- | | Secured indebtedness | $97,179 | $98,981 | | Unsecured indebtedness | $1,997,816 | $1,923,513 | | Less-unamortized debt issuance costs | $(9,164) | $(8,161) | | Total mortgages and notes payable, net | $2,085,831 | $2,014,333 | - The Company repaid $200.0 million of 7.5% unsecured notes at maturity in 2018[419] - In 2018, the Operating Partnership issued $350.0 million aggregate principal amount of 4.125% notes due 2028[420] - The $600.0 million unsecured revolving credit facility matures in January 2022, with $417.8 million unused capacity at December 31, 2018[418] 6. Derivative Financial Instruments This note describes the Company's use of derivative financial instruments, primarily interest rate hedge contracts, to manage interest rate risk - In 2018, the Company entered into $225.0 million notional amount of forward-starting swaps to lock the 10-year treasury rate for a planned debt issuance[437] - The Company had $275.0 million of variable rate debt outstanding with related floating-to-fixed interest rate swaps as of December 31, 2018, effectively fixing the LIBOR rate at a weighted average of 1.681%[240] - Derivative instruments are designated as cash flow hedges, with effective portions of fair value changes recorded in accumulated other comprehensive income[444] 7. Commitments and Contingencies This note outlines the Company's various commitments and contingencies, including operating ground leases and contractual obligations Scheduled Obligations for Operating Ground Leases (December 31, 2018) | Years Ending December 31, | Minimum Payments ($ in thousands) | | :--- | :--- | | 2019 | $2,184 | | 2020 | $2,223 | | 2021 | $2,263 | | 2022 | $2,305 | | 2023 | $2,308 | | Thereafter | $86,577 | | Total | $97,860 | - The Company had $484.8 million in lease and contractual commitments at December 31, 2018, primarily for operating properties and development projects[450] - Contingent consideration of $5.0 million is outstanding for acquired development land, payable upon meeting future development milestones[451] - No environmental liabilities or legal proceedings are expected to have a material adverse effect on the Company's financial condition[452][453] 8. Noncontrolling Interests This note explains the Company's noncontrolling interests, including consolidated affiliates and the Operating Partnership's Redeemable Common Units - Noncontrolling interests in consolidated affiliates relate to a 50.0% interest in Richmond office properties[455] - Noncontrolling interests in the Operating Partnership relate to Redeemable Common Units, with net income attributed based on their weighted average percentage[456] Noncontrolling Interests in the Operating Partnership (2017-2018) | Metric | 2018 ($ in thousands) | 2017 ($ in thousands) | | :--- | :--- | :--- | | Beginning noncontrolling interests | $144,009 | $144,802 | | Adjustment to fair value | $(33,427) | $(354) | | Conversions of Common Units to Common Stock | $(4,043) | $(511) | | Net income attributable to noncontrolling interests | $4,588 | $5,059 | | Distributions to noncontrolling interests | $(5,167) | $(4,987) | | Total noncontrolling interests | $105,960 | $144,009 | 9. Disclosure About Fair Value of Financial Instruments This note provides disclosures about the fair value of financial instruments, categorized into Level 1, Level 2, and Level 3 inputs - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1 prices), and Level 3 (unobservable inputs)[460][461][464] - Level 2 assets and liabilities, such as mortgages, notes, and interest rate swaps, are valued using contractual cash flows and market-based interest rates[462][463] Fair Value Hierarchy (December 31, 2018) | Metric | Total ($ in thousands) | Level 1 ($ in thousands) | Level 2 ($ in thousands) | Level 3 ($ in thousands) | | :--- | :--- | :--- | :--- | :--- | | Assets: | | | | | | Mortgages and notes receivable, at fair value | $5,599 | — | $5,599 | — | | Interest rate swaps | $1,146 | — | $1,146 | — | | Marketable securities of non-qualified deferred compensation plan | $1,849 | $1,849 | — | — | | Impaired real estate assets | $10,252 | — | — | $10,252 | | Total Assets | $18,846 | $1,849 | $6,745 | $10,252 | | Noncontrolling Interests in the Operating Partnership | $105,960 | $105,960 | — | — | | Liabilities: | | | | | | Mortgages and notes payable, net, at fair value | $2,056,248 | — | $2,056,248 | — | | Interest rate swaps | $3,581 | — | $3,581 | — | | Non-qualified deferred compensation obligation | $1,849 | $1,849 | — | — | | Total Liabilities | $2,061,678 | $1,849 | $2,059,829 | — | 10. Equity This note details the Company's equity structure, including Common Stock, Preferred Stock, warrants, and Operating Partnership Units - Dividends declared per Common Stock aggregated $1.85 in 2018, $1.76 in 2017, and $2.50 in 2016 (including a special cash dividend of $0.80 per share in 2016)[472] Estimated Taxability of Common Stock Dividends Per Share (2016-2018) | Tax Component | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Ordinary income | $1.48 | $1.50 | $1.15 | | Capital gains | $0.31 | $0.32 | $1.29 | | Return of capital | $0.06 | — | — | | Total | $1.85 | $1.82 | $2.44 | - As of December 31, 2018, there were 15,000 warrants outstanding with an exercise price of $32.50 per share and no expiration date[478] 11. Employee Benefit Plans This note describes the Company's employee benefit plans, including officer, management, and director compensation programs - Officers are eligible for annual non-equity incentive payments based on company-wide or divisional performance, with target percentages ranging from 35% to 135% of base salary[483][484] - Long-term equity incentive awards in 2018 consisted of time-based and total return-based restricted stock, with total share-based compensation expense of $7.5 million in 2018[486][487] Stock Option Activity (2016-2018) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Stock options outstanding at December 31, beginning of period | 640,822 | 587,115 | 687,228 | | Granted | — | 168,748 | 244,664 | | Exercised | (44,304) | (115,041) | (330,034) | | Canceled | — | — | (14,743) | | Stock options outstanding at December 31, end of period | 596,518 | 640,822 | 587,115 | - The Employee Stock Purchase Plan (ESPP) allows employees to purchase Common Stock at an 85% discount to the average closing price, resulting in $0.3 million in additional compensation expense in 2018[506] 12. Accumulated Other Comprehensive Income This note presents the components of accumulated other comprehensive income, primarily related to cash flow hedges Components of Accumulated Other Comprehensive Income (December 31, 2018 & 2017) | Metric | December 31, 2018 ($ in thousands) | December 31, 2017 ($ in thousands) | | :--- | :--- | :--- | | Beginning balance | $7,838 | $4,949 | | Unrealized gains on cash flow hedges | $4,161 | $1,732 | | Amortization of cash flow hedges | $(2,086) | $1,157 | | Total accumulated other comprehensive income | $9,913 | $7,838 | - An estimated $1.6 million from accumulated other comprehensive income will be reclassified as a net decrease to interest expense in 2019[445] 13. Rental and Other Revenues This note details the Company's rental and other revenues, primarily derived from operating leases with scheduled fixed increases and cost recovery income - Rental and other revenues are primarily from operating leases with scheduled fixed increases and cost recovery income[509] Scheduled Future Minimum Base Rents (December 31, 2018) | Year | Amount ($ in thousands) | | :--- | :--- | | 2019 | $618,014 | | 2020 | $581,399 | | 2021 | $524,381 | | 2022 | $488,157 | | 2023 | $428,461 | | Thereafter | $2,068,891 | | Total | $4,709,303 | 14. Real Estate and Other Assets Held For Sale and Discontinued Operations This note provides information on real estate and other assets classified as held for sale and discontinued operations Real Estate and Other Assets Held For Sale (December 31, 