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Item 7. Management’s Discussion and Analysis

2021-02-09 compared with 2020-02-04 · 151 added, 124 removed, 351 unchanged (44% of the section changed)

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Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that our plans, intentions or expectations will be achieved.

When considering such forward-looking statements, you should keep in mind the following important factors that could cause our actual results to differ materially from those contained in any forward-looking statement:

buyers may not be available and pricing may not be adequate with respect to the planned dispositions of non-core assets;

comparable sales data on which we based our expectations with respect to the sales price of the non-core assets may not reflect current market trends;

anticipated general and administrative expense savings related to the closure of our Greensboro and Memphis offices may not be realized;

the financial condition of our customers could deteriorate;

When considering such forward-looking statements, you should keep in mind important factors that could cause our actual results to differ materially from those contained in any forward-looking statement.

Currently, one of the most significant factors that could cause actual outcomes to differ materially from our forward-looking statements is the ongoing adverse effect of the COVID-19 pandemic, and federal, state, and/or local regulatory guidelines and private business actions to control it, on our financial condition, operating results and cash flows, our customers, the use of and demand for office space, the real estate market in which we operate, the global economy and the financial markets.

The extent to which the COVID-19 pandemic impacts us and our customers will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic and its ongoing impact on the U.S.

economy and potential changes in customer behavior, among others.

Additional factors, many of which may be influenced by the COVID-19 pandemic, that could cause actual outcomes or results to differ materially from those indicated in these statements include:

• the financial condition of our customers could deteriorate or further worsen;

• counterparties under our debt instruments, particularly our revolving credit facility, may attempt to avoid their obligations thereunder, which, if successful, would reduce our available liquidity;

• we may not be able to lease or re-lease second generation space, defined as previously occupied space that becomes available for lease, quickly or on as favorable terms as old leases;

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

• natural disasters and climate change could have an adverse impact on our cash flow and operating results;

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

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You should also review the other cautionary statements we make in “Item 1A.

Business – Risk Factors” set forth in this Annual Report.

Risk Factors” set forth in this Annual Report.

Given these uncertainties, you should not place undue reliance on forward-looking statements.

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

The unprecedented nationwide efforts to slow the spread of the COVID-19 virus have obviously had a significant impact on the U.S.

It is very difficult to predict when, if and to what extent economic activity will return to pre-COVID-19 levels.

The COVID-19 pandemic did have somewhat of an impact on our 2020 financial results, as described further in “Results of Operations.” Our financial results for 2021 and future leasing activity could be adversely affected by the COVID-19 pandemic.

Factors that could cause actual results to differ materially from our current expectations are set forth under “Item 1A.

Risk Factors” and “Disclosure Regarding Forward-Looking Statements.”

While all buildings and parking facilities have remained open for business, the usage of our assets in 2020 was significantly lower due to the COVID-19 pandemic.

As a result, parking and parking-related revenues were lower during this period.

In addition, our operating expenses, net of expense recoveries, were lower during this period due to reduced electricity, janitorial and other variable expenses.

Until usage increases, which will depend on the duration of the COVID-19 pandemic, which is difficult to estimate, we expect that reduced usage will continue to result in reduced parking revenues, which will be partially offset by reduced operating expenses.

We do not expect usage to increase over the current level until the infection rate across the U.S.

and, more specifically, our markets begins to meaningfully decline and/or an increasing number of employers believe the risk of virus spread in the workplace is manageable.

Given the COVID-19 pandemic and its impact on economic activity, we have been experiencing slower speculative new leasing and we expect that trend will continue in 2021.

It is too early to predict the pandemic’s impact on renewal activity in 2021.

Lower overall leasing will negatively impact our rental revenues.

We have incurred and may in the future incur losses due to customers that default on their leases, file bankruptcy and/or otherwise experience significant financial difficulty as a result of the COVID-19 pandemic.

In 2020, such losses totaled $4.5 million, consisting of lost rental revenues resulting from customers that filed bankruptcy or otherwise irrevocably defaulted on their leases and non-cash credit losses of straight-line rent receivables.

Of the straight-line rent receivable credit losses incurred during 2020, $1.3 million were due to the conversion of fixed rent leases to percentage rent leases for certain customers that remain in occupancy but have been impacted by social distancing measures.

Generally, in cases where an otherwise viable, creditworthy customer has been able to demonstrate disruption due to the complete or partial shutdown of its business operations, we have agreed and/or may agree to defer, but not abate, the payment of rent for a limited period of time or, as noted above, convert traditional leases to percentage rent leases.

In other cases, we have agreed and/or may agree to abate rent for a limited period of time as consideration for a lease term extension.

The extent of any losses will depend on whether or not the collectability of future rents from customers experiencing financial difficulty is deemed to be probable under GAAP.

For a discussion of the impact of the COVID-19 pandemic on our liquidity and balance sheet, see “Liquidity and Capital Resources” below.

Our operating results depend heavily on successfully leasing and operating the office space in our portfolio.

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For more information regarding our lease expirations, see “Item 2.

Properties - Lease Expirations.” Occupancy in our office portfolio increased from 91.6% at December 31, 2018 to 91.9% at December 31, 2019 .

Properties - Lease Expirations.” Occupancy in our office portfolio decreased from 92.0% at December 31, 2019 to 90.3% at December 31, 2020.

We expect average occupancy for our office portfolio to be approximately 89% to 90% for 2021.

However, average occupancy in 2021 will be lower, perhaps significantly lower, if the COVID-19 pandemic causes vacancies and move-outs due to (a) customers that default on their leases, file bankruptcy or otherwise experience significant financial difficulty and/or (b) potential changes in customer behavior, such as the continued social acceptance, desirability and perceived economic benefits of work-from-home arrangements, which could materially and negatively impact the future demand for office space over the long-term.

