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 September 30, 2003
[ ] 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 by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act).
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: 40,547,875 common shares, par
value $.0001 per share on November 10, 2003.
PART 1. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2003 (Unaudited) and December 31, 2002
(in thousands, except share and per share data)
September 30, December 31,
2003 2002
---- ----
ASSETS:
Real estate, at cost $ 1,083,759 $ 913,370
Less: accumulated depreciation and amortization 155,619 134,220
------------- -----------
928,140 779,150
Cash and cash equivalents 12,505 12,097
Investment in non-consolidated entities 55,930 54,261
Deferred expenses, net 8,830 8,168
Rent receivable - current -- 3,535
Rent receivable - deferred 23,426 20,115
Other assets, net 26,437 25,145
------------- -----------
$ 1,055,268 $ 902,471
============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Mortgages and notes payable $ 476,316 $ 460,517
Credit facility borrowings 21,500 31,000
Origination fees payable, including accrued interest 6,503 6,565
Accounts payable and other liabilities 9,727 10,758
Prepaid rent 3,646 --
------------- -----------
517,692 508,840
Minority interest 54,345 56,846
------------- -----------
572,037 565,686
------------- -----------
Commitments and contingencies (note 10)
Common shares, par value $0.0001 per share, 287,888 shares issued
and outstanding, liquidation preference $3,886 3,809 3,809
------------- -----------
Shareholders' equity:
Preferred shares, par value $0.0001 per share; authorized 10,000,000 shares,
Class B Cumulative Redeemable Preferred, liquidation preference
$79,000, 3,160,000 shares issued and outstanding in 2003 76,315 --
Common shares, par value $0.0001 per share; authorized 80,000,000 shares,
34,958,915 and 29,742,160 shares issued and outstanding in 2003 and
2002, respectively 3 3
Additional paid-in-capital 498,568 414,989
Deferred compensation, net (6,490) (1,766)
Accumulated distributions in excess of net income (88,974) (77,777)
------------- -----------
479,422 335,449
Less: notes receivable from officers/shareholders -- (2,473)
------------- -----------
479,422 332,976
------------- -----------
$ 1,055,268 $ 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 and nine months ended September 30, 2003 and 2002
(Unaudited and in thousands, except share and per share data)
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues:
Rental $ 28,651 $ 23,130 $ 82,673 $ 68,217
Equity in earnings of non-consolidated entities 1,325 1,468 3,900 3,831
Advisory fees 273 -- 953 --
Interest and other 862 294 1,512 1,294
------------ ------------ ------------ ------------
31,111 24,892 89,038 73,342
------------ ------------ ------------ ------------
Expenses:
Interest 8,205 8,392 26,857 24,662
Debt satisfaction charges -- -- 7,685 --
Depreciation and amortization of real estate 6,960 5,218 20,113 15,403
General and administrative 2,648 1,359 7,399 4,122
Property operating 1,163 496 2,818 1,744
Amortization 557 481 1,601 1,425
------------ ------------ ------------ ------------
19,533 15,946 66,473 47,356
------------ ------------ ------------ ------------
Income from continuing operations before minority
interests 11,578 8,946 22,565 25,986
Minority interests (1,654) (1,452) (2,840) (4,200)
------------ ------------ ------------ ------------
Income from continuing operations 9,924 7,494 19,725 21,786
------------ ------------ ------------ ------------
Discontinued operations:
Income from discontinued operations 38 113 340 645
Gains on sales of properties -- 39 1,143 1,055
------------ ------------ ------------ ------------
Total discontinued operations 38 152 1,483 1,700
------------ ------------ ------------ ------------
Net income $ 9,962 $ 7,646 $ 21,208 $ 23,486
Dividends attributable to preferred shares - Series A -- -- -- (693)
Dividends attributable to preferred shares - Series B (1,590) -- (1,802) --
------------ ------------ ------------ ------------
Net income allocable to common shareholders $ 8,372 $ 7,646 $ 19,406 $ 22,793
============ ============ ============ ============
Income per common share-basic:
Income from continuing operations $ 0.24 $ 0.27 $ 0.55 $ 0.81
Income from discontinued operations -- 0.01 0.05 0.06
------------ ------------ ------------ ------------
Net income $ 0.24 $ 0.28 $ 0.60 $ 0.87
