NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(tabular dollar amounts in thousands, except per share and per unit data)
(Unaudited)
1. Description of Business and Significant Accounting Policies
Description of Business
Highwoods Properties, Inc. (the “Company”) is a fully integrated office real estate investment trust (“REIT”) that owns, develops, acquires, leases and manages properties primarily in the best business districts of Atlanta, Charlotte, Dallas, Nashville, Orlando, Raleigh, Richmond and Tampa. The Company conducts its activities through Highwoods Realty Limited Partnership (the “Operating Partnership”). At September 30, 2022, we owned or had an interest in 28.1 million rentable square feet of in-service properties, 1.4 million rentable square feet of office properties under development and development land with approximately 5.0 million rentable square feet of potential office build out.
Capital Structure
The Company is the sole general partner of the Operating Partnership. At September 30, 2022, the Company owned all of the Preferred Units and 104.8 million, or 97.8%, of the Common Units in the Operating Partnership. Limited partners owned the remaining 2.4 million Common Units. During the nine months ended September 30, 2022, the Company redeemed 30,909 Common Units for a like number of shares of Common Stock and 91,887 Common Units for cash.
During 2020, we entered into separate equity distribution agreements in which the Company may offer and sell up to $300.0 million in aggregate gross sales price of shares of Common Stock. During the nine months ended September 30, 2022, the Company issued 130,011 shares of Common Stock under its equity distribution agreements at an average gross sales price of $46.50 per share and received net proceeds, after sales commissions, of $6.0 million. As a result of this activity and the redemptions discussed above, the percentage of Common Units owned by the Company increased from 97.7% at December 31, 2021 to 97.8% at September 30, 2022.
Basis of Presentation
Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
The Company’s Consolidated Financial Statements include the Operating Partnership, wholly owned subsidiaries and those entities in which the Company has the controlling interest. The Operating Partnership’s Consolidated Financial Statements include wholly owned subsidiaries and those entities in which the Operating Partnership has the controlling interest. We consolidate joint venture investments, such as interests in partnerships and limited liability companies, when we control the major operating and financial policies of the investment through majority ownership, in our capacity as a general partner or managing member or through some other contractual right. In addition, we consolidate those entities deemed to be variable interest entities in which we are determined to be the primary beneficiary.
During the third quarter of 2022, we acquired an office building using a special purpose entity owned by a qualified intermediary to facilitate one or more potential Section 1031 reverse exchanges under the Internal Revenue Code. To realize the tax deferrals available under the Section 1031 exchanges, we must complete the Section 1031 exchanges and take title to the to-be-exchanged buildings within 180 days of the acquisition date. We have determined that this entity is a variable interest entity of which we are the primary beneficiary; and therefore, we consolidate this entity. At September 30, 2022, we also have involvement with four additional entities we determined to be variable interest entities, one of which we are the primary beneficiary and is consolidated and three of which we are not the primary beneficiary and are not consolidated. (See Note 3).
All intercompany transactions and accounts have been eliminated.
The unaudited interim consolidated financial statements and accompanying unaudited consolidated financial information, in the opinion of management, contain all adjustments (including normal recurring accruals) necessary for a fair presentation of our financial position, results of operations and cash flows. We have condensed or omitted certain notes and other information
from the interim Consolidated Financial Statements presented in this Quarterly Report as permitted by SEC rules and regulations. These Consolidated Financial Statements should be read in conjunction with our 2021 Annual Report on Form 10-K.
Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in our Consolidated Financial Statements and accompanying notes. Actual results could differ from those estimates.
Insurance
We are primarily self-insured for health care claims for participating employees. We have stop-loss coverage to limit our exposure to significant claims on a per claim and annual aggregate basis. We determine our liabilities for claims, including incurred but not reported losses, based on all relevant information, including actuarial estimates of claim liabilities. At September 30, 2022, a reserve of $0.6 million was recorded to cover estimated reported and unreported claims.
Investment Activity
During the third quarter of 2022, we entered the Dallas market through the formation of two joint ventures with Granite Properties to develop the following Class AA assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Project | | BBD | | Own % | | Rentable Square Feet | | | | | | | | |
| | | | | | | | | | | | | | |
Granite Park Six | | Frisco/Plano | | 50% | | 422,000 | | | | | | | | |
23Springs | | Uptown | | 50% | | 642,000 | | | | | | | | |
In connection with the formation, we agreed to contribute our 50.0% share of the equity required to fund the development projects, $55.7 million of which was funded on the formation date. We determined that we have a variable interest in each of these entities (see Note 3).
The Granite Park Six joint venture obtained a construction loan for $115.0 million, with an interest rate of SOFR plus 394 basis points and a maturity date of January 2026. In connection with this loan, the Granite Park Six joint venture obtained an interest rate hedge contract that effectively caps the underlying SOFR rate at 3.5% with respect to $95.2 million of any outstanding amounts. The cap expires in July 2024. No amounts were drawn on this loan as of September 30, 2022. The 23Springs joint venture obtained a construction loan for $265.0 million, with an interest rate of SOFR plus 355 basis points and a maturity date of March 2026. In connection with this loan, the 23Springs joint venture obtained an interest rate hedge contract that effectively caps the underlying SOFR rate at 3.5% with respect to $83.0 million of any outstanding amounts. The cap expires in April 2024. No amounts were drawn on this loan as of September 30, 2022.