Whether or not our rental revenue tracks average occupancy proportionally depends upon whether GAAP rents under signed new and renewal leases are higher or lower than the GAAP rents under expiring leases.

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The following table sets forth information regarding second generation office leases signed during the fourth quarter of 2020 (we define second generation office leases as leases with new customers and renewals of existing customers in office space that has been previously occupied under our ownership and leases with respect to vacant space in acquired buildings):

New Renewal All Office

Leased space (in rentable square feet) 160,178 305,795 465,973

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Base rents (per rentable square foot) (1)

$ 29.10 $ 29.43 $ 29.32

Rent concessions (per rentable square foot) (1)

(1.66) (1.01) (1.24)

GAAP rents (per rentable square foot) (1)

$ 27.44 $ 28.42 $ 28.08

Tenant improvements (per rentable square foot) (1)

$ 5.06 $ 1.35 $ 2.62

Leasing commissions (per rentable square foot) (1)

$ 1.05 $ 0.58 $ 0.74

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

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As of December 31, 2020, no customer accounted for more than 3% of our cash revenues other than the Federal Government and Bank of America, which accounted for 4.3% and 4.1%, respectively, of our cash revenues on an annualized basis.

Upon stabilization of the MetLife III development project in Raleigh, it is expected that MetLife would account for approximately 3.2% of our revenues based on annualized cash revenues for December 2019.

Upon stabilization of the MetLife III development project in Raleigh, it is expected that MetLife will account for approximately 3.4% of our revenues based on annualized cash revenues for December 2020.

Properties - Customers.”

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From time to time, expenses also include impairments of real estate assets.

Rental property expenses are expenses associated with our ownership and operation of rental properties and include expenses that vary somewhat proportionately to occupancy levels, such as janitorial services and utilities, and expenses that do not vary based on occupancy, such as property taxes and insurance.

Rental property expenses are expenses associated with our ownership and operation of rental properties and include expenses that vary

somewhat proportionately to occupancy levels, such as janitorial services and utilities, and expenses that do not vary based on occupancy, such as property taxes and insurance.

Depreciation and amortization is a non-cash expense associated with the ownership of real property and generally remains relatively consistent each year, unless we buy, place in service or sell assets, since our properties and related building and tenant improvement assets are depreciated on a straight-line basis over fixed lives.

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Net Operating Income

Whether or not we record increasing net operating income (“NOI”) in our same property portfolio depends upon our ability to garner higher rental revenues, whether from higher average occupancy, higher GAAP rents per rentable square foot or higher cost recovery income, that exceed any corresponding growth in operating expenses.

Same property NOI was $0.3 million , or 0.1% , lower in 2019 as compared to 2018 due to an increase in same property expenses of $4.3 million offset by an increase of $4.0 million in same property revenues.

Same property revenues were lower primarily due to $8.0 million in credit losses on operating lease receivables and write-offs of lease incentives associated with Laser Spine Institute on March 1, 2019, partly offset by higher average GAAP rents per rentable square foot and higher parking income.

See “Results of Operations - Comparison of 2019 to 2018 - Laser Spine Institute.” We expect same property NOI to be higher in 2020 as compared to 2019 as higher rental revenues, mostly from higher average GAAP rents per rentable square foot, no credit losses and write-offs associated with Laser Spine Institute and higher cost recovery income, are expected to more than offset an anticipated increase in same property operating expenses.

In addition to the effect of same property NOI, whether or not NOI increases depends upon whether the NOI from our acquired properties and development properties placed in service exceeds the NOI from property dispositions.

NOI was $9.8 million , or 2.1% , higher in 2019 as compared to 2018 due to the impact of development properties placed in service and acquisitions, partly offset by Laser Spine Institute credit losses and write-offs noted above, NOI lost from property dispositions and lower restoration fees.

We expect NOI to be higher in 2020 as compared to 2019 due to the impact of our net investment activity and no credit losses and write-offs associated with Laser Spine Institute.

Whether or not we record increasing net operating income (“NOI”) in our same property portfolio typically depends upon our ability to garner higher rental revenues, whether from higher average occupancy, higher GAAP rents per rentable square foot or higher cost recovery income, that exceed any corresponding growth in operating expenses.

Same property NOI was $16.3 million, or 3.9%, higher in 2020 as compared to 2019 due to a decrease of $10.4 million in same property expenses, mostly from reduced usage of our assets because of the COVID-19 pandemic, and an increase of $6.0 million in same property revenues.

Same property revenues were higher primarily due to higher average GAAP rents per rentable square foot and no credit losses and write-offs associated with Laser Spine Institute (See “Results of Operations - Comparison of 2020 to 2019 - Laser Spine Institute”), partly offset by lower cost recovery income and lower parking income as a result of reduced usage of our assets because of the COVID-19 pandemic.

We expect same property NOI to be lower in 2021 as compared to 2020 as an anticipated increase in same property expenses, mostly from increased usage of our assets, is expected to more than offset higher anticipated same property revenues.

We expect same property revenues to be higher due to higher average GAAP rents per rentable square foot, higher cost recovery income and higher parking income, partly offset by an anticipated decrease in average occupancy.

With the fluidity of the COVID-19 pandemic and its uncertain impact on economic activity, same property NOI could be further negatively impacted if the COVID-19 pandemic causes losses related to customer difficulties.

In addition to the effect of same property NOI, whether or not NOI increases typically depends upon whether the NOI from our acquired properties and development properties placed in service exceeds the NOI from property dispositions.

NOI was $17.6 million, or 3.6%, higher in 2020 as compared to 2019 primarily due to acquisitions, higher same property NOI and development properties placed in service, partly offset by NOI lost from property dispositions.

