UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _________________ to ________________
Commission File Number 1-12386
LEXINGTON CORPORATE PROPERTIES TRUST
------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 13-3717318
------------------------------ ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
355 Lexington Avenue
New York, NY 10017
------------------------------ -----------
(Address of principal executive offices) (Zip code)
(212) 692-7260
-----------------------------------------
(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.
Yes x . No .
---- ----
Indicate the number of shares outstanding of each of the registrant's classes of
common shares, as of the latest practicable date: 27,117,068 common shares, par
value $.0001 per share on August 12, 2002.
PART 1. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2002 (Unaudited) and December 31, 2001
(in thousands, except share and per share data)
June 30, December 31,
2002 2001
--------- ---------
ASSETS:
Real estate, at cost $ 817,950 $ 830,788
Less: accumulated depreciation and amortization 123,990 116,741
--------- ---------
693,960 714,047
Investment in non-consolidated entities 49,162 48,764
Cash and cash equivalents 14,888 13,863
Restricted cash 1,903 1,825
Rent receivable - current 3,518 1,081
Rent receivable - deferred 18,833 17,945
Other assets, net 24,517 24,628
--------- ---------
$ 806,781 $ 822,153
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Mortgages and notes payable $ 440,091 $ 445,771
Credit facility borrowings -- 10,000
Origination fees payable, including accrued interest 6,569 6,636
Accounts payable and other liabilities 6,313 6,996
--------- ---------
452,973 469,403
Minority interests 57,009 57,859
--------- ---------
509,982 527,262
--------- ---------
Preferred shares, par value $0.0001 per share; authorized 10,000,000 shares. Class A
Senior Cumulative Convertible Preferred, liquidation preference $25,000;
2,000,000 shares issued and outstanding in 2001 -- 24,369
--------- ---------
Common shares, par value $0.0001 per share; 287,888 shares issued and outstanding,
liquidation preference $3,886 3,809 3,809
--------- ---------
Shareholders' equity:
Common shares, par value $0.0001 per share, authorized 80,000,000 shares,
26,772,987 and 24,219,409 shares issued and outstanding in 2002 and 2001,
respectively 3 2
Additional paid-in-capital 371,427 342,161
Deferred compensation (2,258) (1,641)
Accumulated distributions in excess of net income (73,709) (71,836)
--------- ---------
295,463 268,686
Less: notes receivable from officers/shareholders (2,473) (1,973)
--------- ---------
Total shareholders' equity 292,990 266,713
--------- ---------
$ 806,781 $ 822,153
========= =========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
2
LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three and six months ended June 30, 2002 and 2001
(Unaudited and in thousands, except share and per share data)
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues:
Rental $ 22,937 $ 19,371 $ 45,932 $ 38,734
Equity in earnings of non-consolidated entities 937 806 2,363 1,416
Interest and other 612 271 1,004 531
------------ ------------ ------------ ------------
24,486 20,448 49,299 40,681
------------ ------------ ------------ ------------
Expenses:
Interest 8,086 7,712 16,336 15,344
Depreciation and amortization of real estate 5,192 4,361 10,375 8,718
General and administrative 1,192 1,215 2,771 2,457
Property operating 442 343 1,248 714
Amortization of deferred expenses 459 408 946 756
------------ ------------ ------------ ------------
15,371 14,039 31,676 27,989
------------ ------------ ------------ ------------
Income before gain on sale of properties, minority
interests and extraordinary item 9,115 6,409 17,623 12,692
Gain on sale of properties 280 -- 1,134 --
------------ ------------ ------------ ------------
Income before minority interests and extraordinary
item 9,395 6,409 18,757 12,692
Minority interests 1,516 1,319 2,917 2,754
------------ ------------ ------------ ------------
Income before extraordinary item 7,879 5,090 15,840 9,938
Extraordinary item -- -- -- (270)
------------ ------------ ------------ ------------
Net income $ 7,879 $ 5,090 $ 15,840 $ 9,668
============ ============ ============ ============
Income per common share-basic:
Income before extraordinary item $ 0.30 $ 0.25 $ 0.59 $ 0.50
Extraordinary item -- -- -- (0.02)
------------ ------------ ------------ ------------
Net income $ 0.30 $ 0.25 $ 0.59 $ 0.48
============ ============ ============ ============
Weighted average common shares outstanding 26,584,426 17,351,400 25,552,478 17,219,900
============ ============ ============ ============
Income per common share-diluted:
Income before extraordinary item $ 0.29 $ 0.25 $ 0.58 $ 0.48
Extraordinary item -- -- -- (0.01)
------------ ------------ ------------ ------------
Net income $ 0.29 $ 0.25 $ 0.58 $ 0.47
============ ============ ============ ============
Weighted average common shares outstanding 32,386,335 23,109,844 31,120,910 23,039,062
============ ============ ============ ============
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2002 and 2001
(Unaudited and in thousands)
2002 2001
-------- --------
Net cash provided by operating activities $ 26,113 $ 21,172
-------- --------
Cash flows from investing activities:
Additions to real estate assets (17,518) (1,560)
Proceeds from sale of real estate, net 18,831 --
Real estate deposits (1,266) (359)
Investment in and advances to non-consolidated entities -- (6,517)
Investment in partnerships -- (1,122)