We plan to fund our entry into the Dallas market, including our share of the equity required to construct Granite Park Six and 23Springs, by exiting the Pittsburgh market (see Note 4). Our Pittsburgh assets, which consist of 2,155,000 square feet of office that was 90.3% occupied as of September 30, 2022, represent approximately 6% of our overall net operating income.
Recently Issued Accounting Standards
The Financial Accounting Standards Board (“FASB”) issued an accounting standards update (“ASU”) that provides temporary optional expedients and exceptions to the guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). Entities can elect not to apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Entities can also elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met. The guidance in this ASU is optional and may be elected now through December 31, 2022 as reference rate reform activities occur. We will continue to evaluate the impact of this ASU; however, we currently expect to avail ourselves of such optional expedients and exceptions should our modified contracts meet the required criteria.
2. Leases
Operating Leases
We generally lease our office properties to lessees in exchange for fixed monthly payments that cover rent, property taxes, insurance and certain cost recoveries, primarily common area maintenance. Office properties owned by us that are under lease are primarily located in Atlanta, Charlotte, Nashville, Orlando, Pittsburgh, Raleigh, Richmond and Tampa and are leased to a wide variety of lessees across many industries. Our leases are operating leases and mostly range from three to 10 years. We recognized rental and other revenues related to operating lease payments of $203.9 million and $192.3 million during the three months ended September 30, 2022 and 2021, respectively, and $608.1 million and $554.6 million during the nine months ended September 30, 2022 and 2021, respectively. Included in these amounts are variable lease payments of $16.9 million and $13.7 million during the three months ended September 30, 2022 and 2021, respectively, and $51.9 million and $42.7 million during the nine months ended September 30, 2022 and 2021, respectively.
3. Variable Interest Entities
The acquisition of SIX50 at Legacy Union in Charlotte was completed in the third quarter of 2022 using a special purpose entity owned by a qualified intermediary to facilitate one or more potential Section 1031 reverse exchanges under the Internal Revenue Code. As of September 30, 2022, this variable interest entity had total assets, liabilities and cash flows of $200.6 million, $3.3 million, and $0.5 million, respectively.
Consolidated Variable Interest Entity
In 2019, we and The Bromley Companies formed a joint venture to construct Midtown West, a 150,000 square foot, multi-customer office building located in the mixed-use Midtown Tampa project in Tampa’s Westshore submarket. Midtown West has an anticipated total investment of $71.3 million. Construction of Midtown West began in the third quarter of 2019 and the building was placed in service in the second quarter of 2021. At closing, we agreed to contribute cash of $20.0 million, which has been fully funded, in exchange for an 80.0% interest in the Midtown West joint venture and The Bromley Companies contributed land valued at $5.0 million in exchange for the remaining 20.0% interest. We also committed to provide a $46.3 million interest-only secured construction loan to the Midtown West joint venture that is scheduled to mature in June 2023. The loan bears interest at LIBOR plus 250 basis points. As of September 30, 2022, $37.7 million under the loan has been funded.
We determined that we have a variable interest in the Midtown West joint venture primarily because the entity was designed to pass along interest rate risk, equity price risk and operation risk to us as both a debt and an equity holder and The Bromley Companies as an equity holder. The Midtown West joint venture was further determined to be a variable interest entity as it requires additional subordinated financial support in the form of a loan because the initial equity investment provided by us and The Bromley Companies is not sufficient to finance its planned investments and operations. We, as majority owner and managing member and through our control rights as set forth in the joint venture’s governance documents, were determined to be the primary beneficiary as we have both the power to direct the activities that most significantly affect the entity (primarily lease rates, property operations and capital expenditures) and significant economic exposure through our equity investment and loan commitment. As such, the Midtown West joint venture is consolidated and all intercompany transactions and accounts are eliminated. The following table sets forth the assets and liabilities of the Midtown West joint venture included on our Consolidated Balance Sheets:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| | | |
Net real estate assets | $ | 60,917 | | | $ | 53,191 | |
| | | |
Cash and cash equivalents | $ | 1,246 | | | $ | 389 | |
Accounts receivable | $ | 166 | | | $ | — | |
Accrued straight-line rents receivable | $ | 720 | | | $ | 121 | |
Deferred leasing costs, net | $ | 2,251 | | | $ | 1,519 | |
Prepaid expenses and other assets, net | $ | 160 | | | $ | 163 | |
Accounts payable, accrued expenses and other liabilities | $ | 1,476 | | | $ | 646 | |
The assets of the Midtown West joint venture can be used only to settle obligations of the joint venture, and its creditors have no recourse to our wholly owned assets.
Unconsolidated Variable Interest Entities
During the fourth quarter of 2021, we and Brand Properties, LLC (“Brand”) formed a joint venture to construct 2827 Peachtree, a 135,000 square foot, multi-customer office building located in Atlanta’s Buckhead submarket. 2827 Peachtree has an anticipated total investment of $79.0 million. Construction of 2827 Peachtree began in the first quarter of 2022 with a scheduled completion date in the third quarter of 2023. At closing, we agreed to contribute cash of $13.3 million, which has been fully funded, in exchange for a 50.0% interest in the 2827 Peachtree joint venture and Brand contributed land valued at $7.7 million and cash of $5.6 million in exchange for the remaining 50.0% interest. We also committed to provide a $49.6 million interest-only secured construction loan to the 2827 Peachtree joint venture that is scheduled to mature in December 2024 with an option to extend for one year. The loan bears interest at LIBOR plus 300 basis points. As of September 30, 2022, no amounts under the loan have been funded.
