# Highwoods Properties, Inc.: Form 10-Q for the period ended Mar 31, 2023

- Company: [Highwoods Properties, Inc.](/companies/hiw.md) (CIK 921082)
- Form: 10-Q
- Filed: 2023-04-25
- Accepted by EDGAR: Apr 25, 2023, 16:03 ET
- Period: 2023-03-31
- Accession: 0000921082-23-000041
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/921082/000092108223000041/hiw-20230331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/921082/000092108223000041/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-01-01 to 2023-03-31 | $212.8m | us-gaap:Revenues |
| Operating income | 3 months, 2023-01-01 to 2023-03-31 | $147.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-01-01 to 2023-03-31 | $33.1m | us-gaap:InterestExpense |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | $45.0m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.42 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.42 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-03-31 | 107,646,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | $65.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 3 months, 2023-01-01 to 2023-03-31 | $52.6m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2023-03-31 | $15.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2023-03-31 | $6.07bn | us-gaap:Assets |
| Total liabilities | at 2023-03-31 | $3.53bn | us-gaap:Liabilities |
| Shareholders' equity | at 2023-03-31 | $2.48bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 50,351 characters.

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 (BBDs) of Atlanta, Charlotte, Dallas, Nashville, Orlando, Raleigh, Richmond and Tampa. The Company conducts its activities through the Operating Partnership. The Operating Partnership is managed by the Company, its sole general partner. Additional information about us can be found on our website at www.highwoods.com. Information on our website is not part of this Quarterly Report.

You should read the following discussion and analysis in conjunction with the accompanying Consolidated Financial Statements and related notes contained elsewhere in this Quarterly Report.

### Disclosure Regarding Forward-Looking Statements

Some of the information in this Quarterly Report may contain forward-looking statements. Such statements include, in particular, statements about our plans, strategies and prospects under this section. You can identify forward-looking statements by our use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “continue” or other similar words. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that our plans, intentions or expectations will be achieved. When considering such forward-looking statements, you should keep in mind important factors that could cause our actual results to differ materially from those contained in any forward-looking statement, including the following:

- the financial condition of our customers could deteriorate;
- our assumptions regarding potential losses related to customer financial difficulties could prove incorrect;
- 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;
- we may not be able to lease newly constructed buildings as quickly or on as favorable terms as originally anticipated;
- we may not be able to complete development, acquisition, reinvestment, disposition or joint venture projects as quickly or on as favorable terms as anticipated;
- development activity in our existing markets could result in an excessive supply relative to customer demand;
- our markets may suffer declines in economic and/or office employment growth;
- unanticipated increases in interest rates could increase our debt service costs;
- 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; and
- the Company could lose key executive officers.

This list of risks and uncertainties, however, is not intended to be exhaustive. You should also review the other cautionary statements we make in “Item 1A. Risk Factors” set forth in our 2022 Annual Report on Form 10-K. Given these uncertainties, you should not place undue reliance on forward-looking statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements to reflect any future events or circumstances or to reflect the occurrence of unanticipated events.

### Executive Summary

We are in the work-placemaking business. We believe that in creating environments and experiences where the best and brightest can achieve together what they cannot apart, we can deliver greater value to our customers, their teammates and, in turn, our stockholders. Our simple strategy is to own and operate high-quality workplaces in the BBDs within our footprint, maintain a strong balance sheet to be opportunistic throughout economic cycles, employ a talented and dedicated team and communicate transparently with all stakeholders. We focus on owning and managing buildings in the most dynamic and vibrant BBDs. BBDs are highly-energized and amenitized workplace locations that enhance our customers’ ability to attract and retain talent. They are both urban and suburban. Providing the most talent-supportive workplace options in these environments is core to our work-placemaking strategy.

Our investment strategy is to generate attractive and sustainable returns over the long term for our stockholders by developing, acquiring and owning a portfolio of high-quality, differentiated office buildings in the BBDs of our core markets. A core component of this strategy is to continuously strengthen the financial and operational performance, resiliency and long-term growth prospects of our existing in-service portfolio and recycle those properties that no longer meet our criteria.