-------- --------
Net cash provided by (used in) investing activities 47 (9,558)
-------- --------
Cash flows from financing activities:
Dividends to common and preferred shareholders (17,713) (12,242)
Dividend reinvestment plan proceeds 2,102 1,347
Change in credit facility borrowings, net (10,000) (41,821)
Principal amortization payments (7,013) (6,184)
Proceeds of mortgages and notes payable 11,000 59,244
Increase in deferred costs (372) (1,983)
Cash distributions to minority partners (3,202) (3,201)
Proceeds from the sale of common shares, net 702 21
Repurchase of common shares/units -- (192)
Increase in escrow deposits (561) (246)
Change in restricted cash (78) (221)
Other financing activities, net -- 7
-------- --------
Net cash used in financing activities (25,135) (5,471)
-------- --------
Change in cash and cash equivalents 1,025 6,143
Cash and cash equivalents, at beginning of period 13,863 4,792
-------- --------
Cash and cash equivalents, at end of period $ 14,888 $ 10,935
======== ========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
4
LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited and dollars in thousands, except per share data)
(1) The Company
Lexington Corporate Properties Trust (the "Company") is a self-managed
and self-administered real estate investment trust ("REIT") that
acquires, owns and manages a geographically diversified portfolio of
net leased office, industrial and retail properties. The real
properties owned by the Company are generally subject to triple net
leases to corporate tenants. As of June 30, 2002 the Company had an
ownership interest in 96 properties and managed an additional 2
properties.
The Company believes it has qualified as a REIT under the Internal
Revenue Code of 1986, as amended. A REIT is generally not subject to
Federal income tax on that portion of its REIT taxable income which is
distributed to its shareholders, provided that at least 90% of taxable
income is distributed. Accordingly, no provision for Federal income
taxes has been made.
The unaudited financial statements reflect all adjustments, which are
in the opinion of management, necessary to present a fair statement of
the condition and results for the interim periods. For a more complete
understanding of the Company's operations and financial position,
reference is made to the financial statements previously filed with the
Securities and Exchange Commission with the Company's Annual Report on
Form 10-K for the year ended December 31, 2001.
(2) Summary of Significant Accounting Policies
Basis of Presentation and Consolidation. The Company's consolidated
financial statements are prepared on the accrual basis of accounting.
The financial statements reflect the accounts of the Company and its
controlled subsidiaries, including Lepercq Corporate Income Fund L.P.
("LCIF"), Lepercq Corporate Income Fund II L.P. ("LCIF II") and Net 3
Acquisition L.P. ("Net 3"). The Company is the sole stockholder of each
of the general partner and majority limited partner of LCIF, LCIF II
and Net 3.
Earnings Per Share. Basic net income per share is computed by dividing
net income reduced by preferred dividends by the weighted average
number of common shares outstanding during the period. Diluted net
income per share amounts are similarly computed but include the effect,
when dilutive, of in-the-money common share options, preferred shares,
operating partnership units and exchangeable redeemable secured notes.
The Company's preferred shares are excluded from the six months ended
June 30, 2002 computation since they are anti-dilutive and the
preferred shares and exchangeable redeemable secured notes are excluded
from the 2001 computations since they are anti-dilutive. The Company's
preferred shares were converted into common shares in April 2002 and
the exchangeable redeemable secured notes were redeemed in July 2001.
Recently Issued Accounting Standards. The Company's adoption of SFAS
No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets," had no impact of the Company's consolidated financial position
or results of operations. In April 2002, the FASB issued SFAS No. 145
which rescinds SFAS No. 4 which required all gains and losses on
extinguishment of debt to be classified as an extraordinary item. The
Company will adopt the provisions of SFAS No. 145 effective January 1,
2003. Had the statement been adopted earlier the extraordinary item
recorded in 2001 would have been eliminated and the charge would have
been reflected in interest expense. In July 2002, the FASB issued SFAS
No. 146 which requires that exit or disposal costs be recorded when
incurred and can be measured at fair value. SFAS No. 146 is effective
for an exit or disposal activity initiated after December 31, 2002. The
Company does not expect that this statement will have a material effect
on the Company's consolidated results of operations or financial
position.
Use of Estimates. Management has made a number of estimates and
assumptions relating to the reporting of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported
amounts of revenues and expenses to prepare these condensed
consolidated financial statements in conformity with generally accepted
accounting principles. The most significant estimates made include the
recoverability of accounts receivable (primarily related to
straight-line rents) and the useful lives of depreciable assets. Actual
results could differ from those estimates.
5
Reclassifications. Certain amounts included in 2001 financial
statements have been reclassified to conform with the 2002
presentation.
