News Column

HIGHWOODS REALTY LTD PARTNERSHIP - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

February 10, 2014

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

Disclosure Regarding Forward-Looking Statements Some of the information in this Annual Report may contain forward-looking statements. Such statements include, in particular, statements about our plans, strategies and prospects under this section and under the heading "Item 1. Business." 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 the following important factors that could cause our actual results to differ materially from those contained in any forward-looking statement:



the financial condition of our customers could deteriorate;

we may not be able to lease or release 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 our 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 by our competitors in our existing markets could



result in an excessive supply of office properties relative to customer

demand;



our markets may suffer declines in economic growth;

unanticipated increases in interest rates could increase our debt service

costs;



unanticipated increases in operating expenses could negatively impact our

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. Business - Risk Factors" set forth in this Annual Report. 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. 29



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Table of Contents Executive Summary



Our Strategic Plan focuses on:

owning high-quality, differentiated real estate assets in the key infill

business districts in our core markets; improving the operating results of our existing properties through



concentrated leasing, asset management, cost control and customer service

efforts; developing and acquiring office properties in key infill business



districts that improve the overall quality of our portfolio and generate

attractive returns over the long-term for our stockholders;



disposing of properties no longer considered to be core assets primarily

due to location, age, quality and overall strategic fit; and



maintaining a conservative and flexible balance sheet with ample liquidity

to meet our funding needs and growth prospects.

While we own and operate a limited number of industrial and retail properties, our operating results depend heavily on successfully leasing and operating our office properties. Economic growth and employment levels in our core markets are and will continue to be important factors 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 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 must concentrate our leasing efforts on renewing our existing leases prior to expiration. For more information regarding our lease expirations, see "Item 2. Properties - Lease Expirations." Our occupancy declined from 90.9% at December 31, 2012 to 89.9% at December 31, 2013 primarily due to a scheduled expiration of a large customer in Tampa, FL and the acquisition of relatively low occupied buildings in Atlanta, GA, Nashville, TN and Orlando, FL and the disposition of relatively high occupied industrial buildings in Atlanta, GA. Whether or not our rental revenue tracks average occupancy proportionally depends upon whether rents under signed new and renewal leases are higher or lower than the rents under the previous leases. Annualized rental revenues from second generation leases expiring during any particular year are generally less than 15% of our total annual rental revenues. The following table sets forth information regarding second generation leases signed during the fourth quarter of 2013 (we define second generation leases as leases with new customers and renewals of existing customers in space that has been previously occupied under our ownership and leases with respect to vacant space in acquired buildings): Office Industrial Retail New Renewal New Renewal New Renewal Leased space (in rentable square feet) 407,513 383,286 18,000 172,022 - 5,304 Rentable square foot weighted average term (in years) 6.3 5.7 3.2 2.8 - 3.4 Base rents (per rentable square foot) (1) $ 24.23$ 22.20$ 4.23$ 3.28 $ - $ 37.77 Rent concessions (per rentable square foot) (1) (0.91 ) (0.56 ) (0.28 ) (0.23 ) - - GAAP rents (per rentable square foot) (1) $ 23.32$ 21.64$ 3.95$ 3.05 $ - $ 37.77 Tenant improvements (per rentable square foot) (1) $ 3.73$ 1.16$ 0.09$ 0.07 $ - $ 3.61 Leasing commissions (per rentable square foot) (1) $ 0.90$ 0.55$ 0.16 $



0.05 $ - $ 1.21

__________

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

term. 30



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Compared to previous leases in the same spaces, annual combined GAAP rents for new and renewal leases signed in the fourth quarter were $22.51 per rentable square foot, or 8.5% higher, for office leases, $3.14 per rentable square foot, or 8.3% higher, for industrial leases and $37.77 per rentable square foot, or 9.7% lower, for retail leases. 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. Currently, no customer accounts for more than 3% of our revenues other than the Federal Government, which accounted for less than 10.0% of our revenues on an annualized basis, as of December 31, 2013. See "Item 2. Properties - Customers." 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 levels, such as maintenance, repairs 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 we depreciate our properties and related building and tenant improvement assets on a straight-line basis over fixed lives. General and administrative expenses consist primarily of management and employee salaries and other personnel costs, corporate overhead and short and long-term incentive compensation. We intend to maintain a conservative and flexible balance sheet that allows us to capitalize on favorable development and acquisition opportunities as they arise. We anticipate commencing up to $150 million of new development in 2014. Such projects would likely not be placed in service until 2015 or beyond. We also anticipate acquiring up to $300 million of new properties and selling up to $175 million of non-core properties in 2014. We generally seek to acquire and develop assets 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 net operating income for any such period exceeds the actual cost of capital used to finance the acquisition. Forward-looking information regarding 2014 operating performance contained below under "Results of Operations" excludes the impact of any potential acquisitions or dispositions. Results of Operations Comparison of 2013 to 2012 Rental and Other Revenues Rental and other revenues from continuing operations were $71.8 million, or 14.8%, higher in 2013 as compared to 2012 primarily due to recent acquisitions and development properties placed in service, which accounted for $70.9 million of the increase. Same property rental and other revenues in 2013 were flat with 2012 as average occupancy in the same property portfolio was substantially unchanged as well. We expect 2014 rental and other revenues to increase over 2013 primarily due to the full year contribution of acquisitions closed in 2013, contribution of development properties and slightly higher same property revenues resulting from higher expected cost recovery income and higher average GAAP rents per rentable square foot.



Operating Expenses

Rental property and other expenses were $26.6 million, or 15.1%, higher in 2013 as compared to 2012 primarily due to recent acquisitions, which contributed $27.1 million to the net increase. Same property operating expenses in 2013 were flat with 2012 as average occupancy was substantially unchanged and lower utility costs and property taxes offset inflationary effects on other costs. We expect 2014 rental property and other expenses to increase over 2013 primarily due to the full year contribution of acquisitions closed in 2013 and slightly higher same property operating expenses resulting from higher expected utility costs and higher property taxes.



Operating margin, defined as rental and other revenues less rental property and other expenses expressed as a percentage of rental and other revenues, was slightly lower at 63.5% for 2013, as compared to 63.6% for 2012. Operating margin is expected to be slightly lower in 2014 as compared to 2013.

