SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



______________



FORM 10-Q



QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended September30,2008



Commission file number: 000-21731



______________



HIGHWOODS REALTY LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)





North Carolina
        56-1869557(State or other jurisdictionof incorporation or organization)
        (I.R.S. EmployerIdentification Number)






3100 Smoketree Court, Suite 600, Raleigh, N.C.

(Address of principal executive office)



27604

(Zip Code)



(919) 872-4924

(Registrants telephone number, including area code)



______________



Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     YesxNoo



Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Securities Exchange Act.



Large accelerated filero
        Accelerated filero
        Non-accelerated filerx
        Smaller reporting companyo




Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).  YesoNox






HIGHWOODS REALTY LIMITED PARTNERSHIP



QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER30,2008



TABLE OF CONTENTS



PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS (unaudited)
        2


Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007
        3


Consolidated Statements of Income for the three and nine months ended September 30, 2008 and 2007
        4


Consolidated Statement of Partners Capital for the nine months ended September 30, 2008
        5


Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007
        6


Notes to Consolidated Financial Statements
        8


ITEM 2.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS
        24


Disclosure Regarding Forward-Looking Statements
        24


Results of Operations
        25


Liquidity and Capital Resources
        29


Critical Accounting Estimates
        34


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
        35


ITEM 4.  CONTROLS AND PROCEDURES
        36


PART II - OTHER INFORMATION

ITEM 6.  EXHIBITS
        37









Table of Contents



PART I - FINANCIAL INFORMATION



ITEM 1.  FINANCIAL STATEMENTS



We refer to Highwoods Properties, Inc. as the Company, Highwoods Realty Limited Partnership as the Operating Partnership, the Companys common stock as Common Stock, the Companys preferred stock as Preferred Stock, the Operating Partnerships common partnership interests as Common Units, the Operating Partnerships preferred partnership interests as Preferred Units and in-service properties (excluding rental residential units) to which the Company and/or the Operating Partnership have title and 100.0% ownership rights as the Wholly Owned Properties. The partnership agreement provides that the Operating Partnership will assume and pay when due, or reimburse the Company for payment of, all costs and expenses relating to the ownership and operations of, or for the benefit of, the
Operating Partnership. The partnership agreement further provides that all expenses of the Company are deemed to be incurred for the benefit of the Operating Partnership.



2







Table of Contents



HIGHWOODS REALTY LIMITED PARTNERSHIP

CONSOLIDATED BALANCE SHEETS

(Unaudited and in thousands, except unit and per unit amounts)



September30,2008
        
        December31,2007Assets:Real estate assets, at cost:Land
        
        $
        360,496
        
        $
        357,841Buildings and tenant improvements
        
        
        2,824,695
        
        
        2,708,989Development in process
        
        
        79,354
        
        
        101,661Land held for development
        
        
        100,271
        
        
        103,3653,364,816
        
        
        3,271,856Less-accumulated depreciation
        
        
        (700,517
        )
        
        (649,765
        )Net real estate assets
        
        
        2,664,299
        
        
        2,622,091Real estate and other assets, net, held for sale
        
        
        8,607
        
        
        10,466Cash and cash equivalents
        
        
        13,511
        
        
        3,144Restricted cash
        
        
        8,940
        
        
        15,896Accounts receivable, net of allowance of $1,275 and $935, respectively
        
        
        23,755
        
        
        23,521Notes receivable, net of allowance of $452 and $68, respectively
        
        
        3,660
        
        
        5,226Accrued straight-line rents receivable, net of allowance of $1,406 and $440,respectively
        
        
        79,505
        
        
        74,427Investment in unconsolidated affiliates
        
        
        67,271
        
        
        56,891Deferred financing and leasing costs, net of accumulated amortization
        
        
        73,224
        
        
        72,188Prepaid expenses and other assets
        
        
        40,330
        
        
        41,954Total Assets
        
        $
        2,983,102
        
        $
        2,925,804Liabilities, Minority Interest, Redeemable Operating Partnership Units andPartners Capital:Mortgages and notes payable
        
        $
        1,588,954
        
        $
        1,641,987Accounts payable, accrued expenses and other liabilities
        
        
        150,862
        
        
        157,726Financing obligations
        
        
        35,195
        
        
        35,071Total Liabilities
        
        
        1,775,011
        
        
        1,834,784Commitments and ContingenciesMinority interest
        
        
        4,772
        
        
        6,804Redeemable Operating Partnership Units:Common Units, 3,905,576 and 4,057,003 units issued and outstanding atSeptember 30, 2008 and December 31, 2007, respectively
        
        
        138,882
        
        
        119,195Series A Preferred Units (liquidation preference $1,000 per unit), 29,092and 82,937 units issued and outstanding at September 30, 2008 andDecember 31, 2007, respectively
        
        
        29,092
        
        
        82,937Series B Preferred Units (liquidation preference $25 per unit), 2,100,000units issued and outstanding at both September 30, 2008 and December 31, 2007
        
        
        52,500
        
        
        52,500Total Redeemable Operating Partnership Units
        
        
        220,474
        
        
        254,632Partners Capital:Common Units:General partner Common Units, 670,421 and 608,154 units issued andoutstanding at September 30, 2008 and December 31, 2007, respectively
        
        
        9,851
        
        
        8,305Limited partner Common Units, 62,466,138 and 56,150,230 units issuedand outstanding at September 30, 2008 and December 31, 2007,respectively
        
        
        975,311
        
        
        822,217Accumulated other comprehensive loss
        
        
        (2,317
        )
        
        (938
        )Total Partners Capital
        
        
        982,845
        
        
        829,584Total Liabilities, Minority Interest, Redeemable OperatingPartnership Units and Partners Capital
        
        $
        2,983,102
        
        $
        2,925,804




See accompanying notes to consolidated financial statements.



3







Table of Contents



HIGHWOODS REALTY LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited and in thousands, except per unit amounts)



Three Months EndedSeptember30,
        
        Nine Months EndedSeptember30,2008
        
        2007
        
        2008
        
        2007Rental and other revenues
        
        $
        116,207
        
        $
        107,580
        
        $
        346,154
        
        $
        318,188Operating expenses:Rental property and other expenses
        
        
        42,165
        
        
        38,675
        
        
        122,441
        
        
        113,639Depreciation and amortization
        
        
        32,109
        
        
        31,891
        
        
        94,359
        
        
        90,476Impairment of assets held for use
        
        
        
        
        
        789
        
        
        
        
        
        789General and administrative
        
        
        8,885
        
        
        9,649
        
        
        29,509
        
        
        31,577Total operating expenses
        
        
        83,159
        
        
        81,004
        
        
        246,309
        
        
        236,481Interest expenses:Contractual
        
        
        22,995
        
        
        23,728
        
        
        69,803
        
        
        69,433Amortization of deferred financing costs
        
        
        714
        
        
        616
        
        
        2,038
        
        
        1,791Financing obligations
        
        
        783
        
        
        981
        
        
        2,287
        
        
        2,96824,492
        
        
        25,325
        
        
        74,128
        
        
        74,192Other income:Interest and other income
        
        
        1,019
        
        
        1,469
        
        
        3,425
        
        
        5,0831,019
        
        
        1,469
        
        
        3,425
        
        
        5,083Income before disposition of property, insurance gain, minorityinterest and equity in earnings of unconsolidated affiliates
        
        
        9,575
        
        
        2,720
        
        
        29,142
        
        
        12,598Net gains on disposition of property
        
        
        1,745
        
        
        1,144
        
        
        1,852
        
        
        20,228Gain from property insurance settlement
        
        
        
        
        
        
        
        
        
        
        
        4,128Minority interest
        
        
        (201
        )
        
        (170
        )
        
        (590
        )
        
        (518
        )Equity in earnings of unconsolidated affiliates
        
        
        1,187
        
        
        1,200
        
        
        4,668
        
        
        12,749Income from continuing operations
        
        
        12,306
        
        
        4,894
        
        
        35,072
        
        
        49,185Discontinued operations:Income from discontinued operations
        
        
        53
        
        
        906
        
        
        867
        
        
        2,857Net gains on sales of discontinued operations
        
        
        3,137
        
        
        6,617
        
        
        11,890
        
        
        26,4633,190
        
        
        7,523
        
        
        12,757
        
        
        29,320Net income
        
        
        15,496
        
        
        12,417
        
        
        47,829
        
        
        78,505Distributions on preferred units
        
        
        (2,451
        )
        
        (2,680
        )
        
        (8,127
        )
        
        (10,639
        )Excess of preferred unit redemption/repurchase cost overcarrying value
        
        
        (108
        )
        
        (842
        )
        
        (108
        )
        
        (2,285
        )Net income available for common unitholders
        
        $
        12,937
        
        $
        8,895
        
        $
        39,594
        
        $
        65,581Net income per common unit - basic:Income from continuing operations
        
        $
        0.16
        
        $
        0.02
        
        $
        0.44
        
        $
        0.60Income from discontinued operations
        
        
        0.05
        
        
        0.13
        
        
        0.21
        
        
        0.49Net income
        
        $
        0.21
        
        $
        0.15
        
        $
        0.65
        
        $
        1.09Weighted average common units outstanding - basic
        
        
        62,016
        
        
        60,280
        
        
        60,925
        
        
        60,201Net income per common unit - diluted:Income from continuing operations
        
        $
        0.16
        
        $
        0.02
        
        $
        0.43
        
        $
        0.59Income from discontinued operations
        
        
        0.05
        
        
        0.13
        
        
        0.21
        
        
        0.48Net income
        
        $
        0.21
        
        $
        0.15
        
        $
        0.64
        
        $
        1.07Weighted average common units outstanding - diluted
        
        
        62,529
        
        
        60,987
        
        
        61,456
        
        
        61,202Distributions declared per common unit
        
        $
        0.425
        
        $
        0.425
        
        $
        1.275
        
        $
        1.275




See accompanying notes to consolidated financial statements.



4







Table of Contents



HIGHWOODS REALTY LIMITED PARTNERSHIP

CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL

For the Nine Months Ended September30,2008

(Unaudited and in thousands, except unit amounts)





Common UnitsGeneralPartner
        
        LimitedPartner
        
        AccumulatedOtherComprehensiveLoss
        
        TotalPartnersCapitalBalance at December 31, 2007
        
        $
        8,305
        
        $
        822,217
        
        $
        (938
        )
        $
        829,584Issuance of Common Units, net
        
        
        2,098
        
        
        207,686
        
        
        
        
        
        209,784Redemption of Common Units
        
        
        (33
        )
        
        (3,260
        )
        
        
        
        
        (3,293
        )Distributions paid on Common Units
        
        
        (778
        )
        
        (76,991
        )
        
        
        
        
        (77,769
        )Distributions paid on Preferred Units
        
        
        (81
        )
        
        (8,046
        )
        
        
        
        
        (8,127
        )Amortization of restricted stock and stock options
        
        
        53
        
        
        5,232
        
        
        
        
        
        5,285Adjustment of Redeemable Common Units to fair valueand contributions/distributions from/to the General Partner
        
        
        (191
        )
        
        (18,878
        )
        
        
        
        
        (19,069
        )Comprehensive income:Net income
        
        
        478
        
        
        47,351
        
        
        
        
        
        47,829Other comprehensive loss
        
        
        
        
        
        
        
        
        (1,379
        )
        
        (1,379
        )Total comprehensive income
        
        
        
        
        
        
        
        
        
        
        
        46,450Balance at September 30, 2008
        
        $
        9,851
        
        $
        975,311
        
        $
        (2,317
        )
        $
        982,845




See accompanying notes to consolidated financial statements.



