UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
[ ] 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.)
One Penn Plaza - Suite 4015
New York, NY 10119
---------------------------------------- -----------
(Address of principal executive offices) (Zip code)
(212) 692-7200
-----------------------------------------------
(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: 48,316,079 common shares, par
value $.0001 per share on August 4, 2004.
PART 1. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2004 (Unaudited) and December 31, 2003
(in thousands, except share and per share data)
June 30, December 31,
2004 2003
------------ ------------
ASSETS:
Real estate, at cost $ 1,324,298 $ 1,162,395
Less: accumulated depreciation and amortization 171,556 160,623
------------ ------------
1,152,742 1,001,772
Properties held for sale - discontinued operations 48,242 36,478
Cash and cash equivalents 121,651 15,923
Investment in non-consolidated entities 96,455 69,225
Deferred expenses, net 9,222 10,013
Rent receivable - current 2,413 -
Rent receivable - deferred 24,160 24,069
Intangible assets, net 27,773 14,736
Other assets 49,788 35,195
------------ ------------
$ 1,532,446 $ 1,207,411
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Mortgages and notes payable $ 725,992 $ 455,940
Credit facility borrowings - 94,000
Mortgage note payable - discontinued operations - 1,445
Accounts payable and other liabilities 5,730 7,308
Accrued interest payable 4,866 1,576
Deferred revenue 3,863 975
Prepaid rent 4,173 2,482
Origination fees payable, including accrued interest - 808
------------ ------------
744,624 564,534
Minority interests 59,449 59,220
------------ ------------
804,073 623,754
------------ ------------
Commitments and contingencies (note 11)
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,
Series B Cumulative Redeemable Preferred, liquidation preference
$79,000, 3,160,000 shares issued and outstanding 76,315 76,315
Common shares, par value $0.0001 per share; authorized 80,000,000 shares,
48,024,156, and 40,394,113 shares issued and outstanding in 2004 and
2003, respectively 5 4
Additional paid-in-capital 757,055 601,501
Deferred compensation, net (9,308) (6,265)
Accumulated distributions in excess of net income (99,503) (91,707)
------------ ------------
724,564 579,848
------------ ------------
$ 1,532,446 $ 1,207,411
============ ============
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
2
LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three and six months ended June 30, 2004 and 2003
(Unaudited and in thousands, except share and per share data)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Gross revenues:
Rental $ 35,254 $ 26,207 $ 66,318 $ 51,927
Advisory fees 777 181 1,727 506
Tenant reimbursements 1,348 1,226 2,873 2,333
------------ ------------ ------------ ------------
Total gross revenues 37,379 27,614 70,918 54,766
Expense applicable to revenues:
Depreciation and amortization (9,292) (6,847) (17,123) (13,167)
Property operating (2,570) (1,905) (5,078) (3,844)
General and administrative (2,549) (2,405) (6,023) (4,674)
Non-operating income 649 230 770 514
Interest and amortization expense (12,330) (9,517) (21,676) (19,112)
Debt satisfaction charges - (7,685) - (7,685)
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes, minority interests,
equity in earnings of non-consolidated entities and
discontinued operations 11,287 (515) 21,788 6,798
Provision for income taxes (488) - (1,253) -
Minority interests (1,101) 245 (2,224) (893)
Equity in earnings of non-consolidated entities 1,717 1,397 3,521 2,742
------------ ------------ ------------ ------------
Income from continuing operations 11,415 1,127 21,832 8,647
------------ ------------ ------------ ------------
Discontinued operations, net of minority interest:
Income from discontinued operations 1,353 672 2,910 1,456
Impairment charge (478) - (2,212) -
Gains on sales of properties 2,327 684 4,065 1,143
------------ ------------ ------------ ------------
Total discontinued operations 3,202 1,356 4,763 2,599
------------ ------------ ------------ ------------
Net income 14,617 2,483 26,595 11,246
Dividends attributable to preferred shares - Series B (1,590) (212) (3,180) (212)
------------ ------------ ------------ ------------
Net income allocable to common shareholders $ 13,027 $ 2,271 $ 23,415 $ 11,034
============ ============ ============ ============
Income per common share-basic:
Income from continuing operations $ 0.21 $ 0.03 $ 0.41 $ 0.27
Income from discontinued operations 0.06 0.04 0.11 0.08
------------ ------------ ------------ ------------
Net income $ 0.27 $ 0.07 $ 0.52 $ 0.35
============ ============ ============ ============
Weighted average common shares outstanding-basic 47,704,823 32,920,546 45,089,816 31,460,135
============ ============ ============ ============
Income per common shares-diluted:
Income from continuing operations $ 0.21 $ 0.02 $ 0.41 $ 0.25
Income from discontinued operations 0.06 0.04 0.11 0.08
------------ ------------ ------------ ------------
Net income $ 0.27 $ 0.06 $ 0.52 $ 0.33
============ ============ ============ ============
Weighted average common shares outstanding-diluted 47,805,758 38,333,046 45,224,600 36,872,837
============ ============ ============ ============
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2004 and 2003
(Unaudited and in thousands)
2004 2003
---------- ----------
Net cash provided by operating activities $ 46,866 $ 29,177
---------- ----------
Cash flows from investing activities:
Investment in convertible mortgage note (19,800) -
Investment in real estate properties and intangible assets (79,225) (24,690)
Net proceeds from sale/transfer of properties 58,450 7,807
Real estate deposits, net (5,875) (4,273)
Investment in non-consolidated entities (30,431) (2,994)
Distribution of loan proceeds from non-consolidated entities 12,996 -
(Increase) decrease in escrow deposits (5,551) 788
Increase in leasing costs (189) -
---------- ----------
Net cash used in investing activities (69,625) (23,362)
---------- ----------
Cash flows from financing activities:
Dividends to common and preferred shareholders (34,391) (20,426)
Dividend reinvestment plan proceeds 5,213 3,034
Change in credit facility borrowings, net (94,000) (31,000)
Principal amortization payments (10,009) (8,240)
Principal payments on debt, excluding normal amortization (1,264) (78,084)
Proceeds of mortgages and notes payable 124,940 40,655
Increase in deferred financing costs, net (934) (534)
Cash distributions to minority partners (5,603) (3,506)
Proceeds from the sale of common and preferred shares, net 144,564 150,364
Origination fee amortization payments (29) (189)
---------- ----------
Net cash provided by financing activities 128,487 52,074
---------- ----------
Cash attributable to newly consolidated entity - 1,578
---------- ----------
Change in cash and cash equivalents 105,728 59,467
Cash and cash equivalents, at beginning of period 15,923 12,097
---------- ----------
Cash and cash equivalents, at end of period $ 121,651 $ 71,564
========== ==========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
4
LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(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 June 30, 2004, the Company
had an ownership interest in 130 properties and managed an additional two
properties. The real properties owned by the Company are generally subject
to triple net leases to corporate tenants. Of the Company's 130
properties, six provide for operating expense stops and one is a modified
gross lease.