============ ============ ============ ============
Weighted average common shares outstanding -
Basic 34,780,279 27,165,248 32,579,011 26,095,976
============ ============ ============ ============
Income per common share-diluted:
Income from continuing operations $ 0.24 $ 0.27 $ 0.54 $ 0.80
Income from discontinued operations -- 0.01 0.04 0.05
------------ ------------ ------------ ------------
Net income $ 0.24 $ 0.28 $ 0.58 $ 0.85
============ ============ ============ ============
Weighted average common shares outstanding -
Diluted 34,973,430 32,677,901 37,989,563 31,614,492
============ ============ ============ ============
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
Nine months ended September 30, 2003 and 2002
(Unaudited and in thousands)
2003 2002
--------- ---------
Net cash provided by operating activities $ 50,019 $ 37,793
--------- ---------
Cash flows from investing activities:
Acquisition of properties (141,707) (72,662)
Proceeds from sale of properties, net 7,807 18,831
Real estate deposits (5,417) (859)
Investment in and advances to non-consolidated entities, net (3,854) (7,201)
--------- ---------
Net cash used in investing activities (143,171) (61,891)
--------- ---------
Cash flows from financing activities:
Dividends to common and preferred shareholders (32,405) (26,663)
Dividend reinvestment plan proceeds 4,795 3,328
Change in credit facility borrowings, net (9,500) (10,000)
Principal amortization payments (11,048) (9,608)
Principal payments on debt, excluding normal amortization (78,084) --
Proceeds of mortgages and notes payable 74,882 37,508
Increase in deferred costs (2,411) (1,228)
Cash distributions to minority partners (5,053) (4,743)
Proceeds from the sale of common and preferred shares, net 150,323 37,255
Increase in escrow deposits (1,150) (702)
Change in restricted cash 1,925 (161)
Origination fee amortization payments (292) (279)
--------- ---------
Net cash provided by financing activities 91,982 24,707
--------- ---------
Cash attributable to newly consolidated entity 1,578 --
--------- ---------
Change in cash and cash equivalents 408 609
Cash and cash equivalents, at beginning of period 12,097 13,863
--------- ---------
Cash and cash equivalents, at end of period $ 12,505 $ 14,472
========= =========
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
September 30, 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 September
30, 2003, the Company had an ownership interest in 108 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 108 properties, six 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. Accordingly, the Company will not be
subject to federal income tax, provided that distributions to its
shareholders equal at least the amount of its REIT taxable income as
defined under the Code. The Company is permitted to participate in
certain activities which it was previously precluded from in order to
maintain its qualification as a REIT, so long as these activities are
conducted in entities which elect to be treated as taxable REIT
subsidiaries under the Code. As such, the Company will be subject to
federal income taxes on the income from these activities.
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 of operations 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, and
as updated on a Form 8-K filed on September 30, 2003, 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, required the Company to record debt satisfaction
charges and the write-off of unamortized financing costs as a charge
from continuing operations instead of an extraordinary item. 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 for the first reporting period ending after December
15, 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 believes
the adoption of FIN 46 will not have a material impact of its financial
position or results of operations. The adoption of SFAS No. 148,
"Accounting for Stock-Based Compensation -
5
Transition and Disclosure and Amendment of FASB Statement No. 123"
requires the Company to disclose in both annual and interim financial
statements the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
Company has elected to continue to account for its option plan under
the recognition provision of Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees." Accordingly, no
compensation cost has been recognized with regard to options granted in
the condensed consolidated statements of income.