We determined that we have a variable interest in the 2827 Peachtree joint venture primarily because the entity was designed to pass along interest rate risk, equity price risk and operation risk to us as both a debt and equity holder and Brand as an equity holder. The 2827 Peachtree joint venture was further determined to be a variable interest entity as it requires additional subordinated financial support in the form of a loan because the initial equity investment provided by us and Brand is not sufficient to finance its planned investments and operations. We concluded we do not have the power to direct matters that most significantly impact the activities of the entity and therefore do not qualify as the primary beneficiary. Accordingly, the entity is not consolidated. At September 30, 2022, our risk of loss with respect to this arrangement was limited to the carrying value of the investment balance of $13.7 million as no amounts were outstanding under the loan. The assets of the 2827 Peachtree joint venture can be used only to settle obligations of the joint venture and its creditors have no recourse to our wholly owned assets.
We also determined that we have a variable interest in both the Granite Park Six and 23Springs joint ventures primarily because the entities were designed to pass along interest rate risk, equity price risk and operation risk to us and Granite Properties as equity holders. The joint ventures were further determined to be variable interest entities as they require additional subordinated financial support in the form of loans because the initial equity investments provided by us and Granite Properties are not sufficient to finance the planned investments and operations. We concluded we do not have the power to direct matters that most significantly impact the activities of either entity and therefore do not qualify as the primary beneficiary. Accordingly, the entities are not consolidated. At September 30, 2022, our risk of loss with respect to these arrangements was limited to the carrying value of each investment balance as no amounts were outstanding under the loans. Our investment balances were $36.1 million and $37.9 million at September 30, 2022 for Granite Park Six and 23Springs, respectively. The assets of the Granite Park Six and 23Springs joint ventures can be used only to settle obligations of the respective joint venture and their creditors have no recourse to our wholly owned assets.
4. Real Estate Assets
Acquisitions
During the third quarter of 2022, we acquired SIX50 at Legacy Union, a 367,000 square foot trophy office building in Charlotte’s Uptown CBD submarket, for a net purchase price of $198.0 million. The assets acquired and liabilities assumed were recorded at relative fair value as determined by management, with the assistance of third party specialists, based on information available at the acquisition date and on current assumptions as to future operations.
During the second quarter of 2022, we acquired land in Charlotte for an aggregate purchase price, including capitalized acquisition costs, of $27.0 million.
Dispositions
During the third quarter of 2022, we sold land in Richmond for a sales price of $23.3 million and recorded a gain on disposition of property of $9.4 million.
During the second quarter of 2022, we sold office buildings and land in Atlanta, Greensboro and Tampa for an aggregate sales price of $100.7 million (before closing credits to buyers of $1.1 million) and recorded aggregate gains on disposition of property of $50.0 million.
During the first quarter of 2022, we sold land in Tampa for a sales price of $9.6 million and recorded a gain on disposition of property of $4.1 million.
Impairments
Because we classified all of our assets in Pittsburgh as non-core, we recorded the following impairment charges in 2022:
•During the third quarter of 2022, we recorded an impairment charge of $1.5 million to lower the carrying amount of a land parcel in Pittsburgh to its estimated fair value less costs to sell; and
•During the second quarter of 2022, we recorded an impairment charge of $35.0 million to lower the carrying amount of EQT Plaza (including accrued straight-line rents receivable and deferred leasing costs) to its estimated fair value less costs to sell. EQT Plaza is a 616,000 square foot office building located in the heart of Pittsburgh’s CBD. EQT Corporation’s lease of 317,000 square feet at EQT Plaza is scheduled to expire in September 2024.