(3) Earnings per Share
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations for the three and
six months ended June 30, 2002 and 2001:
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
BASIC
Income before extraordinary item $ 7,879 $ 5,090 $ 15,840 $ 9,938
Less preferred dividends -- (672) (693) (1,344)
------------ ------------ ------------ ------------
Income attributed to common shareholders before
extraordinary item 7,879 4,418 15,147 8,594
Extraordinary item -- -- -- (270)
------------ ------------ ------------ ------------
Net income attributed to common shareholders $ 7,879 $ 4,418 $ 15,147 $ 8,324
============ ============ ============ ============
Weighted average number of common shares outstanding 26,584,426 17,351,400 25,552,478 17,219,900
============ ============ ============ ============
Income per common share - basic:
Income before extraordinary item $ 0.30 $ 0.25 $ 0.59 $ 0.50
Extraordinary item -- -- -- (0.02)
------------ ------------ ------------ ------------
Net income $ 0.30 $ 0.25 $ 0.59 $ 0.48
============ ============ ============ ============
DILUTED
Income attributed to common shareholders before
extraordinary item - basic $ 7,879 $ 4,418 $ 15,147 $ 8,594
Add incremental income attributed to assumed conversion
of dilutive securities 1,457 1,267 2,804 2,613
------------ ------------ ------------ ------------
Income attributed to common shareholders before
extraordinary item - diluted 9,336 5,685 17,951 11,207
Extraordinary item -- -- -- (270)
------------ ------------ ------------ ------------
Net income attributed to common shareholders - diluted $ 9,336 $ 5,685 $ 17,951 $ 10,937
============ ============ ============ ============
Weighted average number of common shares used in
calculation of basic earnings per share 26,584,426 17,351,400 25,552,478 17,219,900
Add incremental shares representing:
Shares issuable upon exercise of employee share
options 304,165 325,777 276,020 287,234
Shares issuable upon conversion of dilutive securities 5,497,744 5,432,667 5,292,412 5,531,928
------------ ------------ ------------ ------------
Weighted average number of shares used in calculation of
diluted earnings per common share 32,386,335 23,109,844 31,120,910 23,039,062
============ ============ ============ ============
Income per common share-diluted:
Income before extraordinary item $ 0.29 $ 0.25 $ 0.58 $ 0.48
Extraordinary item -- -- -- (0.01)
------------ ------------ ------------ ------------
Net income $ 0.29 $ 0.25 $ 0.58 $ 0.47
============ ============ ============ ============
6
(4) Investments in Real Estate
In March 2002, the Company purchased a property in Lake Forest,
California leased to Apria Healthcare Group, Inc. for $16,970. The
lease, which expires in 2012, provides for annual rental revenues of
$1,800. The purchase price was partially funded through an $11,000
non-recourse mortgage which bears interest at 7.26%, provides for
annual debt service of $901 and matures January 2012 when a balloon
payment of $9,708 is due.
During the six months ended June 30, 2002, the Company sold its
properties in Modesto, California, Bessemer, Alabama and Highland
Heights, Ohio for net proceeds of $14,417 and realized a gain of
$1,134. In addition, the Company sold a 77% interest in a property in
Florence, South Carolina for net proceeds of $4,414 and deferred a $671
gain on sale since the purchasers can put their interests in the
property to the Company for a 2 year period.
The following pro forma operating information for the six months ended
June 30, 2002 and 2001 has been prepared as if all Company acquisitions
and dispositions (including non-consolidated entities) in 2002 and 2001
had been consummated as of January 1, 2001. The information does not
purport to be indicative of what the operating results of the Company
would have been had the acquisitions and dispositions been consummated
on January 1, 2001. Pro forma amounts are as follows:
June 30,
2002 2001
---------- ----------
Revenues $ 49,059 $ 48,262
Income before extraordinary item $ 14,555 $ 12,851
Net income $ 14,555 $ 12,581
Income before extraordinary item per common share
Basic $ 0.54 $ 0.59
Diluted $ 0.53 $ 0.56
Net income per common share
Basic $ 0.54 $ 0.58
Diluted $ 0.53 $ 0.55
(5) Investment in Non-Consolidated Entities
The Company has interests in non-consolidated entities ranging from 22%
to 99%. As of June 30, 2002, these investments have total net real
estate and notes payable of $381,164 and $237,457, respectively. For
the three months ended June 30, 2002 and 2001, combined revenues,
expenses and net income were $11,609 and $10,205; $8,418 and $7,717;
and $3,191 and $2,488, respectively. For the six months ended June 30,
2002 and 2001 combined revenues, expenses and net income were $23,317
and $19,989; $16,759 and $15,552; and $6,558 and $4,437, respectively.
(6) Concentration of Risk
The Company seeks to reduce its operating and leasing risks through
diversification achieved by the geographic distribution of its
properties, avoiding dependency on a single property and the
creditworthiness of its tenants.
For the six months ended June 30, 2002, no single tenant represented
greater than 10% of revenues and for the six months ended June 30,
2001, the following tenants represented greater than 10% of revenues:
Northwest Pipeline Corporation 11%
Kmart Corporation 12%
Both of these tenants are publicly registered companies subject to the
Securities Exchange Act of 1934 and accordingly file financial
information with the Securities and Exchange Commission.