Common share options granted generally vest ratably over a four-year
term and expire five years from the date of grant. The following table
illustrates the effect on net income and earnings per share if the fair
value based method had been applied to all outstanding stock awards in
each period:
Three Months Ended September 30,
2003 2002
-------- --------
Net income allocable to common shareholders,
as reported $ 8,372 $ 7,646
Add: Stock based employee compensation
expense included in reported net income -- --
Deduct: Total stock based employee
compensation expense determined under fair
value based method for all awards 127 239
-------- --------
Pro forma net income - basic $ 8,245 $ 7,407
======== ========
Net income per share - basic
Basic - as reported $ 0.24 $ 0.28
======== ========
Basic - pro forma $ 0.24 $ 0.27
======== ========
Net income allocable to common shareholders
for diluted earnings per share $ 8,372 $ 9,068
Add: Stock based employee compensation
expense included in reported net income -- --
Deduct: Total stock based employee
compensation expense determined under fair
value based method for all awards 127 239
-------- --------
Pro forma net income - diluted $ 8,245 $ 8,829
======== ========
Net income per share - diluted
Diluted - as reported $ 0.24 $ 0.28
======== ========
Diluted - pro forma $ 0.24 $ 0.27
======== ========
6
Nine Months Ended September 30,
2003 2002
-------- ---------
Net income allocable to common shareholders,
as reported $ 19,406 $ 22,793
Add: Stock based employee compensation
expense included in reported net income -- --
Deduct: Total stock based employee
compensation expense determined under fair
value based method for all awards 382 736
-------- ---------
Pro forma net income - basic $ 19,024 $ 22,057
======== =========
Net income per share - basic
Basic - as reported $ 0.60 $ 0.87
======== =========
Basic - pro forma $ 0.58 $ 0.85
======== =========
Net income allocable to common shareholders
for diluted earnings per share $ 22,222 $ 27,018
Add: Stock based employee compensation
expense included in reported net income -- --
Deduct: Total stock based employee
compensation expense determined under fair
value based method for all awards 382 736
-------- ---------
Pro forma net income - diluted $ 21,840 $ 26,282
======== =========
Net income per share - diluted
Diluted - as reported $ 0.58 $ 0.85
======== =========
Diluted - pro forma $ 0.58 $ 0.83
======== =========
The adoption of SFAS No. 149, which amended SFAS No. 133 on derivative
instruments and hedging activities and SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity" had
no impact on the Company's consolidated financial position or results of
operations.
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.
Purchase Accounting for Acquisition of Real Estate. The fair value of the real
estate acquired is allocated to the acquired tangible assets, consisting of
land, building and tenant improvements, and identified intangible assets and
liabilities, consisting of the value of above-market and below-market leases,
other value of in-place leases and value of tenant relationships, based in each
case on their fair values.
The fair value of the tangible assets of an acquired property (which includes
land, building and tenant improvements) is determined by valuing the property as
if it were vacant, and the "as-if-vacant" value is then allocated to land,
building and tenant improvements based on management's determination of relative
fair values of these assets. Factors considered by management in performing
these analyses include an estimate of carrying costs during the expected
lease-up periods considering current market conditions and costs to execute
similar leases. In estimating carrying costs, management includes real estate
taxes, insurance and other operating expenses and estimates of lost rental
revenue during the expected lease-up periods based on current market demand.
Management also estimates costs to execute similar leases including leasing
commissions.
7
In allocating the fair value of the identified intangible assets and liabilities
of an acquired property, above-market and below-market in-place lease values
are recorded based on the difference between the current in-place lease rent and
a management estimate of current market rents.
The aggregate value of other acquired intangible assets, consisting of in-place
leases and tenant relationships, is measured by the excess of (i) the purchase
price paid for a property over (ii) the estimated fair value of the property as
if vacant, determined as set forth above. This aggregate value is allocated
between in-place lease values and tenant relationships based on management's
evaluation of the specific characteristics of each tenant's lease. The value of
in-place leases and customer relationships are amortized to expense over the
remaining non-cancelable periods of the respective leases.
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 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.
Reclassification. Certain amounts included in 2002 financial statements have
been reclassified to conform with the 2003 presentation.