5. Intangible Assets and Below Market Lease Liabilities
The following table sets forth total intangible assets and acquisition-related below market lease liabilities, net of accumulated amortization:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Assets: | | | |
Deferred leasing costs (including lease incentives and above market lease and in-place lease acquisition-related intangible assets) | $ | 413,036 | | | $ | 402,013 | |
Less accumulated amortization | (157,205) | | | (143,111) | |
| $ | 255,831 | | | $ | 258,902 | |
Liabilities (in accounts payable, accrued expenses and other liabilities): | | | |
Acquisition-related below market lease liabilities | $ | 55,371 | | | $ | 57,703 | |
Less accumulated amortization | (28,633) | | | (28,978) | |
| $ | 26,738 | | | $ | 28,725 | |
The following table sets forth amortization of intangible assets and below market lease liabilities:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Amortization of deferred leasing costs and acquisition-related intangible assets (in depreciation and amortization) | $ | 11,425 | | | $ | 10,070 | | | $ | 33,603 | | | $ | 27,267 | |
Amortization of lease incentives (in rental and other revenues) | $ | 500 | | | $ | 424 | | | $ | 1,369 | | | $ | 1,317 | |
Amortization of acquisition-related intangible assets (in rental and other revenues) | $ | 797 | | | $ | 636 | | | $ | 2,448 | | | $ | 1,154 | |
| | | | | | | |
Amortization of acquisition-related below market lease liabilities (in rental and other revenues) | $ | (1,473) | | | $ | (1,391) | | | $ | (4,159) | | | $ | (4,241) | |
The following table sets forth scheduled future amortization of intangible assets and below market lease liabilities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Amortization of Deferred Leasing Costs and Acquisition-Related Intangible Assets (in Depreciation and Amortization) | | Amortization of Lease Incentives (in Rental and Other Revenues) | | Amortization of Acquisition-Related Intangible Assets (in Rental and Other Revenues) | | | | Amortization of Acquisition-Related Below Market Lease Liabilities (in Rental and Other Revenues) |
October 1 through December 31, 2022 | | | | $ | 11,068 | | | $ | 488 | | | $ | 865 | | | | | $ | (1,275) | |
2023 | | | | 40,696 | | | 1,623 | | | 3,279 | | | | | (4,918) | |
2024 | | | | 35,514 | | | 1,554 | | | 3,065 | | | | | (4,278) | |
2025 | | | | 28,586 | | | 1,478 | | | 2,202 | | | | | (2,764) | |
2026 | | | | 24,614 | | | 1,279 | | | 1,868 | | | | | (2,464) | |
Thereafter | | | | 86,384 | | | 4,089 | | | 7,179 | | | | | (11,039) | |
| | | | $ | 226,862 | | | $ | 10,511 | | | $ | 18,458 | | | | | $ | (26,738) | |
Weighted average remaining amortization periods as of September 30, 2022 (in years) | | | | 7.9 | | 7.9 | | 7.7 | | | | 8.4 |
The following table sets forth the intangible assets acquired and below market lease liabilities assumed as a result of the acquisition of SIX50 at Legacy Union in Charlotte:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Acquisition-Related Intangible Assets (amortized in Rental and Other Revenues) | | Acquisition-Related Intangible Assets (amortized in Depreciation and Amortization) | | Acquisition-Related Below Market Lease Liabilities (amortized in Rental and Other Revenues) |
Amount recorded at acquisition | | | | $ | 4,722 | | | $ | 12,606 | | | $ | (2,172) | |
Weighted average remaining amortization periods as of September 30, 2022 (in years) | | | | 9.1 | | 9.8 | | 12.7 |
6. Mortgages and Notes Payable
The following table sets forth our mortgages and notes payable:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Secured indebtedness | $ | 486,003 | | | $ | 491,942 | |
Unsecured indebtedness | 2,503,252 | | | 2,312,180 | |
Less-unamortized debt issuance costs | (15,886) | | | (15,207) | |
Total mortgages and notes payable, net | $ | 2,973,369 | | | $ | 2,788,915 | |
At September 30, 2022, our secured mortgage loans were collateralized by real estate assets with an undepreciated book value of $742.1 million.
Our $750.0 million unsecured revolving credit facility is scheduled to mature in March 2025 and includes an accordion feature that allows for an additional $400.0 million of borrowing capacity subject to additional lender commitments. Assuming no defaults have occurred, we have an option to extend the maturity for two additional six-month periods. During the second quarter of 2022, in connection with the modification of our $200.0 million term loan as discussed below, the interest rate on our revolving credit facility was converted from LIBOR plus 90 basis points to SOFR plus a related spread adjustment of 10 basis points and a borrowing spread of 85 basis points, based on current credit ratings. The annual facility fee is 20 basis points. The interest rate and facility fee are based on the higher of the publicly announced ratings from Moody’s Investors Service or Standard & Poor’s Ratings Services. We may be entitled to a temporary reduction in the interest rate of one basis point provided we meet certain sustainability goals with respect to the ongoing reduction of greenhouse gas emissions. There was $110.0 million and $170.0 million outstanding under our revolving credit facility at September 30, 2022 and October 18, 2022, respectively. At both September 30, 2022 and October 18, 2022, we had $0.1 million of outstanding letters of credit, which reduces the availability on our revolving credit facility. As a result, the unused capacity of our revolving credit facility at September 30, 2022 and October 18, 2022 was $639.9 million and $579.9 million, respectively.
During the second quarter of 2022, we modified our $200.0 million unsecured bank term loan to extend the maturity date from November 2022 to May 2026. As part of this modification, we also obtained a $150.0 million delayed-draw term loan, which was drawn in its entirety in the third quarter of 2022, that is scheduled to mature in May 2027. The interest rate, based on current credit ratings, is SOFR plus a related spread adjustment of 10 basis points and a borrowing spread of 95 basis points. The interest rate is based on the higher of the publicly announced ratings from Moody’s Investors Service or Standard & Poor’s Ratings Services. We may be entitled to a temporary reduction in the interest rate of one basis point provided we meet certain sustainability goals with respect to the ongoing reduction of greenhouse gas emissions. We incurred $2.7 million of debt issuance costs, which are being amortized along with certain existing unamortized debt issuance costs over the remaining term of our modified term loan.
See Note 15 for a discussion of financing activities subsequent to September 30, 2022.
We are currently in compliance with financial covenants with respect to our consolidated debt.