### Revenues

Our operating results depend heavily on successfully leasing and operating the office space in our portfolio. Economic growth and office employment levels in our core markets are important factors, among others, in predicting our future operating results. The key components affecting our rental and other revenues are average occupancy, rental rates, cost recovery income, new developments placed in service, acquisitions and dispositions. Average occupancy generally increases during times of improving economic growth, as our ability to lease space outpaces vacancies that occur upon the expirations of existing leases. Average occupancy generally declines during times of slower or negative economic growth, when new vacancies tend to outpace our ability to lease space. Asset acquisitions, dispositions and new developments placed in service directly impact our rental revenues and could impact our average occupancy, depending upon the occupancy rate of the properties that are acquired, sold or placed in service. A further indicator of the predictability of future revenues is the expected lease expirations of our portfolio. As a result, in addition to seeking to increase our average occupancy by leasing current vacant space, we also concentrate our leasing efforts on renewing existing leases prior to expiration. For more information regarding our lease expirations, see “Item 2. Properties - Lease Expirations” and “Item 1A. Risk Factors – Risks Related to our Operations – Potential changes in customer behavior, such as the continued social acceptance, desirability and perceived economic benefits of work-from-home arrangements, could materially and negatively impact the future demand for office space over the long-term” in our 2022 Annual Report on Form 10-K. Occupancy in our office portfolio decreased from 91.0% as of December 31, 2022 to 89.4% as of March 31, 2023. We expect average occupancy for our office portfolio to be approximately 89.0% to 90.0% for the remainder of 2023.

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. Annualized rental revenues from second generation leases expiring during any particular year are typically less than 15% of our total annual rental revenues. The following table sets forth information regarding second generation office leases signed during the first quarter of 2023 (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) | 219,510 | 302,349 | 521,859 |
| Average term (in years - rentable square foot weighted) | 6.6 | 4.5 | 5.4 |
| Base rents (per rentable square foot) (1) | $33.36 | $35.13 | $34.39 |
| Rent concessions (per rentable square foot) (1) | (1.57) | (0.75) | (1.09) |
| GAAP rents (per rentable square foot) (1) | $31.79 | $34.38 | $33.30 |
| Tenant improvements (per rentable square foot) (1) | $7.86 | $3.68 | $5.44 |
| Leasing commissions (per rentable square foot) (1) | $1.31 | $0.79 | $1.01 |

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

Annual combined GAAP rents for new and renewal leases signed in the first quarter were $33.30 per rentable square foot, 15.9% higher compared to previous leases in the same office spaces.

We strive to maintain a diverse, stable and creditworthy customer base. We have an internal guideline whereby customers that account for more than 3% of our revenues are periodically reviewed with the Company’s Board of Directors. As of March 31, 2023, Bank of America (3.8%) and Asurion (3.5%) accounted for more than 3% of our annualized GAAP revenues.

### Expenses

Our expenses primarily consist of rental property expenses, depreciation and amortization, general and administrative expenses and interest expense. From time to time, expenses also include impairments of real estate assets. Rental property expenses are expenses associated with our ownership and operation of rental properties and include expenses that vary somewhat proportionately to occupancy and usage 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. General and administrative expenses consist primarily of management and employee salaries and benefits, corporate overhead and short and long-term incentive compensation.

### Net Operating Income

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 $0.3 million, or 0.2%, higher in the first quarter of 2023 as compared to 2022 due to an increase of $4.5 million in same property revenues offset by an increase of $4.2 million in same property expenses. We expect same property NOI to be lower for the remainder of 2023 as compared to 2022 as an anticipated increase in same property expenses 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 and higher cost recovery income, partially offset by an anticipated decrease in average occupancy.

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 $2.1 million, or 1.4%, higher in the first quarter of 2023 as compared to 2022 primarily due to the acquisition of SIX50 at Legacy Union, development properties placed in service and higher same property NOI, partially offset by NOI lost from property dispositions and the deconsolidation of our Highwoods-Markel Associates, LLC joint venture (“Markel”). See “Results of Operations – Three Months Ended March 31, 2023 and 2022 – Deconsolidation of Markel.” We expect NOI to be lower for the remainder of 2023 as compared to 2022 due to property dispositions, the deconsolidation of Markel and an anticipated decrease in same property NOI, partially offset by NOI from development properties placed in service and the acquisition of SIX50 at Legacy Union.

### Cash Flows

In calculating net cash related to operating activities, depreciation and amortization, which are non-cash expenses, are added back to net income. We have historically generated a positive amount of cash from operating activities. From period to period, cash flow from operations depends primarily upon changes in our net income, as discussed more fully below under “Results of Operations,” changes in receivables and payables and net additions or decreases in our overall portfolio.

Net cash related to investing activities generally relates to capitalized costs incurred for leasing and major building improvements and our acquisition, development, disposition and joint venture activity. During periods of significant net acquisition and/or development activity, our cash used in such investing activities will generally exceed cash provided by investing activities, which typically consists of cash received upon the sale of properties and distributions from our joint ventures.