The Company believes it has qualified as a REIT under the Internal Revenue
Code of 1986, as amended (the "Code"). 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 ("TRS")
under the Code. As such, the TRS 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 for the year
ended December 31, 2003.
(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"), Lexington Realty Advisors, Inc. ("LRA"), and
Lexington Contributions, Inc. ("LCI"). LRA and LCI are wholly owned
taxable REIT subsidiaries and the Company is the sole unitholder of each
of the general partner and the majority limited partner of LCIF, LCIF II
and Net 3.
In December 2003, the FASB issued FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities ("VIEs"),
which addresses how a business enterprise should evaluate whether it has a
controlling financial interest in an entity through means other than
voting rights and accordingly should consolidate the entity. FIN 46R
replaces FASB Interpretation No. 46, Consolidation of Variable Interest
Entities, which was issued in January 2003. The Company adopted FIN 46R
and it had no impact.
Earnings Per Share. Basic net income per share is computed by dividing net
income reduced by preferred dividends by the weighted average number of
common shares outstanding during the period. Diluted net income per share
amounts are similarly computed but include the effect, when dilutive, of
in-the-money common share options and operating partnership units.
Common Share Options. 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 share option awards
in each period:
5
Three Months Ended June 30,
2004 2003
-------- --------
Net income allocable to common shareholders,
as reported $ 13,027 $ 2,271
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 64 127
-------- --------
Pro forma net income - basic $ 12,963 $ 2,144
======== ========
Net income per share - basic
Basic - as reported $ 0.27 $ 0.07
======== ========
Basic - pro forma $ 0.27 $ 0.07
======== ========
Net income allocable to common shareholders
for diluted earnings per share $ 13,027 $ 2,138
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 64 127
-------- --------
Pro forma net income - diluted $ 12,963 $ 2,011
======== ========
Net income per share - diluted
Diluted - as reported $ 0.27 $ 0.06
======== ========
Diluted - pro forma $ 0.27 $ 0.05
======== ========
Six Months Ended June 30,
2004 2003
-------- --------
Net income allocable to common shareholders,
as reported $ 23,415 $ 11,034
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 127 255
-------- --------
Pro forma net income - basic $ 23,288 $ 10,779
======== ========
Net income per share - basic
Basic - as reported $ 0.52 $ 0.35
======== ========
Basic - pro forma $ 0.52 $ 0.34
======== ========
Net income allocable to common shareholders
for diluted earnings per share $ 23,415 $ 12,247
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 127 255
-------- --------
Pro forma net income - diluted $ 23,288 $ 11,992
======== ========
Net income per share - diluted
Diluted - as reported $ 0.52 $ 0.33
======== ========
Diluted - pro forma $ 0.52 $ 0.33
======== ========
6
Use of Estimates. Management has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, the disclosure of
contingent assets and liabilities and the reported amounts of revenues and
expenses to prepare these condensed consolidated financial statements in
conformity with generally accepted accounting principles. The most significant
estimates made include the recoverability of accounts receivable (primarily
related to straight-line rents) and the useful lives of assets. Actual results
could differ from those estimates.
Purchase Accounting for Acquisition of Real Estate. The fair value of the real
estate acquired, which includes the impact of mark to market adjustments for
assumed mortgage debt relating to property acquisitions, 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.
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. Below-market lease intangibles
are recorded as part of deferred revenue.
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.
Properties Held for Sale. The Company accounts for properties held for sale in
accordance with Statement of Financial Accounting Standards No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No.
144 requires that the assets and liabilities of properties that meet various
criteria in SFAS No. 144 be presented separately in the statement of financial
position, with assets and liabilities being separately stated. The operating
results of these properties are reflected as discontinued operations in the
income statement. Properties that do not meet the held for sale criteria of SFAS
No. 144 are accounted for as operating properties.
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"(SFAS No. 66). 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. As of June 30, 2004 and December 31, 2003, the Company did not
record an allowance for doubtful accounts.
Impairment of 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.
7
However, estimating future sale proceeds is highly subjective and such estimates
could differ materially from actual results.
Income Taxes. Income taxes for the TRS are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carry-forwards.
Deferred tax assets and liabilities are measured using estimated tax rates in
effect for the year in which the temporary differences are expected to be
recovered or settled.