7
(7) Minority Interests
In conjunction with several of the Company's acquisitions, sellers were
given interests in LCIF, LCIF II, or Net 3 as a form of consideration.
All of such interests are redeemable at certain times for common shares
on a one-for-one basis at various dates through November 2006.
As of June 30, 2002, the total number of limited partnership units of
LCIF, LCIF II and Net 3 outstanding was 5,259,778. These units, subject
to certain adjustments through the date of redemption, currently have
annual distributions per unit in varying amounts from $0 to $1.32 per
unit with a weighted average distribution of $1.17 per unit.
(8) Related Party Transactions
In January 2002, the Company issued 34,483 common shares in respect of
a 15 year, 8% interest only recourse note to an officer for $500. The
note provides for forgiveness of the principal balance under certain
circumstances.
In 2001, the Company earned $80 in asset management fees from two
partnerships controlled by the Company's Chairman. The Company incurred
reimbursable expenses relating to these partnerships of $275.
All related party transactions are approved by the independent members
of the Board of Trustees.
(9) Supplemental Disclosure of Statement of Cash Flow Information
During 2002 and 2001, the Company made interest payments of $16,415 and
$15,448, respectively.
During 2002, the Company sold a property to a newly formed joint
venture with unrelated parties for $4,414 in net proceeds and a deemed
capital contribution of $643.
During 2002 and 2001, the Company issued 64,249 and 100,000 common
shares, respectively, to certain employees and trustees resulting in
$996 and $1,181 of deferred compensation, respectively. These common
shares vest ratably, primarily over a 5 year period.
During 2002, the Company issued 34,483 common shares in respect of a 15
year, 8% interest only recourse note to an officer for $500. The note
provides for forgiveness of the principal balance under certain
circumstances.
During 2002 and 2001, holders of an aggregate of 48,584 and 388,732
partnership units redeemed such units for common shares of the Company.
This redemption resulted in an increase in shareholders' equity and
corresponding decrease in minority interest of $585 and $5,330,
respectively.
During 2001, the Company purchased a property in Winchester, Virginia
for $14,400 of which $10,800 was financed by the seller through a
purchase money note.
(10) Shareholders' Equity
In April 2002, the holder of the Company's 2 million preferred shares
converted its interest into 2 million common shares.
(11) Subsequent Events
In August 2002, a non-consolidated entity in which the Company has a
one-third economic interest purchased two properties net leased to TNT
Logistics North America, Inc. for an aggregate $45,279. The leases,
which expire in September 2012, provide for annual net rent of $5,389.
The purchases were partially funded through $30,150 non-recourse
mortgages which bear interest at 6.0%, provide for annual debt service
of $2,331 and mature September 2012 when a balloon payment of $23,020
is due. The mortgage notes are not cross collateralized.
In August 2002, a non-consolidated entity in which the Company has a
99% economic interest purchased a property net leased to TNT Canada,
Inc. for $2,896. The lease, which expires September 2012, provides for
annual net rent of $331.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this Form 10-Q Report, the words "believes," "expects," "estimates"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties which could cause
actual results to differ materially. In particular, among the factors that could
cause actual results to differ materially are continued qualification as a real
estate investment trust, general business and economic conditions, competition,
increases in real estate construction costs, interest rates, accessibility of
debt and equity capital markets and other risks inherent in the real estate
business including tenant defaults, potential liability relating to
environmental matters and illiquidity of real estate investments. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release the results of any revisions to these forward-looking
statements which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
General
The Company, which has elected to qualify as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended, acquires and
manages net leased commercial properties. The Company believes it has operated
as a REIT since October 1993.
As of June 30, 2002, the Company owned (or had interests in) 96 real estate
properties and managed 2 additional properties.
Critical Accounting Policies
The Company's accompanying consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America, which require management to make estimates that affect the amounts
of revenues, expenses, assets and liabilities reported. The following are
critical accounting policies which are both very important to the portrayal of
the Company's financial condition and results and which require some of
management's most difficult, subjective and complex judgments. The accounting
for these matters involves the making of estimates based on current facts,
circumstances and assumptions which could change in a manner that would
materially affect management's future estimate with respect to such matters.
Accordingly, future reported financial conditions and results could differ
materially from financial conditions and results reported based on management's
current estimates.
Revenue Recognition. The Company recognizes revenue in accordance with
Statement of Financial Accounting Standards No. 13 "Accounting for Leases" (SFAS
No.13). SFAS No. 13 requires that revenue be recognized on a straight line basis
over the term of the lease unless another systematic and rational basis is more
representative of the time pattern in which the use benefit is derived from the
leased property.
Accounts Receivable. The Company continuously monitors collections from our
tenants and would provide a provision for estimated losses based upon our
historical experience and any specific tenant collection issues that we have
identified.