Depreciation and amortization was $30.6 million, or 20.9%, higher in 2013 as compared to 2012 primarily due to recent acquisitions. We expect 2014 depreciation and amortization to increase over 2013 primarily due to the full year contribution of acquisitions closed and developments placed in service in 2013. 31



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General and administrative expenses were $0.2 million, or 0.5%, lower in 2013 as compared to 2012 primarily due to lower incentive compensation, partly offset by higher salaries and acquisition costs. We expect 2014 general and administrative expenses to slightly decrease relative to 2013 primarily due to lower incentive compensation, partially offset by higher company-wide base salaries and employee benefit costs. Interest Expense Interest expense was $3.4 million, or 3.5%, lower in 2013 as compared to 2012 primarily due to lower average interest rates and higher capitalized interest, partly offset by higher average debt balances. We expect 2014 interest expense to decrease over 2013 primarily due to lower average interest rates and higher capitalized interest, partially offset by higher average debt balances.



Other Income

Other income was relatively unchanged in 2013 as compared to 2012 primarily due to a decrease in interest income on notes receivable in 2013 resulting from the 2012 repayment of a secured loan made to our Highwoods DLF 98/29, LLC joint venture and a bankruptcy settlement in 2012, offset by a higher loss on debt extinguishment in 2012. We expect 2014 other income to decrease over 2013 primarily due to lower interest income as a result of the January 2014 repayment of seller financing provided in conjunction with a 2010 disposition transaction.



Gain on Acquisition of Controlling Interest in Unconsolidated Affiliate

We recorded a gain on acquisition of controlling interest in unconsolidated affiliate of $7.5 million in 2013 due to the acquisition of our joint venture partner's 60.0% interest in our HIW-KC Orlando, LLC joint venture. We had no similar transactions in 2012.



Equity in Earnings of Unconsolidated Affiliates

Equity in earnings of unconsolidated affiliates was $2.8 million lower in 2013 as compared to 2012 primarily due to our $4.5 million share of impairments of real estate assets on certain office properties in our Highwoods DLF 98/29, LLC joint venture, the acquisition of our joint venture partner's 60.0% interest in our HIW-KC Orlando, LLC joint venture in 2013 and the sale of office properties in our Highwoods DLF 98/29, LLC and Highwoods DLF 97/26 DLF 99/32, LP joint ventures in late 2012 and early 2013. Partly offsetting this decrease was $3.2 million, net of taxes, that we recorded as our share of a gain recognized by the Lofts at Weston, LLC joint venture upon the sale of 215 residential units to an unrelated third party. Additionally offsetting this decrease was our $1.0 million share of impairments of real estate assets on two office properties in our Highwoods DLF 98/29, LLC joint venture in 2012. The impairments in 2013 and 2012 were due to a change in the assumed timing of future dispositions and/or leasing assumptions. We expect 2014 equity in earnings of unconsolidated affiliates to remain consistent to 2013 due to impairments of real estate assets recorded in 2013 offset by the reduction of our overall joint venture investments in 2013.



Impairments of Real Estate Assets in Discontinued Operations

We recorded impairments of real estate assets of $1.1 million on seven industrial properties in Atlanta, GA and $1.1 million on four properties in a single office park in Winston-Salem, NC in 2013. These impairments were due to a change in the assumed timing of future dispositions and leasing assumptions. We recorded no such impairments in 2012.



Net Gains on Disposition of Discontinued Operations

Net gains on disposition of discontinued operations were $34.3 million higher in 2013 as compared to 2012 due to higher disposition activity in 2013.

Earnings Per Common Share - Diluted

Diluted earnings per common share was $0.42, or 41.2%, higher in 2013 as compared to 2012 due to an increase in net income for the reasons discussed above, offset by an increase in the weighted average Common Shares outstanding from the 2012 and 2013 issuances under our equity sales agreements and the August 2013 Common Stock offering.

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Table of Contents Comparison of 2012 to 2011 Rental and Other Revenues Rental and other revenues from continuing operations were $53.1 million, or 12.3%, higher in 2012 as compared to 2011 primarily due to recent acquisitions, which accounted for $43.8 million of the increase, and higher same property revenues of $10.7 million, partly offset by lower construction income of $1.7 million. Same property revenues were higher primarily due to an increase in average occupancy to 91.0% in 2012 from 90.5% in 2011, an increase in annualized GAAP rent per rentable square foot to $20.45 in 2012 from $20.07 in 2011, higher cost recovery income, higher net termination fees and lower bad debt expense.



Operating Expenses

Rental property and other expenses were $19.4 million, or 12.4%, higher in 2012 as compared to 2011 primarily due to recent acquisitions, which accounted for $18.8 million of the increase and higher same property operating expenses of $1.6 million, partly offset by $1.7 million lower cost of construction expense. Same property operating expenses were higher primarily due to higher repairs and maintenance and insurance costs, partly offset by lower utilities and real estate taxes. Operating margin, defined as rental and other revenues less rental property and other expenses expressed as a percentage of rental and other revenues, remained constant at 63.6% at both 2012 and 2011. Depreciation and amortization was $18.9 million, or 14.8%, higher in 2012 as compared to 2011 primarily due to recent acquisitions, which accounted for $16.5 million of the increase, and higher same property depreciation and amortization of $2.3 million. General and administrative expenses were $1.7 million, or 4.6%, higher in 2012 as compared to 2011 primarily due to higher salaries and incentive compensation, partly offset by lower acquisition and dead deal costs.



Interest Expense

Interest expense was $0.6 million, or 0.6%, higher in 2012 as compared to 2011 primarily due to higher average debt balances, partly offset by lower average interest rates and lower financing obligation interest expense.



Other Income

Other income was $1.0 million, or 13.4%, lower in 2012 as compared to 2011 primarily due to recording a loss on debt extinguishment in 2012.

Gains on Disposition of Investments in Unconsolidated Affiliates

We recorded a gain on disposition of investment in unconsolidated affiliate of $2.3 million in 2011 due to our partner exercising its option to acquire our 10.0% equity interest in one of our unconsolidated joint ventures. We recorded no such gain in 2012.



Impairments of Real Estate Assets in Discontinued Operations

We recorded impairments of real estate assets of $2.4 million in 2011 related to two office properties in Orlando, FL which resulted from a change in the assumed timing of future dispositions. We recorded no such impairments in 2012.