We have considered our short-term liquidity needs within one year from October 25, 2022 (the date of issuance of the quarterly financial statements) and the adequacy of our estimated cash flows from operating activities and other available financing sources to meet these needs. We have concluded it is probable we will meet these short-term liquidity requirements through a combination of the following:
•available cash and cash equivalents;
•cash flows from operating activities;
•issuance of debt securities by the Operating Partnership;
•issuance of secured debt;
•bank term loans;
•borrowings under our revolving credit facility;
•issuance of equity securities by the Company or the Operating Partnership; and
•the disposition of non-core assets.
7. Derivative Financial Instruments
We previously entered into floating-to-fixed interest rate swaps through January 2022 with respect to an aggregate of $50.0 million LIBOR-based borrowings. These swaps effectively fixed the underlying one month LIBOR rate at a weighted average rate of 1.693%. During the first quarter of 2022, these interest rate swaps expired.
Our interest rate swaps were designated as and accounted for as cash flow hedges with changes in fair value recorded in other comprehensive income/(loss) each reporting period. We had no collateral requirements related to our interest rate swaps.
Amounts reported in accumulated other comprehensive income/(loss) related to derivatives are reclassified to interest expense as interest payments are made on our debt. During the period from October 1, 2022 through September 30, 2023, we estimate that $0.3 million will be reclassified as a net decrease to interest expense.
The following table sets forth the fair value of our derivatives:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Derivatives: | | | |
| | | |
| | | |
Derivatives designated as cash flow hedges in accounts payable, accrued expenses and other liabilities: | | | |
Interest rate swaps | $ | — | | | $ | 60 | |
The following table sets forth the effect of our cash flow hedges on accumulated other comprehensive loss and interest expense:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Derivatives Designated as Cash Flow Hedges: | | | | | | | |
Amount of unrealized losses recognized in accumulated other comprehensive loss on derivatives: | | | | | | | |
Interest rate swaps | $ | — | | | $ | (6) | | | $ | — | | | $ | (17) | |
Amount of (gains)/losses reclassified out of accumulated other comprehensive loss into interest expense: | | | | | | | |
Interest rate swaps | $ | (75) | | | $ | 129 | | | $ | (164) | | | $ | 377 | |
8. Noncontrolling Interests
Noncontrolling Interests in Consolidated Affiliates
At September 30, 2022, our noncontrolling interests in consolidated affiliates relate to our joint venture partners’ 50.0% interest in office properties in Richmond and 20.0% interest in the Midtown West joint venture. Our joint venture partners are unrelated third parties.
Noncontrolling Interests in the Operating Partnership
The following table sets forth the Company’s noncontrolling interests in the Operating Partnership:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Beginning noncontrolling interests in the Operating Partnership | $ | 84,583 | | | $ | 128,180 | | | $ | 111,689 | | | $ | 112,499 | |
Adjustment of noncontrolling interests in the Operating Partnership to fair value | (16,952) | | | (4,262) | | | (42,480) | | | 11,072 | |
| | | | | | | |
Conversions of Common Units to Common Stock | — | | | (234) | | | (1,251) | | | (278) | |
Redemptions of Common Units | (3,101) | | | — | | | (3,101) | | | — | |
Net income attributable to noncontrolling interests in the Operating Partnership | 881 | | | 1,967 | | | 3,049 | | | 5,084 | |
Distributions to noncontrolling interests in the Operating Partnership | (1,192) | | | (1,418) | | | (3,687) | | | (4,144) | |
Total noncontrolling interests in the Operating Partnership | $ | 64,219 | | | $ | 124,233 | | | $ | 64,219 | | | $ | 124,233 | |
The following table sets forth net income available for common stockholders and transfers from the Company’s noncontrolling interests in the Operating Partnership:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net income available for common stockholders | $ | 38,251 | | | $ | 72,105 | | | $ | 129,022 | | | $ | 185,869 | |
Increase in additional paid in capital from conversions of Common Units to Common Stock | — | | | 234 | | | 1,251 | | | 278 | |
| | | | | | | |
Change from net income available for common stockholders and transfers from noncontrolling interests | $ | 38,251 | | | $ | 72,339 | | | $ | 130,273 | | | $ | 186,147 | |
9. Disclosure About Fair Value of Financial Instruments
The following summarizes the levels of inputs that we use to measure fair value.
Level 1. Quoted prices in active markets for identical assets or liabilities.
Our Level 1 asset is our investment in marketable securities that we use to pay benefits under our non-qualified deferred compensation plan. Our Level 1 liability is our non-qualified deferred compensation obligation. The Company’s Level 1 noncontrolling interests in the Operating Partnership relate to the ownership of Common Units by various individuals and entities other than the Company.
Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.
Our Level 2 assets include the fair value of our mortgages and notes receivable. Our Level 2 liabilities include the fair value of our mortgages and notes payable and any interest rate swaps.
The fair value of mortgages and notes receivable and mortgages and notes payable is estimated by the income approach utilizing contractual cash flows and market-based interest rates to approximate the price that would be paid in an orderly transaction between market participants. The fair value of any interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments of interest rate swaps are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves. In addition, credit valuation adjustments are considered in the fair values to account for potential nonperformance risk, but were concluded to not be significant inputs to the calculation for the periods presented.