Real Estate. The Company evaluates the carrying value of all real estate held to
determine if an impairment has occurred which would require the recognition of a
loss. The evaluation includes reviewing anticipated cash flows of the property,
based on current leases in place, coupled with an estimate of proceeds to be
realized upon sale. However, estimating future sale proceeds is highly
subjective and could differ materially from actual results.
9
Liquidity and Capital Resources
Real Estate Assets. As of June 30, 2002, the Company's real estate assets were
located in 30 states and contained an aggregate of approximately 16.4 million
square feet of net rentable space. The Properties are generally subject to
triple net leases, which are generally characterized as leases in which the
tenant pays all or substantially all of the cost and cost increases for real
estate taxes, capital expenditures, insurance and ordinary maintenance of the
Property. Approximately 98.3% of square feet is subject to a lease.
During the six months ended June 30, 2002, the Company purchased one Property
for $17.0 million and sold three Properties and an interest in a fourth Property
for net cash proceeds of $18.8 million.
The Company's principal sources of liquidity are revenues generated from the
Properties, interest on cash balances, amounts available under its unsecured
credit facility and amounts that may be raised through the sale of securities in
private or public offerings. For the six months ended June 30, 2002, the leases
on the Properties generated $45.9 million in revenue compared to $38.7 million
during the same period in 2001.
Dividends. The Company has made quarterly distributions since October 1986
without interruption. The Company declared a dividend in respect of the second
quarter of 2002, in the amount of $0.33 per share to shareholders of record as
of July 31, 2002 to be paid on August 14, 2002. The Company's annualized
dividend rate is currently $1.32 per share.
In connection with its intention to continue to qualify as a REIT for Federal
income tax purposes, the Company expects to continue paying regular dividends to
its shareholders. These dividends are expected to be paid from operating cash
flows which are expected to increase due to property acquisitions and growth in
rental revenues in the existing portfolio and from other sources. Since cash
used to pay dividends reduces amounts available for capital investments, the
Company generally intends to maintain a conservative dividend payout ratio,
reserving such amounts as it considers necessary for the expansion of Properties
in its portfolio, debt reduction, the acquisition of interests in new properties
as suitable opportunities arise, and such other factors as the Board of Trustees
considers appropriate.
Cash dividends paid to common shareholders increased to $17.0 million in 2002
compared to $10.9 million in 2001. The Company's dividend and distribution FFO
payout ratio on a per share basis for 2002 and 2001, was 69.5% and 69.2%,
respectively.
Although the Company receives the majority of its rental payments on a monthly
basis, it intends to continue paying dividends quarterly. The Company's two
largest tenants, as a percentage of revenue, pay their rent semi-annually (Kmart
Corporation) and quarterly (Northwest Pipeline Corporation). Amounts accumulated
in advance of each quarterly distribution are invested by the Company in
short-term money market or other suitable instruments.
Kmart, the Company's largest tenant based upon rental revenues, filed for
Chapter 11 bankruptcy protection on January 22, 2002. Kmart leases a 1.7 million
square foot distribution facility in Warren, Ohio. The Company acquired the
Property in 1998 by assuming a non-recourse mortgage of $42.2 million, issuing
operating partnership units valued at $18.9 million and $2.8 million in cash.
The Company has no retail properties leased to Kmart. The Kmart lease expires on
September 30, 2007. Annual net rents are presently $8.4 million ($4.95 per
square foot) and increase to $9.4 million on October 1, 2002. Rents are paid
semi-annually in arrears. The Property is encumbered by a non-recourse first
mortgage, bearing interest at an imputed rate of 7% with an outstanding balance
of $29.8 million at June 30, 2002. Annual debt service on this non-recourse
mortgage, which fully amortizes by maturity on October 1, 2007, is $6.2 million.
Accordingly, this Property lease currently provides after debt service cash flow
to Company of $2.2 million.
The Property is one of sixteen-leased warehouse distribution facilities utilized
in Kmart's logistical operation. According to Kmart, this facility ranks third
by distribution volume, is the primary supply source for 167 open Kmart retail
stores (approximately 9% of Kmart's total) and also supplies other distribution
facilities used by Kmart. As of March 31, 2002 the Company had $6.1 million in
accounts receivable from Kmart (including $1.9 million in straight-line rents).
On April 1, 2002 Kmart paid the Company $1.6 million in rent which was the
post-petition rent owed. The pre-petition rent would be paid to the Company if
and when Kmart affirms the lease on the Property as part of its reorganization
and the accrued straight-lined rent would be realized over the remaining lease
term. As of June 30, 2002 the Company had $6.7 million in accounts receivable
from Kmart (including $2.0 million in straight-
10
line rents) and the next rent payment is October 1, 2002. There have been no
discussions with Kmart with respect to the lease.
The Company anticipates that cash flows from operations will continue to provide
adequate funds for its operating and administrative expenses, regular debt
service obligations and all dividend payments in accordance with REIT
requirements in both the short-term and long-term. In addition, the Company
anticipates that cash on hand, borrowings under its unsecured credit facility,
issuance of equity and debt, as well as other alternatives, will provide the
necessary capital required by the Company. Cash flows from operations were $26.1
million and $21.2 million for the six months ended June 30, 2002 and 2001,
respectively.
