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 March 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from to
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Commission File Number 1-12386
LEXINGTON CORPORATE PROPERTIES TRUST
------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 13-3717318
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
355 Lexington Avenue
New York, NY 10017
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(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: 34,984,541 common shares, par
value $.0001 per share on May 13, 2003.
PART 1. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2003 (Unaudited) and December 31, 2002 (in thousands,
except share and per share data)
March 31, December 31,
2003 2002
---- ----
ASSETS:
Real estate, at cost $ 978,735 $ 913,370
Less: accumulated depreciation and amortization 141,900 134,220
--------- ---------
836,835 779,150
Cash and cash equivalents 13,998 12,097
Investment in non-consolidated entities 56,407 54,261
Deferred expenses, net 8,594 8,168
Rent receivable - current 4,967 3,535
Rent receivable - deferred 21,474 20,115
Other assets, net 17,806 25,145
--------- ---------
$ 960,081 $ 902,471
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Mortgages and notes payable $ 528,007 $ 460,517
Credit facility borrowings 22,500 31,000
Origination fees payable, including accrued interest 6,531 6,565
Accounts payable and other liabilities 9,065 10,758
--------- ---------
566,103 508,840
Minority interest 56,479 56,846
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622,582 565,686
--------- ---------
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, 30,152,997 and 29,742,160 shares issued and outstanding
in 2003 and 2002, respectively 3 3
Additional paid-in-capital 419,729 414,989
Deferred compensation, net (6,814) (1,766)
Accumulated distributions in excess of net income (79,228) (77,777)
--------- ---------
333,690 335,449
Less: notes receivable from officers/shareholders -- (2,473)
--------- ---------
333,690 332,976
--------- ---------
$ 960,081 $ 902,471
========= =========
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 months ended March 31, 2003 and 2002
(Unaudited and in thousands, except share and per share data)
2003 2002
---- ----
Revenues:
Rental $ 27,049 $ 22,995
Equity in earnings of non-consolidated entities 1,263 1,426
Advisory fees 411 --
Interest and other 358 392
----------- -----------
29,081 24,813
----------- -----------
Expenses:
Interest 9,368 8,250
Depreciation and amortization of real estate 6,361 5,183
General and administrative 2,311 1,579
Property operating 916 806
Amortization of deferred expenses 532 487
----------- -----------
19,488 16,305
----------- -----------
Income before gains on sale of properties and minority interests 9,593 8,508
Gains on sale of properties 885 854
----------- -----------
Income before minority interests 10,478 9,362
Minority interests 1,715 1,401
----------- -----------
Net income $ 8,763 $ 7,961
=========== ===========
Net income per common share-basic $ 0.29 $ 0.30
=========== ===========
Weighted average common shares outstanding-basic 29,983,496 24,509,064
=========== ===========
Net income per common share-diluted $ 0.29 $ 0.29
=========== ===========
Weighted average common shares outstanding-diluted 35,393,714 30,088,259
=========== ===========
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
Three months ended March 31, 2003 and 2002
(Unaudited and in thousands)
2003 2002
---- ----
Net cash provided by operating activities $ 13,184 $ 13,435
-------- --------
Cash flows from investing activities:
Investments in real estate assets (24,223) (17,445)
Net proceeds from the sale of properties 2,151 12,296
Investment in and advances to non-consolidated entities (6,875) --
Real estate deposits (422) --
-------- --------
Net cash used in investing activities (29,369) (5,149)
-------- --------
Cash flows from financing activities:
Dividends to common and preferred shareholders (10,214) (8,834)
Dividend reinvestment plan proceeds 1,452 1,001
Change in credit facility borrowings (8,500) (10,000)
Principal amortization payments (3,196) (2,515)
Proceeds of mortgages and notes payable 40,655 11,000
Increase in deferred costs (459) (237)
Cash distributions to minority interests (1,917) (1,567)
Proceeds from the issuance of common shares, net 250 85
Increase in escrow deposits (1,456) (396)
Origination fee amortization payments (107) (124)
-------- --------
Net cash provided by (used in) financing activities 16,508 (11,587)
-------- --------
Cash attributable to newly consolidated entity 1,578 --
-------- --------
Change in cash and cash equivalents 1,901 (3,301)
Cash and cash equivalents, at beginning of period 12,097 13,863
-------- --------
Cash and cash equivalents, at end of period $ 13,998 $ 10,562
======== ========
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
March 31, 2003
(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. As of March 31,
2003, the Company had an ownership interest in 104 properties and
managed an additional 2 properties. The real properties owned by the
Company are generally subject to triple net leases to corporate
tenants. Of the Company's 104 properties, four provide for operating
expense stops, one is a modified gross lease and one requires the
Company to be responsible for real estate taxes in 2003 and the tenant
to be responsible thereafter.