We expect NOI to be lower in 2021 as compared to 2020 due to NOI lost from property dispositions and lower same property NOI, partly offset by NOI from the acquisition of our joint venture partner’s 75.0% interest in our Highwoods DLF Forum, LLC joint venture (the “Forum”) in the first quarter of 2021 and development properties placed in service.

Similar to same property NOI, NOI could be further negatively impacted if the COVID-19 pandemic causes losses related to customer difficulties.

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

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Liquidity and Capital Resources

We intend to maintain a conservative and flexible balance sheet with access to multiple sources of debt and equity capital and sufficient availability under our revolving credit facility that allows us to capitalize on favorable development and acquisition opportunities as they arise.

We continue to maintain a conservative and flexible balance sheet and believe we have ample liquidity to fund our operations and growth prospects.

As of January 29, 2021, we had approximately $85 million of existing cash and zero drawn on our $600 million revolving credit facility, which is scheduled to mature in January 2022.

Assuming we are in compliance with our covenants, we have an option to extend the maturity for two additional six-month periods.

At December 31, 2020, our leverage ratio, as measured by the ratio of our mortgages and notes payable and outstanding preferred stock to the undepreciated book value of our assets, was 37.7% and there were 106.8 million diluted shares of Common Stock outstanding.

Rental and other revenues are our principal source of funds to meet our short-term liquidity requirements.

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Continued ability to borrow under the revolving credit facility allows us to quickly capitalize on strategic opportunities at short-term interest rates.

Subject to potential losses related to customer financial difficulties due to the COVID-19 pandemic, we generally believe existing cash and rental and other revenues will continue to be sufficient to fund short-term liquidity needs such as funding operating and general and administrative expenses, paying interest expense, maintaining our existing quarterly dividend and funding existing portfolio capital expenditures, including building improvement costs, tenant improvement costs and lease commissions.

Our long-term liquidity uses generally consist of the retirement or refinancing of debt upon maturity, funding of building improvements, new building developments and land infrastructure projects and funding acquisitions of buildings and development land.

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• the disposition of non-core assets.

At December 31, 2019 , our leverage ratio, as measured by the ratio of our mortgages and notes payable and outstanding preferred stock to the undepreciated book value of our assets, was 39.3% and there were 106.5 million diluted shares of Common Stock outstanding.

We have no debt scheduled to mature during 2021 except for the remaining $150.0 million principal amount of 3.20% (3.363% effective rate) notes that are scheduled to mature in June 2021.

We intend to exercise our right to redeem the remaining 3.20% notes at par on April 15, 2021.

During 2021, we forecast funding approximately $109 million of our $503 million development pipeline, which was over 75% funded as of December 31, 2020.

We generally believe we will be able to satisfy these obligations with existing cash, borrowings under our revolving credit facility, new bank term loans, issuance of other unsecured debt, mortgage debt and/or proceeds from the sale of additional non-core assets.

Investment Activity

As noted above, a key tenet of our strategic plan is to continuously upgrade the quality of our office portfolio through acquisitions, dispositions and development.

We generally seek to acquire and develop office buildings that improve the average quality of our overall portfolio and deliver consistent and sustainable value for our stockholders over the long-term.

We generally seek to acquire and develop office buildings that improve the average

quality of our overall portfolio and deliver consistent and sustainable value for our stockholders over the long-term.

Whether or not an asset acquisition or new development results in higher per share net income or funds from operations (“FFO”) in any given period depends upon a number of factors, including whether the NOI for any such period exceeds the actual cost of capital used to finance the acquisition or development.

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Sales of non-core assets could result in lower per share net income or FFO in any given period in the event the resulting use of proceeds does not exceed the capitalization rate on the sold properties.

Market Rotation Plan

During the third quarter of 2019, we announced a series of planned investment activities.

First, during the fourth quarter of 2019, we acquired Bank of America Tower at Legacy Union in Charlotte’s uptown CBD submarket for a total investment of $436 million.

Bank of America Tower at Legacy Union is a trophy, LEED gold-registered office building encompassing 841,000 square feet with structured parking that delivered in 2019.

Second, we have a two-phased plan to exit the Greensboro and Memphis markets.

The first phase consists of selling a select portfolio of assets in Greensboro and Memphis by mid-2020 with a total sales price that approximates the $436 million total investment for Bank of America Tower at Legacy Union (with the intent of executing a reverse 1031 exchange) and closing the division offices.

In 2020 , we sold 35 buildings and land in Greensboro for an aggregate sale price of $193.4 million .

We can provide no assurances, however, that we will dispose of the remainder of these assets on favorable terms, or at all.

The second phase is the planned sale of the remaining assets in both markets.

There is no pre-determined timetable for the second phase.

Results of Operations

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This unexpected announcement affected all of its locations nationwide.

As a result of this sudden closure, we incurred $5.6 million of credit losses on operating lease receivables and write-offs of $2.3 million of lease incentives, $4.1 million of notes receivable and $11.6 million of tenant improvements and deferred leasing costs.

As a result of this sudden closure, in the first quarter of 2019, we incurred $5.6 million of credit losses on operating lease receivables and write-offs of $2.3 million of lease incentives, $4.1 million of notes receivable and $11.6 million of tenant improvements and deferred leasing costs.

Rental and Other Revenues

Rental and other revenues were $15.9 million, or 2.2%, higher in 2019 as compared to 2018 primarily due to development properties placed in service, acquisitions and higher same property revenues, which increased rental and other revenues by $22.4 million, $4.7 million and $4.0 million, respectively.

Same property rental and other revenues were higher primarily due to higher average GAAP rents per rentable square foot and higher parking income, partly offset by credit losses on operating lease receivables and write-offs of lease incentives associated with Laser Spine Institute.