Net cash related to financing activities generally relates to distributions, incurrence and repayment of debt, and issuances, repurchases or redemptions of Common Stock, Common Units and Preferred Stock. We use a significant amount of our cash to fund distributions. Whether or not we have increases in the outstanding balances of debt during a period depends generally upon the net effect of our acquisition, disposition, development and joint venture activity. We generally use our revolving credit facility for daily working capital purposes, which means that during any given period, in order to minimize interest expense, we may record significant repayments and borrowings under our revolving credit facility.

For a discussion regarding dividends and distributions, see “Liquidity and Capital Resources - Dividends and Distributions.”

### Liquidity and Capital Resources

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 April 18, 2023, we had approximately $20 million of existing cash and $257.0 million drawn on our $750.0 million revolving credit facility, which is scheduled to mature in March 2026, assuming we exercise our option to extend the maturity date for two additional six-month periods. As of March 31, 2023, 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 42.8%, and there were 107.8 million diluted shares of Common Stock outstanding.

Rental and other revenues are our principal source of funds to meet our short-term liquidity requirements. Other sources of funds for short-term liquidity needs include available working capital and borrowings under our revolving credit facility, which had $492.1 million of availability as of April 18, 2023. Our short-term liquidity requirements primarily consist of operating expenses, interest and principal amortization on our debt, distributions and capital expenditures, including building improvement costs, tenant improvement costs and lease commissions. Building improvements are capital costs to maintain or enhance existing buildings not typically related to a specific customer. Tenant improvements are the costs required to customize space for the specific needs of customers. We anticipate that our available cash and cash equivalents and cash provided by operating activities and planned financing activities, including borrowings under our revolving credit facility, will be adequate to meet our short-term liquidity requirements. We use our revolving credit facility for working capital purposes and for the short-term funding of our development and acquisition activity and, in certain instances, the repayment of other debt. Continued ability to borrow under the revolving credit facility allows us to quickly capitalize on strategic opportunities at short-term interest rates.

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 (including our proportionate share of joint venture developments) and land infrastructure projects and funding acquisitions of buildings and development land. Additionally, we may, from time to time, retire outstanding equity and/or debt securities through redemptions, open market repurchases, privately negotiated acquisitions or otherwise.

We expect to meet our long-term liquidity needs through a combination of:

- 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.

We have no debt scheduled to mature prior to 2026 other than our $200.0 million, two-year unsecured bank term loan that is scheduled to mature in October 2025, assuming we exercise our option to extend the maturity date for one additional year. 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. 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. Additionally, given the length of construction cycles, development projects are not placed in service until several years after commencement in some cases. Sales of non-core assets could result in lower per share net income or FFO in any given period in the event the return on the resulting use of proceeds does not exceed the capitalization rate on the sold properties.

### 1800 Century Boulevard

The State of Georgia Department of Revenue currently occupies 255,000 square feet at 1800 Century Boulevard in Atlanta pursuant to a lease that is scheduled to expire in December 2024. 1800 Century Boulevard is a non-core 290,000 square foot building constructed in 1975. Subsequent to quarter-end, we learned the customer expects to reduce its office space needs after expiration of the current lease by approximately 60% and is considering alternative locations, including other company-owned buildings and buildings owned by third parties. There are no assurances that the customer will renew all or any of its space at 1800 Century Boulevard upon expiration of its current lease.

Because we now expect the customer may vacate all or a significant portion of its space at 1800 Century Boulevard, we are evaluating a number of long-term options with respect to the asset, including substantially renovating the asset as an office building, converting the asset for multi-family use and/or selling the asset. See “Item 1A. Risk Factors – In order to maintain and/or increase the quality of our properties and successfully compete against other properties, we regularly must spend money to maintain, repair, renovate and improve our properties, which could negatively impact our financial condition and results of operations” in our 2022 Annual Report on Form 10-K. No assurances can be provided that we may not be required to record an impairment charge in a subsequent period to lower the carrying amount of 1800 Century Boulevard.

### Results of Operations

### Three Months Ended March 31, 2023 and 2022

### Deconsolidation of Markel

Markel is a joint venture in which we own a 50.0% interest that was consolidated as of December 31, 2022 because we controlled the major operating and financial policies of the entity. Effective January 1, 2023, the agreement governing the joint venture was modified to require the consent of both partners for major operating and financial policies of the entity. As a result, Markel was deconsolidated effective January 1, 2023, and this joint venture is now accounted for using the equity method of accounting.