Net Gains on Disposition of Discontinued Operations

Net gains on disposition of discontinued operations were $26.9 million higher in 2012 as compared to 2011 due to higher disposition activity in 2012.

Dividends on Preferred Stock and Excess of Preferred Stock Redemption/Repurchase Cost Over Carrying Value

Dividends on Preferred Stock and excess of Preferred Stock redemption/repurchase cost over carrying value were $2.0 million and $1.9 million lower, respectively, in 2012 as compared to 2011 due to the redemption of all remaining Series B Preferred Shares in 2011. 33



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Table of Contents Liquidity and Capital Resources Overview Our goal is 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. We generally use rents received from customers to fund our operating expenses, recurring capital expenditures and distributions. To fund property acquisitions, development activity or building renovations and repay debt upon maturity, we may use current cash balances, sell assets, obtain new debt and/or issue equity. Our debt generally consists of unsecured debt securities, unsecured bank term loans, mortgage debt and borrowings under our unsecured revolving credit facility.



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): Year Ended December 31, 2013 2012



Change

Net Cash Provided By Operating Activities $ 256,437$ 193,416 $

63,021

Net Cash (Used In) Investing Activities (356,603 ) (238,812 ) (117,791 ) Net Cash Provided By Financing Activities 96,567 47,991

48,576 Total Cash Flows $ (3,599 )$ 2,595$ (6,194 ) In calculating net cash related to operating activities, depreciation and amortization, which are non-cash expenses, are added back to net income. As a result, 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 above under "Results of Operations," changes in receivables and payables, and net additions or decreases in our overall portfolio, which affect the amount of depreciation and amortization expense. 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 capital 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 of capital 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. As discussed previously, 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 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. The change in net cash related to operating activities in 2013 as compared to 2012 was primarily due to higher net cash from the operations of acquired properties and lower cash paid for operating expenses in 2013. We expect net cash related to operating activities to be higher in 2014 as compared to 2013 due to the full year impact of properties acquired in 2013 and higher cash flows from leases signed in 2013 and prior years as free rent periods expire. The change in net cash related to investing activities in 2013 as compared to 2012 was primarily due to higher acquisition and development activity and higher expenditures on tenant and building improvements in 2013, partly offset by higher net proceeds from dispositions of real estate assets and higher distributions of capital from unconsolidated affiliates in 2013. We expect net cash related to investing activities to be lower in 2014 as compared to 2013 due to our plans to acquire $100 million to $300 million of office buildings and commence development of $75 million to $150 million of office buildings. Additionally, as of December 31, 2013, we have $136.4 million left to fund of our previously-announced development activity. We expect these uses of cash for investing activities will be partially offset by $100 million to $175 million of non-core dispositions and additional distributions of capital from unconsolidated affiliates in 2014. The change in net cash related to financing activities in 2013 as compared to 2012 was primarily due to higher proceeds from the issuance of Common Stock and contributions from noncontrolling interests in consolidated affiliates in 2013, partly offset by 34



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higher dividends on Common Stock and higher net debt repayments in 2013. Assuming the net effect of our acquisition, disposition, development and joint venture activity in 2014 results in an increase in our assets, we would expect outstanding debt balances to increase. However, because we plan to continue to maintain a flexible and conservative balance sheet with mortgages and notes payable and outstanding preferred stock representing around 40% to 45% of the undepreciated book value of our assets, we would also expect higher outstanding balances of Common Stock in such event.



Capitalization

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

December 31, 2013 2012



Mortgages and notes payable, at recorded book value $ 1,956,299$ 1,859,162 Financing obligations

$ 26,664 $



29,358

Preferred Stock, at liquidation value $ 29,077 $



29,077

Common Stock outstanding 89,921



80,311

Common Units outstanding (not owned by the Company) 2,944 3,733 Per share stock price at year end

$ 36.17 $



33.45

Market value of Common Stock and Common Units $ 3,358,927$ 2,811,272 Total capitalization

$ 5,370,967$ 4,728,869



At December 31, 2013, our mortgages and notes payable and outstanding preferred stock represented 37.0% of our total capitalization and 41.4% of the undepreciated book value of our assets.

Our mortgages and notes payable as of December 31, 2013 consisted of $488.7 million of secured indebtedness with a weighted average interest rate of 4.98% and $1,467.6 million of unsecured indebtedness with a weighted average interest rate of 4.07%. The secured indebtedness was collateralized by real estate assets with an aggregate undepreciated book value of $801.7 million.



Current and Future Cash Needs

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 existing revolving credit facility, which had $251.9 million of availability at January 31, 2014. Our short-term liquidity requirements primarily consist of operating expenses, interest and principal amortization on our debt, dividends and distributions and capital expenditures, including building improvement costs, tenant improvement costs and lease commissions. Building improvements are capital costs to maintain 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, together with cash available from borrowings under our revolving credit facility, will be adequate to meet our short-term liquidity requirements. Our long-term liquidity needs generally consist of the retirement or refinancing of debt upon maturity (including mortgage debt, our revolving credit facility, term loans and other unsecured debt), funding of existing and new building development or land infrastructure projects and funding acquisitions of buildings and development land. Additionally, we may, from time to time, retire some or all of our remaining outstanding Preferred Stock and/or unsecured 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 flow from operating activities;

bank term loans and borrowings under our revolving credit facility;

the issuance of unsecured debt;

the issuance of secured debt;

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the issuance of equity securities by the Company or the Operating Partnership; and



the disposition of non-core assets.

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 generally accepted accounting principles 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 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 influence decisions of the Board of Directors regarding distributions, see "Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities."