These increases were partly offset by property dispositions and lower restoration fees, which decreased rental and other revenues by $11.0 million and $3.8 million, respectively.

We expect rental and other revenues to be higher in 2020 as compared to 2019 due to acquisitions, development properties placed in service and higher same property revenues (including the effects of Laser Spine Institute credit losses and write-offs in 2019), partly offset by lost revenue from property dispositions.

Rental and other revenues were $0.9 million, or 0.1%, higher in 2020 as compared to 2019 primarily due to acquisitions, development properties placed in service and higher same property revenues, which increased rental and other revenues by $31.4 million, $6.9 million and $6.0 million, respectively.

Same property rental and other revenues were higher primarily due to higher average GAAP rents per rentable square foot and no credit losses and write-offs associated with Laser Spine Institute, partly offset by lower cost recovery income and lower parking income as a result of reduced usage of our assets because of the COVID-19 pandemic.

These increases were partly offset by lost revenue of $42.8 million from property dispositions.

We expect rental and other revenues to be higher in 2021 as compared to 2020 due to the acquisition of our joint venture partner’s 75.0% interest in the Forum, development properties placed in service and higher same property revenues, partly offset by lost revenue from property dispositions.

Rental and other revenues, particularly same property revenues, could be adversely affected, perhaps significantly, in the event customers default on their leases, file bankruptcy and/or otherwise experience significant financial difficulty as a result of the COVID-19 pandemic or if our overall leasing and demand for office space are negatively impacted by potential changes in customer behavior, such as the continued social acceptance, desirability and perceived economic benefits of work-from-home arrangements.

Operating Expenses

Rental property and other expenses were $6.1 million, or 2.5%, higher in 2019 as compared to 2018 primarily due to development properties placed in service, higher same property operating expenses and acquisitions, which increased operating expenses by $4.9 million, $4.3 million and $0.9 million, respectively.

Same property operating expenses were higher primarily due to higher property taxes, property insurance and repairs and maintenance, partly offset by lower utilities.

These increases were partly offset by a $3.6 million decrease in operating expenses from property dispositions.

We expect rental property and other expenses to be higher in 2020 as compared to 2019 due to higher same property operating expenses, acquisitions and development properties placed in service, partly offset by lower operating expenses from property dispositions.

Depreciation and amortization was $24.5 million, or 10.7%, higher in 2019 as compared to 2018 primarily due to accelerated depreciation and amortization of tenant improvements and deferred leasing costs associated with Laser Spine Institute, development properties placed in service and acquisitions, partly offset by property dispositions.

We expect depreciation and amortization to be higher in 2020 as compared to 2019 due to acquisitions and development properties placed in service, partly offset by accelerated depreciation and amortization of tenant improvements and deferred leasing costs associated with Laser Spine Institute in 2019 and property dispositions.

In 2019, we recorded aggregate impairments of real estate assets of $5.8 million primarily as a result of shortened hold periods from classifying all of our assets in Greensboro and Memphis as non-core.

In 2018, we recorded aggregate impairments of real estate assets of $0.4 million, which resulted from changes in market-based inputs and our assumptions about the use of the assets.

General and administrative expenses were $4.1 million, or 10.2%, higher in 2019 as compared to 2018 primarily due to certain previously capitalized lease related costs that are now expensed upon adoption of the new lease accounting standard in 2019 and higher company-wide base salaries and benefits, executive retirement and consulting costs and severance costs associated with the anticipated closure of our Greensboro and Memphis offices, partly offset by lower incentive compensation and expensed pre-development costs.

We expect general and administrative expenses to be lower in 2020 as compared to 2019 due to lower severance costs, salaries and benefits associated with the anticipated closure of our Greensboro and Memphis offices, lower incentive compensation and executive retirement and consulting costs in 2019.

Rental property and other expenses were $16.7 million, or 6.7%, lower in 2020 as compared to 2019 primarily due to property dispositions and lower same property operating expenses, which decreased operating expenses by $13.5 million and $10.4 million, respectively.

Same property operating expenses were lower primarily due to lower utilities, contract services and repairs and maintenance as a result of reduced usage of our assets because of the COVID-19 pandemic, partly offset by higher property taxes.

These decreases were partly offset by acquisitions and development properties placed in service, which increased operating expenses by $6.6 million and $1.6 million, respectively.

We expect rental property and other expenses to be higher in 2021 as compared to 2020 due to higher same property operating expenses as a result of increased usage of our assets, the acquisition of our joint venture partner’s 75.0% interest in the Forum and development properties placed in service, partly offset by lower operating expenses from property dispositions.

Depreciation and amortization was $12.9 million, or 5.1%, lower in 2020 as compared to 2019 primarily due to property dispositions and accelerated depreciation and amortization of tenant improvements and deferred leasing costs associated with Laser Spine Institute in 2019, partly offset by acquisitions and development properties placed in service.

We expect depreciation and amortization to be higher in 2021 as compared to 2020 due to the acquisition of our joint venture partner’s 75.0% interest in the Forum and development properties placed in service, partly offset by fully amortized acquisition-related intangible assets and property dispositions.

In 2020, we recorded an impairment of real estate assets of $1.8 million, which resulted from a change in market-based inputs and our assumptions about the use of the assets.

In 2019, we recorded aggregate impairments of real estate assets of $5.8

million primarily as a result of shortened hold periods from classifying all of our assets in Greensboro and Memphis as non-core.

General and administrative expenses were $3.0 million, or 6.9%, lower in 2020 as compared to 2019 primarily due to lower incentive compensation, salaries and benefits, expensed pre-development costs and executive retirement and consulting costs, partly offset by higher severance and early retirement costs.

We expect general and administrative expenses to be lower in 2021 as compared to 2020 due to lower salaries and benefits, severance and early retirement costs, partly offset by higher long-term equity incentive compensation.