### Rental and Other Revenues

Rental and other revenues were $6.4 million, or 3.1%, higher in the first quarter of 2023 as compared to 2022 primarily due to higher same property revenues, the acquisition of SIX50 at Legacy Union and development properties placed in service, which increased rental and other revenues by $4.5 million, $3.5 million and $2.0 million, respectively. Same property rental and other revenues were higher primarily due to higher average GAAP rents per rentable square foot and higher cost recovery and parking income, partially offset by a decrease in average occupancy. These increases were partially offset by lost revenue from property dispositions and the deconsolidation of Markel, which decreased rental and other revenues by $2.5 million and $1.4 million, respectively. We expect rental and other revenues to be higher for the remainder of 2023 as compared to 2022 for similar reasons.

### Operating Expenses

Rental property and other expenses were $4.3 million, or 7.0%, higher in the first quarter of 2023 as compared to 2022 primarily due to higher same property operating expenses, the acquisition of SIX50 at Legacy Union and development properties placed in service, which increased operating expenses by $4.2 million, $0.7 million and $0.3 million, respectively. Same property operating expenses were higher primarily due to higher contract services, property taxes, utilities and repairs and maintenance. These increases were partially offset by decreases in operating expenses from property dispositions and the deconsolidation of Markel, which decreased operating expenses by $0.9 million and $0.5 million, respectively. We expect rental property and other expenses to be higher for the remainder of 2023 as compared to 2022 for similar reasons.

Depreciation and amortization was $1.0 million, or 1.4%, higher in the first quarter of 2023 as compared to 2022 primarily due to the acquisition of SIX50 at Legacy Union, development properties placed in service and higher same property lease related depreciation and amortization, partially offset by fully amortized acquisition-related intangible assets, property dispositions and the deconsolidation of Markel. We expect depreciation and amortization to be higher for the remainder of 2023 as compared to 2022 for similar reasons.

General and administrative expenses were $1.1 million, or 8.4%, lower in the first quarter of 2023 as compared to 2022 primarily due to lower long-term equity incentive compensation and office rent. We expect general and administrative expenses to be lower for the remainder of 2023 as compared to 2022 due to lower incentive compensation and office rent, partially offset by higher salaries and benefits. First quarter general and administrative expenses are typically higher than in subsequent quarters due to higher long-term equity incentive compensation recognized for certain employees who meet the age and service eligibility requirements under our retirement plan. Long-term equity incentive compensation awards are typically issued during the first quarter of each year.

### Interest Expense

Interest expense was $8.7 million, or 35.7%, higher in the first quarter of 2023 as compared to 2022 primarily due to higher average interest rates and higher average debt balances, partially offset by higher capitalized interest. We expect interest expense to be higher for the remainder of 2023 as compared to 2022 for similar reasons.

### Other Income

Other income was $0.8 million higher in the first quarter of 2023 as compared to 2022 primarily due to dividend income from short-term preferred equity contributed to the McKinney and Olive joint venture.

### Gains on Disposition of Property

Gains on disposition of property were $3.7 million lower in the first quarter of 2023 as compared to 2022.

### Gain on Deconsolidation of Affiliate

We recognized a gain on deconsolidation of $11.8 million related to adjusting our retained interest in Markel to fair value.

### Equity in Earnings of Unconsolidated Affiliates

Equity in earnings of unconsolidated affiliates was $0.4 million higher in the first quarter of 2023 as compared to 2022 primarily due to the deconsolidation of Markel and the operations of the McKinney and Olive joint venture.

### Earnings Per Common Share - Diluted

Diluted earnings per common share was $0.04 higher in the first quarter of 2023 as compared to 2022 due to an increase in net income for the reasons discussed above.

### Liquidity and Capital Resources

### Statements of Cash Flows

We report and analyze our cash flows based on operating activities, investing activities and financing activities. The following table sets forth the changes in the Company’s cash flows (in thousands):

|  | Three Months Ended March 31, 2023 | 2022 | Change |
| --- | ---: | ---: | ---: |
| Net Cash Provided By Operating Activities | $65,669 | $74,078 | $(8,409) |
| Net Cash Used In Investing Activities | (74,536) | (59,417) | (15,119) |
| Net Cash Provided By/(Used In) Financing Activities | 10,782 | (13,120) | 23,902 |
| **Total Cash Flows** | $1,915 | $1,541 | $374 |

The change in net cash provided by operating activities in the first quarter of 2023 as compared to 2022 was primarily due to higher interest expense, property dispositions in the prior year and changes in operating liabilities, partially offset by net cash from the operations of properties acquired in the prior year, same properties and development properties placed in service. We expect net cash related to operating activities to be lower for the remainder of 2023 as compared to 2022 for similar reasons.