2013 Acquisition Activity

During the third quarter of 2013, we acquired:

our joint venture partner's 60.0% interest in our HIW-KC Orlando, LLC

joint venture, which owned five office properties in the central business

district of Orlando, FL encompassing 1.3 million rentable square feet, for

a net purchase price of $112.8 million. The purchase price included the

assumption of secured debt recorded at fair value of $127.9 million, with

an effective interest rate of 3.11%. This debt matures in July 2014. We

previously accounted for our 40.0% interest in this joint venture using

the equity method of accounting. As a result of acquiring a controlling

interest in this joint venture, our previously held equity interest was remeasured at a fair value of $75.2 million resulting in a gain of $7.5 million; an office property in the central business district of Nashville, TN encompassing 520,000 rentable square feet for a net purchase price of $150.1 million; and our Highwoods DLF 97/26 DLF 99/32, LP joint venture partner's 57.0% interest in two office properties in the central perimeter submarket of



Atlanta, GA encompassing 505,000 rentable square feet for a net purchase

price of $44.5 million, including the assumption of secured debt recorded

at fair value of $37.6 million, with an effective interest rate of 3.34%.

This debt matures in April 2015.

During the second quarter of 2013, we acquired:

an office property in the Buckhead submarket of Atlanta, GA encompassing

553,000 rentable square feet for a purchase price of $140.1 million.

During the first quarter of 2013, we acquired:

two office properties in the Westshore submarket of Tampa, FL encompassing

372,000 rentable square feet for a purchase price of $52.5 million; two office properties in the Green Valley submarket of Greensboro, NC



encompassing 195,000 rentable square feet for a purchase price of $30.8

million; and five acres of land in the Poplar Corridor submarket of Memphis, TN on



which a build-to-suit development project is underway for a purchase price

of $4.8 million. During 2013, we expensed $1.8 million of acquisition costs (included in general and administrative expenses) related to these aforementioned acquisitions. The assets acquired and liabilities assumed were recorded at fair value as determined by management based on information available at the acquisition date and on current assumptions as to future operations. We have invested or intend to invest an additional $17.7 million in the aggregate of planned building improvements and future tenant improvements committed under existing leases acquired in these building acquisitions. Based on the total anticipated investment of $548.5 million, 36



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the weighted average capitalization rate for the acquisitions of these buildings, which were 81.3% occupied on average as of the respective closing dates, is 7.0% using projected annual GAAP net operating income. These forward-looking statements are subject to risks and uncertainties. See "Disclosure Regarding Forward-Looking Statements."

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 - 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." 2013 Disposition Activity



During the fourth quarter of 2013, we sold:

eight office properties in Greenville, SC for a sale price of $57.9

million (before $0.1 million in closing credits to buyer for unfunded

tenant improvements and after $0.3 million in closing credits to buyer for

free rent) and recorded a gain on disposition of discontinued operations

of $3.1 million;



an office property in Tampa, FL for a sale price of $11.5 million (before

$0.6 million in closing credits to buyer for unfunded tenant improvements)

and recorded a gain on disposition of discontinued operations of $2.8 million;



an office property in Atlanta, GA for a sale price of $13.8 million and

recorded a gain on disposition of discontinued operations of $3.0 million;

four office properties in Winston-Salem, NC for a sale price of $6.2



million and recorded a gain on disposition of discontinued operations of

$0.1 million; and



an office property in Winston-Salem, NC for a sale price of $5.3 million

and recorded a gain on disposition of discontinued operations of $2.5 million.



During the third quarter of 2013, we sold:

an office property in Tampa, FL for a sale price of $11.6 million and

recorded a gain on disposition of discontinued operations of $1.2 million;

and



sixteen industrial properties and a land parcel in a single transaction in

Atlanta, GA for a sale price of $91.6 million (before $0.3 million in

closing credits to buyer for unfunded tenant improvements and after $0.3

million in closing credits to buyer for free rent). We recorded gains on

disposition of discontinued operations of $36.7 million related to the

industrial properties and a gain on disposition of property of less than

$0.1 million related to the land parcel.

During the second quarter of 2013, we sold:

five industrial properties in Atlanta, GA for a sale price of $4.5 million

(after $0.1 million in closing credits to buyer for free rent) and recorded a gain on disposition of discontinued operations of less than $0.1 million;



six industrial properties and a land parcel in a single transaction in

Atlanta, GA for a sale price of $38.7 million (before $1.8 million in closing credits to buyer for unfunded tenant improvements and after $1.3



million in closing credits to buyer for free rent) and recorded a gain on

disposition of discontinued operations of $13.2 million; and



two industrial properties in Atlanta, GA for a sale price of $4.8 million

and recorded a loss on disposition of discontinued operations of less than

$0.1 million.



During the first quarter of 2013, we sold:

two office properties in Orlando, FL for a sale price of $14.6 million

(before $0.8 million in closing credits to buyer for unfunded tenant improvements) and recorded a loss on disposition of discontinued operations of $0.3 million. 37



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Additionally, in connection with the disposition of an office property in Jackson, MS in the third quarter of 2012, we had the right to receive additional cash consideration of up to $1.5 million upon the satisfaction of a certain post-closing requirement. The post-closing requirement was satisfied and the cash consideration was received during 2013. Accordingly, we recognized $1.5 million in additional gain on disposition of discontinued operations in 2013.