Interest Expense

Interest expense was $10.2 million, or 14.3%, higher in 2019 as compared to 2018 primarily due to higher average debt balances, higher average interest rates and lower capitalized interest.

We expect interest expense to be higher in 2020 as compared to 2019 due to higher average debt balances, partly offset by lower average interest rates and higher capitalized interest.

Other Income/(Loss)

Other income/(loss) was $4.5 million lower in 2019 as compared to 2018 primarily due to the write-off of notes receivable associated with Laser Spine Institute.

Interest expense was $0.7 million, or 0.8%, lower in 2020 as compared to 2019 primarily due to lower average interest rates and higher capitalized interest, partly offset by higher average debt balances.

We expect interest expense to be lower in 2021 as compared to 2020 for similar reasons.

Other loss was $1.7 million in 2020 primarily due to losses on debt extinguishment and $2.5 million in 2019 primarily due to the write-off of notes receivable associated with Laser Spine Institute.

Gains on Disposition of Property

Gains on disposition of property were $1.9 million higher in 2019 as compared to 2018 due to the net effect of the disposition activity in such periods.

Gains on disposition of property were $176.4 million higher in 2020 as compared to 2019 primarily due to our market rotation plan of exiting the Greensboro and Memphis markets in 2020.

Equity in Earnings of Unconsolidated Affiliates

Equity in earnings of unconsolidated affiliates was $0.7 million, or 22.3%, higher in 2020 as compared to 2019 primarily due to higher average occupancy.

We expect equity in earnings of unconsolidated affiliates to be higher in 2020 as compared to 2019 for the same reason.

We expect equity in earnings of unconsolidated affiliates to be lower in 2021 as compared to 2020 due to the acquisition of our joint venture partner’s 75.0% interest in the Forum.

Equity in earnings of unconsolidated affiliates could be adversely affected, perhaps significantly, in the event customers of our unconsolidated affiliates default on their leases, file bankruptcy and/or otherwise experience significant financial difficulty as a result of the COVID-19 pandemic.

Earnings Per Common Share - Diluted

Diluted earnings per common share was $0.34 lower in 2019 as compared to 2018 due to a decrease in net income for the reasons discussed above.

Diluted earnings per common share was $2.02 higher in 2020 as compared to 2019 due to an increase in net income for the reasons discussed above.

Comparison of 2019 to 2018

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations” in our 2018 Annual Report on Form 10-K for a comparison of 2018 to 2017 .

For a comparison of 2019 to 2018, see “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations” in our 2019 Annual Report on Form 10-K.

Liquidity and Capital Resources

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Year Ended December 31,

2019-2018 Change

2018-2017 Change

2020 2019 2018 2020-2019 Change 2019-2018 Change

Net Cash Provided By Operating Activities $ 358,160 $ 365,797 $ 358,628 $ (7,637) $ 7,169

Net Cash Used In Investing Activities

Net Cash Provided By/(Used In) Investing Activities 110,682 (607,407) (306,749) 718,089 (300,658)

Net Cash Provided By/(Used In) Financing Activities (294,340) 246,209 (130,069) (540,549) 376,278

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Comparison of 2020 to 2019

The increase in net cash provided by operating activities in 2019 as compared to 2018 was primarily due to higher net cash from the operations of development properties placed in service, acquisitions and same properties and the timing of cash paid for operating expenses, partly offset by lower net cash from the settlement of cash flow hedges and property dispositions.

We expect net cash related to operating activities to be higher in 2020 as compared to 2019 due to acquisitions, development properties placed in service and same properties, partly offset by property dispositions.

The increase in net cash used in investing activities in 2019 as compared to 2018 was primarily due to the acquisition of Bank of America Tower at Legacy Union in Charlotte in 2019, partly offset by higher net proceeds from disposition activity in 2019 and higher investments in development in-process in 2018.

The change in net cash provided by operating activities in 2020 as compared to 2019 was primarily due to property dispositions and the timing of cash paid for operating expenses, partly offset by higher net cash from the operations of acquisitions, development properties placed in service and same properties and the settlement of cash flow hedges in 2019.

We expect net cash related to operating activities to be higher in 2021 as compared to 2020 due to the acquisition of our joint venture partner’s 75.0% interest in the Forum, development properties placed in service and same properties, partly offset by property dispositions.

With the fluidity of the COVID-19 pandemic and its uncertain impact on economic activity, net cash related to operating activities could be negatively impacted if the COVID-19 pandemic causes losses related to customer difficulties.

The change in net cash provided by/(used in) investing activities in 2020 as compared to 2019 was primarily due to the acquisition of Bank of America Tower at Legacy Union in Charlotte in 2019 and net proceeds from disposition activity in 2020, partly offset by higher investments in development in-process in 2020.

We expect uses of cash for investing activities in 2021 to be primarily driven by whether or not we acquire and commence development of additional office buildings in the BBDs of our markets.

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Comparison of 2019 to 2018

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in our 2018 Annual Report on Form 10-K for a comparison of 2018 to 2017 .

For a comparison of 2019 to 2018, see “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in our 2019 Annual Report on Form 10-K.

Capitalization

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See “Item 1A.

Risk Factors - Recent and future acquisitions and development properties may fail to perform in accordance with our expectations and may require renovation and development costs exceeding our estimates."

During the fourth quarter of 2019, we acquired a building in the central business district of Charlotte, which delivered in 2019 and encompasses 841,000 rentable square feet, for a net purchase price of $399.1 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.

We have invested or intend to invest an additional $36.9 million of planned leasing capital expenditures.

As of the closing date, based on the total anticipated investment of $436.0 million , the capitalization rate for the acquisition of this building, which was 89.5% leased as of the closing date, is 6.3% using projected annual GAAP net operating income for 2020.