The change in net cash used in investing activities in the first quarter of 2023 as compared to 2022 was primarily due to investments in the 2827 Peachtree, 23Springs and Midtown East joint ventures, lower net proceeds from disposition activity and higher investments in building improvements, partially offset by lower investments in tenant improvements. We expect uses of cash for investing activities for the remainder of 2023 to be primarily driven by whether we acquire or commence development of additional office buildings in the BBDs of our markets. We expect these uses of cash for investing activities will be partially offset by proceeds from property dispositions in 2023.

The change in net cash provided by/(used in) financing activities in the first quarter of 2023 as compared to 2022 was primarily due to net debt borrowings to fund our investment activity. Assuming the net effect of our acquisition, disposition and development activity in 2023 results in an increase to our assets, we would expect outstanding debt and/or Common Stock balances to increase.

### Capitalization

The following table sets forth the Company’s capitalization (in thousands, except per share amounts):

|  | March 31, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Mortgages and notes payable, net, at recorded book value | $3,263,969 | $3,197,215 |
| Preferred Stock, at liquidation value | $28,811 | $28,821 |
| Common Stock outstanding | 105,458 | 105,211 |
| Common Units outstanding (not owned by the Company) | 2,358 | 2,358 |
| Per share stock price at period end | $23.19 | $27.98 |
| Market value of Common Stock and Common Units | $2,500,253 | $3,009,781 |
| Total capitalization | $5,793,033 | $6,235,817 |

As of March 31, 2023, our mortgages and notes payable and outstanding preferred stock represented 56.8% of our total capitalization and 42.8% of the undepreciated book value of our assets. See also “Executive Summary - Liquidity and Capital Resources.”

Our mortgages and notes payable as of March 31, 2023 consisted of $682.0 million of secured indebtedness with a weighted average interest rate of 4.23% and $2,598.9 million of unsecured indebtedness with a weighted average interest rate of 4.27%. The secured indebtedness was collateralized by real estate assets with an undepreciated book value of $1,157.2 million. As of March 31, 2023, $805.0 million of our debt does not bear interest at fixed rates.

### Investment Activity

In the normal course of business, we regularly evaluate potential acquisitions. As a result, from time to time, we may have one or more potential acquisitions under consideration that are in varying stages of evaluation, negotiation or due diligence, including potential acquisitions that are subject to non-binding letters of intent or enforceable contracts. Consummation of any transaction is subject to a number of contingencies, including the satisfaction of customary closing conditions. No assurances can be provided that we will acquire any properties in the future. See “Item 1A. 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” in our 2022 Annual Report on Form 10-K.

Markel is a joint venture in which we own a 50.0% interest that was consolidated as of December 31, 2022 because we controlled the major operating and financial policies of the entity. Effective January 1, 2023, the agreement governing the joint venture was modified to require the consent of both partners for major operating and financial policies of the entity. As a result, Markel was deconsolidated effective January 1, 2023, and this joint venture is now accounted for using the equity method of accounting. We recognized a gain on deconsolidation of $11.8 million related to adjusting our retained interest in the joint venture to fair value. The assets of Markel can be used only to settle obligations of the joint venture, and its creditors have no recourse to our wholly owned assets.

On April 21, 2023, we received $40.0 million of net proceeds upon the full redemption of our $80.0 million short-term preferred equity investment in the McKinney & Olive joint venture. Such net proceeds were used to repay amounts outstanding under our $750.0 million revolving credit facility. Prior to the redemption, the preferred equity received monthly distributions at a rate of SOFR plus 350 basis points.

As of March 31, 2023, we were developing 1.6 million rentable square feet of office properties. The following table summarizes these announced and in-process office developments:

*($ in thousands)*

| Property | Market | Own % | Consolidated (Y/N) | Rentable Square Feet | Anticipated Total Investment (1) | Investment as of March 31, 2023 | Pre Leased % | Estimated Completion | Estimated Stabilization |
| --- | --- | ---: | --- | ---: | ---: | ---: | ---: | --- | --- |
| 23Springs | Dallas | 50.0% | N | 642,000 | $460,000 | $88,947 | 17.1% | 1Q 25 | 1Q 28 |
| Granite Park Six | Dallas | 50.0% | N | 422,000 | 200,000 | 112,935 | 12.4 | 4Q 23 | 1Q 26 |
| GlenLake III Office & Retail (2) | Raleigh | 100.0% | Y | 218,250 | 94,600 | 55,289 | 14.6 | 3Q 23 | 1Q 26 |
| Midtown East | Tampa | 50.0% | N | 143,000 | 83,000 | 13,244 | 2.1 | 1Q25 | 2Q26 |
| 2827 Peachtree | Atlanta | 50.0% | N | 135,300 | 79,000 | 48,913 | 87.5 | 3Q 23 | 1Q 25 |
| Four Morrocroft (2)(3) | Charlotte | 100.0% | Y | 18,000 | 12,000 | 1,286 | 100.0 | 2Q24 | 2Q24 |
|  |  |  |  | **1,578,550** | **$928,600** | **$320,614** | **21.1%** |  |  |

(1) Includes estimated lease up costs for tenant improvements and lease commissions until the property has reached stabilization.