8
(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
nine months ended September 30, 2003 and 2002:
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
BASIC
Income from continuing operations $ 9,924 $ 7,494 $ 19,725 $ 21,786
Less preferred dividends (1,590) -- (1,802) (693)
------------ ------------ ------------ ------------
Income allocable to common shareholders from
continuing operations 8,334 7,494 17,923 21,093
Total income from discontinued operations 38 152 1,483 1,700
------------ ------------ ------------ ------------
Net income allocable to common shareholders $ 8,372 $ 7,646 $ 19,406 $ 22,793
============ ============ ============ ============
Weighted average number of common shares outstanding 34,780,279 27,165,248 32,579,011 26,095,976
============ ============ ============ ============
Income per common share - basic:
Income from continuing operations $ 0.24 $ 0.27 $ 0.55 $ 0.81
Income from discontinued operations -- 0.01 0.05 0.06
------------ ------------ ------------ ------------
Net income $ 0.24 $ 0.28 $ 0.60 $ 0.87
============ ============ ============ ============
DILUTED
Income allocable to common shareholders from
continuing operations - basic $ 8,334 $ 7,494 $ 17,923 $ 21,093
Incremental income attributed to assumed conversion
of dilutive securities -- 1,408 2,701 4,073
------------ ------------ ------------ ------------
Income allocable to common shareholders from
continuing operations - diluted 8,334 8,902 20,624 25,166
Total income from discontinued operations - diluted 38 166 1,598 1,852
------------ ------------ ------------ ------------
Net income allocable to common shareholders -
diluted $ 8,372 9,068 $ 22,222 $ 27,018
============ ============ ============ ============
Weighted average number of common shares used in
calculation of basic earnings per share 34,780,279 27,165,248 32,579,011 26,095,976
Add incremental shares representing:
Shares issuable upon exercise of employee share
options 193,151 253,723 188,988 237,387
Shares issuable upon conversion of dilutive
securities -- 5,258,930 5,221,564 5,281,129
------------ ------------ ------------ ------------
Weighted average number of shares used in
calculation of diluted earnings per common share 34,973,430 32,677,901 37,989,563 31,614,492
============ ============ ============ ============
Income per common share-diluted:
Income from continuing operations $ 0.24 $ 0.27 $ 0.54 $ 0.80
Income from discontinued operations -- 0.01 0.04 0.05
------------ ------------ ------------ ------------
Net income $ 0.24 $ 0.28 $ 0.58 $ 0.85
============ ============ ============ ============
9
(4) Investments in Real Estate
The following acquisitions were consummated during 2003:
- The Company acquired a property in Boca Raton, Florida net
leased to OCE Printing Systems USA, Inc. for a purchase price
of $23,551. 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.
- The Company purchased an industrial property in Dubuque, Iowa
for $11,424 net leased to McGraw-Hill, Inc. through June 2017.
The lease provides for average annual rents of $1,164. The
purchase price was partially funded through a $7,400,
non-recourse mortgage which bears interest at 4.89%, provides
for annual debt service of $513 and matures August 2008 when a
balloon payment of $6,588 is due.
- The Company purchased an industrial property in Minneapolis,
Minnesota for $4,610 net leased to Owens Corning through June
2015. The lease provides for average annual rents of $596. The
purchase price was satisfied entirely with cash.
- The Company purchased an office property in Greenville, South
Carolina for $21,745 net leased to Verizon, Inc. through
January 2012. The lease provides for average annual net rents
of $1,955. The purchase price was partially funded through a
$13,975, non-recourse mortgage which bears interest at 4.415%,
provides for annual debt service of $841 and matures January
2012 when a balloon payment of $11,806 is due.
- The Company purchased an office property in Malvern,
Pennsylvania for $22,361 net leased to Ikon Office Solutions,
Inc. through September 2013. The lease provides for average
annual rents of $1,994. The purchase price was satisfied
entirely with cash.
- The Company purchased an industrial property in Plymouth,
Michigan for $20,710 net leased to Tower Automotive Products
Company, through October 2012. The lease provides for average
annual rents of $1,886. The purchase price was partially
funded through a $12,852, non-recourse mortgage which bears
interest at 6.22%, provides for annual debt service of $1,026
and matures December 2012 when a balloon payment of $10,026 is
due.
- The Company purchased an office property in Novato, California
for $39,523 net leased to Greenpoint Mortgage Funding, through
July 2011. The lease provides for average annual net rents of
$3,939. The purchase price was satisfied entirely with cash.
The Company has allocated $8,805 of the purchase price of these
properties to intangibles, which are included in other assets in the
accompanying condensed consolidated balance sheet.