Level 3. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Our Level 3 assets include any real estate assets recorded at fair value on a non-recurring basis as a result of our quarterly impairment analysis, which are valued using unobservable local and national industry market data such as comparable sales, appraisals, brokers’ opinions of value and/or the terms of definitive sales contracts. Significant increases or decreases in any valuation inputs in isolation would result in a significantly lower or higher fair value measurement.
The following table sets forth our assets and liabilities and the Company’s noncontrolling interests in the Operating Partnership that are measured or disclosed at fair value within the fair value hierarchy:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Level 1 | | Level 2 | | Level 3 |
| | Total | | Quoted Prices in Active Markets for Identical Assets or Liabilities | | Significant Observable Inputs | | Significant Unobservable Inputs |
Fair Value at September 30, 2022: | | | | | | | | |
Assets: | | | | | | | | |
Mortgages and notes receivable, at fair value (1) | | $ | 1,103 | | | $ | — | | | $ | 1,103 | | | $ | — | |
| | | | | | | | |
Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets) | | 2,364 | | | 2,364 | | | — | | | — | |
Impaired real estate assets | | 1,665 | | | — | | | — | | | 1,665 | |
| | | | | | | | |
| | | | | | | | |
Total Assets | | $ | 5,132 | | | $ | 2,364 | | | $ | 1,103 | | | $ | 1,665 | |
Noncontrolling Interests in the Operating Partnership | | $ | 64,219 | | | $ | 64,219 | | | $ | — | | | $ | — | |
Liabilities: | | | | | | | | |
Mortgages and notes payable, net, at fair value (1) | | $ | 2,630,788 | | | $ | — | | | $ | 2,630,788 | | | $ | — | |
| | | | | | | | |
Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities) | | 2,364 | | | 2,364 | | | — | | | — | |
| | | | | | | | |
| | | | | | | | |
Total Liabilities | | $ | 2,633,152 | | | $ | 2,364 | | | $ | 2,630,788 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Fair Value at December 31, 2021: | | | | | | | | |
Assets: | | | | | | | | |
Mortgages and notes receivable, at fair value (1) | | $ | 1,227 | | | $ | — | | | $ | 1,227 | | | $ | — | |
| | | | | | | | |
Marketable securities of non-qualified deferred compensation plan (in prepaid expenses and other assets) | | 2,866 | | | 2,866 | | | — | | | — | |
| | | | | | | | |
| | | | | | | | |
Total Assets | | $ | 4,093 | | | $ | 2,866 | | | $ | 1,227 | | | $ | — | |
Noncontrolling Interests in the Operating Partnership | | $ | 111,689 | | | $ | 111,689 | | | $ | — | | | $ | — | |
Liabilities: | | | | | | | | |
Mortgages and notes payable, net, at fair value (1) | | $ | 2,907,492 | | | $ | — | | | $ | 2,907,492 | | | $ | — | |
Interest rate swaps (in accounts payable, accrued expenses and other liabilities) | | 60 | | | — | | | 60 | | | — | |
Non-qualified deferred compensation obligation (in accounts payable, accrued expenses and other liabilities) | | 2,866 | | | 2,866 | | | — | | | — | |
| | | | | | | | |
| | | | | | | | |
Total Liabilities | | $ | 2,910,418 | | | $ | 2,866 | | | $ | 2,907,552 | | | $ | — | |
__________
(1) Amounts are not recorded at fair value on our Consolidated Balance Sheets at September 30, 2022 and December 31, 2021.
The Level 3 impaired real estate assets measured at a fair value of $1.7 million in the third quarter of 2022 included a land parcel in Pittsburgh. This impairment resulted from the changes in our assumptions about the use of the asset as a result of our plan to exit the Pittsburgh market and was calculated using broker opinions of value, as observable inputs were not available.
In the second quarter of 2022, Level 3 impaired real estate assets, which measured at a fair value of $57.4 million, resulted from the shortened hold period assumptions for EQT Plaza as a result of our plan to exit the Pittsburgh market. The estimated fair value was calculated using broker opinions of value, which incorporate an income approach, as observable inputs were not available. Key assumptions used in the impairment calculation were estimated selling costs of 3.5% (including seller’s share of anticipated transfer taxes), the high end of an estimated discount rate ranging from 13.2% to 16.2% and an estimated terminal capitalization rate of 8.0%.
10. Share-Based Payments
During the nine months ended September 30, 2022, the Company granted 99,975 shares of time-based restricted stock and 81,832 shares of total return-based restricted stock with weighted average grant date fair values per share of $43.58 and $41.94, respectively. We recorded share-based compensation expense of $0.7 million and $1.9 million during the three months ended September 30, 2022 and 2021, and $6.8 million during each of the nine months ended September 30, 2022 and 2021. At September 30, 2022, there was $4.3 million of total unrecognized share-based compensation costs, which will be recognized over a weighted average remaining contractual term of 2.0 years.