(2) Investment includes deferred lease commissions which are classified in deferred leasing costs on our Consolidated Balance Sheet.

(3) Recorded on our Consolidated Balance Sheet as land held for development, not development in-process.

### Financing Activity

During the first quarter of 2023, we entered into separate equity distribution agreements with each of Wells Fargo Securities, LLC, BofA Securities, Inc., BTIG, LLC, Jefferies LLC, J.P. Morgan Securities LLC, Regions Securities LLC, TD Securities (USA) LLC and Truist Securities, 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 New York Stock Exchange (“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 (which may include block trades). During the three months ended March 31, 2023, there were no shares of common stock issued under these agreements.

Our $750.0 million unsecured revolving credit facility is scheduled to mature in March 2025 and includes an accordion feature that currently allows for an additional $200.0 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. The interest rate on our revolving credit facility is 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 $255.0 million and $257.0 million outstanding under our revolving credit facility as of March 31, 2023 and April 18, 2023, respectively. As of both March 31, 2023 and April 18, 2023, we had $0.9 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 as of March 31, 2023 and April 18, 2023 was $494.1 million and $492.1 million, respectively.

During the first quarter of 2023, we obtained a $200.0 million, five-year secured mortgage loan from a third party lender, with an effective fixed interest rate of 5.69%. This loan is scheduled to mature in April 2028. We incurred $1.3 million of debt issuance costs, which will be amortized over the term of the loan.

We are currently in compliance with financial covenants and other requirements with respect to our consolidated debt. Although we expect to remain in compliance with these covenants and ratios for at least the next year, depending upon our future operating performance, property and financing transactions and general economic conditions, we cannot provide any assurances that we will continue to be in compliance.

Our revolving credit facility and bank term loans require us to comply with customary operating covenants and various financial requirements. Upon an event of default on our revolving credit facility, the lenders having at least 51.0% of the total commitments under our revolving credit facility can accelerate all borrowings then outstanding, and we could be prohibited from borrowing any further amounts under our revolving credit facility, which would adversely affect our ability to fund our operations. In addition, certain of our unsecured debt agreements contain cross-default provisions giving the unsecured lenders the right to declare a default if we are in default under more than $35.0 million with respect to other loans in some circumstances.

The indenture that governs the Operating Partnership’s outstanding notes requires us to comply with customary operating covenants and various financial ratios. The trustee or the holders of at least 25.0% in principal amount of any series of notes can accelerate the principal amount of such series upon written notice of a default that remains uncured after 60 days.

We may not be able to repay, refinance or extend any or all of our debt at maturity or upon any acceleration. If any refinancing is done at higher interest rates, the increased interest expense could adversely affect our cash flow and ability to pay distributions. Any such refinancing could also impose tighter financial ratios and other covenants that restrict our ability to take actions that could otherwise be in our best interest, such as funding new development activity, making opportunistic acquisitions, repurchasing our securities or paying distributions.

### Dividends and Distributions

To maintain its qualification as a REIT, the Company must pay dividends to stockholders that are at least 90.0% of its annual REIT taxable income, excluding net capital gains. The partnership agreement requires the Operating Partnership to distribute at least enough cash for the Company to be able to pay such dividends. The Company’s REIT taxable income, as determined by the federal tax laws, does not equal its net income under accounting principles generally accepted in the United States of America (“GAAP”). In addition, although capital gains are not required to be distributed to maintain REIT status, capital gains, if any, are subject to federal and state income tax unless such gains are distributed to stockholders.

Cash dividends and 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. For a discussion of the factors that will affect such cash flows and, accordingly, influence the decisions of the Company’s Board of Directors regarding dividends and distributions, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Dividends and Distributions” in our 2022 Annual Report on Form 10-K.

On April 19, 2023, the Company declared a cash dividend of $0.50 per share of Common Stock, which is payable on June 13, 2023 to stockholders of record as of May 22, 2023.