Reclassification. Certain amounts included in 2003 financial statements have
been reclassified to conform with the 2004 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 months
and six months ended June 30, 2004 and 2003:
Three months ended Six months ended
June 30, June 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
BASIC
Income from continuing operations $ 11,415 $ 1,127 $ 21,832 $ 8,647
Less preferred dividends (1,590) (212) (3,180) (212)
------------ ------------ ------------ ------------
Income allocable to common shareholders from
continuing operations 9,825 915 18,652 8,435
Total income from discontinued operations 3,202 1,356 4,763 2,599
------------ ------------ ------------ ------------
Net income allocable to common shareholders $ 13,027 $ 2,271 $ 23,415 $ 11,034
============ ============ ============ ============
Weighted average number of common
shares outstanding 47,704,823 32,920,546 45,089,816 31,460,135
============ ============ ============ ============
Income per common share - basic:
Income from continuing operations $ 0.21 $ 0.03 $ 0.41 $ 0.27
Income from discontinued operations 0.06 0.04 0.11 0.08
------------ ------------ ------------ ------------
Net income $ 0.27 $ 0.07 $ 0.52 $ 0.35
============ ============ ============ ============
DILUTED
Income allocable to common shareholders from
continuing operations - basic $ 9,825 $ 915 $ 18,652 $ 8,435
Incremental income (loss) attributed to assumed
conversion of dilutive securities - (245) - 893
------------ ------------ ------------ ------------
Income allocable to common shareholders from
continuing operations - diluted 9,825 670 18,652 9,328
Total income from discontinued operations - diluted 3,202 1,468 4,763 2,919
------------ ------------ ------------ ------------
Net income allocable to common shareholders - diluted $ 13,027 $ 2,138 $ 23,415 $ 12,247
============ ============ ============ ============
Weighted average number of common shares used in
calculation of basic earnings per share 47,704,823 32,920,546 45,089,816 31,460,135
Add incremental shares representing:
Shares issuable upon exercise of employee
share options 100,935 199,986 134,784 181,690
Shares issuable upon conversion of
dilutive securities - 5,212,514 - 5,231,012
------------ ------------ ------------ ------------
Weighted average number of shares used in
calculation of diluted earnings per common share 47,805,758 38,333,046 45,224,600 36,872,837
============ ============ ============ ============
Income per common share-diluted:
Income from continuing operations $ 0.21 $ 0.02 $ 0.41 $ 0.25
Income from discontinued operations 0.06 0.04 0.11 0.08
------------ ------------ ------------ ------------
Net income $ 0.27 $ 0.06 $ 0.52 $ 0.33
============ ============ ============ ============
9
(4) Investments in Real Estate
The following acquisitions were consummated during the second quarter of
2004:
- The Company acquired a property in Jackson, Tennessee for a
capitalized cost of $15,714 which is net leased to Kirkland's, Inc.
The lease, which expires in May 2019, provides for average annual
net rent of $1,398. The purchase price was partially funded through
a $10,400 non-recourse mortgage note which bears interest at 5.93%,
provides for annual debt service of $743 and matures in May 2014,
when a balloon payment of $8,820 is due.
- The Company purchased a property in Clive, Iowa for a capitalized
cost of $9,292 which is net leased to Principal Life Insurance
Company through January 2012. The lease provides for average annual
net rent of $774. The purchase price was paid entirely with cash.
- The Company purchased a property in Southfield, Michigan for a
capitalized cost of $12,796 which is net leased to Federal-Mogul
Corporation through January 2015. The lease provides for average
annual net rent of $1,057. The purchase price was partially funded
through the assumption of a $11,629 non-recourse mortgage note which
bears interest at 4.55%, provides for annual debt service of $1,058
and matures in February 2015, when a balloon payment of $4,451 is
due.
The Company has allocated $5,374 of the purchase price of these properties
to intangible assets.
In addition, the Company sold two properties to a newly formed entity in
which it has a 30% ownership interest. The properties were sold for
$35,871 (subject to $22,788 in non-recourse mortgages) which approximated
historical cost and accordingly, no gain or loss was realized.
During the first quarter of 2004, the Company purchased nine properties
for an aggregate capitalized cost of $231,983. The acquisitions were
partially funded through the assumption of non-recourse mortgage notes
valued at $169,569 (face value of $154,087) and $24,345 in new non-
recourse mortgage notes. Detailed information relating to each acquisition
is contained in the March 31, 2004 Form 10-Q.
The following pro forma operating information for the six months ended
June 30, 2004 and 2003 has been prepared as if all Company acquisitions
and dispositions (including non-consolidated entities) in 2004 and 2003
had been consummated as of January 1, 2003. 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, 2003. Pro forma amounts are as follows:
June 30,
2004 2003
---------- ----------
Rental revenues $ 70,569 $ 70,939
Net income $ 22,646 $ 15,968
Net income per common share
Basic $ 0.43 $ 0.50
Diluted $ 0.43 $ 0.46
During the second quarter of 2004, the Company issued a $19,800
convertible mortgage note secured by a property in Carrollton, Texas which
is net leased to Carlson Restaurants Worldwide, Inc. through December
2018. The Company has the election until December 2004 to convert the note
along with an additional $2,200 in cash, into a 100% equity position in
the property. The note, which currently bears interest at 8.20%, provides
for interest only payments through December 2004. If the note is not
converted due to no fault of the borrower the interest rate resets to
6.22% and annual debt service payments of $1,458 commence until the entire
note is satisfied. If the note is not converted due to a reason beyond the
Company's control, the interest rate resets to 8.00% and annual debt
service payments of $1,745 commence until the entire note is satisfied.
The convertible mortgage note is included in Other Assets in the
accompanying Condensed Consolidated Balance Sheets.
(5) Discontinued Operations
During the three months ended June 30, 2004, the Company sold one property
in Reno, Nevada and one in Bethesda, Maryland for aggregate net proceeds
of $11,056, which resulted in an aggregate gain of $2,327. As of June 30,
2004, the Company had four properties held for sale and for the six months
ended June 30, 2004 recorded an impairment charge of $2,212 relating to
the difference between the basis for two properties and the estimated net
proceeds
10
expected to be realized upon sale. During the second quarter the Company
reclassified a property from held for sale to operating real estate since
it was no longer anticipated that the property would be sold within a
twelve month period.