Net cash provided by (used in) investing activities totaled $0.1 million and
($9.6) million for the six months ended June 30, 2002 and 2001, respectively.
Cash used in investing activities related primarily to investments in real
estate properties and joint ventures. Cash provided by investing activities
related to the sale of properties. Therefore, the fluctuation in investing
activities relates primarily to the timing of investments and sales of
properties.
Net cash used in financing activities totaled $25.1 million and $5.5 million for
the six months ended June 30, 2002 and 2001, respectively. Cash used in
financing activities during each period was primarily attributable to proceeds
from non-recourse mortgages and advances/repayments under the Company's credit
facility coupled with dividends, net of proceeds reinvested under the Company's
dividend reinvestment plan, distributions to limited partners and debt service
payments.
UPREIT Structure. The Company's UPREIT structure permits the Company to effect
acquisitions by issuing to a seller, as a form of consideration, interests in
partnerships controlled by the Company. All of such interests are redeemable at
certain times for common shares on a one-for-one basis and all of such interests
require the Company to pay certain distributions to the holders of such
interests. The Company accounts for these interests in a manner similar to a
minority interest holder. The number of common shares that will be outstanding
in the future should be expected to increase, and minority interest expense
should be expected to decrease, from time to time, as such partnership interests
are redeemed for common shares. The table set forth below provides certain
information with respect to such partnership interests as of June 30, 2002,
based on the current $1.32 annual dividend.
Current Total Current
Redeemable Total Annualized Annualized
for Common Number Affiliate Per Unit Distribution
Shares: of Units Units Distribution ($000)
- ------------- --------- --------- ------------ -------------
At any time 3,501,521 1,401,159 $ 1.32 $ 4,622
At any time 1,254,152 120,374 1.08 1,354
At any time 114,059 52,144 1.12 128
January 2003 17,901 -- -- --
December 2003 1,341 -- 1.32 2
March 2004 43,734 -- 0.27 12
March 2004 19,510 -- -- --
November 2004 24,552 2,856 -- --
March 2005 29,384 -- -- --
January 2006 171,168 416 -- --
February 2006 28,230 1,743 -- --
May 2006 9,368 -- 0.29 3
November 2006 44,858 44,858 1.32 59
--------- --------- --------- ---------
5,259,778 1,623,550 $ 1.17 $ 6,180
========= ========= ========= =========
Financing
Revolving Credit Facility. The Company's $60.0 million unsecured credit facility
bears interest at LIBOR plus 150-250 basis points depending on the amount of
Properties free and clear of mortgage debt. The credit facility contains
customary financial covenants including restrictions on the level of
indebtedness and net worth maintenance
11
provisions. As of June 30, 2002 the Company is in compliance with all covenants,
there are no borrowings outstanding on the facility and $56.7 million is
available to be borrowed due to $3.3 million in letters of credit outstanding.
Financing Transactions. During the six months ending June 30, 2002 the Company
completed the following financing transaction:
- Obtained a $11.0 million non-recourse mortgage on its Lake Forest,
California property. The mortgage note bears interest at 7.26%,
provides for annual debt service payments of $0.9 million and
matures in January 2012 when a balloon payment of $9.7 million is
due.
Debt Service Requirements. The Company's principal liquidity needs are the
payment of interest and principal on outstanding mortgage debt. As of June 30,
2002, a total of 64 of the Company's 83 consolidated Properties were subject to
outstanding mortgages, which had an aggregate principal amount of $427.6
million. The weighted average interest rate on the Company's total debt on such
date was approximately 7.34%. The scheduled principal amortization payments for
the remainder of 2002 and for 2003, 2004, 2005 and 2006 are $7.5 million, $15.5
million, $16.4 million, $15.8 million and $13.9 million, respectively. The
scheduled balloon payments for the remainder of 2002 and for 2003, 2004, 2005
and 2006 are $0, $0, $17.4 million, $80.9 million and $0, respectively.
Lease Obligations. Since the Company's tenants bear all or substantially all of
the cost of Property operations, maintenance and repairs, the Company does not
anticipate significant needs for cash for these costs. For three of the
Properties, the Company does have a level of property operating expense
responsibility. The Company generally funds property expansions with additional
secured borrowings, the repayment of which is funded out of rental increases
under the leases covering the expanded properties. To the extent there is a
vacancy of a Property, the Company would be obligated for all operating
expenses, including real estate taxes and insurance.