During the first quarter of 2023, the Company declared and paid a cash dividend of $0.50 per share of Common Stock.

### 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 generally believe existing cash and rental and other revenues will continue to be sufficient to fund operating and general and administrative expenses, interest expense, our existing quarterly dividend and existing portfolio capital expenditures, including building improvement costs, tenant improvement costs and lease commissions.

We had $15.7 million of cash and cash equivalents as of March 31, 2023. The unused capacity of our revolving credit facility as of March 31, 2023 and April 18, 2023 was $494.1 million and $492.1 million, respectively, excluding an accordion feature that allows for an additional $200.0 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 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. 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 (which may include block trades).

During 2023, we expect to sell up to $400 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 additional 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

There were no changes made by management to the critical accounting policies in the three months ended March 31, 2023. For a description of our critical accounting estimates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates” in our 2022 Annual Report on Form 10-K.

### Non-GAAP Information

The Company believes that FFO, FFO available for common stockholders and FFO available for common stockholders per share are beneficial to management and investors and are important indicators of the performance of any equity REIT. Because these FFO calculations exclude such factors as depreciation, amortization and impairments of real estate assets and gains or losses from sales of operating real estate assets, which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful life estimates, they facilitate comparisons of operating performance between periods and between other REITs. Management believes that historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, management believes the use of FFO, FFO available for common stockholders and FFO available for common stockholders per share, together with the required GAAP presentations, provides a more complete understanding of the Company’s performance relative to its competitors and a more informed and appropriate basis on which to make decisions involving operating, financing and investing activities.

FFO, FFO available for common stockholders and FFO available for common stockholders per share are non-GAAP financial measures and therefore do not represent net income or net income per share as defined by GAAP. Net income and net income per share as defined by GAAP are the most relevant measures in determining the Company’s operating performance because these FFO measures include adjustments that investors may deem subjective, such as adding back expenses such as depreciation, amortization and impairments. Furthermore, FFO available for common stockholders per share does not depict the amount that accrues directly to the stockholders’ benefit. Accordingly, FFO, FFO available for common stockholders and FFO available for common stockholders per share should never be considered as alternatives to net income, net income available for common stockholders, or net income available for common stockholders per share as indicators of the Company’s operating performance.

The Company’s presentation of FFO is consistent with FFO as defined by the National Association of Real Estate Investment Trusts, which is calculated as follows:

- Net income/(loss) computed in accordance with GAAP;
- Plus net (income)/loss attributable to noncontrolling interests in consolidated affiliates;
- Plus depreciation and amortization of depreciable operating properties;
- Less gains, or plus losses, from sales of depreciable operating properties, plus impairments on depreciable operating properties and excluding items that are classified as extraordinary items under GAAP;
- Plus or minus our share of adjustments, including depreciation and amortization of depreciable operating properties, for unconsolidated joint venture investments (to reflect funds from operations on the same basis); and
- Plus or minus adjustments for depreciation and amortization and gains/(losses) on sales of depreciable operating properties, plus impairments on depreciable operating properties, and noncontrolling interests in consolidated affiliates related to discontinued operations.

In calculating FFO, the Company includes net income attributable to noncontrolling interests in the Operating Partnership, which the Company believes is consistent with standard industry practice for REITs that operate through an UPREIT structure. The Company believes that it is important to present FFO on an as-converted basis since all of the Common Units not owned by the Company are redeemable on a one-for-one basis for shares of its Common Stock.

The following table sets forth the Company’s FFO, FFO available for common stockholders and FFO available for common stockholders per share (in thousands, except per share amounts):

| Funds from operations: | Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Net income | $44,954 | $42,103 |
| Net (income)/loss attributable to noncontrolling interests in consolidated affiliates | 487 | (257) |
| Depreciation and amortization of real estate assets | 69,995 | 68,992 |
| (Gain) on deconsolidation of affiliate | (11,778) | — |
| Unconsolidated affiliates: |  |  |
| Depreciation and amortization of real estate assets | 2,677 | 183 |
| **Funds from operations** | 106,335 | 111,021 |
| Dividends on Preferred Stock | (621) | (621) |
| **Funds from operations available for common stockholders** | $105,714 | $110,400 |
| **Funds from operations available for common stockholders per share** | $0.98 | $1.03 |
| **Weighted average shares outstanding (1)** | 107,646 | 107,453 |

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

In addition, the Company believes NOI and same property NOI are useful supplemental measures of the Company’s property operating performance because such metrics provide a performance measure of the revenues and expenses directly involved in owning real estate assets and a perspective not immediately apparent from net income or FFO. The Company defines NOI as rental and other revenues less rental property and other expenses. The Company defines cash NOI as NOI less lease termination fees, straight-line rent, amortization of lease incentives and amortization of acquired above and below market leases. Other REITs may use different methodologies to calculate NOI, same property NOI and cash NOI.