These forward-looking statements are subject to risks and uncertainties.

See “Disclosure Regarding Forward-Looking Statements.”

During the fourth quarter of 2019, we also acquired development land in Richmond and Pittsburgh for an aggregate purchase price, including capitalized acquisition costs, of $5.8 million.

During the third quarter of 2019, we acquired development land in Raleigh for a purchase price, including capitalized acquisition costs, of $6.6 million.

During the second quarter of 2019, we and The Bromley Companies formed a joint venture (the "Midtown One joint venture”) to construct Midtown One, a 150,000 square foot, multi-customer office building located in the mixed-use Midtown Tampa project in Tampa’s Westshore submarket.

Midtown One has an anticipated total investment of $71.3 million .

Construction of Midtown One began in the third quarter of 2019 with a scheduled completion date in the second quarter of 2021.

At closing, we agreed to contribute cash of $20.0 million ( $15.9 million of which was funded and/or placed in escrow as of December 31, 2019 ) in exchange for an 80.0% interest in the Midtown One 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 One joint venture that is scheduled to mature on the second anniversary of completion.

The loan bears interest at LIBOR plus 250 basis points .

As of December 31, 2019 , no amounts under the loan have been funded.

The Midtown One joint venture is consolidated.

In 2020 , we sold 35 buildings and land in Greensboro for an aggregate sale price of $193.4 million and expect to record aggregate gains on disposition of property of $105.0 million .

During the fourth quarter of 2019, we sold three buildings for an aggregate sale price of $89.6 million and recorded aggregate gains on disposition of property of $29.3 million.

During the third quarter of 2019, we sold a building and land parcels for an aggregate sale price of $14.3 million and recorded aggregate gains on disposition of property of $3.5 million.

During the second quarter of 2019, we sold two buildings and land for an aggregate sale price of $32.5 million and recorded aggregate gains on disposition of property of $6.7 million.

During the third quarter of 2019, we recorded aggregate impairments of real estate assets of $5.3 million as a result of shortened hold periods from classifying all of our assets in Greensboro and Memphis as non-core.

Risk Factors – Risks Related to our Capital Recycling Activity – Recent and future acquisitions and development properties may fail to perform in accordance with our expectations and may require renovation and development costs exceeding our estimates.”

On January 21, 2021, we acquired our joint venture partner’s 75.0% interest in the Forum, which owned five buildings in Raleigh encompassing 636,000 rentable square feet, for a purchase price of $131.3 million.

We previously accounted for our 25.0% interest in this joint venture using the equity method of accounting.

During the second quarter of 2020, we acquired development land in Raleigh for a purchase price, including capitalized acquisition costs, of $2.3 million.

During the first quarter of 2020, we acquired development land in Nashville for a purchase price of $6.2 million, which consisted of the issuance of 118,592 Common Units and capitalized acquisition costs.

On January 15, 2021, we sold a building in Atlanta for a sale price of $30.7 million and expect to record a gain on disposition of property of $18.9 million.

During the fourth quarter of 2020, we sold nine buildings in Greensboro and Memphis for an aggregate sale price of $129.7 million (before closing credits to buyer of $1.2 million) and recorded aggregate gains on disposition of property of $52.5 million.

During the third quarter of 2020, we sold two buildings in Memphis for an aggregate sale price of $23.3 million (before closing credits to buyer of $0.7 million) and recorded aggregate gains on disposition of property of $9.4 million.

During the third quarter of 2020, we also recognized $0.6 million of aggregate gains related to the disposition of property in the first quarter of 2020.

During the second quarter of 2020, we sold land in Atlanta for a sale price of $2.8 million and recorded a loss on disposition of property of $0.1 million.

During the second quarter of 2020, we also recognized $0.4 million of gain related to the satisfaction of a performance obligation as part of a 2016 land sale.

During the first quarter of 2020, we sold 41 buildings and land in Greensboro and Memphis for an aggregate sale price of $338.4 million (before closing credits to buyer of $3.8 million) and recorded aggregate gains on disposition of property of $153.1 million.

During the second quarter of 2020, we recorded an impairment of real estate assets of $1.8 million, which resulted from a change in market-based inputs and our assumptions about the use of the assets.

In-Process Development

As of December 31, 2020, we were developing 0.8 million rentable square feet of office properties.

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Financing Activity

We have entered into separate equity distribution agreements with each of Wells Fargo Securities, LLC, Robert W.

Incorporated, BB&T Capital Markets, a division of BB&T Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, BTIG, LLC, Capital One Securities, Inc., Fifth Third Securities, Inc., Jefferies LLC and J.P.

Morgan Securities LLC.

During the first quarter of 2020, we entered into separate equity distribution agreements with each of Wells Fargo Securities, LLC, BofA Securities, Inc., BTIG, LLC, Capital One Securities, Inc., Fifth Third Securities, Inc., Jefferies LLC, J.P.

Morgan Securities LLC, Regions Securities LLC and SunTrust Robinson Humphrey, Inc.

Under the terms of the equity distribution agreements, the Company may offer and sell up to $300.0 million in aggregate gross sales price of shares of Common Stock from time to time through such firms, acting as agents of the Company or as principals.

Sales of the shares, if any, may be made by means of ordinary brokers’ transactions on the NYSE or otherwise at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices or as otherwise agreed with any of such firms.

The Company did not issue any shares of Common Stock under these agreements during 2020.

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The interest rate and facility fee are based on the higher of the publicly announced ratings from Moody’s Investors Service or Standard & Poor’s Ratings Services.

There was $221.0 million and $225.0 million outstanding under our revolving credit facility at December 31, 2019 and January 24, 2020 , respectively.