The following presents the operating results for the properties sold and
properties held for sale for the applicable periods:
Three Months Ended June 30,
2004 2003
---------- ----------
Rental revenues $ 1,564 $ 1,177
Pre-tax income, including gains on sale $ 3,309 $ 1,356
Six Months Ended June 30,
2004 2003
------------ ------------
Rental revenues $ 3,524 $ 2,507
Pre-tax income, including gains on sale $ 4,977 $ 2,599
Of the four properties held for sale as of June 30, 2004 one is subject to
sale agreement. The purchaser has the ability to terminate the agreement
for any reason during the due diligence period.
During the first quarter of 2004, the Company sold two properties for an
aggregate net proceeds of $6,261, which resulted in an aggregate gain of
$1,737.
(6) Investment in Non-Consolidated Entities
As of June 30, 2004, the Company has investments in six non-consolidated
entities. The entities are Lexington Acquiport Company, LLC (33 1/3%
ownership interest), Lexington Acquiport Company II, LLC (25% ownership
interest), Lexington/Lion Venture LP (30% ownership interest), Lexington
Columbia LLC (40% ownership interest), Lexington Durham Limited
Partnership (33 1/3% ownership interest) and Triple Net Investment Company
LLC (30% ownership interest).
During the second quarter of 2004, Lexington/Lion Venture LP ("LION")
purchased a property in West Chester, Pennsylvania for a capitalized cost
of $19,400 which is net leased to ING USA Annuity and Life Insurance
Company. The lease, which expires May 2010, provides for average annual
net rent of $2,038. The purchase price was partially funded through the
assumption of a $11,379 non-recourse mortgage which bears interest at
6.75%, provides for annual debt service of $1,204 and fully amortizes by
maturity in July 2019.
In addition, LION purchased a property in Herndon, Virginia for a
capitalized cost of $20,773 which is net leased to Equant N.V. The lease,
which expires April 2015 provides for average annual net rent of $2,011.
The purchase price was partially funded through a $12,450 non-recourse
mortgage which bears interest at 5.92%, provides for annual debt service
of $888 and matures in April 2015, when a balloon payment of $10,371 is
due.
During 2004, Triple Net Investment Company LLC, ("TNI"), was formed. The
Company and its partner have committed to fund $15,000 and $35,000,
respectively, to TNI. The partners share profits, losses, and cash flows
pro-rata in proportion to their funding commitment, except that the
Company does receive a promoted interest of 15% of any return in excess
of an internal rate of return of 12%. TNI acquired a property in Antioch,
Tennessee for a capitalized cost of $25,400 which is net leased to Dana
Corporation. The lease, which expires October 2021, provides for average
annual net rent of $2,585. The purchase price was partially funded through
the assumption of a $14,900 non-recourse mortgage which bears interest at
7.94%, provides for annual debt service of $1,580 and matures in October
2011, when a balloon payment of $11,177 is due.
In addition, the Company sold two properties to TNI for $35,871 (subject
to $22,788 in non-recourse mortgages) which are net leased to The Shaw
Group, Inc. and Bell South Corporation.
11
During the second quarter of 2004, the Company purchased the entire 77.3%
interest it did not already own in Lexington Florence LLC, which owns a
property that is net leased to Washington Mutual Home Loans, Inc. for
$6,137 and accordingly, consolidates the property. The property is subject
to a non-recourse mortgage of $9,318 as of June 30, 2004.
During the second quarter of 2004, the following non-recourse mortgage was
obtained by a non-consolidated entity in addition to those related to
acquisitions discussed above:
Current
Maturity Annual
Entity Amount Rate Date Debt Service Balloon
------ ------ ----- ----- ------------ -------
LION $7,690 4.76% 04/14 $ 371 $ 6,784
The following is summary combined balance sheet and income statement
data as of June 30, 2004 and for the six months ended June 30, 2004 and
2003 for the Company's non-consolidated entities:
2004
--------
Real estate, net $658,905
Intangibles, net $ 16,560
Mortgages payable $410,230
2004 2003
-------- --------
Revenues $ 35,544 $ 24,723
Expenses 25,496 16,972
-------- --------
Net income $ 10,048 $ 7,751
======== ========
The non-consolidated entities pay the Company acquisition and asset
management fees. The fees paid to the Company were $758 and $1,688 for
the three and six months ended June 30, 2004 and $162 and $467 for the
three and six months ended June 30, 2003.
During the first quarter of 2004, LION purchased a property for a
capitalized cost of $28,651 and partially funded the acquisition with a
$17,400 non-recourse mortgage note. In addition, the Company contributed a
property to LION for a capitalized cost of $20,519 (subject to a $12,757
non-recourse mortgage note) and a second property to LAC II for a
capitalized cost of $30,286 on which LAC II obtained a $22,000
non-recourse mortgage note.
(7) Mortgages and Notes Payable
During the second quarter of 2004, the Company obtained non-recourse
mortgages in addition to those discussed in note 4 as follows:
Maturity Current Annual
Property Amount Rate Date Debt Service Balloon
----------------- -------- ----- ------ ------------ -------
Overland Park, KS $ 37,620 5.83% 5/19 $ 2,224 $31,819
Kansas City, MO $ 17,950 5.83% 5/19 $ 1,061 $15,182
Baton Rouge, LA $ 6,955 4.90% 10/12 $ 443 $ 5,955
During the first quarter of 2004, the Company obtained an aggregate of
$27,670 in non-recourse mortgage notes, in addition to the amounts
discussed in note 4, with a weighted average fixed interest rate of 5.52%.
During the six months ended June 30, 2004, the Company repaid $94,000 on
its line of credit.
(8) 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 six
months ended June 30, 2004 and 2003, no single tenant represented greater
than 10% of rental revenues.
Cash and cash equivalent balances may exceed insurable amounts. The
Company believes it mitigates risk by investing in or through major
financial institutions.