The following pro forma operating information for the nine months ended
September 30, 2003 and 2002 has been prepared as if all Company
acquisitions and dispositions (including non-consolidated entities) in
2003 and 2002 had been consummated as of January 1, 2002. 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, 2002. Pro forma amounts are
as follows:
September 30,
2003 2002
--------- ---------
Revenues $ 97,746 $ 92,629
Net income $ 23,544 $ 29,420
Net income per common share
Basic $ 0.67 $ 1.10
Diluted $ 0.65 $ 1.06
10
(5) Discontinued Operations
In accordance with SFAS No. 144, the operating results of properties
sold or held for sale are classified as discontinued operations. During
the nine months ended September 30, 2003, the Company sold its
properties in Bakersfield, California, in which the Company had a 64%
ownership interest, Tempe, Arizona and Alberta, Canada for aggregate
net proceeds of $7,807, which resulted in a gain of $1,143.
The following presents the operating results for the properties sold
and one property held for sale (having a net book value of $1,897 and
included in other assets) for the applicable periods:
Three Months Ended September 30,
2003 2002
----- -----
Revenues $ 38 $ 188
Pre-tax income, including gains on sale $ 38 $ 152
Nine Months Ended September 30,
2003 2002
------- --------
Revenues $ 454 $ 1,038
Pre-tax income, including gains on sale $ 1,644 $ 1,700
(6) 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 $21,420, non-recourse mortgage note
which bears interest at 5.42%, requires annual debt service payments of
$1,500 and matures in September 2012 when a balloon payment of $17,735
is due.
The following is a summary of selected balance sheet data and income
statement data for the Company's non-consolidated entities:
SEPTEMBER 30, 2003
LAC FLORENCE COLUMBIA
--- -------- --------
Real estate, net $ 313,901 $ 15,307 $ 46,962
Mortgages payable $ 199,913 $ 9,434 $ 24,451
Lexington's ownership percentage 33.33% 22.73% 40.00%
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
LAC FLORENCE COLUMBIA
--- -------- --------
2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ----
Revenues $9,316 $8,094 $ 427 $ 426 $1,733 $1,734
Expenses 6,196 5,441 275 278 1,032 1,037
------ ------ ------ ------ ------ ------
Net income $3,120 $2,653 $ 152 $ 148 $ 701 $ 697
====== ====== ====== ====== ====== ======
11
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
LAC FLORENCE COLUMBIA
--- -------- --------
2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ----
Revenues $27,252 $22,615 $ 1,277 $ 1,155 $ 5,203 $ 5,202
Expenses 18,086 15,278 822 756 3,099 3,124
------- ------- ------- ------- ------- -------
Net income $ 9,166 $ 7,337 $ 455 $ 399 $ 2,104 $ 2,078
======= ======= ======= ======= ======= =======
(7) 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. For the three
months and nine months ended September 30, 2003 and 2002, no single
tenant represented greater than 10% of revenues.
Cash and cash equivalent balances may exceed insurable amounts. The
Company believes it mitigates risk by investing in or through major
financial institutions.
(8) 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 September 30, 2003, the total number of limited partnership units
of LCIF, LCIF II and Net 3 outstanding was 5,198,691. 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.
(9) 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.
(10) Commitments and Contingencies
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.
12
(11) Supplemental Disclosure of Statement of Cash Flow Information
During 2003 and 2002, the Company paid $28,001 and $24,241,
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 and 2002, holders of an aggregate of 71,567 and 49,584
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 $915 and $599,
respectively.
During 2002, the Company sold a property to a newly formed joint
venture (Florence) for $4,414 in net proceeds and a deemed capital
contribution of $643.
(12) Subsequent Events
The following events occurred subsequent to September 30, 2003:
The Company purchased an office property in Temple, Texas for $15,300,
which is net leased to Nextel of Texas, Inc. and guaranteed by Nextel
Finance Company through January 2016. The lease provides for average
annual rents of $1,559. The purchase price was satisfied through
borrowings under the unsecured revolving credit facility.
The Company purchased an office property in Bremerton, Washington for
$11,301, which is net leased to Nextel West Corp. and guaranteed by
Nextel Finance Company through May 2016. The lease provides for average
annual rents of $1,113. The purchase price was satisfied through
borrowings under the unsecured revolving credit facility.