2013 Financing Activity

During 2012, we entered into separate equity sales agreements with each of Wells Fargo Securities, LLC, BB&T Capital Markets, a division of BB&T Securities, LLC, Jefferies LLC, Morgan Stanley & Co., LLC and Piper Jaffray & Co. During 2013, the Company issued 1,299,791 shares of Common Stock under these equity sales agreements at an average gross sales price of $35.95 per share and received net proceeds, after sales commissions, of $46.0 million. We paid an aggregate of $0.7 million in sales commissions to BB&T Capital Markets, Morgan Stanley & Co., LLC and Piper Jaffray & Co. during 2013. During 2013, we entered into separate equity sales agreements with each of Wells Fargo Securities, LLC, BB&T Capital Markets, a division of BB&T Securities, LLC, Comerica Securities, Inc., Jefferies LLC and Piper Jaffray & Co. Under the terms of the equity distribution agreements, the Company may offer and sell shares of its 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 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. During 2013, the Company issued 2,661,399 shares of Common Stock at an average gross sales price of $37.47 per share and received net proceeds, after sales commissions, of $98.2 million. We paid an aggregate of $1.5 million in sales commissions to Wells Fargo Securities, LLC and Jefferies LLC during 2013. No shares of Common Stock were sold under the equity sales agreements during the fourth quarter of 2013. During the third quarter of 2013, the Company issued 4,312,500 shares of Common Stock in a public offering and received net proceeds of $150.9 million. The Company used the net proceeds from the offering to repay borrowings outstanding under our unsecured revolving credit facility, to fund property acquisitions and development activity and for general corporate purposes. During the fourth quarter of 2013, we entered into an amended and restated $475.0 million unsecured revolving credit facility, which replaced our previously existing $475.0 million revolving credit facility, and includes an accordion feature that allows for an additional $75.0 million of borrowing capacity subject to additional lender commitments. Our new revolving credit facility is scheduled to mature in January 2018. Assuming no defaults have occurred, we have an option to extend the maturity for two additional six-month periods. The interest rate on the new facility at our current credit ratings is LIBOR plus 110 basis points and 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. The financial and other covenants under the new facility are similar to our previous credit facility. 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. The continued ability to borrow under the revolving credit facility allows us to quickly capitalize on strategic opportunities at short-term interest rates. There was $215.7 million and $223.0 million outstanding under our revolving credit facility at December 31, 2013 and January 31, 2014, respectively. At both December 31, 2013 and January 31, 2014, 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, 2013 and January 31, 2014 was $259.2 million and $251.9 million, respectively. We simultaneously amended and restated our $200.0 million, five-year unsecured bank term loan, which was scheduled to mature in January 2018. The loan is now scheduled to mature in January 2019 and the interest rate, based on our current credit ratings, was reduced from LIBOR plus 135 basis points to LIBOR plus 120 basis points. We also simultaneously amended and restated our $225.0 million, seven-year unsecured bank term loan to conform certain provisions to our other credit facilities. During the fourth quarter of 2013, we prepaid without penalty a secured mortgage loan with a fair market value of $67.5 million bearing an effective interest rate of 5.12% that was originally scheduled to mature in January 2014. During the fourth quarter of 2013, one of our consolidated affiliates also prepaid without penalty the remaining $32.3 million balance on four secured mortgage loans bearing interest at a weighted average rate of 5.79% that were originally scheduled to mature in January 2014. During the third quarter of 2013, we prepaid without penalty the remaining $114.7 million balance on two secured mortgage loans bearing interest at a weighted average rate of 5.75% that were originally scheduled to mature in December 2013. Real estate assets having a gross book value of approximately $147 million became unencumbered in connection with the payoff of these secured loans. During 2013, we also paid down $11.7 million of secured loan balances through principal amortization and prepaid the remaining $35.0 million balance on a $200.0 million unsecured bank term loan that was originally scheduled to mature in February 2016. 38



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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. Based on this review, we currently expect these financial institutions to perform their obligations under our existing facilities and swap agreements. For information regarding our interest hedging activities and other market risks associated with our debt financing activities, see "Item 7A. Quantitative and Qualitative Disclosures About Market Risk."



Covenant Compliance

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 assure you 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 the revolving credit facility, the lenders having at least 51.0% of the total commitments under the 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.



The Operating Partnership has the following unsecured notes currently outstanding ($ in thousands):

Carrying



Stated Effective

Face Amount Amount Interest Rate Interest Rate Notes due March 2017 $ 379,685$ 379,311 5.850 % 5.880 % Notes due April 2018 $ 200,000$ 200,000 7.500 % 7.500 % Notes due January 2023 $ 250,000$ 247,624 3.625 % 3.752 % The indenture that governs these 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 either series of bonds 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. 39



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Table of Contents Contractual Obligations



The following table sets forth a summary regarding our known contractual obligations, including required interest payments for those items that are interest bearing, at December 31, 2013 ($ in thousands):

Amounts due during the years ending December 31, Total 2014 2015 2016 2017 2018 Thereafter Mortgages and Notes Payable: Principal payments (1) $ 1,955,172$ 137,696$ 80,932$ 157,638$ 488,206$ 415,700$ 675,000 Interest payments 338,178 83,626 78,714 68,026 46,931 23,956 36,925 Financing Obligations: SF-HIW Harborview Plaza, LP financing obligation 12,783 12,783 - - - - - Tax increment financing bond 10,422 1,460 1,561 1,669 1,785 1,908 2,039 Interest on financing obligations (2) 2,669 722 621 513 397 274 142 Capitalized Lease Obligations 293 177 101 15 - - - Purchase Obligations: Lease and contractual commitments (3) 233,753 197,698 34,398 625 165 100 767 Operating Lease Obligations: Operating ground leases 131,690 3,044 3,076 3,109 3,143 3,179 116,139 Other Long Term Obligations: Future infrastructure funding 7,958 3,220 3,680 1,058 - - - Total $ 2,692,918$ 440,426$ 203,083$ 232,653$ 540,627$ 445,117$ 831,012 __________



(1) Excludes amortization of premiums, discounts and/or purchase accounting

adjustments.

(2) Does not include interest on the SF-HIW Harborview Plaza, LP financing

obligation, which cannot be reasonably estimated for future periods. The

interest expense on these financing obligations was $0.1 million, $(0.3)

million and $0.8 million in 2013, 2012 and 2011, respectively.

(3) Amount represents commitments under signed leases and contracts for operating

properties, excluding tenant-funded tenant improvements, and contracts for

development/redevelopment projects. This includes $136.4 million of

contractual commitments related to our in process development activity. The

timing of these expenditures 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, 2013 for the variable rate debt. The weighted average interest rate on our fixed (including debt with a variable rate that is effectively fixed by related interest rate swaps) and variable rate debt was 5.10% and 1.32%, respectively, at December 31, 2013. For additional information about our mortgages and notes payable, see Note 6 to our Consolidated Financial Statements. For additional information about our financing obligations, see Note 8 to our Consolidated Financial Statements. For additional information about purchase obligations, operating lease obligations and other long term obligations, see Note 9 to our Consolidated Financial Statements.