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 financial 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 (including the
notes thereto) previously filed with the Securities and Exchange
Commission with the Company's Annual Report on Form 10-K for the year
ended December 31, 2002.
(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"), Net 3
Acquisition L.P. ("Net 3") and Lexington Realty Advisors, Inc. ("LRA").
The Company is the sole unitholder of each of the general partner and
the majority limited partner of LCIF, LCIF II and Net 3. Effective
January 1, 2003, the Company converted its non-voting interest in LRA
to a 99% voting interest.
Earnings Per Share. Basic net income per share is computed by dividing
net income reduced by preferred dividends, if applicable, 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 and
operating partnership units.
Recently Issued Accounting Standards. The Company's adoption of SFAS
No. 146, which requires that exit or disposal costs be recorded when
incurred and be measured at fair value, had no impact on the Company's
consolidated financial position or results of operations. The adoption
of 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, had no impact on the Company's consolidated
financial position or results of operations. The Company's adoption of
FASB Interpretation No. 45, which elaborates on the disclosures to be
made by a guarantor in its financial statements about its obligations,
had no impact on the Company's financial position or results of
operations. FASB Interpretation No. 46 "Consolidation of Variable
Interest Entities" is required for all variable interest entities
created after January 31, 2003 and all existing entities beginning July
1, 2003. FIN 46 requires that companies that absorb the majority of
another entity's expected losses, receive a majority of its expected
residual returns, or both, as a result of holding variable interests,
which are ownership, contractual, or other economic interests in an
entity, consolidate the variable interest entity. The Company has not
determined the impact this will have on its consolidated financial
statements.
5
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 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 assets. Actual results
could differ from those estimates.
Reclassification. Certain amounts included in 2002 financial statements
have been reclassified to conform with the 2003 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 quarters
ended March 31, 2003 and 2002:
Three months ended
March 31,
2003 2002
---- ----
BASIC
Net income $ 8,763 $ 7,961
Less preferred dividends -- (693)
----------- ------------
Net income attributed to common shareholders-basic $ 8,763 $ 7,268
=========== ============
Weighted average number of common shares outstanding 29,983,496 24,509,064
=========== ============
Net income per common share-basic $ 0.29 $ 0.30
=========== ============
DILUTED
Net income attributed to common shareholders - basic $ 8,763 $ 7,268
Add incremental income attributed to assumed
conversion of dilutive securities 1,346 1,347
----------- ------------
Net income attributed to common shareholders -diluted $ 10,109 $ 8,615
=========== ============
Weighted average number of shares used in calculation
of basic earnings per share 29,983,496 24,509,064
Add incremental shares representing:
Shares issuable upon exercise of employee share options 160,503 272,174
Shares issuable upon conversion of dilutive securities 5,249,715 5,307,021
----------- ------------
Weighted average number of shares used in calculation
of diluted earnings per common share 35,393,714 30,088,259
=========== ============
Net income per common share-diluted $ 0.29 $ 0.29
=========== ============
(4) Investments in Real Estate
In February 2003, the Company acquired a property in Boca Raton,
Florida net leased to OCE Printing Systems USA, Inc. for a purchase
price of $23,500. The lease, which expires in February 2020 provides
for annual rental revenues of $2,245. The purchase price was partially
funded through a $15,275 interest only, non-recourse mortgage note
which bears interest at 5.25%, provides for annual debt service of $802
and matures March 2008 when a balloon payment of $15,275 is due.