Results of Operations
Three months ended June 30, 2002 compared with June 30, 2001
Changes in the results of operations for the Company are primarily due to the
growth of its portfolio and costs associated with such growth. Of the increase
in total revenues in 2002, $3.6 million is attributable to rental revenue which
resulted from Properties purchased in 2001 (primarily the purchase of 23
Properties from Net 1 L.P. and Net 2 L.P in November 2001) and owned for the
entire quarter in 2002 and a Property purchased in 2002 offset by a reduction in
rental revenue from a decrease in overall portfolio occupancy from 99.7% to
98.3% and Property sales. Of the remaining $0.5 million in revenue growth in
2002, $0.1 million was attributable to earnings from non-consolidated entities
and $0.4 million was attributable primarily to higher interest earned due to
greater cash balances carried. The increase in interest expense due to the
growth of the Company's portfolio has been offset by a reduction in the weighted
average interest rate from 7.69% for the three months ended June 30, 2001 to
7.34% for the three months ended June 30, 2002 due to debt refinancings,
scheduled principal amortization payments, lower variable interest rates and
lower interest rates on new debt incurred by the Company. The increase in
property operating expenses is due to the vacancy of one Property in the third
quarter of 2001, which resulted in the Company incurring Property level
operating expenses which normally are the responsibility of the tenant, and a
second Property in which the Company has a level of operating expense
responsibility. Net income increased in 2002 due to the impact of items
discussed above plus $0.3 million in gains on sale of Properties.
The Company's non-consolidated entities had aggregate net income of $3.2 million
in 2002 compared with $2.5 million in 2001. The increase in net income is
primarily attributable to an increase in rental revenue of $1.5 million in 2002
attributable to the acquisition of Properties in May and December 2001, the
expansion of an existing Property in the fourth quarter of 2001 and the joint
venturing of a single Property in 2002. In addition, advisory fee income, which
includes acquisition and asset management fees, decreased by $0.1 million in
2002 due to the timing of transactions which generate acquisition fees offset by
more assets under management. These revenue sources were partly offset by an
increase in (i) interest expense of $0.5 million in 2002 due to partially
funding a fourth quarter 2001 acquisition with the use of a non-recourse
mortgage and (ii) depreciation expense of $0.1 million in 2002 due to more
depreciable assets owned.
12
Six months ended June 30, 2002 compared with June 30, 2001
Changes in the results of operations for the Company are primarily due to the
growth of its portfolio and costs associated with such growth. Of the increase
in total revenues in 2002, $7.2 million is attributable to rental revenue from
Properties purchased in 2001 (primarily the purchase of 23 Properties from Net 1
L.P. and Net 2 L.P. in November 2001) and owned for the entire period in 2002
and a Property purchased in 2002 offset by a reduction in rental revenue from a
decrease in overall portfolio occupancy from 99.7% to 98.3% and Property sales.
Of the remaining $1.4 million in revenue growth in 2002, $0.9 million was
attributable to earnings from non-consolidated entities and $0.5 million was
attributable primarily to higher interest earned due to greater cash balances
carried. The increase in interest expense due to the growth of the Company's
portfolio has been offset by a reduction in the weighted average interest rate
from 7.67% for the six months ended June 30, 2001 to 7.34% for the six months
ended June 30, 2002 due to debt refinancings, scheduled principal amortization
payments, lower variable interest rates and lower interest rates on new debt
incurred by the Company. The Company's general and administrative expenses
increased due to the acquisition of 23 Properties from Net 1 L.P. and Net 2
L.P., however decreased to 5.6% of revenue in 2002 compared with 6.0% in 2001.
The increase in property operating expenses increased due to the vacancy of one
Property in the third quarter of 2001, which resulted in the Company incurring
Property level operating expenses which normally are the responsibility of the
tenant, a second Property in which the Company has a level of operating expense
responsibility and costs accrued for our Kmart Property. Net income increased in
2002 due to the impact of items discussed above plus $1.1 million in gains on
sale of Properties and $0.3 million in extraordinary charges in 2001.
The Company's non-consolidated entities had aggregate net income of $6.6 million
in 2002 compared with $4.4 million in 2001. The increase in net income is
primarily attributable to an increase in rental revenue of $3.2 million in 2002
attributable to the acquisition of Properties, the expansion of an existing
Property and the joint venturing of a single Property in 2002. In addition,
advisory fee income, which includes acquisition and asset management fees,
increased by $0.2 million in 2002 due to the timing of transactions which
generate acquisition fees and more assets under management. These revenue
sources were partly offset by an increase in (i) interest expense of $0.8
million in 2002 due to partially funding a fourth quarter 2001 acquisition with
the use of a non-recourse mortgage, (ii) depreciation expense of $0.4 million in
2002 due to more depreciable assets owned and (iii) property operating/general
and administrative expenses of $0.2 million in 2002 due to an increase in the
asset base.
The increase in net income in future periods will be closely tied to the level
of acquisitions made by the Company. Without acquisitions, which in addition to
generating rental revenue, generate acquisition, debt placement and asset
management fees from co-investment programs, the sources of growth in net income
are limited to index adjusted rents (9 leases), percentage rents (3 leases),
reduced interest expense on amortizing mortgages and by controlling other
variable overhead costs. However, there are many factors beyond management's
control that could offset these items including, without limitation, increased
interest rates of variable debt ($47.5 million as of June 30, 2002 at a weighted
average interest rate of 4.73%) and tenant monetary defaults.