Off Balance Sheet Arrangements

We generally account for our investments in less than majority owned joint ventures, partnerships and limited liability companies using the equity method. As a result, these joint ventures are not included in our Consolidated Financial Statements, other than as investments in unconsolidated affiliates and equity in earnings of unconsolidated affiliates. At December 31, 2013, our unconsolidated joint ventures had $294.7 million of total assets and $200.8 million of total liabilities. Our weighted average equity interest based on the total assets of these unconsolidated joint ventures was 33.2%. During 2013, these unconsolidated joint ventures had $5.4 million of aggregate net income, of which our share was $1.1 million. Additionally, we recorded $1.2 million of positive adjustments for management and other fees in equity in earnings of unconsolidated affiliates. For additional information about our unconsolidated joint venture activity, see Note 4 to our Consolidated Financial Statements. 40



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At December 31, 2013, our unconsolidated joint ventures had $189.4 million of outstanding mortgage debt. The following table sets forth the scheduled maturities of the Company's $64.4 million proportionate share of the outstanding debt of its unconsolidated joint ventures at December 31, 2013 ($ in thousands): 2014 $ 11,011 2015 992 2016 1,062 2017 27,082 2018 19,397 Thereafter 4,880 $ 64,424



All of this joint venture debt is non-recourse to us except in the case of customary exceptions pertaining to such matters as misuse of funds, environmental conditions, material misrepresentations and voluntary or uncontested involuntary bankruptcy events.

During the second quarter of 2013, our Highwoods DLF 98/29, LLC joint venture sold an office property to an unrelated third party for a sale price of $5.9 million (after $0.1 million in closing credits to buyer for free rent) and recorded a gain on disposition of discontinued operations of less than $0.1 million. We recorded less than $0.1 million as our share of this gain through equity in earnings of unconsolidated affiliates. Our Highwoods DLF 98/29, LLC joint venture recorded impairments of real estate assets of $15.3 million during the third quarter of 2013 on an office property in Orlando, FL and $4.8 million during the first quarter of 2013 on an office property in Atlanta, GA and an office property in Charlotte, NC. We recorded $3.5 million and $1.0 million, respectively, as our share of these impairment charges through equity in earnings of unconsolidated affiliates. These impairments were due to a change in the assumed timing of future dispositions and/or leasing assumptions, which reduced the future expected cash flows from the impaired properties. During the first quarter of 2013, our Highwoods DLF 97/26 DLF 99/32, LP joint venture sold an office property to an unrelated third party for a sale price of $10.1 million (after $0.3 million in closing credits to buyer for free rent) and recorded a gain on disposition of property of less than $0.1 million. As our cost basis is different from the basis reflected at the joint venture level, we recorded $0.4 million of gain through equity in earnings of unconsolidated affiliates. See "2013 Acquisition Activity" for a description of the acquisitions of (1) our joint venture partner's 60.0% interest in our HIW-KC Orlando, LLC joint venture and (2) two office properties in Atlanta, GA from our Highwoods DLF 97/26 DLF 99/32, LP joint venture. During the fourth quarter of 2013, our Highwoods DLF Forum, LLC joint venture obtained a $71.7 million, five-year secured mortgage loan from a third party lender, bearing a floating interest rate of LIBOR plus 190 basis points, which was used by the joint venture to repay a secured loan at maturity to a third party lender. The loan is scheduled to mature in November 2018. During the fourth quarter of 2013, the Lofts at Weston joint venture sold 215 residential units to an unrelated third party for gross proceeds of $38.3 million and recorded a gain of $12.2 million. As a result, we received aggregate net distributions of $9.4 million and recorded our share of the gain of $3.2 million, which is net of $1.7 million in taxes incurred by our taxable REIT subsidiary, in equity in earnings of unconsolidated affiliates.



Financing Arrangements

- SF-HIW Harborview Plaza, LP

In 2002, we contributed Harborview Plaza, a 205,000 rentable square foot office building to our SF-HIW Harborview Plaza, LP joint venture. We retained a 20.0% equity interest in the joint venture. Our joint venture partner has the right to put its 80.0% equity interest in the joint venture to us in exchange for cash at any time during the one-year period commencing September 11, 2014. The value of the 80.0% equity interest will be determined at the time that our partner elects to exercise its put right, if ever, based upon the then fair market value of the joint venture's assets and liabilities. The fair value of the real estate assets will be reduced by 3.0%, which is intended to represent the hypothetical costs of a sale transaction. Because of the put option, this 41



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transaction has been accounted for as a financing transaction. Accordingly, the assets, liabilities and operations of Harborview Plaza, which is the sole property owned by SF-HIW Harborview LP, remain in our Consolidated Financial Statements. As a result, we initially established a gross financing obligation equal to the $12.7 million equity contributed by our joint venture partner. During 2012, our joint venture partner contributed an additional $1.8 million of equity to the joint venture. During each period, we increase the gross financing obligation for 80.0% of the net income before depreciation of Harborview Plaza, which is recorded as interest expense on financing obligation, and decrease the gross financing obligation for distributions made to our joint venture partner. At the end of each reporting period, the balance of the gross financing obligation is adjusted to equal the greater of the equity contributed by our joint venture partner or the current fair value of the put option, which is recorded as a valuation allowance. The valuation allowance is amortized on a straight-line basis prospectively through September 2014 as interest expense on financing obligation. The fair value of the put option was $12.8 million and $12.7 million at December 31, 2013 and 2012, respectively. We continue to depreciate Harborview Plaza and record all of the depreciation on our books. At such time as the put option expires or is otherwise terminated, we will record the transaction as a partial sale and recognize gain accordingly.



- Tax Increment Financing Bond

In connection with tax increment financing for a parking garage we constructed in 1999, we are obligated to pay fixed special assessments over a 20-year period ending in 2019. The net present value of these assessments, discounted at the 6.93% interest rate on the underlying tax increment financing, is recorded as a financing obligation. We receive special tax revenues and property tax rebates recorded in interest and other income, which are intended, but not guaranteed, to provide funds to pay the special assessments. We acquired the related tax increment financing bond, which is recorded in prepaid and other assets, in a privately negotiated transaction in 2007. For additional information about this tax increment financing bond, see Note 11 to our Consolidated Financial Statements. Critical Accounting Estimates The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from our estimates. The policies used in the preparation of our Consolidated Financial Statements are described in Note 1 to our Consolidated Financial Statements. However, certain of our significant accounting policies contain an increased level of assumptions used or estimates made in determining their impact in our Consolidated Financial Statements. Management has reviewed and determined the appropriateness of our critical accounting policies and estimates with the audit committee of the Company's Board of Directors.



We consider our critical accounting estimates to be those used in the determination of the reported amounts and disclosure related to the following:

Real estate and related assets;

Impairments of real estate assets and investments in unconsolidated

affiliates; Sales of real estate;



Rental and other revenues; and

Allowance for doubtful accounts.