The Greenpoint Mortgage Funding property in Novato, California was
contributed to a newly formed joint venture in which the Company has a
30% ownership interest. The joint venture obtained a $22,850
non-recourse mortgage which bears interest at 5.75%, provides for
annual debt service of $1,600 and matures in July 2011 when a balloon
payment of $20,307 is due. The proceeds from the non-recourse mortgage
were distributed to the Company.
The newly formed joint venture purchased an industrial property in
Logan Township, New Jersey for $12,800, which is net leased to
Linens-n-Things, Inc. through January 2009. The lease provides for
average annual rents of $1,251. The property was purchased from our
joint venture partner. This property is unencumbered.
The Company completed an offering of 5,300,000 common shares raising
net proceeds of $100,419.
The Company repaid all borrowings on its unsecured revolving credit
facility.
13
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 September 30, 2003, the Company owned, or had interests in, 108 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 of operations 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 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.
14
Liquidity and Capital Resources
Real Estate Assets. As of September 30, 2003, the Company's real estate assets
were located in 31 states and contained an aggregate of approximately 20.6
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 108 properties, six 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 99.5% of square feet is subject to a
lease.
During the nine months ended September 30, 2003, the Company purchased eight
properties (including one purchased by a non-consolidated entity) for $176.9
million and sold three properties, for net cash proceeds of $7.8 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 nine months ended September 30, 2003, the
leases on the consolidated properties generated $83.1 million in rental revenue,
including discontinued operations, compared to $69.2 million during the same
period in 2002.
Dividends. The Company has made quarterly distributions since October 1986
without interruption. The Company declared a common dividend of $0.335 per share
to common shareholders of record as of October 31, 2003, payable on November 14,
2003. The Company's annualized common dividend rate is currently $1.34 per
share. The Company also declared a preferred dividend of $0.503125 per share to
preferred shareholders of record as of October 31, 2003, payable on November 17,
2003. The annual preferred dividend rate is $2.0125 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 common and
preferred 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 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 $32.2 million in 2003
compared to $26.0 million in 2002.
Although the Company receives the majority of its rental payments on a monthly
basis, it intends to continue paying dividends quarterly. 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 whereby Kmart agreed to make monthly
rent payments in advance rather than semi-annual payments in arrears as provided
for in the lease and the Company agreed to pay Kmart a management fee of $0.5
million per annum.
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
$50.0 million and $37.8 million for the nine months ended September 30, 2003 and
2002, respectively. The September 30, 2003 cash flows from operations were
negatively impacted by $6.8 million in debt satisfaction charge payments.
Net cash used in investing activities totaled $143.2 million and $61.9 million
for the nine months ended September 30, 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 financing activities totaled $92.0 million and $24.7
million for the nine months ended September 30, 2003 and 2002, respectively.
Cash 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 equity offerings and mortgage
financings.
15
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 September 30, 2003,
based on the current $1.34 annual dividend.
Current Total Current
Total Annualized Annualized
Number Affiliate Per Unit Distribution
Redemption Date Of Units Units Distribution ($000)
- --------------- --------- --------- ------------ -------------
At any time 3,445,442 1,401,159 $ 1.34 $ 4,617
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 -- -- --
March 2005 12,893 -- 1.34 17
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
--------- --------- -------- -----------
5,198,691 1,623,550 $ 1.19 $ 6,193
========= ========= ======== ===========
Financing
Revolving Credit Facility. The Company's $100.0 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 September 30, 2003, the Company is in compliance with all covenants, there
was $21.5 million outstanding on the facility (all of which has been
subsequently repaid), $74.3 million was available to be borrowed and $4.2
million in letters of credit are outstanding.
Financing Transactions. During the nine months ending September 30, 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 $21.4 million non-recourse mortgage on its
Farmington Hills, Michigan property. The mortgage note bears
interest at 5.42%, provides for annual debt service of $1.5
million and matures in September 2012 when a balloon payment
of $17.7 million is due.