6
During the three months ended March 31, 2003, the Company sold its
property in Bakersfield, California, in which the Company had a 64%
ownership interest, for aggregate net proceeds of $2,151 and realized a
gain of $885.
(5) Investment in Non-Consolidated Entities
The Company has investments in three non-consolidated entities. The
entities are Lexington Acquiport Company, LLC ("LAC"), Lexington
Florence LLC ("Florence") and Lexington Columbia LLC ("Columbia").
In March 2003, LAC acquired a property in Farmington Hills, Michigan,
for an aggregate purchase price of $32,650. The property is net leased
to Motorola, Inc. through December 2016 for annual rent of $3,106. The
tenant has the ability to terminate the lease as of December 2011 with
18 months notice and a payment of approximately $6,600. The purchase
was partially funded through a $24,000 non-recourse mortgage note which
bears interest at 30 day LIBOR plus 3.00% and becomes prepayable
without penalty in August 2003. LAC has arranged, subject to certain
conditions, for a $21,420 fixed rate, non-recourse mortgage note to
satisfy, along with an additional equity contribution of $2,580, the
current LIBOR-based note in August 2003. The replacement note bears
interest at 5.42%, requires annual debt service payments of $1,500 and
matures in August 2012 when a balloon payment of $17,500 is due.
The following is a summary of selected balance sheet data and income
statement data for the Company's non-consolidated entities:
MARCH 31, 2003 LAC FLORENCE COLUMBIA
--- -------- --------
Real estate, net $317,398 $15,465 $47,957
Mortgages payable 203,592 9,505 24,571
Lexington's ownership percentage 33.33% 22.73% 40.00%
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
LAC FLORENCE COLUMBIA
--- -------- --------
2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ----
Revenues $8,639 $7,253 $425 $302 $1,736 $1,734
Expenses 5,698 4,914 273 203 1,025 1,047
------ ------ ---- ---- ------ ------
Net income $2,941 $2,339 $152 $ 99 $ 711 $ 687
====== ====== ==== ==== ====== ======
(6) Concentration of Risk
The Company seeks to reduce its operating and leasing risks through
diversification achieved by the geographic distribution of its
properties, tenant industry diversification, avoiding dependency on a
single property and the creditworthiness of its tenants.
7
For the three months ended March 31, 2003 and 2002, no single tenant
represented greater than 10% of revenues.
(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 March 31, 2003, the total number of limited partnership units of
LCIF, LCIF II and Net 3 outstanding was 5,248,306. These units, subject
to certain adjustments through the date of redemption, currently have
annual distributions per unit in varying amounts from $0 to $1.34 per
unit with a weighted average distribution of $1.19 per unit.
(8) Related Party Transactions
In February 2003, three officers repaid recourse notes due the Company,
including accrued interest thereon, of $2,522 by delivering to the
Company 156,189 common shares.
All related party transactions are approved by the independent members
of the Board of Trustees.
(9) Commitments and Contingencies
The Company has entered into a $4,824 land purchase and development
agreement to develop a property in Minneapolis, Minnesota. The Company
funded $3,414 in costs through March 31, 2003 and completion of the
project is expected in the second half of 2003. Upon completion, the
property will be subject to a lease which will expire 12 years after
initial occupancy and provide for estimated annual net rent of 12.24%
of total development costs.
The Company, including its non-consolidated entities, is obligated
under certain tenant leases to fund the expansion of the underlying
leased properties.
The Company is involved in various legal actions occurring in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity.
(10) Supplemental Disclosure of Statement of Cash Flow Information
During 2003 and 2002, the Company paid $10,108 and $7,718,
respectively, for interest.