(9) Minority Interests
In conjunction with several of the Company's acquisitions in prior years,
sellers were given units in LCIF, LCIF II, or Net 3 as a form of
consideration. All of such interests are redeemable at certain times, only
at the option of the holders, for common shares on a one-for-one basis at
various dates through November 2006 and are not otherwise mandatorily
redeemable by the Company.
12
As of June 30, 2004, there were 5,330,401 units outstanding. All units
have stated distributions in accordance with the respective partnership
agreements. To the extent that the Company's dividend per share is less
than the stated distribution per unit per the partnership agreement, the
distributions per unit are reduced by the percentage reduction in the
Company's dividend. No units have a liquidation preference.
(10) Shareholders' Equity
During the first quarter of 2004, the Company issued 6,900,000 common
shares at $20.92 per share raising net proceeds of $144,206.
(11) Commitments and Contingencies
The Company is obligated under certain tenant leases, including leases for
non-consolidated entities 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.
The Company has entered into binding letters of intent to purchase two
properties upon completion of construction and commencement of rent from
the tenants. The aggregate estimated obligation is $29,444. Subsequent to
quarter end, LAC II purchased one of the two properties for $13,788.
(12) Supplemental Disclosure of Statement of Cash Flow Information
During 2004 and 2003, the Company paid $18,257 and $20,241, respectively,
for interest.
During 2004 and 2003, the Company issued 201,029 and 336,992 non-vested
common shares, respectively, to certain employees and trustees resulting
in $4,057 and $5,391 of deferred compensation, respectively. These common
shares generally vest over 5 years. However, in certain situations the
vesting only occurs if certain performance criteria are met.
During 2004 and 2003, holders of an aggregate of 100,053 and 53,395
operating 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 $1,299 and $682,
respectively.
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.
See footnotes 4 and 6 for additional non-cash disclosures.
(13) Subsequent Events
Subsequent to June 30, 2004, the Company purchased four properties for
$67,076. In connection with these acquisitions the Company assumed $39,094
in non-recourse mortgage debt.
In addition, LAC II purchased a property for $13,788 and obtained a
$10,500 non-recourse mortgage on the property.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following is a discussion and analysis of the Company's consolidated
financial condition and results of operations for the three and six month
periods ended June 30, 2004 and 2003, and significant factors that could affect
our prospective financial condition and results of operations. You should read
this discussion together with the accompanying unaudited condensed consolidated
financial statements and notes and with the Company's consolidated financial
statements and notes included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2003 and the Company's quarterly report on Form 10-Q
for the three months ended March 31, 2004. Historical results may not be
indicative of future performance.
This quarterly report on Form 10-Q, together with other statements and
information publicly disseminated by the Company contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The Company intends such forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995 and include this statement for
purposes of complying with these safe harbor provisions. Forward-looking
statements, which are based on certain assumptions and describe the Company's
future plans, strategies and expectations, are generally identifiable by use of
the words "believes," "expects," "intends," "anticipates," "estimates,"
"projects" or similar expressions. Readers should not rely on forward-looking
statements since they involve known and unknown risks, uncertainties and other
factors which are, in some cases, beyond the Company's control and which could
materially affect actual results, performances or achievements. In particular,
among the factors that could cause actual results to differ materially from
current expectations include, but are not limited to, (i) the failure to
continue to qualify as a real estate investment trust, (ii) changes in general
business and economic conditions, (iii) competition, (iv) increases in real
estate construction costs, (v) changes in interest rates, (vi) changes in
accessibility of debt and equity capital markets and other risks inherent in the
real estate business, including, but not limited to, tenant defaults, potential
liability relating to environmental matters, the availability of suitable
acquisition opportunities and illiquidity of real estate investments, (vii)
changes in governmental laws and regulations, and (viii) increases in operating
costs. 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. Accordingly, there is no assurance that the Company's
expectations will be realized.
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 June 30, 2004, the Company owned, or had interests in, 130 real estate
properties and managed 2 additional properties.
Critical Accounting Policies
The Company's accompanying condensed 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
Statement of Financial Accounting Standards No. 66 "Accounting for Sales of Real
Estate" (SFAS No. 66). The specific timing of the sale is measured against
various criteria in
14
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.
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 improvements, and identified intangible assets and
liabilities, consisting of the value of above-market and below-market leases,
other values 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 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 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 demands. Management also
estimates costs to execute similar leases including leasing commissions.
In allocating the fair market 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 the 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.
Impairment of Real Estate. The Company evaluates the carrying value of all real
estate held to determine if 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.
Liquidity and Capital Resources
Real Estate Assets. As of June 30, 2004, the Company's real estate assets were
located in 33 states and contained an aggregate of approximately 27.7 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, utilities and ordinary
maintenance of the property. Of the Company's 130 properties, six provide for
operating expense stops and one is subject to a modified gross lease.
Approximately 98.7% of square feet is subject to a lease.
During the six months ended June 30, 2004, the Company purchased 16 properties
(including non-consolidated entities) for a capitalized cost of $364 million
(including $119.2 million by non-consolidated entities) and sold four properties
to third parties, resulting in a gain of $4.1 million.
The Company's principal sources of liquidity are revenues generated from the
properties, interest on cash balances, amounts available under its unsecured
credit facility and amounts that may be raised through the sale of securities in
private or public offerings. For the six months ended June 30, 2004, the leases
on the consolidated properties generated $69.8 million in rental revenue,
including discontinued operations, compared to $54.4 million during the same
period in 2003.
Dividends. The Company has made quarterly distributions since October 1986
without interruption. The Company declared a common dividend of $0.35 per share
to common shareholders of record as of June 30, 2004, payable on August 13,
2004. The Company's annualized common dividend rate is currently $1.40 per
share. The Company also declared a preferred dividend of $0.503125 per share to
preferred shareholders of record as of June 30, 2004, payable on August 16,
2004. 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,
15
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 Company's board
of trustees considers appropriate.
Cash dividends paid to common shareholders increased to $31.2 million in 2004
compared to $20.4 million in 2003.