- Obtained a $7.4 million non-recourse mortgage on its Dubuque,
Iowa property. The mortgage note bears interest at 4.89%,
provides for annual debt service of $0.5 million and matures
in August 2008 when a balloon payment of $6.6 million is due.
- Obtained a $14.0 million non-recourse mortgage on its
Greenville, South Carolina property. The mortgage note bears
interest at 4.415%, provides for annual debt service of $0.8
million and matures in January 2012 when a balloon payment of
$11.8 million is due.
- Assumed a $12.9 million non-recourse mortgage on its Plymouth,
Michigan property. The mortgage note bears interest at 6.22%,
provides for annual debt service of $1.0 million and matures
in December 2012 when a balloon payment of $10.0 million is
due.
16
Debt Service Requirements. The Company's principal liquidity needs are the
payment of interest and principal on outstanding mortgage debt. As of September
30, 2003, a total of 56 of the Company's 95 consolidated properties were subject
to outstanding mortgages, which had an aggregate principal amount of $463.8
million. The weighted average interest rate on the Company's total consolidated
debt on such date was approximately 6.75%. The estimated scheduled principal
amortization payments for the remainder of 2003 and for 2004, 2005, 2006 and
2007 are $4.9 million, $15.9 million, $15.7 million, $16.1 million and $17.0
million, respectively. The estimated scheduled balloon payments for the
remainder of 2003 and for 2004, 2005, 2006 and 2007, including the interest
only, recourse note on the Company's Warren, Ohio property, and excluding
borrowings on the line of credit, are $0, $14.5 million, $16.5 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 eight 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 September 30, 2003 compared with September 30, 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 $6.2 million, $5.5 million is attributable
to rental revenue which resulted primarily from (i) the consolidation of LRA
($1.1 million), (ii) properties purchased in 2002 and owned for the entire
quarter in 2003 ($2.1 million), (iii) the properties purchased in 2003 ($1.8
million) and (iv) the property expansion in 2002 ($0.4 million). The remaining
$0.7 million in revenue growth in 2003 was attributable to LRA advisory fees of
$0.3 million and a $0.6 million increase in interest and other revenue due to
the collection of penalties and interest from Kmart relating to the affirmation
of its lease in bankruptcy offset by a decrease in earnings from investments in
non-consolidated entities ($0.1 million). Interest expense decreased $0.2
million due to the growth of the Company's portfolio ($1.2 million) and
consolidation of LRA ($0.4 million) offset by interest savings resulting from
scheduled principal amortization payments, mortgage satisfactions and lower
variable interest rates. The Company's general and administrative expenses
increased by $1.3 million due primarily to the consolidation of LRA ($0.4
million), and increases in deferred compensation expense amortization ($0.2
million), professional service costs ($0.1 million), state income taxes ($0.1
million) and personnel costs ($0.6 million). The increase in property operating
expenses of $0.7 million is due primarily 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 net
impact of items discussed above.
The Company's non-consolidated entities had aggregate net income of $4.0 million
for the three months ended September 30, 2003 compared with $3.5 million in the
comparable period in 2002. The increase in net income is primarily attributable
to an increase in rental revenue of $1.2 million in 2003 attributable to the
acquisition of properties in March 2003 and August 2002. These revenue sources
were partially offset by an increase in (i) interest expense of $0.4 million due
to partially funding of acquisitions with the use of non-recourse mortgage debt
and (ii) depreciation expense of $0.4 million due to more depreciable assets
owned. The financial information for non-consolidated entities for 2002 does not
include any financial information for LRA.