11. Accumulated Other Comprehensive Loss
The following table sets forth the components of accumulated other comprehensive loss:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Cash flow hedges: | | | | | | | |
Beginning balance | $ | (1,062) | | | $ | (1,225) | | | $ | (973) | | | $ | (1,462) | |
Unrealized losses on cash flow hedges | — | | | (6) | | | — | | | (17) | |
Amortization of cash flow hedges (1) | (75) | | | 129 | | | (164) | | | 377 | |
Total accumulated other comprehensive loss | $ | (1,137) | | | $ | (1,102) | | | $ | (1,137) | | | $ | (1,102) | |
__________
(1) Amounts reclassified out of accumulated other comprehensive loss into interest expense.
12. Real Estate and Other Assets Held For Sale
The following table sets forth the assets held for sale at September 30, 2022 and December 31, 2021, which are considered non-core:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Assets: | | | |
| | | |
| | | |
| | | |
Land held for development | — | | | $ | 3,482 | |
| | | |
Net real estate assets | — | | | 3,482 | |
| | | |
| | | |
Prepaid expenses and other assets, net | — | | | 36 | |
Real estate and other assets, net, held for sale | $ | — | | | $ | 3,518 | |
| | | |
| | | |
| | | |
| | | |
| | | |
13. Earnings Per Share and Per Unit
The following table sets forth the computation of basic and diluted earnings per share of the Company:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Earnings per Common Share - basic: | | | | | | | |
Numerator: | | | | | | | |
Net income | $ | 40,110 | | | $ | 75,587 | | | $ | 134,815 | | | $ | 194,286 | |
Net (income) attributable to noncontrolling interests in the Operating Partnership | (881) | | | (1,967) | | | (3,049) | | | (5,084) | |
Net (income) attributable to noncontrolling interests in consolidated affiliates | (357) | | | (894) | | | (880) | | | (1,469) | |
Dividends on Preferred Stock | (621) | | | (621) | | | (1,864) | | | (1,864) | |
Net income available for common stockholders | $ | 38,251 | | | $ | 72,105 | | | $ | 129,022 | | | $ | 185,869 | |
Denominator: | | | | | | | |
Denominator for basic earnings per Common Share – weighted average shares (1) | 105,184 | | | 104,277 | | | 105,094 | | | 104,117 | |
Net income available for common stockholders | $ | 0.36 | | | $ | 0.69 | | | $ | 1.23 | | | $ | 1.79 | |
Earnings per Common Share - diluted: | | | | | | | |
Numerator: | | | | | | | |
Net income | $ | 40,110 | | | $ | 75,587 | | | $ | 134,815 | | | $ | 194,286 | |
Net (income) attributable to noncontrolling interests in consolidated affiliates | (357) | | | (894) | | | (880) | | | (1,469) | |
Dividends on Preferred Stock | (621) | | | (621) | | | (1,864) | | | (1,864) | |
Net income available for common stockholders before net (income) attributable to noncontrolling interests in the Operating Partnership | $ | 39,132 | | | $ | 74,072 | | | $ | 132,071 | | | $ | 190,953 | |
Denominator: | | | | | | | |
Denominator for basic earnings per Common Share – weighted average shares (1) | 105,184 | | | 104,277 | | | 105,094 | | | 104,117 | |
Add: | | | | | | | |
Stock options using the treasury method | — | | | 25 | | | 7 | | | 17 | |
Noncontrolling interests Common Units | 2,417 | | | 2,837 | | | 2,469 | | | 2,838 | |
Denominator for diluted earnings per Common Share – adjusted weighted average shares and assumed conversions | 107,601 | | | 107,139 | | | 107,570 | | | 106,972 | |
Net income available for common stockholders | $ | 0.36 | | | $ | 0.69 | | | $ | 1.23 | | | $ | 1.79 | |
__________
(1)Includes all unvested restricted stock where dividends on such restricted stock are non-forfeitable.
The following table sets forth the computation of basic and diluted earnings per unit of the Operating Partnership:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Earnings per Common Unit - basic: | | | | | | | |
Numerator: | | | | | | | |
Net income | $ | 40,110 | | | $ | 75,587 | | | $ | 134,815 | | | $ | 194,286 | |
Net (income) attributable to noncontrolling interests in consolidated affiliates | (357) | | | (894) | | | (880) | | | (1,469) | |
Distributions on Preferred Units | (621) | | | (621) | | | (1,864) | | | (1,864) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net income available for common unitholders | $ | 39,132 | | | $ | 74,072 | | | $ | 132,071 | | | $ | 190,953 | |
Denominator: | | | | | | | |
Denominator for basic earnings per Common Unit – weighted average units (1) | 107,192 | | | 106,705 | | | 107,154 | | | 106,546 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net income available for common unitholders | $ | 0.37 | | | $ | 0.69 | | | $ | 1.23 | | | $ | 1.79 | |
Earnings per Common Unit - diluted: | | | | | | | |
Numerator: | | | | | | | |
Net income | $ | 40,110 | | | $ | 75,587 | | | $ | 134,815 | | | $ | 194,286 | |
Net (income) attributable to noncontrolling interests in consolidated affiliates | (357) | | | (894) | | | (880) | | | (1,469) | |
Distributions on Preferred Units | (621) | | | (621) | | | (1,864) | | | (1,864) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net income available for common unitholders | $ | 39,132 | | | $ | 74,072 | | | $ | 132,071 | | | $ | 190,953 | |
Denominator: | | | | | | | |
Denominator for basic earnings per Common Unit – weighted average units (1) | 107,192 | | | 106,705 | | | 107,154 | | | 106,546 | |
Add: | | | | | | | |
Stock options using the treasury method | — | | | 25 | | | 7 | | | 17 | |
Denominator for diluted earnings per Common Unit – adjusted weighted average units and assumed conversions | 107,192 | | | 106,730 | | | 107,161 | | | 106,563 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net income available for common unitholders | $ | 0.37 | | | $ | 0.69 | | | $ | 1.23 | | | $ | 1.79 | |
__________
(1)Includes all unvested restricted stock where distributions on such restricted stock are non-forfeitable.