2018 & 2017) | Asset Type | December 31, 2018 ($ in thousands) | December 31, 2017 ($ in thousands) | | :--- | :--- | :--- | | Land | — | $870 | | Buildings and tenant improvements | — | $21,318 | | Land held for development | — | $355 | | Less-accumulated depreciation | — | $(9,304) | | Net real estate assets | — | $13,239 | | Accrued straight-line rents receivable | — | $591 | | Deferred leasing costs, net | — | $253 | | Prepaid expenses and other assets | — | $35 | | Real estate and other assets, net, held for sale | — | $14,118 | Income from Discontinued Operations (2016-2018) | Metric | 2018 ($ in thousands) | 2017 ($ in thousands) | 2016 ($ in thousands) | | :--- | :--- | :--- | :--- | | Rental and other revenues | — | — | $8,484 | | Total operating expenses | — | — | $4,722 | | Income from discontinued operations | — | — | $4,097 | | Net gains on disposition of discontinued operations | — | — | $414,496 | | Total income from discontinued operations | — | — | $418,593 | 15. Earnings Per Share and Per Unit This note provides the computation of basic and diluted earnings per share for the Company and earnings per unit for the Operating Partnership Earnings Per Common Share (Highwoods Properties, Inc.) (2016-2018) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Income from continuing operations available for common stockholders (basic) | $1.64 | $1.78 | $1.17 | | Net income available for common stockholders (basic) | $1.64 | $1.78 | $5.30 | | Income from continuing operations available for common stockholders (diluted) | $1.64 | $1.78 | $1.17 | | Net income available for common stockholders (diluted) | $1.64 | $1.78 | $5.30 | Earnings Per Common Unit (Highwoods Realty Limited Partnership) (2016-2018) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Income from continuing operations available for common unitholders (basic) | $1.64 | $1.79 | $1.18 | | Net income available for common unitholders (basic) | $1.64 | $1.79 | $5.33 | | Income from continuing operations available for common unitholders (diluted) | $1.64 | $1.79 | $1.18 | | Net income available for common unitholders (diluted) | $1.64 | $1.79 | $5.32 | 16. Income Taxes This note discusses the Company's income tax position, highlighting its REIT status and tax expense - The Company qualified as a REIT in 2018, 2017, and 2016, incurring no federal income tax expense at the corporate level, except for its taxable REIT subsidiary[522] - The minimum dividend per share of Common Stock required for REIT status was $1.26 in 2018, $1.37 in 2017, and $0.99 in 2016[521] Income Tax Expense/(Benefit) (2016-2018) | Metric | 2018 ($ in thousands) | 2017 ($ in thousands) | 2016 ($ in thousands) | | :--- | :--- | :--- | :--- | | Current tax expense/(benefit): Federal | $133 | $(177) | $(38) | | Current tax expense/(benefit): State | $112 | $105 | $89 | | Deferred tax expense/(benefit): Federal | $(95) | $223 | $(160) | | Deferred tax expense/(benefit): State | $(68) | $(9) | $87 | | Total income tax expense/(benefit) | $82 | $142 | $(22) | 17. Segment Information This note provides segment information, breaking down the Company's operating results and assets by geographic location - The Company evaluates its business by geographic location, with no material inter-segment transactions[527] Rental and Other Revenues by Segment (2016-2018) | Segment | 2018 ($ in thousands) | 2017 ($ in thousands) | 2016 ($ in thousands) | | :--- | :--- | :--- | :--- | | Atlanta | $141,337 | $140,323 | $134,601 | | Nashville | $121,836 | $111,506 | $95,912 | | Raleigh | $118,352 | $119,254 | $112,958 | | Tampa | $102,404 | $97,524 | $89,903 | | Total Office Segment | $707,158 | $689,788 | $651,511 | | Total Rental and Other Revenues | $720,035 | $702,737 | $665,634 | Net Operating Income by Segment (2016-2018) | Segment | 2018 ($ in thousands) | 2017 ($ in thousands) | 2016 ($ in thousands) | | :--- | :--- | :--- | :--- | | Atlanta | $87,503 | $89,575 | $84,733 | | Nashville | $88,554 | $81,204 | $68,678 | | Raleigh | $86,053 | $86,475 | $80,803 | | Tampa | $65,819 | $62,378 | $56,493 | | Total Office Segment | $468,213 | $456,628 | $424,731 | | Total Net Operating Income | $477,620 | $465,849 | $434,549 | Total Assets by Segment (December 31, 2018 & 2017) | Segment | December 31, 2018 ($ in thousands) | December 31, 2017 ($ in thousands) | | :--- | :--- | :--- | | Atlanta | $1,047,850 | $1,049,100 | | Nashville | $937,732 | $806,725 | | Raleigh | $792,464 | $762,331 | | Tampa | $522,263 | $550,375 | | Total Office Segment | $4,517,153 | $4,391,387 | | Total Assets | $4,675,009 | $4,623,791 | 18. Quarterly Financial Data (Unaudited) This note provides unaudited quarterly financial data for Highwoods Properties, Inc. and Highwoods Realty Limited Partnership for 2018 and 2017 Highwoods Properties, Inc. - Quarterly Financial Data (2018) | Metric | Q1 2018 ($ in thousands) | Q2 2018 ($ in thousands) | Q3 2018 ($ in thousands) | Q4 2018 ($ in thousands) | Total 2018 ($ in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Rental and other revenues | $180,438 | $178,792 | $179,417 | $181,388 | $720,035 | | Net income | $34,246 | $52,998 | $35,009 | $55,377 | $177,630 | | Net income available for common stockholders | $32,449 | $50,686 | $33,160 | $53,048 | $169,343 | | Earnings per Common Share – diluted | $0.31 | $0.49 | $0.32 | $0.51 | $1.64 | Highwoods Realty Limited Partnership - Quarterly Financial Data (2018) | Metric | Q1 2018 ($ in thousands) | Q2 2018 ($ in thousands) | Q3 2018 ($ in thousands) | Q4 2018 ($ in thousands) | Total 2018 ($ in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Rental and other revenues | $180,438 | $178,792 | $179,417 | $181,388 | $720,035 | | Net income | $34,246 | $52,998 | $35,009 | $55,377 | $177,630 | | Net income available for common unitholders | $33,337 | $52,067 | $34,062 | $54,465 | $173,931 | | Earnings per Common Unit – diluted | $0.32 | $0.49 | $0.32 | $0.51 | $1.64 | 19. Subsequent Events This note reports a cash dividend declared by the Company on February 5, 2019 - On February 5, 2019, the Company declared a cash dividend of $0.475 per share of Common Stock, payable on March 5, 2019[538] Schedule II Schedule II presents the activity of the allowance for doubtful accounts for Highwoods Properties, Inc. and Highwoods Realty Limited Partnership Activity of Allowance for Doubtful Accounts (2016-2018) | Account Type | Balance at Dec 31, 2017 ($ in thousands) | Additions ($ in thousands) | Deductions ($ in thousands) | Balance at Dec 31, 2018 ($ in thousands) | | :--- | :--- | :--- | :--- | :--- | | Allowance for Doubtful Accounts - Straight-Line Rent | $819 | $599 | $(777) | $641 | | Allowance for Doubtful Accounts - Accounts Receivable | $753 | $969 | $(556) | $1,166 | | Allowance for Doubtful Accounts - Notes Receivable | $72 | — | $(28) | $44 | | Totals | $1,644 | $1,568 | $(1,361) | $1,851 | Schedule III Schedule III provides detailed activity of real estate assets and accumulated depreciation for Highwoods Properties, Inc. and Highwoods Realty Limited Partnership Activity of Real Estate Assets and Accumulated Depreciation (2016-2018) | Metric | 2018 ($ in thousands) | 2017 ($ in thousands) | 2016 ($ in thousands) | | :--- | :--- | :--- | :--- | | Real estate assets: | | | | | Beginning balance | $5,173,754 | $4,865,103 | $4,915,858 | | Additions: Acquisitions, development and improvements | $274,863 | $486,755 | $353,236 | | Cost of real estate sold and retired | $(152,066) | $(178,104) | $(403,991) | | Ending balance | $5,296,551 | $5,173,754 | $4,865,103 | | Accumulated depreciation: | | | | | Beginning balance | $1,211,728 | $1,134,103 | $1,138,378 | | Depreciation expense | $191,035 | $184,385 | $173,072 | | Real estate sold and retired | $(106,201) | $(106,760) | $(177,347) | | Ending balance | $1,296,562 | $1,211,728 | $1,134,103 | - The tax basis of aggregate land and buildings and tenant improvements as of December 31, 2018, was $4.9 billion[555]