Nine months ended September 30, 2003 compared with September 30, 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, 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 $15.7 million, $14.5 million is attributable to rental revenue which resulted
from (i) the consolidation of LRA ($3.3 million), (ii) properties purchased in
2002 and owned for the entire period in 2003 ($7.2 million), (iii) properties
purchased in 2003 ($2.6 million); and (iv) property expansion in 2002 ($1.4
million). The remaining $1.2 million in revenue growth in 2003 was primarily
attributable to LRA advisory fees of $1.0 million and $0.2 million increase in
interest and other revenue. The increase in interest expense of $2.2 million is
primarily due to the growth of the Company's portfolio ($3.4 million) and
consolidation of LRA ($1.5 million) and has been partially offset by interest
savings resulting from scheduled principal amortization payments, mortgage
satisfactions and lower variable interest rates. The Company's general and
administrative expenses increased by
17
$3.3 million due primarily to the consolidation of LRA ($1.3 million), and
increases in deferred compensation expense amortization ($0.5 million),
professional services costs ($0.2 million), personnel costs ($1.0 million),
state income taxes ($0.2 million) and compliance costs ($0.1 million). The
increase in property operating expenses of $1.1 million is due primarily to
incurring property level operating expenses for properties in which the Company
has operating expense responsibility ($1.2 million) offset by the reduction in
costs for the Warren, Ohio property due to the tenant's emergence from
bankruptcy. Debt satisfaction charges of $7.7 million were incurred in 2003 due
to the early satisfaction of certain mortgages. Minority interest expense
decreased in 2003 due to the net reduction in earnings as described above. Net
income decreased in 2003 due to the impact of items discussed above.
The Company's non-consolidated entities had aggregate net income of $11.7
million for the nine months ended September 30, 2003 compared with $9.8 million
in the comparable period in 2002. The increase in net income is primarily
attributable to an increase in rental revenue of $4.7 million 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 $1.5 million due to partially funding of
acquisitions with the use of non-recourse mortgage debt and (ii) depreciation
expense of $1.1 million 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 (6 leases), percentage rents (2 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 rate debt ($67.6 million as of September 30, 2003 at
a weighted average interest rate of 3.55%), tenant monetary defaults and
vacancies at the properties.
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. 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 reconciles net income allocable to common shareholders to
the Company's FFO for the nine months ended September 30, 2003 and 2002
($000's):
2003 2002
--------- ---------
Net income allocable to common shareholders $ 19,406 $ 22,793
Adjustments:
Depreciation and amortization 20,330 15,636
Minority interest's share of net income 2,704 4,108
Amortization of leasing commissions 606 522
Gains on sale of properties (1,143) (1,055)
Joint venture adjustment - depreciation 2,867 3,399
Preferred dividends - Series A -- 693
--------- ---------
Funds From Operations $ 44,770 $ 46,096
========= =========
Cash flows from operating activities $ 50,019 $ 37,793
Cash flows from investing activities $(143,171) $ (61,891)
Cash flows from financing activities $ 91,982 $ 24,707
18
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
September 30, 2003 and 2002, the Company's variable rate indebtedness
represented 13.6% and 10.2% of total long-term indebtedness, respectively.
During the three months ended September 30, 2003 and 2002, this variable rate
indebtedness had a weighted average interest rate of 3.75% and 4.61%,
respectively, and for the nine months ended September 30, 2003 and 2002 the
variable rate indebtedness had a weighted average interest rate of 4.03% and
4.04%, respectively. Had the weighted average interest rate been 100 basis
points higher, the Company's net income for the three months ended September 30,
2003 and 2002 would have been reduced by approximately $74 and $237,
respectively and for the nine months ended September 30, 2003 and 2002 net
income would have been reduced by $377 and $519, respectively.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
(a) Disclosure Controls and Procedures. The Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended) as of the end of the period
covered by this report. Based on such evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of such
period, the Company's disclosure controls and procedures are effective.
Internal Control Over Financial Reporting
(b) Internal Control Over Financial Reporting. There have not been any changes
in the Company's internal control over financial reporting during the fiscal
quarter to which this report relates that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
19
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.
31.1 Certification of Chief Executive Officer pursuant to rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (filed herewith).
31.2 Certification of Chief Financial Officer pursuant to rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (filed herewith).
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
(a) Reports on Form 8-K filed and/or furnished during the quarter
ended September 30, 2003:
Form 8-K (July 24, 2003).
Form 8-K (September 9, 2003).
Form 8-K (September 30, 2003).
20
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: November 13, 2003 By: /s/ T. Wilson Eglin
---------------------------------
T. Wilson Eglin
Chief Executive Officer, President
and Chief Operating Officer
Date: November 13, 2003 By: /s/ Patrick Carroll
---------------------------------
Patrick Carroll
Chief Financial Officer, Executive
Vice President and Treasurer
21