During 2003 and 2002, the Company issued 336,992 and 64,249 common
shares, respectively, to certain employees and trustees resulting in
$5,391 and $996 of deferred compensation, respectively. These common
shares generally vest ratably over 5 years. However, in certain
situations the vesting is cliff based after 5 years and in other cases
vesting only occurs if certain performance criteria are met.
During 2003, three officers repaid recourse notes due the Company,
including accrued interest thereon, of $2,522 by delivering to the
Company 156,189 common shares.
During 2003, holders of an aggregate of 9,059 partnership units
redeemed such units for common shares of the Company. These
redemptions resulted in an increase in shareholders' equity and
corresponding decrease in minority interest of $124.
During 2002, the Company sold a property to a newly formed joint
venture for $4,414 in net proceeds and a deemed capital contribution
of $643.
(11) Subsequent Events
The Company sold 4,500,000 common shares at $16.44 per share raising
net proceeds of $73,980.
The Company entered into an agreement with Kmart Corporation, the
Company's largest tenant based upon revenues, under which Kmart has
agreed to make its rental payments monthly in advance instead of
semi-annual in arrears. In return, the Company has agreed to pay Kmart
a monthly management fee of $42.
The Company received $4,510 from Kmart which represented (i) $2,950 in
pre-petition rent and other charges and (ii) $1,560 for April 2003 and
May 2003 rent.
The Company repaid $22,500 in outstanding borrowings on its unsecured
credit facility.
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 generally 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 the failure to
continue to qualify as a real estate investment trust, changes in general
business and economic conditions, competition, increases in real estate
construction costs, changes in interest rates, changes in 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, owns and
manages net-leased commercial properties. The Company believes that it has
operated as a REIT since October 1993.
As of March 31, 2003, the Company owned, or had interests in, 104 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.
Gains on sales of real estate are recognized pursuant to the provisions of SFAS
No. 66 "Accounting for Sales of Real Estate." The specific timing of the sale is
measured against various criteria in SFAS No. 66 related to the terms of the
transactions and any continuing involvement in the form of management or
financial assistance associated with the properties. If the sales criteria are
not met, the gain is deferred and the finance, installment or cost recovery
method, as appropriate, is applied until the sales criteria are met.
Accounts Receivable. The Company continuously monitors collections from its
tenants and would make a provision for estimated losses based upon historical
experience and any specific tenant collection issues that the Company has
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
9
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 such estimates could differ materially from actual
results.
Liquidity and Capital Resources
Real Estate Assets. As of March 31, 2003, the Company's real estate assets were
located in 30 states and Canada and contained an aggregate of approximately 19.8
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. Of the Company's 104 properties, four provide for operating expense
stops, one is subject to a modified gross lease and one requires the Company to
be responsible for real estate taxes in 2003 and for the tenant to be
responsible thereafter. Approximately 99.2% of square feet is subject to a
lease.
During the three months ended March 31, 2003, the Company purchased two
properties (including one purchased by a non-consolidated entity) for $56.2
million and sold one property, in which it had a 64% ownership interest, for net
cash proceeds of $2.2 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 three months ended March 31, 2003, the
leases on the consolidated properties generated $27.0 million in revenue
compared to $23.0 million during the same period in 2002.
Dividends. The Company has made quarterly distributions since October 1986
without interruption. The Company declared a dividend in the amount of $0.335
per share to shareholders of record as of April 30, 2003, which was paid on May
15, 2003. The Company's annualized dividend rate is currently $1.34 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 over time 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 interest 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 $10.2 million in 2003
compared to $8.1 million in 2002. The Company's dividend and distribution FFO
payout ratio on a per share basis for 2003 and 2002, was 69.8% and 70.2%,
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, based on a percentage of revenues, pay their rent semi-annually
(Kmart Corporation -see discussion below) 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 Corporation, the Company's largest tenant based upon rental revenues,
filed for Chapter 11 bankruptcy protection on January 22, 2002. Kmart emerged
from bankruptcy on May 6, 2003. On April 23, 2003, the bankruptcy court approved
an agreement between the Company and Kmart. Under the agreement, Kmart has
agreed to make monthly rent payments in advance rather than the currently
stipulated semi-annual payments in arrears. In turn, the Company has agreed to
pay Kmart a monthly management fee of approximately $42,000 provided the Company
receives (i) payment in full of all past due pre-petition rent and other past
due amounts (approximately $3.0 million) and (ii) current monthly payments of
future rent (approximately $0.8 million per month). In May 2003, the Company
received a $4.5 million payment from Kmart which represented pre-petition rent
and other charges and April 2003 and May 2003 monthly rent.