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.
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
$46.9 million and $29.2 million for the six months ended June 30, 2004 and 2003,
respectively.
Net cash used in investing activities totaled $69.6 million and $23.4 million
for the six months ended June 30, 2004 and 2003, respectively. Cash used in
investing activities during each period was primarily attributable to the
acquisition of and deposits made for real estate and the investment in
non-consolidated entities. Cash provided by investing activities relates
primarily 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 $128.5 million and $52.1
million for the six months ended June 30, 2004 and 2003, 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.
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
operating partnerships controlled by the Company. All of such interests are
redeemable, at the option of the holder, 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 in accordance with the respective
operating partnership agreements. 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
operating partnership interests are redeemed for common shares. The table set
forth below provides certain information with respect to such operating
partnership interests as of June 30, 2004, based on the current $1.40 annual
dividend.
Current Total Current
Total Annualized Annualized
Number Affiliate Per Unit Distribution
Redemption Date Of Units Units Distribution ($000)
- --------------- ---------- --------- ------------ -------------
At any time 3,447,681 1,401,159 $ 1.40 $ 4,827
At any time 1,218,152 84,374 1.08 1,316
At any time 112,352 52,144 1.12 126
November 2004 24,552 2,856 -- --
March 2005 29,384 -- -- --
March 2005 12,893 -- 1.40 18
January 2006 171,168 416 -- --
January 2006 231,763 120,662 1.40 324
February 2006 28,230 1,743 -- --
May 2006 9,368 -- 0.29 3
November 2006 44,858 44,858 1.40 63
---------- --------- ------------ -------------
5,330,401 1,708,212 $ 1.25 $ 6,677
========== ========= ============ =============
Affiliate units are held by two executive officers of the Company and are
included in the total number of units.
Share Repurchase Program
The Company's board of trustees has authorized the repurchase of up to 2.0
million common shares/operating partnership units. As of June 30, 2004, 1.4
million common shares/operating partnership units have been repurchased and the
last repurchase occurred in September 2001.
16
Financing
Revolving Credit Facility. The Company's $100.0 million unsecured credit
facility bears interest at a rate of LIBOR plus 150-250 basis points depending
on the amount of properties owned by the Company 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 to be
borrowed and net worth maintenance provisions. As of June 30, 2004, the Company
was in compliance with all covenants, there were no borrowings outstanding on
the facility, $95.8 million was available to be borrowed and $4.2 million in
letters of credit were outstanding.
Financing Transactions. During the six months ending June 30, 2004, the Company,
including non-consolidated entities, completed the following financing
transactions ($000's):
Current
Annual Debt Maturity
Property Amount Rate Service (Mo./Yr.) Balloon
- ------------------ ------- ------- ----------- --------- -------
Herndon, VA(3) $12,450 5.92% $ 888 04/15 $10,371
Jackson, TN 10,400 5.93% 743 05/14 8,820
Overland Park, KS 37,620 5.83% 2,224 05/19 31,819
Kansas City, MO 17,950 5.83% 1,061 05/19 15,182
Baton Rouge, LA(3) 6,955 4.90% 443 10/12 5,955
Logan Township, NJ(3) 7,690 4.76% 371 04/14 6,784
West Chester, PA(3) 11,379 6.75% 1,204 07/19 -
Southfield, MI 11,629 4.55% 1,058 02/15 4,451
Antioch, TN(3) 14,900 7.94% 1,580 10/11 11,177
Waterloo, IA 6,800 5.61% 672 2/13 3,505
Mechanicsburg, PA 13,870 5.73% 1,045 3/14 10,501
Newport, OR 7,000 5.03% 470 8/11 5,980
Arlington, TX(3) 22,000 5.81% 1,551 2/14 18,605
Moody, AL 7,675 4.98% 493 1/14 6,350
New Lenox, IL(3) 17,400 5.51% 972 2/14 17,400
Mission, TX 6,570 5.78% 462 6/15 5,371
Redmond, OR 10,100 5.62% 697 4/14 8,484
Houston, TX(1) 123,642 6.25% 10,866 9/15 33,811
Wall, NJ(2) 30,036 6.25% 2,013 1/21 --
Centennial, CO(3) 15,891 6.15% 1,177 2/13 13,555
(1) Face amount of debt is $110,696 and the stated interest rate is 8.04%.
(2) Face amount of debt is $27,500 and the stated interest rate is 7.32%.
(3) Property owned by a non-consolidated entity.
Debt Service Requirements. The Company's principal liquidity needs are for the
payment of interest and principal on outstanding mortgage debt. As of June 30,
2004, a total of 68 of the Company's 105 consolidated properties were subject to
outstanding mortgages, which had an aggregate principal amount of $726 million.
The weighted average interest rate on the Company's total consolidated debt on
such date was approximately 6.61%. The estimated scheduled principal
amortization payments for the remainder of 2004 and for 2005, 2006, 2007 and
2008 are $9.1 million, $21.0 million, $21.5 million, $26.5 million and $20.2
million, respectively. The estimated scheduled balloon payments for the
remainder of 2004 and for 2005, 2006, 2007 and 2008 are $0, $12.6 million, $0,
$0 and $70.5 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 seven 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. As of June 30, 2004,
the Company had 2 vacant properties.
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 $1.0 million.
The following summarizes the Company's principal contractual obligations as of
June 30, 2004 ($000's):
Remaining 2009 and
Contractual Obligations 2004 2005 2006 2007 2008 thereafter Total
- ------------------------------- --------- -------- -------- -------- -------- ---------- --------
Mortgages payable - normal
amortization $ 9,147 $ 20,990 $ 21,490 $ 26,514 $ 20,163 $ 150,403 $248,707
Mortgages payable -
balloon maturities -- 12,569(2) -- -- 70,492 394,224 477,285
Credit facility -- -- -- -- -- -- --
Operating lease obligations (1) 788 1,577 1,577 1,577 1,577 9,282 16,378
-------- -------- -------- -------- -------- ---------- --------
$ 9,935 $ 35,136 $ 23,067 $ 28,091 $ 92,232 $ 553,909 $742,370
======== ======== ======== ======== ======== ========== ========
(1) Amounts include rent for the Company's corporate office which is
fixed through 2008 and adjusted to fair market value as determined
at January 2009.