There were no amounts outstanding under our revolving credit facility at both December 31, 2020 and January 29, 2021.

At both December 31, 2020 and January 29, 2021, 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 December 31, 2019 and January 24, 2020 was $ 378.9 million and $ 374.9 million , respectively.

As a result, the unused capacity of our revolving credit facility at both December 31, 2020 and January 29, 2021 was $599.9 million.

During the third quarter of 2020, the Operating Partnership issued $400.0 million aggregate principal amount of 2.600% notes due February 2031, less original issuance discount of $1.6 million.

These notes were priced to yield 2.645%.

During the third quarter of 2019, prior to the issuance of the 3.050% notes, we obtained $150.0 million notional amount of forward-starting swaps.

Upon the subsequent issuance of the notes, we terminated the forward-starting swaps and paid cash upon settlement.

The unrealized loss of $6.6 million in accumulated other comprehensive income/(loss) will be reclassified to interest expense as interest payments are made on the debt.

Underwriting fees and other expenses were incurred that aggregated $3.4 million;

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The net effect of the amortization of these items resulted in an effective fixed interest rate of 2.74%.

During the third quarter of 2019, we prepaid without penalty $100.0 million of our $200.0 million unsecured bank term loan that is scheduled to mature in January 2022.

The interest rate on the term loan at our current credit ratings is LIBOR plus 110 basis points.

We recorded $0.3 million of loss on debt extinguishment related to this prepayment.

During the first quarter of 2019, we prepaid without penalty our $225.0 million, seven-year unsecured bank term loan, which was scheduled to mature in June 2020.

The interest rate on the term loan was LIBOR plus 110 basis points.

We recorded $0.4 million of loss on debt extinguishment related to this prepayment.

During the first quarter of 2019, the Operating Partnership issued $350.0 million aggregate principal amount of 4.20% notes due April 2029, less original issuance discount of $1.0 million.

These notes were priced to yield 4.234%.

During 2018, we obtained an aggregate of $225.0 million notional amount of forward-starting swaps.

Upon issuance of the notes, we terminated the forward-starting swaps and paid cash upon settlement.

The unrealized loss of $5.1 million in accumulated other comprehensive income/(loss) will be reclassified to interest expense as interest payments are made on the debt.

Underwriting fees and other expenses were incurred that aggregated $3.1 million;

these costs were deferred and will be amortized over the term of the notes.

The net effect of the amortization of these items resulted in an effective fixed interest rate of 4.52%.

The net proceeds from the issuance were used:

(1) to finance the Operating Partnership’s cash tender offer to purchase $150.0 million principal amount of its 3.20% notes due June 15, 2021 at a purchase price of 101.908% of the face amount of the notes, plus accrued and unpaid interest;

(2) to prepay without penalty our $100.0 million unsecured bank term loan that was scheduled to mature in January 2022 and which bore interest at LIBOR plus 110 basis points;

and (3) for general corporate purposes.

We recorded $3.7 million of aggregate losses on debt extinguishment related to the repurchase of the 3.20% notes and the term loan prepayment.

We regularly evaluate the financial condition of the financial institutions that participate in our credit facilities and as counterparties under interest rate swap agreements using publicly available information.

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As of December 31, 2020, the Operating Partnership had the following unsecured notes outstanding ($ in thousands):

Carrying Amount

Stated Interest Rate

Effective Interest Rate

Face Amount Carrying Amount Stated Interest Rate Effective Interest Rate

Notes due June 2021 $ 150,000 $ 149,901 3.200 % 3.363 %

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Notes due February 2030 $ 400,000 $ 399,106 3.050 % 3.079 %

Notes due February 2031 $ 400,000 $ 398,423 2.600 % 2.645 %

The indenture that governs these outstanding notes requires us to comply with customary operating covenants and various financial ratios.

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Amounts due during the years ending December 31,

Total 2021 2022 2023 2024 2025 Thereafter

Mortgages and Notes Payable:

Principal payments (1)

$ 2,493,351 $ 152,032 $ 202,115 $ 252,201 $ 2,291 $ 982 $ 1,883,730

Interest payments 569,554 81,588 79,070 67,268 66,801 66,722 208,105

Financing Lease Obligations

Purchase Obligations:

Lease and contractual commitments and contingent consideration (2)

212,916 194,121 17,231 — — — 1,564

Operating Lease Obligations:

Operating ground leases 92,283 2,127 2,169 2,167 2,123 2,170 81,527

Total $ 3,368,104 $ 429,868 $ 300,585 $ 321,636 $ 71,215 $ 69,874 $ 2,174,926

(1) Excludes amortization of premiums, discounts, debt issuance costs and/or purchase accounting adjustments.

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For a description of our development activity, see “Item 2.

Properties - In-Process Development." The timing of these lease and contractual commitments may fluctuate.

Properties - In-Process Development.” 2021 includes future spend for tenant improvements that can be used at the option of the customer during the remaining lease term.

The timing of these lease and contractual commitments may fluctuate.

The interest payments due on mortgages and notes payable are based on the stated rates for the fixed rate debt and on the rates in effect at December 31, 2020 for the variable rate debt.

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See “Item 1A.

Risk Factors - Cash distributions reduce the amount of cash that would otherwise be available for other business purposes, including funding debt maturities, reducing debt or future growth initiatives.”

Risk Factors – Risks Related to an Investment in our Securities – Cash distributions reduce the amount of cash that would otherwise be available for other business purposes, including funding debt maturities, reducing debt or future growth initiatives.”

The amount of future distributions that will be made is at the discretion of the Company’s Board of Directors.

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Current and Future Cash Needs

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

We intend to exercise our right to redeem the remaining 3.20% notes at par on April 15, 2021.

We had $109.3 million of cash and cash equivalents as of December 31, 2020.