Real Estate and Related Assets

Real estate and related assets are recorded at cost and stated at cost less accumulated depreciation. Renovations, replacements and other expenditures that improve or extend the life of assets are capitalized and depreciated over their estimated useful lives. Expenditures for ordinary maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful life of 40 years for buildings and depreciable land infrastructure costs, 15 years for building improvements and five to seven years for furniture, fixtures and equipment. Tenant improvements are amortized using the straight-line method over initial fixed terms of the respective leases, which generally are from three to 10 years. 42



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Expenditures directly related to the development and construction of real estate assets are included in net real estate assets and are stated at depreciated cost. Development expenditures include pre-construction costs essential to the development of properties, development and construction costs, interest costs on qualifying assets, real estate taxes, development personnel salaries and related costs and other costs incurred during the period of development. Interest and other carrying costs are capitalized until the building is ready for its intended use, but not later than one year from cessation of major construction activity. We consider a construction project as substantially completed and ready for its intended use upon the completion of tenant improvements. We cease capitalization on the portion that is substantially completed and occupied or held available for occupancy, and capitalize only those costs associated with the portion under construction. Expenditures directly related to the leasing of properties are included in deferred financing and leasing costs and are stated at amortized cost. Such expenditures are part of the investment necessary to execute leases and, therefore, are classified as investment activities in the statement of cash flows. All leasing commissions paid to third parties for new leases or lease renewals are capitalized. Internal leasing costs include primarily compensation, benefits and other costs, such as legal fees related to leasing activities, that are incurred in connection with successfully obtaining leases of properties. Capitalized leasing costs are amortized on a straight-line basis over the initial fixed terms of the respective leases, which generally are from three to 10 years. Estimated costs related to unsuccessful activities are expensed as incurred.



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

Upon the acquisition of real estate assets, we assess the fair value of acquired tangible assets such as land, buildings and tenant improvements, intangible assets and liabilities such as above and below market leases, acquired in-place leases, customer relationships and other identifiable intangible assets and assumed liabilities. We assess fair value based on estimated cash flow projections that utilize discount and/or capitalization rates as well as available market information. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant. The above and below market rate portions of leases acquired in connection with property acquisitions are recorded in deferred financing and leasing costs and in accounts payable, accrued expenses and other liabilities, respectively, at fair value and amortized into rental revenue over the remaining term of the respective leases as described below. Fair value is calculated as the present value of the difference between (1) the contractual amounts to be paid pursuant to each in-place lease and (2) our estimate of fair market lease rates for each corresponding in-place lease, using a discount rate that reflects the risks associated with the leases acquired and measured over a period equal to the remaining initial term of the lease for above-market leases and the remaining initial term plus the term of any renewal option that the customer would be economically compelled to exercise for below-market leases. In-place leases acquired are recorded at fair value in deferred financing and leasing costs and are amortized to depreciation and amortization expense over the remaining term of the respective lease. The value of in-place leases is based on our evaluation of the specific characteristics of each customer's lease. Factors considered include estimates of carrying costs during hypothetical expected lease-up periods, current market conditions, the customer's credit quality and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, we consider tenant improvements, leasing commissions and legal and other related expenses. Real estate and other assets are classified as long-lived assets held for use or as long-lived assets held for sale. Real estate is classified as held for sale when the sale of the asset has been duly approved by the Company, a legally enforceable contract has been executed and the buyer's due diligence period has expired.



Impairments of Real Estate Assets and Investments in Unconsolidated Affiliates

With respect to assets classified as held for use, we perform an impairment analysis if events or changes in circumstances indicate that the carrying value may be impaired, such as a significant decline in occupancy, identification of materially adverse legal or environmental factors, change in our designation of an asset from core to non-core, which may impact the anticipated holding period, or a decline in market value to an amount less than cost. This analysis is generally performed at the property level, except when an asset is part of an interdependent group such as an office park, and consists of determining whether the asset's carrying amount will be recovered from its undiscounted estimated future operating and residual cash flows. These cash flows are estimated based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for customers, changes in market rental rates, costs to operate each property and expected ownership periods. For properties under development, the cash flows are based on expected service potential of the asset or asset group when development is substantially complete. 43



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If the carrying amount of a held for use asset exceeds the sum of its undiscounted future operating and residual cash flows, an impairment loss is recorded for the difference between estimated fair value of the asset and the carrying amount. We generally estimate the fair value of assets held for use by using discounted cash flow analyses. In some instances, appraisal information may be available and is used in addition to a discounted cash flow analysis. As the factors used in generating these cash flows are difficult to predict and are subject to future events that may alter our assumptions, the discounted and/or undiscounted future operating and residual cash flows estimated by us in our impairment analyses or those established by appraisal may not be achieved and we may be required to recognize future impairment losses on properties held for use. We record assets held for sale at the lower of the carrying amount or estimated fair value. Fair value of assets held for sale is equal to the estimated or contracted sales price with a potential buyer, less costs to sell. The impairment loss is the amount by which the carrying amount exceeds the estimated fair value. We also analyze our investments in unconsolidated affiliates for impairment. This analysis consists of determining whether an expected loss in market value of an investment is other than temporary by evaluating the length of time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the investee, and our intent and ability to retain our investment for a period of time sufficient to allow for any anticipated recovery in market value. As the factors used in this analysis are difficult to predict and are subject to future events that may alter our assumptions, we may be required to recognize future impairment losses on our investments in unconsolidated affiliates.