17
(2) The Company has the ability to extend the maturity of this mortgage
to 2006.
Capital Expenditures. Due to the triple net lease structure, the Company does
not incur significant expenditures in the ordinary course of business to
maintain its properties. However, in the future, as leases expire, the Company
expects to incur costs in extending the existing tenant lease or re-tenanting
the properties. The amounts of these expenditures can vary significantly
depending on tenant negotiations, market conditions and rental rates. These
expenditures are expected to be funded from operating cash flows or borrowings
on the credit facility.
Results of Operations
Three months ended June 30, 2004 compared with June 30, 2003
Changes in the results of operations for the Company are primarily due to the
growth of its portfolio and costs associated with such growth. Of the increase
in total gross revenues in 2004 of $9.8 million, $9.1 million is attributable to
rental revenue which resulted primarily from (i) properties purchased in 2003
and owned during 2004 ($3.5 million), (ii) properties purchased in 2004 ($5.8
million), (iii) new leases and lease extensions in 2004 ($0.3 million) offset by
an increase in vacancy ($0.6 million). The remaining $0.7 million increase in
gross revenues in 2004 was primarily attributable to an increase in LRA advisory
fees of $0.6 million ($0.5 million in acquisition fees and $0.1 million in asset
management fees). The increase in interest expense of $2.8 million is due to the
growth of the Company's portfolio and has been offset by interest savings
resulting from scheduled principal amortization payments, mortgage satisfactions
and lower variable interest rates. The reduction of $7.7 million in debt
satisfaction charges in 2004 results from the timing of mortgage satisfactions.
The increase in depreciation and amortization of $2.4 million is due primarily
to the growth in real estate. The increase in property operating expenses of
$0.7 million is due primarily to the Company acquiring properties in which it
has property level operating expense responsibility and an increase in vacancy
offset by the reduction in costs for the Warren, Ohio property due to the
tenant's emergence from bankruptcy. The Company recorded a provision for income
taxes of $0.5 million in 2004 relating to the advisory fees generated and the
earnings from real estate investments held by its taxable REIT subsidiaries.
Minority interest expense increased $1.3 million due to the increase in earnings
at the partnership level. Net income increased in 2004 primarily due to the net
impact of items discussed above plus an increase of $0.7 million in income from
discontinued operations and a $1.6 million increase in gains on sale offset by a
$0.5 million impairment charge in 2004.
Equity in earnings of non-consolidated entities increased by $0.3 million as
described as follows. The Company's non-consolidated entities had aggregate net
income of $4.8 million for the three months ended June 30, 2004 compared to $3.9
million in the comparable period in 2003. The increase in net income is
primarily attributable to an increase in revenue of $5.2 million in 2004
attributable to the acquisition of properties in 2003 and 2004. These revenue
sources were partially offset by an increase in (i) interest expense of $1.9
million in 2004 due to partially funding of acquisitions with the use of
non-recourse mortgage debt, (ii) depreciation expense of $2.0 million in 2004
due to more depreciable assets owned and (iii) operating expenses of $0.5
million.
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 non-consolidated entities, the sources of growth in net
income are limited to index adjusted rents (such as the consumer price index),
percentage rents, 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 ($14.6 million as of June
30, 2004 at a weighted average interest rate of 4.61%) and tenant monetary
defaults.
Six months ended June 30, 2004 compared with June 30, 2003
Changes in the results of operations for the Company are primarily due to the
growth of its portfolio and costs associated with such growth. Of the increase
in total gross revenues in 2004 of $16.2 million, $14.4 million is attributable
to rental revenue which resulted primarily from (i) properties purchased in 2003
and owned during 2004 ($7.4 million), (ii) properties purchased in 2004 ($7.4
million) and (iii) new leases and lease extensions in 2004 ($0.4 million) offset
by an increase in vacancy ($1.1 million). The remaining $1.8 million increase in
gross revenues in 2004 was primarily attributable to an increase in LRA advisory
fees of $1.2 million ($1.0 million in acquisition fees and $0.2 million in asset
management fees) and an increase ($0.5 million) in tenant reimbursements. The
increase in interest expense of $2.6 million is due to the growth of the
Company's portfolio and has been partially offset by interest savings resulting
from scheduled principal amortization payments, mortgage satisfactions and lower
variable interest rates. The increase in depreciation and amortization of $4.0
million is due primarily to the growth in real estate. The Company's general and
administrative expenses increased by $1.3 million due primarily to the greater
deferred compensation expense amortization ($0.4 million), trustee fees ($0.3
million), personnel costs ($0.2 million) and filing fees and shareholder
communication costs ($0.2 million). The increase in property operating expenses
of $1.2 million is due primarily to incurring property level operating expenses
for properties in which the Company has operating expense
18
responsibility and an increase in vacancy 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 payoff of
certain mortgages. In 2004, the Company recorded a provision for income taxes of
$1.3 million relating to the advisory fees generated and the earnings from real
estate investments held by its taxable REIT subsidiaries. Minority interest
expense increased in 2004 by $1.3 million due to the increase in earnings at the
partnership level. Net income increased in 2004 primarily due to the positive
impact of items discussed above plus an increase of $1.5 million in income from
discontinued operations and a $2.9 million increase in gains on sale offset by a
$2.2 million impairment change in 2004.