Kmart leases a 1.7 million square foot distribution facility in Warren, Ohio.
The Company has no retail properties leased to Kmart. The Kmart lease expires on
September 30, 2007. Annual cash rents are $9.4 million ($5.50 per square foot)
10
and annual rents on a straight-line basis are $8.9 million, which represents
approximately 7.2% of the Company's rental revenue for the three months ended
March 31, 2003, including the Company's proportionate share of rental revenue
from non-consolidated entities and rental revenue recognized from properties
sold through date of sale. At March 31, 2003, the Company had $9.6 million in
accounts receivable from Kmart, including $3.0 million in pre-bankruptcy
petition rent for the period from October 1, 2001 through January 21, 2002 and
other past due amounts, plus $1.9 million in straight line rent receivable.
Kmart is current in its post-bankruptcy petition rental obligation to the
Company. On April 1, 2003, Kmart made its scheduled semi-annual rental payment
of $4.7 million and on May 13, 2003 paid the pre-petition rent and other charges
owed the Company of $3.0 million.
The Kmart facility is subject to a 7% imputed interest rate non-recourse
mortgage note with an outstanding balance of $25.6 million as of March 31, 2003,
which fully amortizes by maturity on October 1, 2007. On April 1, 2003, the
semi-annual debt service payment of $3.1 million was made reducing the mortgage
balance to $23.4 million. The property is also subject to an interest only
second mortgage loan, which is a recourse obligation to the Company, with a
variable interest rate of 90 day LIBOR plus 3.75% and an outstanding principal
balance of $12.5 million. Annual debt service on the non-recourse first mortgage
note is $6.2 million, and the next debt service payment is due October 1, 2003.
The Company anticipates that cash flows from operations will continue to provide
adequate capital to fund 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, and other alternatives will be available to fund
the necessary capital required by the Company. Cash flows from operations were
$13.2 million and $13.4 million for the three months ended March 31, 2003 and
2002, respectively.
Net cash used in investing activities totaled $29.4 million and $5.1 million for
the three months ended March 31, 2003 and 2002, respectively. Cash used in
investing activities during each period was primarily attributable to the
acquisition of real estate and the investment in joint ventures. Cash provided
by investing activities relates to the sale of properties. Therefore, the
fluctuation in investing activities relates primarily to the timing of
investments and dispositions.
Net cash provided by (used in) financing activities totaled $16.5 million and
$(11.6) million for the three months ended March 31, 2003 and 2002,
respectively. Cash provided by (used in) financing activities during each period
was primarily attributable to repayments under the Company's credit facility,
dividends (net of proceeds reinvested under the Company's dividend reinvestment
plan), distributions to limited partners and debt service payments. Cash
provided by financing activities relates primarily to proceeds from mortgage
financings.
11
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 March 31, 2003,
based on the current $1.34 annual dividend.
Current Total Current
Total Annualized Annualized
Redemption Number Affiliate Per Unit Distribution
Date Of Units Units Distribution ($000)
- ---------- -------- ----- ------------ ------
At any time 3,507,950 1,401,159 $1.34 $4,701
At any time 1,254,152 120,374 1.08 1,354
At any time 114,059 52,144 1.12 128
December 2003 1,341 -- 1.34 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 1.34 60
--------- --------- ----- ------
5,248,306 1,623,550 $1.19 $6,260
========= ========= ===== ======
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, amount of variable rate debt and net worth maintenance provisions.