Sales of Real Estate

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



Rental and Other Revenues

Minimum contractual rents from leases are recognized on a straight-line basis over the terms of the respective leases. This means that, with respect to a particular lease, actual amounts billed in accordance with the lease during any given period may be higher or lower than the amount of rental revenue recognized for the period. Straight-line rental revenue is commenced when the customer assumes control of the leased premises. Accrued straight-line rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements. Contingent rental revenue, such as percentage rent, is accrued when the contingency is removed. Termination fee income is recognized at the later of when the customer has vacated the space or the lease has expired and a fully executed lease termination agreement has been delivered, the amount of the fee is determinable and collectability of the fee is reasonably assured. Rental revenue reductions related to co-tenancy lease provisions, if any, are accrued when events have occurred that trigger such provisions. Cost recovery income is determined on a calendar year and a lease-by-lease basis. The most common types of cost recovery income in our leases are common area maintenance ("CAM") and real estate taxes, for which the customer pays its pro-rata share of operating and administrative expenses and real estate taxes in excess of the costs incurred during a contractually specified base year. The computation of cost recovery income is complex and involves numerous judgments, including the interpretation of terms and other customer lease provisions. Leases are not uniform in dealing with such cost recovery income and there are many variations in the computation. Many customers make monthly fixed payments of CAM, real estate taxes and other cost reimbursement items. We accrue cost recovery income related to these payments each month. We make quarterly accrual adjustments, positive or negative, to cost recovery income to adjust the recorded amounts to our best estimate of the final annual amounts to be billed and collected. After the end of the calendar year, we compute each customer's final cost recovery income and, after considering amounts paid by the customer during the year, issue a bill or credit for the appropriate amount to the customer. The differences between the amounts billed less previously received payments and the accrual adjustment are recorded as increases or decreases to cost recovery income when the final bills are prepared, which occurs during the first half of the subsequent year. 44



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Allowance for Doubtful Accounts

Accounts receivable, accrued straight-line rents receivable and mortgages and notes receivable are reduced by an allowance for amounts that may become uncollectible in the future. We regularly evaluate the adequacy of our allowance for doubtful accounts. The evaluation primarily consists of reviewing past due account balances and considering such factors as the credit quality of our customer, historical trends of the customer and changes in customer payment terms. Additionally, with respect to customers in bankruptcy, we estimate the probable recovery through bankruptcy claims and adjust the allowance for amounts deemed uncollectible. If our assumptions regarding the collectability of receivables prove incorrect, we could experience losses in excess of our allowance for doubtful accounts. The allowance and its related receivable are written-off when we have concluded there is a low probability of collection and we have discontinued collection efforts. Non-GAAP Measures - FFO and NOI 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, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient on a stand-alone basis. As a result, management believes that 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 ("NAREIT"), which is calculated as follows:

Net income/(loss) computed in accordance with GAAP;

Less net income 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

and acquisition of controlling interest in unconsolidated affiliate, plus impairments on depreciable operating properties and excluding items that are classified as extraordinary items under GAAP; Plus or minus our proportionate share of adjustments, including depreciation and amortization of depreciable operating properties, for unconsolidated partnerships and joint ventures (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. 45



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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).

Year Ended December 31, 2013 2012 2011 Funds from operations: Net income $ 131,097 $



84,235 $ 47,971 Net (income) attributable to noncontrolling interests in consolidated affiliates

(949 ) (786 ) (755 ) Depreciation and amortization of real estate assets 174,683 144,275 125,534 (Gain) on acquisition of controlling interest in unconsolidated affiliate (7,451 ) - - Unconsolidated affiliates: Depreciation and amortization of real estate assets 6,796 7,736 8,388 Impairments of depreciable properties 4,507 1,002 - (Gains) on disposition of depreciable properties (431 ) (1,120 ) - Discontinued operations: Depreciation and amortization of real estate assets 5,753 11,970 15,647 Impairments of depreciable properties 2,194 - 2,429 (Gains) on disposition of depreciable properties (63,792 ) (29,455 ) (2,573 ) Funds from operations 252,407 217,857 196,641 Dividends on Preferred Stock (2,508 )



(2,508 ) (4,553 ) Excess of Preferred Stock redemption/repurchase cost over carrying value

- - (1,895 ) Funds from operations available for common stockholders $ 249,899$ 215,349$ 190,193 Funds from operations available for common stockholders per share $ 2.81$ 2.70$ 2.50 Weighted average shares outstanding (1) 88,836



79,678 76,189

__________

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

equivalents.

In addition, the Company believes net operating income from continuing operations ("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 provides a perspective not immediately apparent from net income or FFO. The Company defines NOI as rental and other revenues from continuing operations, less rental property and other expenses from continuing operations. The Company defines cash NOI as NOI less straight-line rent and lease termination fees. Other REITs may use different methodologies to calculate NOI and same property NOI. As of December 31, 2013, our same property portfolio consisted of 247 in-service office, industrial and retail properties encompassing 24.1 million rentable square feet that were wholly owned during the entirety of the periods presented (from January 1, 2012 to December 31, 2013). As of December 31, 2012, our same property portfolio consisted of 284 in-service office, industrial and retail properties encompassing 25.8 million rentable square feet that were wholly owned during the entirety of the periods presented (from January 1, 2011 to December 31, 2012). The change in our same property portfolio was due to the addition of eight office properties encompassing 2.1 million rentable square feet acquired during 2011 and two newly developed office properties encompassing 0.2 million rentable square feet placed in service during 2011, offset by the removal of 18 office properties and 29 industrial properties encompassing 4.0 million rentable square feet classified as discontinued operations during 2013.



Rental and other revenues related to properties not in our same property portfolio were $95.7 million and $23.8 million for the years ended December 31, 2013 and 2012, respectively. Rental property and other expenses related to properties not in our same property portfolio were $38.5 million and $11.9 million for the years ended December 31, 2013 and 2012, respectively.

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The following table sets forth the Company's NOI and same property NOI:

Year



Ended December 31,

2013



2012

Income from continuing operations before disposition of investment properties and activity in unconsolidated affiliates $ 53,011$ 34,834 Other income (6,398 ) (6,380 ) Interest expense 92,703 96,114 General and administrative expenses 37,193 37,377 Depreciation and amortization 176,957 146,357 Net operating income from continuing operations 353,466 308,302 Less - non same property and other net operating income (57,205 ) (11,877 ) Total same property net operating income from continuing operations $ 296,261$ 296,425 Rental and other revenues $ 556,810$ 485,046 Rental property and other expenses 203,344 176,744 Total net operating income from continuing operations 353,466 308,302 Less - non same property and other net operating income



(57,205 ) (11,877 ) Total same property net operating income from continuing operations

$



296,261 $ 296,425

Total same property net operating income from continuing operations

$ 296,261$ 296,425 Less - straight-line rent and lease termination fees (9,474 ) (14,483 ) Same property cash net operating income from continuing operations $ 286,787$ 281,942 47



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