Equity in earnings of non-consolidated entities increased by $0.8 million as
described as follows. The Company's non-consolidated entities had aggregate net
income of $10.0 million for the six months ended June 30, 2004 compared to $7.8
million in the comparable period in 2003. The increase in net income is
primarily attributable to an increase in revenue of $10.8 million in 2004
attributable to the acquisition of properties in 2003 and 2004. These revenue
sources were partially offset by an increase in (i) interest expense of $3.8
million in 2004 due to partially funding of acquisitions with the use of
non-recourse mortgage debt, (ii) depreciation expense of $3.3 million in 2004
due to more depreciable assets owned and (iii) operating expenses of $1.4
million.
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." Impairment charges recorded are not added back to
net income in arriving at FFO. 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 six months ended June 30, 2004 and 2003 ($000's):
2004 2003
--------- ---------
Net income allocable to common shareholders $ 23,415 $ 11,034
Adjustments:
Depreciation and amortization 16,860 13,221
Minority interest's share of net income 2,109 1,101
Amortization of leasing commissions 365 400
Gains on sale of properties (4,065) (1,143)
Joint venture adjustment - depreciation 2,873 1,889
--------- ---------
Funds From Operations $ 41,557 $ 26,502
========= =========
Cash flows from operating activities $ 46,866 $ 29,177
Cash flows from investing activities $ (69,625) $ (23,362)
Cash flows from financing activities $ 128,487 $ 52,074
Off-Balance Sheet Arrangements
Non-Consolidated Real Estate Entities. As of June 30, 2004, the Company has
investments in various real estate entities with varying structures. These
investments include the Company's 33 1/3% non-controlling interest in Lexington
Acquiport Company, LLC; its 25% non-controlling interest in Lexington Acquiport
Company II, LLC; its 40% non-controlling interest in Lexington Columbia LLC; its
30% non-controlling interest in Lexington/Lion Venture L.P.; its 30%
non-controlling interest in Triple Net Investment Company LLC; and its 33 1/3%
non-controlling interest in Lexington Durham Limited Partnership. The properties
owned by the entities are financed with individual non-recourse mortgage loans.
Non-recourse mortgage debt is generally defined as debt whereby the lenders'
sole recourse with respect to borrower defaults is limited to the value of the
property collateralized by the mortgage. The lender generally does not have
recourse against any other assets owned by the borrower or any of the members of
the borrower, except for certain specified expectations listed in the particular
loan documents. These exceptions generally relate to limited circumstances
including breaches of material representations.
19
The Company invests in entities with third parties to increase portfolio
diversification, reduce the amount of equity invested in any one property and to
increase returns on equity due to the realization of advisory fees. See footnote
6 to the condensed consolidated financial statements for combined summary
balance sheet and income statement data relating to these entities.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK ($000's)
The Company's exposure to market risk relates primarily to its variable rate and
fixed rate debt. As of June 30, 2004 and 2003, the Company's variable rate
indebtedness was $14,631 and $46,697, respectively, which represented 2.0% and
10.5% of total long-term indebtedness, respectively. During the three months and
six months ended June 30, 2004 and 2003, this variable rate indebtedness had a
weighted average interest rate of 4.2% and 3.3%, and 4.3% and 4.1%,
respectively. Had the weighted average interest rate been 100 basis points
higher, the Company's net income for the three months ended June 30, 2004 and
2003 would have been reduced by approximately $38 and $130, respectively, and
for the six months ended June 30, 2004 and 2003 net income would have been
reduced by $218 and $300, respectively. As of June 30, 2004 and 2003, the
Company's fixed rate debt was $711,361 and $398,200, respectively, which
represented 98.0% and 89.5%, respectively, of total long-term indebtness. The
weighted average interest rate as of June 30, 2004 of fixed rate debt was 6.6%,
which is approximately 100 basis points higher than the fixed rate debt incurred
by the Company during 2004. With no fixed rate debt maturing until 2008, the
Company believes it has limited market risk exposure to rising interest rates as
it relates to its fixed rate debt obligations. However had the fixed interest
rate been higher by 100 basis points, the Company's net income would have been
reduced by $1,349 and $2,515 for the three and six months ended June 30, 2004
and by $868 and $2,042 for the three and six months ended June 30, 2003.
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), (the "Exchange Act") 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 (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) 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.
21
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings - not applicable.
ITEM 2. Changes in Securities and Use of Proceeds - not applicable.
ITEM 3. Defaults Upon Senior Securities - not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders.
At the Company's 2004 Annual Meeting of Shareholders held on May 26,
2004, the following action was taken:
The shareholders elected nine individuals nominated to serve as
trustees of the Company until the 2005 Annual Meeting of
Shareholders, as set forth in Proposal No. 1 in the Company's Notice
of Annual Meeting of Shareholders and Proxy Statement for the 2004
Annual Meeting of Shareholders. The nine individuals elected, and
the number of votes cast for, or withheld, with respect to each of
them follows:
Nominee for Trustee For Withhold
------------------- ---------- ---------
E. Robert Roskind 43,042,071 425,034
Richard J. Rouse 43,047,631 446,474
T. Wilson Eglin 43,047,415 444,690
Geoffrey Dohrmann 43,114,458 379,647
Carl D. Glickman 43,198,896 295,209
James Grosfeld 43,224,645 269,460
Kevin W. Lynch 43,137,479 356,626
Stanley R. Perla 43,136,134 357,971
Seth M. Zachary 41,807,389 1,686,716
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 (furnished 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 (furnished herewith).
(a) Reports on Form 8-K filed and/or furnished during the quarter
ended June 30, 2004:
Form 8-K (filed April 1, 2004)
Form 8-K (filed May 4, 2004)
Form 8-K (filed June 15, 2004)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Lexington Corporate Properties Trust
Date: August 9, 2004 By: /s/ T. Wilson Eglin
------------------------------------
T. Wilson Eglin
Chief Executive Officer,
President and Chief Operating
Officer
Date: August 9, 2004 By: /s/ Patrick Carroll
------------------------------------
Patrick Carroll
Chief Financial Officer,
Executive Vice President and
Treasurer
23