As of March 31, 2003, the Company is in compliance with all covenants, there is
$22.5 million outstanding on the facility, $33.3 million is available to be
borrowed and $4.2 million in letters of credit outstanding.
Financing Transactions. During the three months ending March 31, 2003 the
Company completed the following financing transactions:
- Obtained a $15.3 million interest only non-recourse mortgage
on its Boca Raton, Florida property. The mortgage note bears
interest at 5.25%, provides for annual debt service payments
of $0.8 million and matures in March 2008 when a balloon
payment of $15.3 million is due.
- Obtained a $24.0 million interest only non-recourse mortgage
on its Farmington Hills, Michigan property. The mortgage note
bears interest at 30 day LIBOR plus 3.00% and can be prepaid
without penalty in August 2003. The Company has arranged,
subject to certain conditions, for a non-recourse mortgage
note to partially satisfy the current outstanding mortgage in
August 2003. The replacement note will have a fixed interest
rate of 5.42%, provide for annual debt service of $1.5
million and will mature in August 2012 when a balloon payment
of $17.5 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 March 31,
2003, a total of 71 of the Company's 91 consolidated properties were subject to
outstanding mortgages, which had an aggregate principal amount of $515.5
million. The weighted average interest rate on the Company's consolidated debt
on such date was approximately 6.97%. The estimated scheduled principal
12
amortization payments for the remainder of 2003 and for 2004, 2005, 2006 and
2007 are $14.8 million, $18.7 million, $17.0 million, $15.4 million and $16.3
million, respectively. The estimated scheduled balloon payments for the
remainder of 2003 and for 2004, 2005, 2006 and 2007, including line of credit
borrowings and the recourse note on the Company's Warren, Ohio property, are
$0, $47.5 million, $76.5 million, $0, and $12.5 million, 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 six 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 in a property, the Company would be obligated for all operating
expenses, including real estate taxes and insurance.
The Company's tenants pay the rental obligation on ground leases either directly
to the fee holder or to the Company as increased rent. The annual ground lease
rental payment obligation for each of the next five years is $0.9 million.
Results of Operations
Three months ended March 31, 2003 compared with March 31, 2002
Changes in the results of operations for the Company are primarily due to the
growth of its portfolio and costs associated with such growth. In addition,
Lexington Realty Advisors, Inc. ("LRA") has been consolidated effective January
1, 2003; previously it had been accounted for under the equity method. Of the
increase in total revenues in 2003 of $4.3 million, $4.1 million is attributable
to rental revenue which resulted from (i) the consolidation of LRA ($1.2
million), (ii) properties purchased in 2002 and owned for the entire quarter in
2003 ($2.7 million), (iii) the property purchased in 2003 ($0.2 million) and
(iv) percentage rent ($0.2 million), offset by a reduction in rental revenue
from property sales ($0.2 million). The remaining $0.2 million in revenue growth
in 2003 was attributable to LRA advisory fees of $0.4 million offset by a $0.2
million decrease in earnings from non-consolidated entities. The increase in
interest expense of $1.1 million due to the growth of the Company's portfolio
($1.0 million) and consolidation of LRA ($0.6 million) has been partially offset
by a reduction in the weighted average interest rate from 7.34% for the three
months ended March 31, 2002 to 6.97% for the three months ended March 31, 2003
due to scheduled principal amortization payments and lower variable interest
rates. The Company's general and administrative expenses increased by $0.7
million due primarily to the consolidation of LRA ($0.4 million) and greater
deferred compensation expense amortization ($0.2 million). The increase in
property operating expenses of $0.1 million is due to the Company incurring
property level operating expenses for certain properties in which the Company
has operating expense responsibility. Net income increased in 2003 due to the
impact of items discussed above.