As of March 31, 2023, our same property portfolio consisted of 158 in-service properties encompassing 27.0 million rentable square feet that were wholly owned during the entirety of the periods presented (from January 1, 2022 to March 31,

2023). As of December 31, 2022, our same property portfolio consisted of 148 in-service properties encompassing 24.4 million rentable square feet that were wholly owned during the entirety of the periods presented (from January 1, 2021 to December 31, 2022). The change in our same property portfolio was due to the addition of seven acquired properties encompassing 1.6 million rentable square feet acquired during 2021 and three newly developed properties encompassing 0.9 million rentable square feet placed in service during 2021.

Rental and other revenues related to properties not in our same property portfolio were $6.0 million and $4.1 million for the three months ended March 31, 2023 and 2022, respectively. Rental property and other expenses related to properties not in our same property portfolio were $2.2 million and $2.1 million for the three months ended March 31, 2023 and 2022, respectively.

The following table sets forth the Company’s NOI, same property NOI and same property cash NOI (in thousands):

|  | Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| **Net income** | $44,954 | $42,103 |
| Equity in earnings of unconsolidated affiliates | (704) | (300) |
| Gain on deconsolidation of affiliate | (11,778) | — |
| Gains on disposition of property | (450) | (4,100) |
| Other income | (1,147) | (363) |
| Interest expense | 33,098 | 24,393 |
| General and administrative expenses | 12,415 | 13,556 |
| Depreciation and amortization | 70,633 | 69,667 |
| **Net operating income** | 147,021 | 144,956 |
| Non same property and other net operating income | (3,768) | (1,963) |
| **Same property net operating income** | $143,253 | $142,993 |
| Same property net operating income | $143,253 | $142,993 |
| Lease termination fees, straight-line rent and other non-cash adjustments | (6,476) | (7,305) |
| **Same property cash net operating income** | $136,777 | $135,688 |

38

## Market risk

As filed, 2,319 characters.

The effects of potential changes in interest rates are discussed below. Our market risk discussion includes “forward-looking statements” and represents an estimate of possible changes in fair value or future earnings that would occur assuming hypothetical future movements in interest rates. Actual future results may differ materially from those presented. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” and the Notes to Consolidated Financial Statements for a description of our accounting policies and other information related to these financial instruments.

We borrow funds at a combination of fixed and variable rates. Borrowings under our revolving credit facility and bank term loans bear interest at variable rates. Our long-term debt, which consists of secured and unsecured long-term financings, typically bears interest at fixed rates. Our interest rate risk management objectives are to limit generally the impact of interest rate changes on earnings and cash flows and lower our overall borrowing costs. To achieve these objectives, from time to time we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to existing and prospective debt instruments. We generally do not hold or issue these derivative contracts for trading or speculative purposes.

As of March 31, 2023, we had $2,475.9 million principal amount of fixed rate debt outstanding, a $198.3 million increase as compared to December 31, 2022. The estimated aggregate fair market value of this debt was $2,089.9 million. If interest rates had been 100 basis points higher, the aggregate fair market value of our fixed rate debt would have been $109.3 million lower. If interest rates had been 100 basis points lower, the aggregate fair market value of our fixed rate debt would have been $116.9 million higher.

As of March 31, 2023, we had $805.0 million of variable rate debt outstanding, a $131.0 million decrease as compared to December 31, 2022. If the weighted average interest rate on this variable rate debt had been 100 basis points higher or lower, the annual interest expense as of March 31, 2023 would increase or decrease by $8.1 million.

## Controls and procedures

As filed, 1,427 characters.

SEC rules require us to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our annual and periodic reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management to allow for timely decisions regarding required disclosure. The Company’s CEO and CFO have concluded that the disclosure controls and procedures of the Company and the Operating Partnership were each effective as of March 31, 2023.

SEC rules also require us to establish and maintain internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There were no changes in internal control over financial reporting during the three months ended March 31, 2023 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. There were also no changes in internal control over financial reporting during the three months ended March 31, 2023 that materially affected, or are reasonably likely to materially affect, the Operating Partnership’s internal control over financial reporting.

Filed Apr 25, 2023.
Source: SEC EDGAR, the filing index for accession 0000921082-23-000041. Last ingested by Listed: Nov 10, 2026, 17:04 ET. No prices; not investment advice.