14. Segment Information
The following tables summarize the rental and other revenues and net operating income, the primary industry property-level performance metric used by our chief operating decision maker and which is defined as rental and other revenues less rental property and other expenses, for each of our reportable segments. Our segment information for the three and nine months ended September 30, 2021 has been retrospectively revised from previously reported amounts to reflect a change in our reportable segments as a result of our plan to exit the Pittsburgh market.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Rental and Other Revenues: | | | | | | | |
Office: | | | | | | | |
Atlanta | $ | 35,804 | | | $ | 36,672 | | | $ | 106,805 | | | $ | 108,385 | |
Charlotte | 18,825 | | | 14,313 | | | 52,643 | | | 32,364 | |
Nashville | 44,587 | | | 36,136 | | | 130,640 | | | 106,873 | |
Orlando | 13,634 | | | 12,852 | | | 40,298 | | | 38,141 | |
| | | | | | | |
Raleigh | 45,220 | | | 42,471 | | | 137,051 | | | 117,168 | |
Richmond | 10,872 | | | 12,050 | | | 31,837 | | | 35,263 | |
Tampa | 23,590 | | | 23,856 | | | 71,169 | | | 74,166 | |
Total Office Segment | 192,532 | | | 178,350 | | | 570,443 | | | 512,360 | |
Other | 14,465 | | | 17,145 | | | 46,773 | | | 52,442 | |
Total Rental and Other Revenues | $ | 206,997 | | | $ | 195,495 | | | $ | 617,216 | | | $ | 564,802 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Net Operating Income: | | | | | | | |
Office: | | | | | | | |
Atlanta | $ | 22,524 | | | $ | 24,157 | | | $ | 69,472 | | | $ | 71,779 | |
Charlotte | 14,275 | | | 11,159 | | | 40,132 | | | 25,446 | |
Nashville | 33,154 | | | 27,355 | | | 97,093 | | | 78,172 | |
Orlando | 7,865 | | | 7,920 | | | 24,264 | | | 23,414 | |
| | | | | | | |
Raleigh | 32,822 | | | 31,425 | | | 101,557 | | | 88,005 | |
Richmond | 7,112 | | | 7,805 | | | 21,700 | | | 24,092 | |
Tampa | 14,351 | | | 15,143 | | | 44,912 | | | 49,640 | |
Total Office Segment | 132,103 | | | 124,964 | | | 399,130 | | | 360,548 | |
Other | 8,560 | | | 9,964 | | | 27,961 | | | 31,272 | |
Total Net Operating Income | 140,663 | | | 134,928 | | | 427,091 | | | 391,820 | |
Reconciliation to net income: | | | | | | | |
Depreciation and amortization | (73,057) | | | (66,547) | | | (212,466) | | | (189,423) | |
Impairments of real estate assets | (1,515) | | | — | | | (36,515) | | | — | |
General and administrative expenses | (9,586) | | | (10,350) | | | (32,733) | | | (30,409) | |
Interest expense | (26,392) | | | (21,986) | | | (75,812) | | | (60,755) | |
Other income | 138 | | | 424 | | | 621 | | | 1,068 | |
Gains on disposition of property | 9,402 | | | 38,572 | | | 63,546 | | | 80,371 | |
Equity in earnings of unconsolidated affiliates | 457 | | | 546 | | | 1,083 | | | 1,614 | |
Net income | $ | 40,110 | | | $ | 75,587 | | | $ | 134,815 | | | $ | 194,286 | |
15. Subsequent Events
On October 11, 2022, we obtained a $200.0 million, two-year unsecured bank term loan that is scheduled to mature in October 2024 and reduces the existing accordion feature on our $750.0 million unsecured revolving credit facility from $400.0 million to $200.0 million. Assuming no defaults have occurred, we have an option to extend the maturity for one additional year. The interest rate, based on current credit ratings, is SOFR plus a related spread adjustment of 10 basis points and a borrowing spread of 95 basis points. The interest rate is based on the higher of the publicly announced ratings from Moody’s Investors Service or Standard & Poor’s Ratings Services. We may be entitled to a temporary reduction in the interest rate of one basis point provided we meet certain sustainability goals with respect to the ongoing reduction of greenhouse gas emissions.
On October 17, 2022, we used the additional $200.0 million of borrowings, together with available cash and borrowings under our revolving credit facility, to prepay without penalty $250.0 million principal amount of 3.625% unsecured notes that were scheduled to mature in January 2023.
On October 20, 2022, the Company declared a cash dividend of $0.50 per share of Common Stock, which is payable on December 13, 2022 to stockholders of record as of November 21, 2022.