The Company's non-consolidated entities had aggregate net income of $3.8 million
in the first quarter of 2003 compared with $3.1 million in the first quarter of
2002. The increase in net income is primarily attributable to an increase in
rental revenue of $1.5 million in 2003 attributable to the acquisition of
properties in March 2003, August 2002, and the formation of a new joint venture
in 2002. These revenue sources were partially offset by an increase in (i)
interest expense of $0.5 million in 2003 due to partially funding of
acquisitions with the use of non-recourse mortgage debt and (ii) depreciation
expense of $0.3 million in 2003 due to more depreciable assets owned. The
financial information for non-consolidated entities for 2002 does not include
any financial information for LRA.
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 (7 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 ($80.5 million as of March 31, 2003 at a
weighted average interest rate of 4.41%) and tenant monetary defaults.
13
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, but limited,
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." 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.
The following table reflects the calculation of the Company's Funds From
Operations and cash flow activities for the three months ended March 31, 2003
and 2002 ($000's):
2003 2002
---- ----
Net income $ 8,763 $ 7,961
Add back:
Depreciation and amortization of real estate 6,361 5,183
Minority interest's share of net income 1,346 1,347
Amortization of leasing commissions 200 174
Gains on sale of properties (885) (854)
Minority interest's share-gains on sale 319 --
Joint venture adjustment 908 1,112
-------- --------
Funds From Operations $ 17,012 $ 14,923
======== ========
Cash flows from operating activities $ 13,184 $ 13,435
Cash flows from investing activities (29,369) (5,149)
Cash flows from financing activities 16,508 (11,587)
For the quarters ended March 31, 2003 and 2002, the Company's dividends and
distribution FFO payout ratio, on a per share basis, was 69.8% and 70.2%
respectively, of the Company's FFO, respectively.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk relates to its variable rate debt. As of
March 31, 2003 and 2002, the Company's variable rate indebtedness represented
14.6% and 10.7% of total long-term indebtedness, respectively. During the
quarters ended March 31, 2003 and 2002, this variable rate indebtedness had a
weighted average interest rate of 4.04% and 4.44%, respectively, and had the
weighted average interest rate been 100 basis points higher, the Company's net
income would have been reduced by approximately $149,000 and $140,000
respectively.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of the Company's
"disclosure controls and procedures" (as defined in rule 13a-14(c) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) was carried
out within 90 days prior to the filing of this quarterly report. This evaluation
was made under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and its Chief Financial
Officer. Based upon this evaluation, the Company's Chief Executive Officer and
its Chief Financial Officer have concluded that the Company's disclosure
controls and procedures (a) are effective to ensure that information required to
be disclosed by the Company in reports filed or submitted under the Exchange Act
is timely recorded, processed, summarized and reported and (b) include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in reports filed or submitted under the Exchange
Act is accumulated and communicated to the Company's management, including its
Chief Executive Officer and its Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
Changes in Internal Controls
There have been no significant changes in the Company's internal controls or, to
the knowledge of the management of the Company, in other factors that could
significantly affect these controls subsequent to the date of the Company's
evaluation.
15
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 - not
applicable.
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 - T.
Wilson Eglin
99.2 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 March 31, 2003.
None
16
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: May 15, 2003 By: /s/ T. Wilson Eglin
------------ ------------------------------------------
T. Wilson Eglin
Chief Executive Officer, President
and Chief Operating Officer
Date: May 15, 2003 By: /s/ Patrick Carroll
------------ ------------------------------------------
Patrick Carroll
Chief Financial Officer, Executive Vice
President and Treasurer
17
CERTIFICATION
I, T. Wilson Eglin, Chief Executive Officer of Lexington Corporate Properties
Trust (the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in this
quarterly report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the Audit
Committee of Company's board of trustees (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ T. Wilson Eglin
- ------------------------
T. Wilson Eglin
Chief Executive Officer
May 15, 2003
18
CERTIFICATION
I, Patrick Carroll, Chief Financial Officer of Lexington Corporate Properties
Trust (the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in this
quarterly report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the Audit
Committee of Company's board of trustees (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Patrick Carroll
- ------------------------
Patrick Carroll
Chief Financial Officer
May 15, 2003
19