5







Table of Contents



HIGHWOODS REALTY LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)



Nine Months EndedSeptember30,2008
        
        2007Operating activities:Net income
        
        $
        47,829
        
        $
        78,505Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
        
        
        83,151
        
        
        82,417Amortization of lease commissions
        
        
        11,441
        
        
        10,532Amortization of lease incentives
        
        
        783
        
        
        719Amortization of restricted stock and stock options
        
        
        5,285
        
        
        3,814Amortization of deferred financing costs
        
        
        2,038
        
        
        1,791Amortization of accumulated other comprehensive loss
        
        
        174
        
        
        431Impairment of assets held for use
        
        
        
        
        
        789Net gains on disposition of properties
        
        
        (13,742
        )
        
        (46,691
        )Gain from property insurance settlement
        
        
        
        
        
        (4,128
        )Minority interest
        
        
        590
        
        
        518Equity in earnings of unconsolidated affiliates
        
        
        (4,668
        )
        
        (12,749
        )Change in financing obligations
        
        
        124
        
        
        302Distributions of earnings from unconsolidated affiliates
        
        
        4,549
        
        
        4,980Changes in operating assets and liabilities:Accounts receivable
        
        
        (747
        )
        
        (3,555
        )Prepaid expenses and other assets
        
        
        (1,414
        )
        
        (4,191
        )Accrued straight-line rents receivable
        
        
        (5,263
        )
        
        (3,367
        )Accounts payable, accrued expenses and other liabilities
        
        
        (1,942
        )
        
        10,608Net cash provided by operating activities
        
        
        128,188
        
        
        120,725Investing activities:Additions to real estate assets and deferred leasing costs
        
        
        (165,722
        )
        
        (212,148
        )Proceeds from disposition of real estate assets
        
        
        37,258
        
        
        108,579Proceeds from property insurance settlement
        
        
        
        
        
        4,940Distributions of capital from unconsolidated affiliates
        
        
        2,343
        
        
        14,905Net repayments of notes receivable
        
        
        1,566
        
        
        2,714Contributions to unconsolidated affiliates
        
        
        (12,341
        )
        
        (4,716
        )Changes in restricted cash and other investing activities
        
        
        8,295
        
        
        (13,345
        )Net cash used in investing activities
        
        
        (128,601
        )
        
        (99,071
        )Financing activities:Distributions paid on Common Units
        
        
        (77,769
        )
        
        (77,196
        )Redemption/repurchase of Preferred Units
        
        
        (52,499
        )
        
        (62,256
        )Distributions paid on Preferred Units
        
        
        (8,127
        )
        
        (10,639
        )Distributions to minority partner in consolidated affiliate
        
        
        (3,247
        )
        
        (1,893
        )Net proceeds from the issuance of Common Units
        
        
        209,784
        
        
        6,716Repurchase of Common Units
        
        
        (3,293
        )
        
        (27,402
        )Borrowings on revolving credit facility
        
        
        350,650
        
        
        312,800Repayments of revolving credit facility
        
        
        (445,950
        )
        
        (491,000
        )Borrowings on mortgages and notes payable
        
        
        177,918
        
        
        418,846Repayments of mortgages and notes payable
        
        
        (135,742
        )
        
        (103,504
        )Payments on financing obligations
        
        
        
        
        
        (913
        )Contributions from minority interest partner
        
        
        625
        
        
        5,111Additions to deferred financing costs
        
        
        (1,570
        )
        
        (2,605
        )Net cash provided by/(used in) financing activities
        
        
        10,780
        
        
        (33,935
        )Net increase/(decrease) in cash and cash equivalents
        
        
        10,367
        
        
        (12,281
        )Cash and cash equivalents at beginning of the period
        
        
        3,144
        
        
        15,838Cash and cash equivalents at end of the period
        
        $
        13,511
        
        $
        3,557




See accompanying notes to consolidated financial statements.



6







Table of Contents



HIGHWOODS REALTY LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS- Continued

(Unaudited and in thousands)



Supplemental disclosure of cash flow information:



Nine Months EndedSeptember30,2008
        
        2007Cash paid for interest, net of amounts capitalized (excludes cash distributions to owners of soldproperties accounted for as financings of $1,219 and $1,676 for 2008 and 2007, respectively)
        
        $
        77,198
        
        $
        69,014




Supplemental disclosure of non-cash investing and financing activities:



The following table summarizes the net asset acquisitions and dispositions subject to mortgage notes payable and other non-cash transactions.



Nine Months EndedSeptember30,2008
        
        2007Assets:Net real estate assets
        
        $
        
        
        $
        2,409Investments in unconsolidated affiliates
        
        
        
        
        
        2,342Prepaid expenses and other assets
        
        
        (1,553
        )
        
        29$
        (1,553
        )
        $
        4,780Liabilities:Accounts payable, accrued expenses and other liabilities
        
        $
        
        
        $
        23$
        
        
        $
        23Minority Interest and Partners Capital
        
        $
        (1,553
        )
        $
        4,757




See accompanying notes to consolidated financial statements.



7







Table of Contents



HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September30,2008

(tabular dollar amounts in thousands, except per unit data)

(Unaudited)



1.
        DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES




Description of Business



Highwoods Realty Limited Partnership (the "Operating Partnership") is managed by its sole general partner, Highwoods Properties, Inc., together with its consolidated subsidiaries (the "Company"), a fully-integrated, self-administered and self-managed equity real estate investment trust ("REIT") that operates in the southeastern and midwestern United States. The Company conducts virtually all of its activities through the Operating Partnership. The partnership agreement provides that the Operating Partnership will assume and pay when due, or reimburse the Company for payment of, all costs and expenses relating to the ownership and operations of, or for the benefit of, the Operating Partnership. The partnership agreement further provides that all expenses of the Company are deemed to be incurred for the benefit of the Operating Partnership. At September 30, 2008, the Company
and/or the Operating Partnership wholly owned: 311 in-service office, industrial and retail properties; 96 rental residential units; 619 acres of undeveloped land suitable for future development, of which 479 acres are considered core holdings; and an additional 10 properties under development.



At September 30, 2008, the Company owned all of the preferred partnership interests (Preferred Units) and 94.2% of the common partnership interests ("Common Units") in the Operating Partnership. Limited partners (including certain officers and directors of the Company) own the remaining Common Units. During the nine months ended September 30, 2008, the Company redeemed 106,613 Common Units for $3.3 million in cash and redeemed 44,814 Common Units for a like number of shares of Common Stock.



Common Stock Offering



On September 12, 2008, the Company sold 5.5 million shares of Common Stock for net proceeds of $195.0 million. As required by the terms of the partnership agreement of the Operating Partnership, the net proceeds from the offering were contributed to the Operating Partnership in exchange for 5.5 million additional Common Units. The net impact of the offering and the redemptions discussed above increased the percentage of Common Units owned by the Company from 93.3% at December 31, 2007 to 94.2% at September 30, 2008. In September 2008, a portion of the net proceeds of the offering were used to repurchase 53,845 outstanding 8 5/8% Series A Cumulative Redeemable Preferred Shares for an aggregate purchase price of $52.5 million. The remaining net proceeds from the offering were used to reduce the amount of borrowings outstanding under our revolving credit facility.



Basis of Presentation



Our Consolidated Financial Statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). As required by Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), the Consolidated Balance Sheet at December 31, 2007 was revised from previously reported amounts to reflect in real estate and other assets held for sale those properties held for sale at September 30, 2008. The Consolidated Statements of Income for the three and nine months ended September 30, 2007 were also revised from previously reported amounts to reflect in discontinued operations the operations of any property sold or held for sale in the first nine months of 2008.



The Consolidated Financial Statements include wholly owned subsidiaries and those subsidiaries in which we own a majority voting interest with the ability to control operations of the subsidiaries and where no substantive participating rights or substantive kick out rights have been granted to the minority interest holders. All significant intercompany transactions and accounts have been eliminated.





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Table of Contents



HIGHWOODS REALTY LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) (tabular dollar amounts in thousands, except per unit data)


1.
        DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - Continued




The unaudited interim financial statements and accompanying unaudited financial information, in the opinion of management, contain all adjustments (including normal recurring accruals) necessary for a fair presentation of our financial position, results of operations and cash flows. We have condensed or omitted certain notes and other information from the interim financial statements presented in this Quarterly Report on Form 10-Q as permitted by SEC rules and regulations. These financial statements should be read in conjunction with our 2007 Annual Report on Form 10-K.



The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.



Income Taxes



The Company has elected and expects to continue to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the Code). A corporate REIT is a legal entity that holds real estate assets and, through the payment of dividends to stockholders, is generally permitted to reduce or avoid the payment of federal and state income taxes at the corporate level. To maintain qualification as a REIT, the Company is required to distribute to its stockholders at least 90.0% of its annual REIT taxable income, excluding capital gains. The partnership agreement requires the Operating Partnership to pay economically equivalent distributions on outstanding Common Units at the same time that the Company pays dividends on its outstanding Common Stock. Continued qualification as a REIT depends on the Companys ability to satisfy the dividend distribution
tests, stock ownership requirements and various other qualification tests prescribed in the Code. The Operating Partnership conducts certain business activities through a taxable REIT subsidiary, as permitted under the Code. The taxable REIT subsidiary is subject to federal and state income taxes on its net taxable income.



Minority Interest



Minority interest in the accompanying Consolidated Financial Statements relates to the 50.0% interest in a consolidated affiliate, Highwoods-Markel Associates, LLC (Markel), the equity interest owned by a third party in a consolidated venture formed during 2006 with Real Estate Exchange Services (REES), and the 7% equity interest owned by a third party in Plaza Residential, LLC, a consolidated joint venture formed in February 2007 related to a residential condominium project.



Following is minority interest as reflected in our Consolidated Balance Sheets:



September30,2008
        
        December 31,2007Minority interest in Markel
        
        $
        3,975
        
        $
        3,446Minority interest in REES
        
        
        
        
        
        2,561Minority interest in Plaza Residential
        
        
        797
        
        
        797Total minority interest
        
        $
        4,772
        
        $
        6,804






9







Table of Contents



HIGHWOODS REALTY LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) (tabular dollar amounts in thousands, except per unit data)


1.
        DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - Continued




Impact of Newly Adopted and Issued Accounting Standards



In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS No. 157), which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. The statement applies whenever other statements require or permit assets or liabilities to be measured at fair value. SFAS No. 157 became effective for fiscal years beginning after November 15, 2007, except for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis, for which application has been deferred for one year. We adopted SFAS No. 157 in the first quarter of 2008 (See Note 8).



In November 2006, the FASB ratified EITF Issue No. 06-8, Applicability of the Assessment of a Buyers Continuing Investment under FASB Statement No. 66 for Sales of Condominiums. EITF No. 06-8 provided additional guidance on whether the seller of a condominium unit is required to evaluate the buyers continuing investment under SFAS No. 66 in order to recognize profit from the sale under the percentage of completion method. The EITF concluded that both the buyers initial and continuing investment must meet the criteria in SFAS No. 66 in order for condominium sale profits to be recognized under the percentage of completion method. Sales of condominiums not meeting the continuing investment test must be accounted for under the deposit method. We adopted EITF No. 06-8 in the first quarter of 2008 and such adoption did not have an
effect on our financial condition or results of operations.



In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159), which permits all entities to choose to measure eligible items at fair value at specified election dates. We adopted SFAS No. 159 on January 1, 2008 and chose to measure no additional eligible items at fair value.



In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS No. 141(R)), which addresses principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree. SFAS No. 141(R) becomes effective for us on January 1, 2009. SFAS No. 141(R) will affect our accounting for any qualifying acquisitions subsequent to January 1, 2009.



In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements  an amendment of ARB No. 51 (SFAS No. 160), which establishes accounting and presentation standards for a noncontrolling interest in a subsidiary and amends certain of ARB No. 51s consolidation procedures for consistency with other business combination standards. SFAS No. 160 becomes effective for us on January 1, 2009. SFAS No. 160 will affect the presentation of minority interest on our Consolidated Balance Sheets, Statements of Income and Statements of Stockholders Equity for all periods presented subsequent to January 1, 2009.



In December 2007, the FASB ratified EITF Issue No. 07-6 Accounting for the Sale of Real Estate Subject to the Requirements of FASB Statement No. 66, Accounting for Sales of Real Estate, When the Agreement Includes a Buy-Sell Clause (EITF No. 07-6), which addresses whether a buy-sell clause represents a prohibited form of continuing involvement that would preclude partial sale and profit recognition pursuant to SFAS No. 66. We adopted EITF No. 07-6 in the first quarter of 2008 and such adoption could affect our accounting for real estate dispositions subsequent to January 1, 2009.



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HIGHWOODS REALTY LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) (tabular dollar amounts in thousands, except per unit data)


1.
        DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - Continued




In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS No. 161), which amends and expands the disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS No. 161 becomes effective for us on January 1, 2009. We will expand our disclosures related to our derivative instruments and hedging activities beginning in the first quarter of 2009 as a result of SFAS No. 161.



In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 removes the requirement of SFAS No. 142, Goodwill and Other Intangible Assets, for an entity to consider, when determining the useful life of an acquired intangible asset, whether the intangible asset can be renewed without substantial cost or material modifications to the existing terms and conditions associated with the intangible asset. FSP FAS 142-3 becomes effective for us on January 1, 2009. We do not believe FSP FAS 142-3 will have a material effect on our financial condition and results of operations.



In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method as described in SFAS No. 128, Earnings per Share. FSP EITF 03-6-1 becomes effective for us on January 1, 2009. We will include our unvested restricted stock in our calculation of basic and diluted EPS beginning in the first quarter of 2009 as a result of FSP EITF 03-6-1.



In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (FSP FAS 157-3). FSP FAS 157-3 clarifies the application of SFAS No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. We adopted FSP FAS 157-3 for this Quarterly Report and such adoption did not have a material effect on our financial condition or results of operations.



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HIGHWOODS REALTY LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) (tabular dollar amounts in thousands, except per unit data)


2.
        INVESTMENTS IN UNCONSOLIDATED AFFILIATES




We have retained equity interests ranging from 22.8% to 50.0% in various joint ventures with unrelated investors. We account for our unconsolidated joint ventures using the equity method of accounting. As a result, the assets and liabilities of these joint ventures for which we use the equity method of accounting are not included on our Consolidated Balance Sheet.



Combined summarized income statements for our unconsolidated joint ventures for the three and nine months ended September 30, 2008 and 2007 were as follows:



Three Months EndedSeptember30,
        
        Nine Months EndedSeptember30,2008
        
        2007
        
        2008
        
        2007Income Statements:Revenues
        
        $
        39,665
        
        $
        33,142
        
        $
        116,899
        
        $
        100,044Expenses:Operating expenses
        
        
        19,939
        
        
        15,305
        
        
        57,227
        
        
        41,741Depreciation and amortization
        
        
        8,680
        
        
        7,795
        
        
        24,505
        
        
        21,391Interest expense and loan cost amortization
        
        
        9,034
        
        
        8,435
        
        
        26,258
        
        
        24,933Total expenses
        
        
        37,653
        
        
        31,535
        
        
        107,990
        
        
        88,065Income before disposition of property
        
        
        2,012
        
        
        1,607
        
        
        8,909
        
        
        11,979Gains on disposition of property
        
        
        
        
        
        
        
        
        
        
        
        20,621Net income
        
        $
        2,012
        
        $
        1,607
        
        $
        8,909
        
        $
        32,600Our share of:Net income(1)
        
        $
        1,187
        
        $
        1,200
        
        $
        4,668
        
        $
        12,749Depreciation and amortization (real estate related)
        
        $
        3,097
        
        $
        3,057
        
        $
        9,342
        
        $
        8,608Interest expense and loan cost amortization
        
        $
        3,676
        
        $
        3,587
        
        $
        10,837
        
        $
        10,744Gains on disposition of property
        
        $
        
        
        $
        
        
        $
        
        
        $
        7,158




(1)
        Our share of net income differs from our weighted average ownership percentage in the joint ventures net income due to our purchase accounting and other related adjustments.




In March 2008, we and an affiliate of Schweiz-Deutschland-USA Dreilander Beteiligung Objekt DLF 98/29-Walker Fink-KG ("DLF") formed a new joint venture, Highwoods DLF Forum, LLC, in which we have a 25.0% ownership interest. On April 3, 2008, Highwoods DLF Forum, LLC acquired The Forum, which is a 635,000 square foot office park in Raleigh, North Carolina, for $113 million. We contributed $12.3 million to Highwoods DLF Forum, LLC and, simultaneously with the acquisition of The Forum, the joint venture obtained a $67.5 million secured loan. We are the property manager and leasing agent for the office park and receive customary management fees and leasing commissions.



3.
        INVESTMENT ACTIVITIES




Acquisitions



During the third quarter, we acquired an aggregate of 8.3 acres of land in the Atlanta metropolitan area for an aggregate purchase price of $2.1 million.



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HIGHWOODS REALTY LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) (tabular dollar amounts in thousands, except per unit data)




3.
        INVESTMENT ACTIVITIES - Continued




Dispositions



We previously had a contract to acquire development land in the Bluegrass Valley office development project. Under the terms of the contract, the development land was to be purchased in phases. In May 2003, 4.0 acres of the remaining acres not yet acquired by us were taken by the Georgia Department of Transportation to develop a roadway interchange for consideration of $1.8 million. The Department of Transportation took possession and title of the property in June 2003. As part of the terms of the contract, we were entitled to and received in 2003 the $1.8 million proceeds from the condemnation. In July 2003, we appealed the condemnation and sought additional payment from the state; the recognition of any gain was deferred pending resolution of the appeal process. Upon settlement of this claim in September 2008, we received an additional payment of $624,000. We, therefore, recorded gain
on the sale of this land of $1.7 million in the third quarter of 2008.



In the first quarter of 2008, we sold an office property totaling 30,000 rentable square feet located in the Kansas City, Missouri metropolitan area for $6.0 million. A gain of $3.1 million was recorded in the first quarter of 2008.



In the second quarter of 2008, we sold non-core land of 6.4 acres in Tampa, Florida for $2.0 million and office properties aggregating 271,000 rentable square feet located in the Kansas City, Missouri metropolitan area for $21.7 million. Gains of $0.1 million and $4.9 million, respectively, were recorded in the second quarter of 2008.



In the third quarter of 2008, we sold an industrial property aggregating 250,000 rentable square feet located in the Winston-Salem, North Carolina metropolitan area for $8.2 million. A gain of $3.2 million was recorded in the third quarter of 2008.



Gains from dispositions not classified as discontinued operations consisted of the following:



Three Months EndedSeptember30,
        
        Nine Months EndedSeptember30,2008
        
        2007
        
        2008
        
        2007Gains on disposition of land
        
        $
        1,727
        
        $
        81
        
        $
        1,816
        
        $
        16,885Gains on disposition of depreciable properties
        
        
        18
        
        
        1,063
        
        
        36
        
        
        3,343Total
        
        $
        1,745
        
        $
        1,144
        
        $
        1,852
        
        $
        20,228




Net gains on sales of discontinued operations consisted of the following:



Three Months EndedSeptember30,
        
        Nine Months EndedSeptember30,2008
        
        2007
        
        2008
        
        2007Gains on disposition of depreciable properties
        
        $
        3,137
        
        $
        7,001
        
        $
        11,890
        
        $
        26,847Impairments on disposition of depreciable properties
        
        
        
        
        
        (384
        )
        
        
        
        
        (384
        )Total
        
        $
        3,137
        
        $
        6,617
        
        $
        11,890
        
        $
        26,463




See Note 9 for information on discontinued operations.



The above gains on land and depreciable properties include deferred gain recognition from prior sales.



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HIGHWOODS REALTY LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) (tabular dollar amounts in thousands, except per unit data)




3.
        INVESTMENT ACTIVITIES - Continued




Development



We currently have under development 10 office and industrial properties aggregating 1.8 million square feet and 139 for-sale residential units. The aggregate cost of these properties is currently expected to total approximately $336 million when fully leased and completed, of which $241 million was incurred as of September 30, 2008. The weighted average pre-leasing of such development projects (excluding the residential units) was 72% at September 30, 2008. Six of these properties aggregating 1.3 million square feet and $204 million projected total investment were completed and transferred to completed real estate assets or deferred financing and leasing costs at various times prior to September 30, 2008, but had not yet reached projected 95.0% stabilized occupancy. The remaining development properties are still under construction and are included in
Development in Process in the Consolidated Balance Sheet.



4.
        MORTGAGES AND NOTES PAYABLE




Our consolidated mortgages and notes payable consisted of the following at September 30, 2008 and December 31, 2007:



September30,2008
        
        December 31,2007Secured mortgage loans
        
        $
        669,986
        
        $
        665,311Unsecured loans
        
        
        918,968
        
        
        976,676Total
        
        $
        1,588,954
        
        $
        1,641,987




As of September 30, 2008, our secured mortgage loans were secured by real estate assets with an aggregate undepreciated book value of $1.1 billion.



Our $450.0 million unsecured revolving credit facility is initially scheduled to mature on May 1, 2009. Assuming no default exists, we have an option to extend the maturity date by one additional year. The interest rate is LIBOR plus 80 basis points and the annual base facility fee is 20 basis points. The interest rate would increase to LIBOR plus 140 or 155 basis points if our credit rating were to fall below investment grade according to two of three credit rating agencies. The revolving credit facility had $315.9 million of availability at September 30, 2008.



On February 1, 2008, we paid off at maturity $100.0 million of 7.13% unsecured notes using borrowings under our revolving credit facility. On February 26, 2008, we closed a $137.5 million three-year term loan that bears interest at LIBOR plus 110 basis points. The interest rate would increase to LIBOR plus 160 basis points if our credit rating were to fall below investment grade according to two of three credit rating agencies. Proceeds from this loan were used to reduce the outstanding borrowings under our revolving credit facility and for short-term investments.



In July 2008, REES, a consolidated joint venture (see Note 1 to the Consolidated Financial Statements in our 2007 Annual Report on Form 10-K), fully repaid the remaining $17.5 million outstanding under a secured construction loan.



Our revolving credit facility, our term loan and the indenture that governs our outstanding notes require us to comply with customary operating covenants and various financial and operating ratios. We are currently in compliance with all such requirements.



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HIGHWOODS REALTY LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) (tabular dollar amounts in thousands, except per unit data)




5.
        EMPLOYEE BENEFIT PLANS




During the nine months ended September 30, 2008, the Company granted under its Amended and Restated 1994 Stock Option Plan (the Stock Option Plan) 319,091 stock options at an exercise price equal to the closing market price of a share of its common stock on the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, which resulted in a weighted-average grant date fair value per share of $3.18. The Company also granted 92,150 shares of time-based restricted stock and 67,618 shares of performance-based and total return-based restricted stock with a weighted-average grant date fair value per share of $30.13 and $30.19, respectively. Shares of total return-based restricted stock issued in 2008 will generally vest only to the extent the Companys absolute total return for the three-year period
ended December 31, 2010 is at least 22% or if the Companys total return exceeds 100% of the peer group index. We recorded stock-based compensation expense of $1.3 million and $1.0 million during the three months ended September 30, 2008 and 2007, respectively, and $5.3 million and $3.9 million during the nine months ended September 30, 2008 and 2007, respectively.



6.
        DERIVATIVE FINANCIAL INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS AVAILABLE FOR SALE




Accumulated Other Comprehensive Loss (AOCL) at September 30, 2008 was $2.3 million and consisted of deferred gains and losses from past cash flow hedging instruments, deferred losses on current cash flow hedges and the mark to market adjustment for bonds that are classified as available for sale.



The amount of deferred gains and losses from past cash flow hedging instruments which are being recognized as interest expense over the terms of the related debt aggregated $765,000 as of September 30, 2008. We expect that the portion of the cumulative loss recorded in AOCL at September 30, 2008 associated with these derivative instruments, which will be recognized as interest expense within the next 12 months, will be approximately $204,000.



In January 2008, we entered into two floating-to-fixed interest rate swaps for a one-year period with respect to an aggregate of $50.0 million of borrowings outstanding under our revolving credit facility and other floating rate debt. These swaps fix the underlying LIBOR rate under which interest on such borrowings is based at 3.3% for $30.0 million of borrowings and 3.2% for $20.0 million of borrowings. In April 2008, we entered into an additional floating-to-fixed interest rate swap for a two-year period with respect to an aggregate of $50.0 million of borrowings outstanding under our term loan or other floating rate debt. The swap fixes the underlying LIBOR rate under which interest on such borrowings is based at 2.5%. These swaps were designated as hedges under SFAS No. 133. Accordingly, the swaps are being accounted for as cash flow hedges. We expect that the portion of the
cumulative gain recorded in AOCL at September 30, 2008 associated with these derivative instruments, which will be recognized within the next 12 months, will be $573,000. See Note 8 for Fair Value Measurements disclosure.



We currently have an investment in bonds that were issued by a municipal authority in connection with tax increment financing for a development that we constructed in Kansas City, Missouri in a prior period. These bonds are classified as available for sale and thus are being recorded at fair value with the offset recorded in AOCL. The amount of unrealized loss at September 30, 2008 was $2.1 million. See Note 8 for Fair Value Measurements disclosure.



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HIGHWOODS REALTY LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) (tabular dollar amounts in thousands, except per unit data)




7.
        OTHER COMPREHENSIVE INCOME/(LOSS)




Other comprehensive income/(loss) represents net income plus the changes in certain amounts deferred in accumulated other comprehensive income/(loss) related to hedging and other activities not reflected in the Consolidated Statements of Income. The components of other comprehensive income/(loss) are as follows:



Three Months EndedSeptember30,
        
        Nine Months EndedSeptember30,2008
        
        2007
        
        2008
        
        2007Net income
        
        $
        15,496
        
        $
        12,417
        
        $
        47,829
        
        $
        78,505Other comprehensive income/(loss):Unrealized loss on available for sale securities
        
        
        (1,751
        )
        
        
        
        
        (2,126
        )
        
        Unrealized gains on cash-flow hedges
        
        
        49
        
        
        
        
        
        573
        
        
        Amortization of hedging gains and losses included in othercomprehensive income
        
        
        47
        
        
        146
        
        
        174
        
        
        431Total other comprehensive income/(loss)
        
        
        (1,655
        )
        
        146
        
        
        (1,379
        )
        
        431Total comprehensive income
        
        $
        13,841
        
        $
        12,563
        
        $
        46,450
        
        $
        78,936




8.
        FAIR VALUE MEASUREMENTS




As stated in Note 1, on January 1, 2008, we adopted SFAS No. 157 for our financial assets and liabilities. Our adoption of SFAS No. 157 did not impact our financial position, results of operations or liquidity. In accordance with FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157 (FSP FAS 157-2), we elected to defer until January 1, 2009 the adoption of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis. The adoption of SFAS No. 157 for those assets and liabilities within the scope of FSP FAS 157-2 is not expected to have a material impact on our financial position, results of operations or liquidity.



SFAS No. 157 provides a framework for measuring fair value and requires expanded disclosure regarding fair value measurements. SFAS No. 157 defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. SFAS No. 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required by the standard that we use to measure fair value, as well as the assets and liabilities that we value using those levels of inputs.



Level 1.Quoted prices in active markets for identical assets or liabilities. Our Level 1 assets are comprised of investments in marketable securities which we use to pay benefits under our deferred compensation plan. Our Level 1 liabilities are our obligations to pay certain deferred compensation plan benefits whereby participants have designated investment options (primarily mutual funds) to serve as the basis for measurement of the notional value of their accounts.



Level 2.Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. Our Level 2 assets are interest rate swaps whose fair value is determined using a price model predicated upon observable market inputs.



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HIGHWOODS REALTY LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) (tabular dollar amounts in thousands, except per unit data)




8.
        FAIR VALUE MEASUREMENTS - Continued




Level 3.Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Our Level 3 assets are bonds that are not routinely traded but whose fair value is determined using an estimate of projected redemption value predicated upon quoted bid/ask prices for similar unrated bonds. Our Level 3 liabilities consist of the right of our joint venture partner in SF-HIW Harborview Plaza, LP to put its 80% equity interest in SF-HIW Harborview Plaza, LP to us in exchange for cash at any time during the one-year period commencing September 11, 2014. Because of the put option, this transaction is accounted for as a financing transaction. Accordingly, the assets and liabilities and operations related to Harborview Plaza, the property owned by SF-HIW Harborview Plaza, LP, including any
new financing by the partnership, remain in our Consolidated Financial Statements. As a result, we have established a financing obligation equal to the net equity contributed by the other partner.



The following tables set forth the financial assets and liabilities as of September 30, 2008 that we measured at fair value on a recurring basis by level within the fair value hierarchy. As required by SFAS No. 157, assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.



Fair Value Measurements UsingLevel 1
        
        Level 2
        
        Level 3Balance atSeptember30,2008
        
        Quoted Prices inActive Marketsfor IdenticalAssets
        
        SignificantOtherObservableInputs
        
        SignificantUnobservableInputsAssetsMarketable securities(1)
        
        $
        6,301
        
        $
        6,301
        
        $
        
        
        $
        Tax Increment Financing Bonds
        
        
        18,790
        
        
        
        
        
        
        
        
        18,790Interest rate swaps
        
        
        573
        
        
        
        
        
        573
        
        
        Total Assets
        
        $
        25,664
        
        $
        6,301
        
        $
        573
        
        $
        18,790LiabilitiesDeferred compensation
        
        $
        6,301
        
        $
        6,301
        
        $
        
        
        $
        Harborview financing obligation
        
        
        16,659
        
        
        
        
        
        
        
        
        16,659Total Liabilities
        
        $
        22,960
        
        $
        6,301
        
        $
        
        
        $
        16,659




(1)
        The marketable securities are held through our officer deferred compensation plans.




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HIGHWOODS REALTY LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) (tabular dollar amounts in thousands, except per unit data)




8.
        FAIR VALUE MEASUREMENTS - Continued




Fair ValueMeasurementsUsingSignificantUnobservableInputs(Level 3)Assets:Tax Increment Financing BondsBeginning balance as of June 30, 2008
        
        $
        Transfer into Level 3
        
        
        20,541Unrealized loss included in AOCL
        
        
        (1,751
        )Ending balance as of September 30, 2008
        
        $
        18,790Liabilities:Harborview Financing ObligationBeginning balance as of June 30, 2008
        
        $
        16,620Payments on financing obligation
        
        
        (419
        )Financing obligation (interest expense)
        
        
        458Ending balance as of September 30, 2008
        
        $
        16,659






Fair ValueMeasurementsUsingSignificantUnobservableInputs(Level 3)Assets:Tax Increment Financing BondsBeginning balance as of December 31, 2007
        
        $
        Transfer into Level 3
        
        
        20,541Unrealized loss included in AOCL
        
        
        (1,751
        )Ending balance as of September 30, 2008
        
        $
        18,790Liabilities:Harborview Financing ObligationBeginning balance as of December 31, 2007
        
        $
        16,566Payments on financing obligation
        
        
        (1,219
        )Financing obligation (interest expense)
        
        
        1,312Ending balance as of September 30, 2008
        
        $
        16,659






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HIGHWOODS REALTY LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) (tabular dollar amounts in thousands, except per unit data)




9.
        DISCONTINUED OPERATIONS




As part of our business strategy, we from time to time selectively dispose of non-core properties in order to use the net proceeds for investments, for repayment of debt and/or retirement of Preferred Units, or other purposes. The table below sets forth the net operating results of those assets classified as discontinued operations in our Consolidated Financial Statements. Those assets classified as discontinued operations comprise 1.8 million square feet of office and industrial properties and 13 rental residential units sold during 2007 and the nine months ended September 30, 2008. These long-lived assets relate to disposal activities that were initiated subsequent to the effective date of SFAS No. 144, or that met certain stipulations prescribed by SFAS No. 144. The operations of these assets have been reclassified from our ongoing operations to discontinued operations, and
we will not have any significant continuing involvement in the operations after the disposal transactions:



Three Months EndedSeptember30,
        
        Nine Months EndedSeptember30,2008
        
        2007
        
        2008
        
        2007Rental and other revenues
        
        $
        70
        
        $
        3,285
        
        $
        1,936
        
        $
        10,108Operating expenses:Rental property and other expenses
        
        
        17
        
        
        1,610
        
        
        839
        
        
        4,800Depreciation and amortization
        
        
        
        
        
        773
        
        
        233
        
        
        2,474Total operating expenses
        
        
        17
        
        
        2,383
        
        
        1,072
        
        
        7,274Other income
        
        
        
        
        
        4
        
        
        3
        
        
        23Income from discontinued operations
        
        
        53
        
        
        906
        
        
        867
        
        
        2,857Net gains on sales of discontinued operations
        
        
        3,137
        
        
        6,617
        
        
        11,890
        
        
        26,463Total discontinued operations
        
        $
        3,190
        
        $
        7,523
        
        $
        12,757
        
        $
        29,320






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HIGHWOODS REALTY LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) (tabular dollar amounts in thousands, except per unit data)




10.
        EARNINGS PER UNIT




The following table sets forth the computation of basic and diluted earnings per unit:



Three Months EndedSeptember30,
        
        Nine Months EndedSeptember30,2008
        
        2007
        
        2008
        
        2007Basic income per unit:Numerator:Income from continuing operations
        
        $
        12,306
        
        $
        4,894
        
        $
        35,072
        
        $
        49,185Preferred Unit distributions
        
        
        (2,451
        )
        
        (2,680
        )
        
        (8,127
        )
        
        (10,639
        )Excess of Preferred Unit redemption/repurchase costs overcarrying value
        
        
        (108
        )
        
        (842
        )
        
        (108
        )
        
        (2,285
        )Income from continuing operations available for commonunitholders
        
        
        9,747
        
        
        1,372
        
        
        26,837
        
        
        36,261Income from discontinued operations
        
        
        3,190
        
        
        7,523
        
        
        12,757
        
        
        29,320Net income available for common unitholders
        
        $
        12,937
        
        $
        8,895
        
        $
        39,594
        
        $
        65,581Denominator:Denominator for basic earnings per unit  weighted average units(1)
        
        
        62,016
        
        
        60,280
        
        
        60,925
        
        
        60,201Basic earnings per unit:Income from continuing operations
        
        $
        0.16
        
        $
        0.02
        
        $
        0.44
        
        $
        0.60Income from discontinued operations
        
        
        0.05
        
        
        0.13
        
        
        0.21
        
        
        0.49Net income
        
        $
        0.21
        
        $
        0.15
        
        $
        0.65
        
        $
        1.09Diluted income per unit:Numerator:Income from continuing operations
        
        $
        12,306
        
        $
        4,894
        
        $
        35,072
        
        $
        49,185Preferred Unit distributions
        
        
        (2,451
        )
        
        (2,680
        )
        
        (8,127
        )
        
        (10,639
        )Excess of Preferred Unit redemption/repurchase costs overcarrying value
        
        
        (108
        )
        
        (842
        )
        
        (108
        )
        
        (2,285
        )Income from continuing operations available for commonunitholders
        
        
        9,747
        
        
        1,372
        
        
        26,837
        
        
        36,261Income from discontinued operations
        
        
        3,190
        
        
        7,523
        
        
        12,757
        
        
        29,320Net income available for common unitholders
        
        $
        12,937
        
        $
        8,895
        
        $
        39,594
        
        $
        65,581Denominator:Denominator for basic earnings per unit  adjusted weightedaverage units(1)
        
        
        62,016
        
        
        60,280
        
        
        60,925
        
        
        60,201Add:Employee and director stock options and warrants
        
        
        302
        
        
        494
        
        
        336
        
        
        744Unvested restricted stock
        
        
        211
        
        
        213
        
        
        195
        
        
        257Denominator for diluted earnings per unit  adjusted weightedaverage units and assumed conversions(2)
        
        
        62,529
        
        
        60,987
        
        
        61,456
        
        
        61,202Diluted earnings per unit:Income from continuing operations
        
        $
        0.16
        
        $
        0.02
        
        $
        0.43
        
        $
        0.59Income from discontinued operations
        
        
        0.05
        
        
        0.13
        
        
        0.21
        
        
        0.48Net income
        
        $
        0.21
        
        $
        0.15
        
        $
        0.64
        
        $
        1.07




(1)
        Weighted average units exclude shares of unvested restricted stock pursuant to SFAS No. 128, Earnings per Share.


(2)
        Options and warrants aggregating 328,000 and 177,000 units were outstanding during the three months ended September 30, 2008 and 2007, respectively, and 175,000 and 141,000 units were outstanding during the nine months ended September 30, 2008 and 2007, respectively, but were not included in the computation of diluted earnings per unit because the exercise prices of the options and warrants were higher than the average market price of Common Stock during these periods.




20







Table of Contents



HIGHWOODS REALTY LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) (tabular dollar amounts in thousands, except per unit data)




11.
        SEGMENT INFORMATION




Our principal business is the acquisition, development and operation of rental real estate properties. We evaluate our business by product type and by geographic locations. These segments and our disclosures below are expanded from what we reported in our Annual Report on Form 10-K for 2007 due to expanded internal reporting information used by our chief operating decision maker starting in the first quarter of 2008. Each product type has different customers and economic characteristics as to rental rates and terms, cost per square foot of buildings, the purposes for which customers use the space, the degree of maintenance and customer support required and customer dependency on different economic drivers, among others. The operating results by geographic grouping are also regularly reviewed by our chief operating decision maker for assessing performance and other purposes. There are no
material inter-segment transactions.



The accounting policies of the segments are the same as those described in Note 1 included herein. Further, all operations are within the United States and, at September 30, 2008, no tenant of the Wholly Owned Properties comprised more than 7.6% of our consolidated revenues.



The following table summarizes the rental income, net operating income and assets for each reportable segment for the three and nine months ended September 30, 2008 and 2007:



Three Months EndedSeptember30,
        
        Nine Months EndedSeptember30,2008
        
        2007
        
        2008
        
        2007Rental and Other Revenues:(1) (2)Office:Atlanta, GA
        
        $
        11,751
        
        $
        10,400
        
        $
        34,950
        
        $
        31,347Greenville, SC
        
        
        3,553
        
        
        3,232
        
        
        10,296
        
        
        9,732Kansas City, MO
        
        
        3,989
        
        
        3,820
        
        
        11,555
        
        
        10,703Memphis, TN
        
        
        6,349
        
        
        5,991
        
        
        18,848
        
        
        17,991Nashville, TN
        
        
        16,152
        
        
        13,257
        
        
        47,825
        
        
        39,495Orlando, FL
        
        
        2,279
        
        
        1,615
        
        
        6,457
        
        
        4,796Piedmont Triad, NC
        
        
        6,266
        
        
        6,834
        
        
        19,136
        
        
        19,968Raleigh, NC
        
        
        17,487
        
        
        16,092
        
        
        53,310
        
        
        47,104Richmond, VA
        
        
        11,767
        
        
        11,516
        
        
        35,809
        
        
        33,385Tampa, FL
        
        
        16,801
        
        
        15,427
        
        
        49,467
        
        
        45,770Other
        
        
        685
        
        
        465
        
        
        1,720
        
        
        1,889Total Office Segment
        
        
        97,079
        
        
        88,649
        
        
        289,373
        
        
        262,180Industrial:Atlanta, GA
        
        
        3,828
        
        
        3,939
        
        
        11,756
        
        
        11,728Kansas City, MO
        
        
        5
        
        
        5
        
        
        15
        
        
        15Piedmont Triad, NC
        
        
        3,723
        
        
        3,410
        
        
        11,030
        
        
        10,118Total Industrial Segment
        
        
        7,556
        
        
        7,354
        
        
        22,801
        
        
        21,861Retail:Kansas City, MO
        
        
        11,021
        
        
        11,130
        
        
        32,370
        
        
        32,863Piedmont Triad, NC
        
        
        253
        
        
        149
        
        
        708
        
        
        406Total Retail Segment
        
        
        11,274
        
        
        11,279
        
        
        33,078
        
        
        33,269Residential:Kansas City, MO
        
        
        298
        
        
        298
        
        
        902
        
        
        878Total Residential Segment
        
        
        298
        
        
        298
        
        
        902
        
        
        878Total Rental and Other Revenues
        
        $
        116,207
        
        $
        107,580
        
        $
        346,154
        
        $
        318,188






21







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HIGHWOODS REALTY LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) (tabular dollar amounts in thousands, except per unit data)




11.
        SEGMENT INFORMATION - Continued




Three Months EndedSeptember30,
        
        Nine Months EndedSeptember30,2008
        
        2007
        
        2008
        
        2007Net Operating Income:(1) (2)Office:Atlanta, GA
        
        $
        6,762
        
        $
        6,549
        
        $
        21,789
        
        $
        20,133Greenville, SC
        
        
        2,153
        
        
        1,896
        
        
        6,324
        
        
        5,907Kansas City, MO
        
        
        2,324
        
        
        2,208
        
        
        6,548
        
        
        5,960Memphis, TN
        
        
        3,925
        
        
        3,332
        
        
        11,395
        
        
        10,345Nashville, TN
        
        
        10,790
        
        
        8,183
        
        
        31,930
        
        
        25,229Orlando, FL
        
        
        1,224
        
        
        1,415
        
        
        3,644
        
        
        3,287Piedmont Triad, NC
        
        
        3,947
        
        
        4,663
        
        
        12,012
        
        
        12,624Raleigh, NC
        
        
        11,940
        
        
        9,760
        
        
        36,258
        
        
        30,247Richmond, VA
        
        
        7,685
        
        
        8,145
        
        
        23,957
        
        
        23,307Tampa, FL
        
        
        10,083
        
        
        9,346
        
        
        30,053
        
        
        27,629Other
        
        
        398
        
        
        57
        
        
        854
        
        
        570Total Office Segment
        
        
        61,231
        
        
        55,554
        
        
        184,764
        
        
        165,238Industrial:Atlanta, GA
        
        
        2,777
        
        
        2,975
        
        
        8,677
        
        
        8,963Kansas City, MO
        
        
        3
        
        
        3
        
        
        7
        
        
        7Piedmont Triad, NC
        
        
        2,759
        
        
        2,616
        
        
        8,496
        
        
        7,820Total Industrial Segment
        
        
        5,539
        
        
        5,594
        
        
        17,180
        
        
        16,790Retail:Kansas City, MO
        
        
        6,936
        
        
        7,461
        
        
        20,754
        
        
        21,763Piedmont Triad, NC
        
        
        203
        
        
        139
        
        
        577
        
        
        334Raleigh, NC
        
        
        (20
        )
        
        (26
        )
        
        (67
        )
        
        (64
        )Total Retail Segment
        
        
        7,119
        
        
        7,574
        
        
        21,264
        
        
        22,033Residential:Kansas City, MO
        
        
        153
        
        
        183
        
        
        505
        
        
        488Total Residential Segment
        
        
        153
        
        
        183
        
        
        505
        
        
        488Total Net Operating Income
        
        
        74,042
        
        
        68,905
        
        
        223,713
        
        
        204,549Reconciliation to income before disposition of property,insurance gain, minority interest and equity inearnings of unconsolidated affiliates:Depreciation and amortization
        
        
        (32,109
        )
        
        (31,891
        )
        
        (94,359
        )
        
        (90,476
        )Impairment of assets held for use
        
        
        
        
        
        (789
        )
        
        
        
        
        (789
        )General and administrative expense
        
        
        (8,885
        )
        
        (9,649
        )
        
        (29,509
        )
        
        (31,577
        )Interest expenses
        
        
        (24,492
        )
        
        (25,325
        )
        
        (74,128
        )
        
        (74,192
        )Interest and other income
        
        
        1,019
        
        
        1,469
        
        
        3,425
        
        
        5,083Income before disposition of property, insurance gain,minority interest and equity in earnings ofunconsolidated affiliates
        
        $
        9,575
        
        $
        2,720
        
        $
        29,142
        
        $
        12,598




(1)
        Net of discontinued operations.


(2)
        The Piedmont Triad market encompasses the Greensboro and Winston-Salem metropolitan areas.




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Table of Contents



HIGHWOODS REALTY LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) (tabular dollar amounts in thousands, except per unit data)




12.
        SUBSEQUENT EVENTS




In October 2008, we acquired a 135,000 square foot office building in Memphis, Tennessee in exchange for 183,587 Common Units and the assumption of $7.8 million of 8.15% secured debt, which will be recorded at fair value, that matures in February 2016. We expect to incur or have incurred approximately $1.7 million of near-term building improvements and other costs related to this acquisition.



In October 2008, we entered into a floating-to-fixed interest rate swap with PNC Bank, N.A. for a one-year period with respect to an aggregate of $25.0 million of borrowings outstanding under our $137.5 million term loan. This swap fixes the underlying LIBOR rate upon which interest on such borrowings are based at 2.35%.





23







Table of Contents



ITEM 2.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The Operating Partnership is managed by its sole general partner, the Company, a fully integrated, self-administered and self-managed equity REIT that provides leasing, management, development, construction and other customer-related services for our properties and for third parties. The Company conducts substantially all of its activities through the Operating Partnership. The partnership agreement provides that the Operating Partnership will assume and pay when due, or reimburse the Company for payment of, all costs and expenses relating to the ownership and operations of, or for the benefit of, the Operating Partnership. The partnership agreement further provides that all expenses of the Company are deemed to be incurred for the benefit of the Operating Partnership. As of September 30, 2008, we owned or had an interest in 383 in-service office, industrial and retail
properties, encompassing 34.8 million square feet, which includes six in-service office, industrial and retail development properties that had not yet reached 95% stabilized occupancy aggregating 1.3 million square feet, and 514 rental residential units. We are based in Raleigh, North Carolina, and our properties and development land are located in Florida, Georgia, Iowa, Kansas, Maryland, Mississippi, Missouri, North Carolina, South Carolina, Tennessee and Virginia. Additional information about us can be found on our website atwww.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 and under the heading "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:




        speculative development activity by our competitors in our existing markets could result in an excessive supply of office, industrial and retail properties relative to tenant demand;





        the financial condition of our tenants could deteriorate;





        we may not be able to complete development, acquisition, reinvestment, disposition or joint venture projects as quickly or on as favorable terms as anticipated;





        we may not be able to lease or release space quickly or on as favorable terms as old leases;





        difficulties in obtaining additional capital to satisfy our future cash needs or increases in interest rates could adversely impact our ability to fund important business initiatives and increase our debt service costs;





        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 to repay or refinance outstanding debt upon maturity;





        in light of the current dislocations in the credit markets, one or more of our banking partners could suffer unexpected financial difficulties that cause them to default on their obligations under our existing revolving credit facility and/or revolving construction facility, which would make it difficult for us to meet our short- and long-term liquidity needs;





        we could lose key executive officers; and





        our southeastern and midwestern markets may suffer declines in economic growth.




24







Table of Contents



This list of risks and uncertainties, however, is not intended to be exhaustive. You should also review the other cautionary statements we make in Business  Risk Factors set forth in our 2007 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.



RESULTS OF OPERATIONS



In accordance with SFAS No. 144 and as described in Note 9 to the Consolidated Financial Statements, we reclassified the operations and/or gain/(loss) from disposal of certain properties to discontinued operations for all periods presented if the operations and cash flows have been or will be eliminated from our ongoing operations and we will not have any significant continuing involvement in the operations after the disposal transaction and the properties were either sold during 2007 and the first nine months of 2008 or were held for sale at September 30, 2008. There were no properties sold during 2007 and the first nine months of 2008 that did not meet the conditions as stipulated by SFAS No. 144.



Three Months Ended September30,2008 and 2007



The following table sets forth information regarding our unaudited results of operations for the three months ended September 30, 2008 and 2007 ($ in millions):



Three Months EndedSeptember30,
        
        2008 to 20072008
        
        2007
        
        $ Change
        
        % of ChangeRental and other revenues
        
        $
        116.2
        
        $
        107.6
        
        $
        8.6
        
        8.0
        %Operating expenses:Rental property and other expenses
        
        
        42.2
        
        
        38.7
        
        
        3.5
        
        9.0Depreciation and amortization
        
        
        32.1
        
        
        31.9
        
        
        0.2
        
        0.6Impairment of assets held for use
        
        
        -
        
        
        0.8
        
        
        (0.8
        )
        (100.0
        )General and administrative
        
        
        8.9
        
        
        9.6
        
        
        (0.7
        )
        (7.3
        )Total operating expenses
        
        
        83.2
        
        
        81.0
        
        
        2.2
        
        2.7Interest expenses:Contractual
        
        
        23.0
        
        
        23.7
        
        
        (0.7
        )
        (3.0
        )Amortization of deferred financing costs
        
        
        0.7
        
        
        0.6
        
        
        0.1
        
        16.7Financing obligations
        
        
        0.7
        
        
        1.0
        
        
        (0.3
        )
        (30.0
        )24.4
        
        
        25.3
        
        
        (0.9
        )
        (3.6
        )Other income:Interest and other income
        
        
        1.0
        
        
        1.4
        
        
        (0.4
        )
        (28.6
        )1.0
        
        
        1.4
        
        
        (0.4
        )
        (28.6
        )Income before disposition of property, minority interest and equityin earnings of unconsolidated affiliates
        
        
        9.6
        
        
        2.7
        
        
        6.9
        
        255.6Net gains on disposition of property
        
        
        1.7
        
        
        1.1
        
        
        0.6
        
        54.5Minority interest
        
        
        (0.2
        )
        
        (0.1
        )
        
        (0.1
        )
        (100.0
        )Equity in earnings of unconsolidated affiliates
        
        
        1.2
        
        
        1.2
        
        
        -
        
        -Income from continuing operations
        
        
        12.3
        
        
        4.9
        
        
        7.4
        
        151.0Discontinued operations:Income from discontinued operations
        
        
        0.1
        
        
        0.9
        
        
        (0.8
        )
        (88.9
        )Net gains on sales of discontinued operations
        
        
        3.1
        
        
        6.6
        
        
        (3.5
        )
        (53.0
        )3.2
        
        
        7.5
        
        
        (4.3
        )
        (57.3
        )Net income
        
        
        15.5
        
        
        12.4
        
        
        3.1
        
        25.0Distributions on preferred units
        
        
        (2.5
        )
        
        (2.7
        )
        
        0.2
        
        7.4Excess of preferred unit redemption/repurchase cost overcarrying value
        
        
        (0.1)
        
        
        (0.8
        )
        
        0.7
        
        87.5Net income available for common unitholders
        
        $
        12.9
        
        $
        8.9
        
        $
        4.0
        
        44.9
        %






25







Table of Contents



Rental and Other Revenues



While we own and operate a limited number of industrial, retail and residential properties, our operating results depend heavily on successfully leasing our office properties. Economic growth in Florida, Georgia, North Carolina and Tennessee is and will continue to be an important determinative factor in predicting our future operating results.



The key components affecting our rental revenue stream are dispositions, acquisitions, new developments placed in service, average occupancy and rental rates. 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 leases on expiring space. Whether or not our rental revenue tracks average occupancy proportionally depends upon whether rents under new leases signed are higher or lower than the rents under the previous leases.



Rental and other revenues increased $8.6 million in the third quarter of 2008 compared to 2007 primarily as a result of the contribution from developed properties placed in service in 2007 and the first nine months of 2008 and higher same property rental revenue, driven by higher average occupancy, in certain locations in 2008 as compared to 2007.



Operating Expenses



Our expenses primarily consist of rental property expenses, depreciation and amortization, general and administrative expenses and interest expense. Rental property expenses are expenses associated with our ownership and operation of rental properties and include expenses that vary somewhat, such as common area maintenance and utilities, and relatively fixed expenses, such as property taxes and insurance. Some of these variable expenses may be lower when our average occupancy declines. 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 or sell assets, since we depreciate our properties on a straight-line basis over fixed lives. General and administrative expenses, net of amounts capitalized, consist primarily of management and employee salaries and other personnel costs,
corporate and division overhead and long-term incentive compensation.



Rental property and other expenses from continuing operations (real estate taxes, utilities, insurance, repairs and maintenance and other property-related expenses) increased $3.5 million in the third quarter of 2008 compared to the third quarter of 2007, primarily as a result of the additional operating expenses of developed properties placed in service in 2007 and the nine months ended September 30, 2008 and general inflationary increases in certain operating expenses, such as utility costs, insurance costs and real estate taxes.



Rental and other revenues less rental property and other expenses increased $5.1 million in 2008 compared to 2007. This is primarily the result of higher margins on development properties and higher revenues from higher average occupancy.



In the third quarter of 2007, one land parcel had indicators of impairment where the carrying value exceeded the sum of estimated undiscounted future cash flows. Therefore, impairment of assets held for use of $0.8 million was recorded in the third quarter of 2007.



The $0.7 million decrease in general and administrative expenses is primarily related to lower external audit and legal fees and a decrease in the adjustment related to our deferred compensation liability.



Interest Expenses



Interest expense depends primarily upon the amount of our borrowings, the weighted average interest rates on our debt and the amount of interest capitalized on development projects.



The $0.7 million decrease in contractual interest expense is primarily the result of a decrease in average borrowings in 2008 compared to 2007 and a decrease in weighted average interest rates on outstanding debt, offset



26







Table of Contents



by a decrease in capitalized interest of $0.6 million for the third quarter of 2008 compared to the third quarter of 2007.



Net Gains on Disposition of Property



Net gains on dispositions of properties not classified as discontinued operations was $1.7 million and $1.1 million for the three months ended September 30, 2008 and 2007, respectively. Gains are dependent on the specific assets sold, their historical cost basis and other factors, and can vary significantly from period to period.



Discontinued Operations



In accordance with SFAS No. 144, we classified net income of $3.2 million and $7.5 million as discontinued operations for the three months ended September 30, 2008 and 2007, respectively. These amounts relate to 1.8 million square feet of office and industrial properties and 13 rental residential units sold during 2007 and the nine months ended September 30, 2008. These amounts include net gains on the sale of these properties of $3.1 million and $6.6 million in the three months ended September 30, 2008 and 2007, respectively.



Nine Months Ended September30,2008 and 2007



The following table sets forth information regarding our unaudited results of operations for the nine months ended September 30, 2008 and 2007 ($ in millions):



Nine Months EndedSeptember30,
        
        2008 to 20072008
        
        2007
        
        $ Change
        
        % of ChangeRental and other revenues
        
        $
        346.2
        
        $
        318.2
        
        $
        28.0
        
        8.8
        %Operating expenses:Rental property and other expenses
        
        
        122.4
        
        
        113.6
        
        
        8.8
        
        7.7Depreciation and amortization
        
        
        94.4
        
        
        90.5
        
        
        3.9
        
        4.3Impairment of assets held for use
        
        
        -
        
        
        0.8
        
        
        (0.8
        )
        (100.0
        )General and administrative
        
        
        29.5
        
        
        31.6
        
        
        (2.1
        )
        (6.6
        )Total operating expenses
        
        
        246.3
        
        
        236.5
        
        
        9.8
        
        4.1Interest expenses:Contractual
        
        
        69.8
        
        
        69.4
        
        
        0.4
        
        0.6Amortization of deferred financing costs
        
        
        2.0
        
        
        1.8
        
        
        0.2
        
        11.1Financing obligations
        
        
        2.3
        
        
        3.0
        
        
        (0.7
        )
        (23.3
        )74.1
        
        
        74.2
        
        
        (0.1
        )
        (0.1
        )Other income:Interest and other income
        
        
        3.4
        
        
        5.1
        
        
        (1.7
        )
        (33.3
        )3.4
        
        
        5.1
        
        
        (1.7
        )
        (33.3
        )Income before disposition of property, insurance gain, minorityinterest and equity in earnings of unconsolidated affiliates
        
        
        29.2
        
        
        12.6
        
        
        16.6
        
        131.7Net gains on disposition of property
        
        
        1.8
        
        
        20.2
        
        
        (18.4
        )
        (91.1
        )Gain from property insurance settlement
        
        
        
        
        
        4.1
        
        
        (4.1
        )
        (100.0
        )Minority interest
        
        
        (0.6
        )
        
        (0.5
        )
        
        (0.1
        )
        (20.0
        )Equity in earnings of unconsolidated affiliates
        
        
        4.7
        
        
        12.7
        
        
        (8.0
        )
        (63.0
        )Income from continuing operations
        
        
        35.1
        
        
        49.1
        
        
        (14.0
        )
        (28.5
        )Discontinued operations:Income from discontinued operations
        
        
        0.8
        
        
        2.9
        
        
        (2.1
        )
        (72.4
        )Net gains on sales of discontinued operations
        
        
        11.9
        
        
        26.5
        
        
        (14.6
        )
        (55.1
        )12.7
        
        
        29.4
        
        
        (16.7
        )
        (56.8
        )Net income
        
        
        47.8
        
        
        78.5
        
        
        (30.7
        )
        (39.1
        )Distributions on preferred units
        
        
        (8.1
        )
        
        (10.6
        )
        
        2.5
        
        23.6Excess of preferred unit redemption/repurchase cost over carrying value
        
        
        (0.1
        )
        
        (2.3
        )
        
        2.2
        
        95.7Net income available for common unitholders
        
        $
        39.6
        
        $
        65.6
        
        $
        (26.0
        )
        (39.6
        )%






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Rental and Other Revenues



Rental and other revenues increased $28.0 million in the first nine months of 2008 compared to 2007 primarily as a result of the contribution from developed properties placed in service in 2007 and the first nine months of 2008 and higher same property rental revenue, driven by higher average occupancy, in certain locations in 2008 as compared to 2007.



Operating Expenses



Rental property and other operating expenses from continuing operations (real estate taxes, utilities, insurance, repairs and maintenance and other property-related expenses) increased $8.8 million in the first nine months of 2008 compared to the first nine months of 2007, primarily as a result of the additional operating expenses of developed properties placed in service in 2007 and the nine months ended September 30, 2008 and general inflationary increases in certain operating expenses, such as utility costs, insurance costs and real estate taxes.



Rental and other revenues less rental property and other operating expenses increased $19.2 million in 2008 compared to 2007. This is primarily the result of higher margins on development properties and higher revenues from higher average occupancy.



The $3.9 million increase in depreciation and amortization is primarily a result of the contribution from development properties placed in service in 2007 and the nine months ended September 30, 2008 and an increase in building improvements, tenant improvements and deferred leasing costs related to those buildings placed in service.



In the nine months ended September 30, 2007, one land parcel had indicators of impairment where the carrying value exceeded the sum of estimated undiscounted future cash flows. Therefore, impairment of assets held for use of $0.8 million was recorded in the nine months ended September 30, 2007.



The $2.1 million decrease in general and administrative expenses is primarily related to lower external legal and audit fees, lower condominium marketing costs and a decrease in the adjustment related to our deferred compensation liability. These decreases are partially offset by higher compensation related costs.



Financing Obligation



The $0.7 million decrease in financing obligations is primarily the result of lower fair market amortization and interest expense for the first nine months of 2008 compared to the first nine months of 2007.



Other Income



The $1.7 million decrease in interest and other income is primarily related to a decrease in income from 2007 to 2008 related to our investments in marketable securities which we use to pay benefits under our deferred compensation plan, offset by interest income from our investment in TIF bonds.



Net Gains on Disposition of Property; Gain from Property Insurance Settlement; Equity in Earnings of Unconsolidated Affiliates



Net gains on dispositions of properties not classified as discontinued operations was $1.8 million and $20.2 million for the nine months ended September 30, 2008 and 2007, respectively. Gains are dependent on the specific assets sold, their historical cost basis and other factors, and can vary significantly from period to period.



In the first nine months of 2007, we recorded a $4.1 million gain from finalization of a prior year insurance claim.



Equity in earnings of unconsolidated affiliates decreased $8.0 million from 2007. The decrease primarily resulted from the sale of certain properties and recognition of a substantial lease termination fee in certain of our unconsolidated affiliates.



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Discontinued Operations



In accordance with SFAS No. 144, we classified net income of $12.7 million and $29.4 million as discontinued operations for the nine months ended September 30, 2008 and 2007, respectively. These amounts relate to 1.8 million square feet of office and industrial properties and 13 rental residential units sold during 2007 and the nine months ended September 30, 2008. These amounts include net gains on the sale of these properties of $11.9 million and $26.5 million in the nine months ended September 30, 2008 and 2007, respectively.



Distributions on Preferred Units and Excess of Preferred Unit Redemption/Repurchase Cost Over Carrying Value



Preferred unit distributions decreased $2.5 million due to the reduction in outstanding Preferred Unit balances in 2007 and 2008. In addition, net income available for common unitholders was reduced by $0.1 million and $2.3 million in the nine months ended September 30, 2008 and 2007, respectively, related to the excess of redemption cost over the net carrying value of Preferred Units.



LIQUIDITY AND CAPITAL RESOURCES



Because the Company is a REIT, our partnership agreement requires us to distribute at least enough cash for the Company to be able to distribute at least 90.0% of its REIT taxable income, excluding capital gains, to its stockholders. We generally use rents received from customers and proceeds from sales of non-core development land to fund our operating expenses, recurring capital expenditures and unitholder distributions. To fund property acquisitions, development activity or building renovations, we may sell other assets and may incur debt from time to time. Our debt generally consists of mortgage debt, unsecured debt securities and borrowings under our credit facilities.



Our revolving credit facility, the term loan and the indenture that governs our outstanding notes require us to comply with customary operating covenants and various financial and operating ratios. As a result, to ensure that we do not violate the provisions of these debt instruments, we may from time to time be limited in undertaking certain activities that may otherwise be in our best interest, such as repurchasing partnership units, acquiring additional assets or increasing the total amount of our debt. We review our current and expected operating results, financial condition and planned strategic actions on an ongoing basis for the purpose of monitoring our continued compliance with these covenants and ratios. Any unwaived event of default could result in an acceleration of some or all of our debt, severely restrict our ability to incur additional debt to fund short- and long-term
cash needs or result in higher interest expense.



If any of our lenders ever accelerated outstanding debt due to an event of default, we would not be able to borrow any further amounts under our revolving credit facility, which would adversely affect our ability to fund our operations. If our debt cannot be paid, refinanced or extended at maturity or upon acceleration, in addition to our failure to repay our debt, we may not be able to make distributions to unitholders at expected levels or at all. Furthermore, if any refinancing is done at higher interest rates, the increased interest expense would adversely affect our cash flows and ability to pay distributions to unitholders. Any such refinancing could also impose tighter financial ratios and other covenants that would restrict our ability to take actions that would otherwise be in our best interest, such as funding new development activity, making opportunistic acquisitions,
repurchasing our securities or paying distributions.



To generate additional capital to fund our growth and other strategic initiatives and to lessen the ownership risks typically associated with owning 100.0% of a property, we may sell some of our properties or contribute them to joint ventures. When we create a joint venture with a strategic partner, we usually contribute one or more properties that we own and/or vacant land to a newly formed entity in which we retain an interest of 50.0% or less. In exchange for our equal or minority interest in the joint venture, we generally receive cash from the partner and retain some or all of the management income relating to the properties in the joint venture. The joint venture itself will frequently borrow money on its own behalf to finance the acquisition of, and/or leverage the return upon, the properties being acquired by the joint venture or to build or acquire additional buildings. Such
borrowings are typically on a non-recourse or limited recourse basis. We generally are not liable for the debts of our joint ventures, except to the extent



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of our equity investment, unless we have directly guaranteed any of that debt. In most cases, we and/or our strategic partners are required to guarantee customary exceptions to non-recourse liability in non-recourse loans.



We also may sell additional Common Units or Preferred Units to fund additional growth or to reduce our debt. In addition, we may from time to time use available funds to redeem Common Units and Preferred Units for cash.



Statement of Cash Flows



As required by GAAP, we report and analyze our cash flows based on operating activities, investing activities and financing activities. The following table sets forth the changes in our cash flows in the first nine months of 2008 as compared to the first nine months of 2007 (in thousands):



Nine Months EndedSeptember30,2008
        
        2007
        
        ChangeCash Provided By Operating Activities
        
        $
        128,188
        
        $
        120,725
        
        $
        7,463Cash Used In Investing Activities
        
        
        (128,601
        )
        
        (99,071
        )
        
        (29,530
        )Cash Provided by/(Used In) Financing Activities
        
        
        10,780
        
        
        (33,935
        )
        
        44,715Total Cash Flows
        
        $
        10,367
        
        $
        (12,281
        )
        $
        22,648




The increase of $7.5 million in cash provided by operating activities in 2008 compared to 2007 was primarily the result of higher cash flows from net income as adjusted for depreciation and amortization, net gains on disposition of properties, a gain from a property insurance settlement, minority interest, equity in earnings of unconsolidated affiliates and distributions of earnings from unconsolidated affiliates, which resulted in a $17.7 million increase in cash provided by operating activities. Partially offsetting this increase was the net change in operating assets and liabilities, which resulted in a $8.9 million decrease in cash provided by operating activities.



The increase of $29.5 million in cash used in investing activities in 2008 compared to 2007 was primarily a result of a decrease in proceeds from disposition of real estate assets and distributions of capital from unconsolidated affiliates and an increase in contributions to unconsolidated affiliates. Partially offsetting these changes were a decrease in additions to real estate assets and deferred leasing costs and an increase in changes in restricted cash and other investing activities.



The increase of $44.7 million in cash provided by/(used in) financing activities in 2008 compared to 2007 was primarily a result of an increase in net proceeds from the issuance of Common Units, an increase in borrowings on our revolving credit facility, a decrease in redemption/repurchase of Preferred Units and a decrease in cash paid for repurchase of Common Units. Partially offsetting these changes was a decrease in borrowings on mortgages and notes payable and an increase in repayments of mortgages and notes payable.



Capitalization



Our total indebtedness at September 30, 2008 was approximately $1.6 billion and was comprised of $670.0 million of secured indebtedness with a weighted average interest rate of 6.49% and $919.0 million of unsecured indebtedness with a weighted average interest rate of 5.85%. As of September 30, 2008, our outstanding mortgages and notes payable were secured by real estate assets with an aggregate undepreciated book value of $1.1 billion.



We do not intend to reserve funds to retire existing secured or unsecured debt upon maturity. For a more complete discussion of our long-term liquidity needs, see Liquidity and Capital Resources - Current and Future Cash Needs.



Recent Developments



In October 2008, we acquired a 135,000 square foot office building in Memphis, Tennessee in exchange for 183,587 Common Units and the assumption of $7.8 million of 8.15% secured debt, which will be recorded at fair value, that matures in February 2016. We expect to incur or have incurred approximately $1.7 million of near-term building improvements and other costs related to this acquisition.



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In October 2008, we entered into a floating-to-fixed interest rate swap with PNC Bank, N.A. for a one-year period with respect to an aggregate of $25.0 million of borrowings outstanding under our $137.5 million term loan. This swap fixes the underlying LIBOR rate upon which interest on such borrowings are based at 2.35%.



Covenant Compliance



Our revolving credit facility, the term loan and the indenture that governs our outstanding notes require us to comply with customary operating covenants and various financial and operating ratios. We are currently in compliance with all such requirements. 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.



The following table sets forth more detailed information about our ratio and covenant compliance under our indenture as of September 30, 2008. Certain of these definitions may differ from similar terms used in the consolidated financial statements and may, for example, consider our proportionate share of investments in unconsolidated affiliates. For a more detailed discussion of the covenants in our indenture, including definitions of certain relevant terms, see the indenture governing our unsecured notes which is incorporated by reference in our 2007 Annual Report on Form 10-K.



September30,2008Overall Debt Less Than or Equal to 60% of Adjusted Total Assets
        
        45.3
        %Secured Debt Less Than or Equal to 40% of Adjusted Total Assets
        
        19.1
        %Income Available for debt service Greater Than 1.50 times Annual Service Charge
        
        2.8Total Unencumbered Assets Greater Than 200% (150% for the bonds issued in March 2007) ofUnsecured Debt
        
        266
        %




Financing and Investments Activity



On September 12, 2008, the Company sold 5.5 million shares of Common Stock for net proceeds of $195.0 million. As required by the terms of the partnership agreement of the Operating Partnership, the net proceeds from the offering were contributed to the Operating Partnership in exchange for 5.5 million additional Common Units. In September 2008, a portion of the net proceeds of the offering were used to repurchase 53,845 outstanding 8 5/8% Series A Cumulative Redeemable Preferred Shares for an aggregate purchase price of $52.5 million. The remaining net proceeds from the offering were used to reduce the amount of borrowings outstanding under our revolving credit facility.



Our $450.0 million unsecured revolving credit facility is initially scheduled to mature on May 1, 2009. Assuming no default exists, we have an option to extend the maturity date by one additional year. The interest rate is LIBOR plus 80 basis points and the annual base facility fee is 20 basis points. The interest rate would increase to LIBOR plus 140 or 155 basis points if our credit rating were to fall below investment grade according to two of three credit rating agencies. As of September 30, 2008, we had $132.5 million borrowed on this revolving credit facility. Our revolving credit facility is syndicated as follows (in thousands):



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Name of Lender
        
        TotalCommitment
        
        AmountOutstandingatSeptember30,2008
        
        UnfundedCommitmentatSeptember30,2008Bank of America, N.A.
        
        $
        50,000
        
        $
        14,722
        
        $
        35,278Branch Banking and Trust Co.
        
        
        50,000
        
        
        14,722
        
        
        35,278Wachovia Bank, N.A.
        
        
        50,000
        
        
        14,722
        
        
        35,278Wells Fargo Bank, N.A.
        
        
        50,000
        
        
        14,722
        
        
        35,278Emigrant Bank
        
        
        35,000
        
        
        10,306
        
        
        24,694Eurolypo AG, New York Branch
        
        
        35,000
        
        
        10,306
        
        
        24,694PNC Bank, N.A.
        
        
        30,000
        
        
        8,833
        
        
        21,167Regions Bank
        
        
        30,000
        
        
        8,833
        
        
        21,167Comerica Bank
        
        
        25,000
        
        
        7,361
        
        
        17,639RBC Bank
        
        
        25,000
        
        
        7,361
        
        
        17,639Union Bank of California, N.A.
        
        
        25,000
        
        
        7,361
        
        
        17,639US Bank
        
        
        20,000
        
        
        5,890
        
        
        14,110First Horizon Bank
        
        
        15,000
        
        
        4,417
        
        
        10,583Chevy Chase Bank
        
        
        10,000
        
        
        2,944
        
        
        7,056Total
        
        $
        450,000
        
        $
        132,500
        
        $
        317,500




The unfunded commitment in the table above includes $1.6 million in outstanding letters of credit, which effectively reduces the availability under our revolving credit facility to $315.9 million as of September 30, 2008.



On February 1, 2008, we paid off at maturity $100.0 million of 7.13% unsecured notes using borrowings under our revolving credit facility. On February 26, 2008, we closed a $137.5 million three-year term loan that bears interest at LIBOR plus 110 basis points. The interest rate would increase to LIBOR plus 160 basis points if our credit rating were to fall below investment grade according to two of three credit rating agencies. Proceeds from this loan were used to reduce the outstanding borrowings under our revolving credit facility and for short-term investments.



In July 2008, REES, a consolidated joint venture (see Note 1 to the Consolidated Financial Statements in our 2007 Annual Report on Form 10-K), fully repaid the remaining $17.5 million outstanding under a secured construction loan.



In March 2008, we and an affiliate of DLF formed a new joint venture, Highwoods DLF Forum, LLC, in which we have a 25.0% ownership interest. On April 3, 2008, Highwoods DLF Forum, LLC acquired The Forum, which is a 635,000 square foot office park in Raleigh, North Carolina, for $113 million. We contributed $12.3 million to Highwoods DLF Forum, LLC and, simultaneously with the acquisition of The Forum, the joint venture obtained a $67.5 million secured loan. We are the property manager and leasing agent for the office park and receive customary management fees and leasing commissions. We account for this unconsolidated joint venture using the equity method of accounting.



Current and Future Cash Needs



Rental and other revenues are our principal source of funds to meet our short-term liquidity requirements, which primarily consist of operating expenses, debt service, unitholder distributions, any guarantee obligations and recurring capital expenditures. In addition, we could incur tenant improvement costs and lease commissions related to any releasing of vacant space. As of September 30, 2008, other than principal amortization on certain secured loans, we have no outstanding debt that matures prior to the end of 2008.



We generally expect to fund our short-term liquidity needs through a combination of available working capital, cash flows from operations and borrowings under our revolving credit facility and revolving construction facilities (which had $315.9 million and $72.2 million of availability, respectively, as of September 30, 2008). We regularly evaluate the financial condition of our banking partners using publicly available information, particularly in light of



32







Table of Contents



the current dislocations in the credit market. Based on this review, we currently expect our banking partners, which are major financial institutions, to perform their obligations under our existing facilities.



Our long-term liquidity needs generally include the funding of capital expenditures to lease space to our customers, maintain the quality of our existing properties and build new properties. Capital expenditures include tenant improvements, building improvements, new building completion costs and land infrastructure costs. Tenant improvements are the costs required to customize space for the specific needs of first-generation and second-generation customers. Building improvements are recurring capital costs not related to a specific customer to maintain existing buildings. New building completion costs are expenses for the construction of new buildings. Land infrastructure costs are expenses to prepare development land for future development activity that is not specifically related to a single building. Excluding recurring capital expenditures for leasing costs and tenant improvements
and for normal building improvements, our expected future capital expenditures for started and/or committed new development projects were $95.3 million at September 30, 2008. A significant portion of these future expenditures are currently subject to binding contractual arrangements. Our long-term liquidity needs also include the funding of development projects, selective asset acquisitions and the retirement of mortgage debt, amounts outstanding under our revolving credit facility and long-term unsecured debt.



Our goal is to maintain a conservative and flexible balance sheet. Accordingly, we expect to meet our long-term liquidity needs through a combination of:




        borrowings under unsecured financing arrangements that we may obtain, such as the issuance of unsecured debt securities;




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





        borrowings under other secured mortgages or construction loans that we may obtain;





        the selective disposition of non-core assets; and





        the sale or contribution of some of our Wholly Owned Properties, development projects and development land to strategic joint ventures to be formed with unrelated investors, which would have the net effect of generating additional capital through such sale or contributions.




We expect to use such sources to meet our long-term liquidity requirements either through direct payments or repayments of borrowings under our revolving credit facility. As mentioned above, we do not intend to reserve funds to retire existing secured or unsecured indebtedness upon maturity. Instead, we will seek to refinance such debt at maturity or retire such debt through the issuance of equity or debt securities or from proceeds from sales of properties. In the future, we may from time to time retire some or all of our remaining outstanding Preferred Units.



We anticipate that our available cash and cash equivalents and cash flows from operating activities, with cash available from borrowings and other sources, will be adequate to meet our capital and liquidity needs in both the short and long term. However, if these sources of funds are insufficient or unavailable, our ability to make distributions to unitholders and satisfy other cash payments may be adversely affected.



Off Balance Sheet Arrangements



We have several off balance sheet joint venture and guarantee arrangements. The joint ventures were formed with unrelated investors to generate additional capital to fund property acquisitions, repay outstanding debt, fund other strategic initiatives and lessen the risks typically associated with owning 100.0% of a property. When we create a joint venture with a partner, we usually contribute cash or wholly owned assets to a newly formed entity in which we retain an equal or minority interest. For financial reporting purposes, certain assets we sold have been accounted for as financing arrangements.



As of September 30, 2008, our unconsolidated joint ventures had $838.3 million of total assets and $643.8 million of total liabilities as reflected in their financial statements. At September 30, 2008, our weighted average equity interest based on the total assets of these unconsolidated joint ventures was 38.0%. During the nine months



33







Table of Contents



ended September 30, 2008, these unconsolidated joint ventures earned $8.9 million of total net income of which our share, after appropriate purchase accounting and other adjustments, was $4.7 million.



As of September 30, 2008, our unconsolidated joint ventures had $606.1 million of outstanding mortgage debt. All of this joint venture debt is non-recourse to us except (1) in the case of customary exceptions pertaining to such matters as misuse of funds, environmental conditions and material misrepresentations and (2) those guarantees and loans described in Note 15 to the Consolidated Financial Statements in our 2007 Annual Report on Form 10-K.



Interest Rate Hedging Activities



To meet, in part, our long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Borrowings under our revolving credit facility bear interest at variable rates. Our long-term debt, which consists of secured and unsecured long-term financings and the issuance of unsecured debt securities, typically bears interest at fixed rates although some loans bear interest at variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we may 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 various debt instruments. We do not hold or issue these derivative contracts for trading or speculative
purposes. The interest rate on all of our variable rate debt is adjusted at one and three month intervals, subject to settlements under interest rate hedge contracts. We also enter into treasury lock agreements from time to time in order to limit our exposure to an increase in interest rates with respect to future debt offerings.



In January 2008, we entered into two floating-to-fixed interest rate swaps for a one-year period with respect to an aggregate of $50.0 million of borrowings outstanding under our revolving credit facility or other floating rate debt. These swaps fix the underlying LIBOR rate upon which interest on such borrowings is based at 3.3% for $30.0 million of borrowings and 3.2% for $20.0 million of borrowings. The counterparty under the $30.0 million swap is PNC Bank and the counterparty under the $20.0 million swap is Bank of America. These swaps were designated as hedges under SFAS No. 133. Accordingly, the swaps are being accounted for as cash flow hedges.



In April 2008, we entered into an additional floating-to-fixed interest rate swap for a two-year period with respect to an aggregate of $50.0 million of borrowings outstanding under our term loan or other floating rate debt. The swap fixes the underlying LIBOR rate upon which interest on such borrowings is based at 2.5%. The counterparty under this swap is Bank of America. The swap was designated as a hedge under SFAS No. 133. Accordingly, the swap is being accounted for as a cash flow hedge.



CRITICAL ACCOUNTING ESTIMATES



There were no changes to the critical accounting policies made by management in the nine months ended September 30, 2008, except as set forth in Note 1 to the Consolidated Financial Statements under Impact of Newly Adopted and Issued Accounting Standards. 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 2007 Annual Report on Form 10-K.



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Table of Contents



ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



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. These disclosures are not precise indicators of expected future effects, but only indicators of reasonably possible effects. As a result, actual future results may differ materially from those presented. See 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.



As of September 30, 2008, we had $1,287.0 million of fixed rate debt outstanding. The estimated aggregate fair market value of this debt at September 30, 2008 was $1,180.0 million. If interest rates increase by 100 basis points, the aggregate fair market value of our fixed rate debt as of September 30, 2008 would decrease by $48.6 million. If interest rates decrease by 100 basis points, the aggregate fair market value of our fixed rate debt as of September 30, 2008 would increase by $51.7 million.



As of September 30, 2008, we had $302.0 million of variable rate debt outstanding. If the weighted average interest rate on this variable rate debt had been 100 basis points higher or lower during the 12 months ended September 30, 2008, our interest expense relating to this debt would increase or decrease by approximately $3.0 million (excluding the offsetting impact, if any, of interest rate swaps in effect with respect to $100.0 million of such debt as of such date).



As of September 30, 2008, we had floating-to-fixed interest rate swaps with respect to an aggregate of $100.0 million of borrowings outstanding under our revolving credit facility. The swaps fix the underlying LIBOR rate under which interest on such borrowings is based at a weighted average of 2.88%. If LIBOR interest rates increase or decrease by 100 basis points, the aggregate fair market value of the swaps as of September 30, 2008 would decrease or increase by $837,000 and $815,000, respectively.



In addition, we are exposed to certain losses in the event of nonperformance by the counterparties, which are PNC Bank, N.A. and Bank of America, N.A., under the swaps. We regularly evaluate the financial condition of our counterparties using publicly available information, particularly in light of the current dislocations in the credit market.  Based on this review, we currently expect the counterparties, which are major financial institutions, to perform fully under the swaps. However, if a counterparty defaults on its obligations under the swap, we could be required to pay the full rates on the applicable debt, even if such rates were in excess of the rate in the contract.



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Table of Contents



ITEM 4.  CONTROLS AND PROCEDURES



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. As defined in Rule 13a-15(e) under the Exchange Act, disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us is accumulated and communicated to the Companys management, including the CEO and CFO, to allow timely decisions regarding required disclosure. The CEO and CFO believe that our disclosure controls and procedures were effective at the end of the period covered by this Quarterly Report.



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 accepting accounting principles. As defined in Rule 13a-15(f) under the Exchange Act, internal control over financial reporting includes those policies and procedures that:




        pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of assets;





        provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepting accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and





        provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.




There were no changes in our internal control over financial reporting during the third quarter of 2008 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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Table of Contents



PART II - OTHER INFORMATION



ITEM 6.  EXHIBITS



ExhibitNumber
        Description1.1
        Underwriting Agreement (filed as part of the Companys Current Report on Form 8-K dated September 12, 2008)31.1
        Certification Pursuant to Section 302 of the Sarbanes-Oxley Act31.2
        Certification Pursuant to Section 302 of the Sarbanes-Oxley Act32.1
        Certification Pursuant to Section 906 of the Sarbanes-Oxley Act32.2
        Certification Pursuant to Section 906 of the Sarbanes-Oxley Act






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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





HIGHWOODS REALTY LIMITED PARTNERSHIPBy: Highwoods Properties, Inc., its sole general partnerBy:
        /s/TERRY L. STEVENSTerry L. StevensSenior Vice President and Chief Financial Officer






Date: November 12, 2008





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