Funds From Operations
The Company believes that Funds From Operations ("FFO") enhances an investor's
understanding of the Company's financial condition, results of operations and
cash flows. The Company believes that FFO is an appropriate measure of the
performance of an equity REIT, and that it can be one measure of a REIT's
ability to make cash distributions. FFO is defined in the April 2002 "White
Paper", issued by the National Association of Real Estate Investment Trusts,
Inc. ("NAREIT") as "net income (computed in accordance with generally accepted
accounting principles), excluding gains (or losses) from sales of property, plus
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. Adjustments for unconsolidated partnerships and
joint ventures will be calculated to reflect funds from operations on the same
basis." The Company included in the 2001 calculation of FFO the dilutive effect
of the deemed conversion of its redeemable exchangeable notes which were
redeemed in July 2001. FFO should not be considered an alternative to net income
as an indicator of operating performance or to cash flows from operating
activities as determined in accordance with generally accepted accounting
principles, or as a measure of liquidity to other consolidated income or cash
flow statement data as determined in accordance with generally accepted
accounting principles.
13
The following table reflects the calculation of the Company's Funds From
Operations and cash flow activities for the six months ended June 30, 2002 and
2001 ($000's):
2002 2001
-------- --------
Net income $ 15,840 $ 9,668
Add back:
Depreciation and amortization of real
estate 10,375 8,718
Extraordinary item -- 270
Minority interest's share of net income 2,804 2,613
Amortization of leasing commissions 348 383
Deemed conversion of notes payable -- 1,000
Gains on sale (1,134) --
Joint venture adjustment-depreciation 2,226 1,919
-------- --------
Funds from Operations $ 30,459 $ 24,571
======== ========
Cash flows from operating activities $ 26,113 $ 21,172
Cash flows from investing activities 47 (9,558)
Cash flows from financing activities (25,135) (5,471)
For the six months ended June 30, 2002 and 2001, the Company's dividends and
distribution FFO payout ratio, on a per share basis, was 69.5% and 69.2% of the
Company's Funds From Operations, respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK ($000's)
The Company's exposure to market risk relates to its variable rate debt. As of
June 30, 2002 and 2001, the Company's variable rate indebtedness represented
10.8% and 9.5% of total long-term indebtedness, respectively. During the three
months ended June 30, 2002 and 2001, this variable rate indebtedness had a
weighted average interest rate of 4.64% and 6.87%, respectively, and for the six
months ended June 30, 2002 and 2001 the variable rate indebtedness had a
weighted average interest rate of 4.53% and 7.21%, respectively. Had the
weighted average interest rate been 100 basis points higher, the Company's net
income for the three months ended June 30, 2002 and 2001 would have been reduced
by approximately $144 and $110, respectively, and for the six months ended June
30, 2002 and 2001 net income would have been reduced by $284 and $240
respectively.
14
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings - not applicable.
ITEM 2. Changes in Securities and Use of Proceeds - not applicable.
ITEM 3. Defaults upon Senior Securities - not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders.
At the Company's Annual Meeting of Shareholders held on May
22, 2002, the following action was taken:
The shareholders elected the seven individuals nominated to
serve as trustees of the Company until the 2003 Annual
Meeting, as set forth in Proposal No. 1 in the Company's
Notice of Annual Meeting of Shareholders and Proxy Statement
for the Annual Meeting. The seven individuals elected, and the
number of votes cast for, or withheld, with respect to each of
them, follows:
For Withheld
--- --------
E. Robert Roskind 22,291,979 1,514,859
Richard J. Rouse 22,295,355 1,511,483
T. Wilson Eglin 22,283,301 1,523,537
Geoffrey Dohrmann 23,420,480 386,358
Carl D. Glickman 23,393,809 413,029
Jack A. Shaffer 23,395,367 411,471
Seth M. Zachary 23,393,372 413,466
The shareholders also approved the following other proposal
set forth in the Company's Proxy Statement, with the number of
votes for, against and abstaining set forth:
Proposal 2: To approve the Trust's 2002 Equity - Based Award
Plan:
For Against Abstain
--- ------- -------
20,245,153 3,117,317 444,368
ITEM 5. Other Information - not applicable.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
99.1 Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 - E.
Robert Roskind
99.2 Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 -
Richard J. Rouse
99.3 Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 -
Patrick Carroll
(b) Reports on Form 8-K filed during the quarter
ended June 30, 2002.
None.
15
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.
Lexington Corporate Properties Trust
Date: August 14, 2002 By: /s/ E. Robert Roskind
--------------------- ---------------------------------------------
E. Robert Roskind
Chairman and Co-Chief Executive Officer
Date: August 14, 2002 By: /s/ Richard J. Rouse
--------------------- ---------------------------------------------
Richard J. Rouse
Vice Chairman and Co-Chief Executive Officer
Date: August 14, 2002 By: /s/ Patrick Carroll
--------------------- ---------------------------------------------
Patrick Carroll
Chief Financial Officer and Treasurer
16