The unused capacity of our revolving credit facility at December 31, 2019 and January 24, 2020 was $ 378.9 million and $ 374.9 million , respectively, excluding an accordion feature that allows for an additional $400.0 million of borrowing capacity subject to additional lender commitments.

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

The unused capacity of our revolving credit facility at both December 31, 2020 and January 29, 2021 was $599.9 million, excluding an accordion feature that allows for an additional $400.0 million of borrowing capacity subject to additional lender commitments.

common stock, preferred stock and depositary shares and the Operating Partnership may sell an indefinite amount of debt securities, subject to our ability to effect offerings on satisfactory terms based on prevailing market conditions.

The Company from time to time enters into equity distribution agreements with a variety of firms pursuant to which the Company may offer and sell shares of common stock from time to time through such firms, acting as agents of the Company or as principals.

During 2020, in addition to completing the first phase of our plan to exit Greensboro and Memphis, we also expect to sell $100 million to $150 million of properties no longer considered to be core assets due to location, age, quality and/or overall strategic fit.

During the remainder of 2021, we expect to sell an additional $100 million to $150 million of properties no longer considered to be core assets due to location, age, quality and/or overall strategic fit.

We can make no assurance, however, that we will sell any non-core assets or, if we do, what the timing or terms of any such sale will be.

See also “Executive Summary - Liquidity and Capital Resources.”

Critical Accounting Estimates

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Depreciation is computed using the straight-line method over the estimated useful life of 40 years for buildings and depreciable land infrastructure costs, 15 years for building improvements and five to seven years for furniture, fixtures and equipment.

Tenant improvements are amortized using the straight-line method over initial fixed terms of the respective leases, which generally are from three to 10 years.

Tenant improvements are amortized using the straight-line method over the initial fixed terms of the respective leases, which generally are from three to 10 years.

Expenditures directly related to the development and construction of real estate assets are included in net real estate assets and are stated at depreciated cost.

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Fair value is calculated as the present value of the difference between (1) the contractual amounts to be paid pursuant to each in-place lease and (2) our estimate of fair market lease rates for each corresponding in-place lease, using a discount rate that reflects the risks associated with the leases acquired and measured over a period equal to the remaining initial term of the lease for above-market leases and the remaining initial term plus the term of any renewal option that the customer would be economically compelled to exercise for below-market leases.

In-place leases acquired are recorded at fair value in deferred leasing costs and are amortized to depreciation and amortization expense over the remaining term of the respective lease.

In-place leases acquired are recorded at fair value in deferred leasing costs and amortized to depreciation and amortization expense over the remaining term of the respective lease.

The value of in-place leases is based on our evaluation of the specific characteristics of each customer’s lease.

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Any post-sale involvement is accounted for as separate performance obligations and when the separate performance obligations are satisfied, the sales price allocated to each is recognized.

To generate positive cash flow, as a lessor, 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 (“CAM”).

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 (“CAM”).

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 were determined to be operating leases and mostly range from three to 10 years.

Our leases are operating leases and mostly range from three to 10 years.

Payments from customers for CAM are considered nonlease components that are separated from lease components and are generally accounted for in accordance with the revenue recognition standard.

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We regularly evaluate the collectability of our lease related receivables.

Our evaluation of collectability primarily consists of reviewing past due account balances and considering such factors as the credit quality of our customer, historical trends of the customer and changes in customer payment terms.

Additionally, with respect to customers in bankruptcy, we estimate the probable recovery through bankruptcy claims and reduce the related receivable balance for amounts deemed uncollectible.

Our evaluation of collectability primarily consists of reviewing the credit quality of our customer, historical trends of the customer and changes in customer payment terms.

We do not maintain a general reserve to estimate amounts that may not be collectible.

If our assumptions regarding the collectability of lease related receivables prove incorrect, we could experience credit losses in excess of what was recognized in rental and other revenues.

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Year Ended December 31,

2020 2019 2018

Funds from operations:

Net income $ 357,914 $ 141,683 $ 177,630

Net (income) attributable to noncontrolling interests in consolidated affiliates (1,174) (1,214) (1,207)

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Depreciation and amortization of real estate assets 2,395 2,425 2,284

(Gains) on disposition of depreciable properties

Funds from operations 384,556 357,257 368,656

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Weighted average shares outstanding (1)

106,714 106,445 106,268

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

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As of December 31, 2019, our same property portfolio consisted of 207 in-service properties encompassing 28.3 million rentable square feet that were wholly owned during the entirety of the periods presented (from January 1, 2018 to December 31, 2019).

The change in our same property portfolio was due to the addition of three newly developed properties encompassing 0.8 million rentable square feet placed in service during 2017 .

These additions were offset by the removal of six properties encompassing 0.6 million rentable square feet that were sold during 2019 .

The change in our same property portfolio was due to the addition of four newly developed properties encompassing 0.4 million rentable square feet placed in service during 2018.

These additions were offset by the removal of 51 properties encompassing 4.4 million rentable square feet that were sold during 2020 and one property encompassing less than 0.1 million rentable square feet that is planned for demolition.

Rental and other revenues related to properties not in our same property portfolio were $90.0 million and $95.1 million for the years ended December 31, 2020 and 2019, respectively.

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Year Ended December 31,

$ 357,914 $ 141,683

Equity in earnings of unconsolidated affiliates (4,005) (3,276)

Gains on disposition of property (215,897) (39,517)

Other (income)/loss

Other loss 1,707 2,510

Interest expense 80,962 81,648

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Lease termination fees, straight-line rent and other non-cash adjustments (1)

(27,653) (19,654)

Same property cash net operating income $ 410,602 $ 402,268

(1) Includes $3.4 million of temporary rent deferrals, net of repayments, granted by the Company during the year ended December 31, 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis