1
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, 1997
[ ] 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, INC.
------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 13-3717318
------------------------------ ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
355 Lexington Avenue
New York, NY 10017
------------------------------ -----------
(Address of principal executive offices) (Zip code)
(212) 692-7260
-----------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
--- ---
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 12,713,663 shares of common
stock, par value $.0001 per share on October 30, 1997.
2
PART 1. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1997 (Unaudited) and December 31, 1996
(in thousands, except share and per share data)
September 30, December 31,
ASSETS 1997 1996
---- ----
Real estate, at cost: (notes 4 and 5) $415,433 $339,411
Less: accumulated depreciation and amortization 55,632 51,343
------ ------
359,801 288,068
Cash and cash equivalents 3,268 2,468
Restricted cash 4,133 3,750
Other assets, net (note 2) 16,330 14,840
------ ------
$383,532 $309,126
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable, including accrued interest (note 5) $199,550 $186,188
Subordinated notes payable, including accrued interest 1,936 1,973
Origination fees payable, including accrued interest and
accumulated accretion (note 7) 4,546 4,379
Accounts payable and other liabilities 2,801 1,394
----- -----
208,833 193,934
------- -------
Minority interests (note 8) 28,232 22,533
------ ------
237,065 216,467
------- -------
Stockholders' equity (notes 3 and 9):
Preferred stock, par value $0.0001 per share; authorized
10,000,000 shares. Class A Senior Cumulative
Convertible Preferred, liquidation preference $12.50 per share,
1,325,000 shares issued and outstanding at September 30, 1997 --- ---
Excess stock, par value $0.0001 per share; authorized
40,000,000 shares, issued none --- ---
Common stock, par value $0.0001 per share, authorized
40,000,000 shares, 12,713,663 and 9,426,900 shares issued
and outstanding in 1997 and 1996, respectively 1 1
Additional paid in capital 194,787 136,956
Accumulated distributions in excess of net income (48,321) (44,298)
-------- --------
Total stockholders' equity 146,467 92,659
------- ------
$383,532 $309,126
======= =======
3
LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Quarters ended September 30, 1997 and 1996 and
Nine Months Ended September 30, 1997 and 1996
(Unaudited and in thousands, except share and per share data)
Nine Months Nine Months
Quarter Ended Quarter Ended Ended Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Rental (notes 2, 4, and 6) $11,242 $8,552 $31,420 $ 22,805
Interest and other 163 103 447 331
--- --- --- ---
11,405 8,655 31,867 23,136
------ ----- ------ ------
Expenses:
Interest expense (notes 5 and 7) 4,045 3,613 12,628 9,213
Depreciation and amortization of real estate 2,844 2,117 7,920 5,510
Amortization of deferred expenses 234 153 649 450
General and administrative expenses 874 760 2,885 2,147
Other expenses 213 197 616 499
----- ----- ----- -----
8,210 6,840 24,698 17,819
----- ----- ------ ------
Income before minority interests, gain on
sale of property and extraordinary item 3,195 1,815 7,169 5,317
Minority interests (note 8) 854 260 1,158 460
--- --- ----- ---
Income before gain on sale of
property and extraordinary item 2,341 1,555 6,011 4,857
Gain on sale of property (note 4) 3,517 --- 3,517 ---
----- --- ----- ---
Income before extraordinary item 5,858 1,555 9,528 4,857
Extraordinary item - loss on extinguishment
of debt (notes 4 and 5) 2,033 --- 3,889 ---
----- --- ----- ---
Net income $3,825 $1,555 $5,639 $4,857
===== ===== ===== =====
(Continued)
4
LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME, CONTINUED
Quarters ended September 30, 1997 and 1996 and
Nine Months Ended September 30, 1997 and 1996
(Unaudited and in thousands, except share and per share data)
Nine Months Nine Months
Quarter Ended Quarter Ended Ended Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
Net income per common share - primary:
Income before extraordinary item, per share $ 0.41 $ 0.17 $ 0.77 $ 0.52
Extraordinary item - loss on extinguishment
of debt, per share (0.15) -- (0.35) --
----- ---- ----- ----
Net income per share $ 0.26 $ 0.17 $ 0.42 $ 0.52
=========== =========== =========== ============
Weighted average shares outstanding 13,252,155 9,407,726 11,142,774 9,383,055
========== ========= ========== =========
Net income per common share fully diluted (note 2):
Income before extraordinary item, per share $ 0.39 $ 0.15 $ 0.70 $ 0.49
Extraordinary item - loss on extinguishment
of debt, per share (0.13) -- (0.28) --
----- ---- ----- ----
Net income per share $ 0.26 $ 0.15 $ 0.42 $ 0.49
=========== =========== =========== ============
Weighted average shares outstanding 15,921,698 11,671,574 13,736,302 10,698,871
========== ========== ========== ==========
5
LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months ended September 30, 1997 and 1996
(Unaudited and in thousands)
Nine Months Ended Nine Months Ended
September 30, September 30,
1997 1996
-------- --------
Cash flows from operating activities:
Net income $ 5,639 $ 4,857
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 8,569 5,960
Gain on sale of property (3,517) --
Extraordinary item - loss on extinguishment of debt 3,889 --
Increase in accounts payable and other liabilities 1,407 727
Other adjustments, net 209 (371)
-------- --------
Total adjustments 10,557 6,316
-------- --------
Net cash provided by operating activities 16,196 11,173
-------- --------
Cash flows from investing activities:
Acquisitions of real estate properties and partnerships, net of issuance
of special limited partnership units, cash received
and liabilities assumed (85,594) (2,232)
Proceeds from sale of property 21,362 --
-------- --------
Net cash used in investing activities (64,232) (2,232)
-------- --------
Cash flows from financing activities:
Proceeds of mortgage notes payable 83,542 4,990
Repayments on mortgage notes (76,115) (6,325)
Prepayment premium on early retirement of debt (3,560) --
Proceeds from common stock issued, net of offering costs 41,811 870
Proceeds from preferred stock issued, net of offering costs 16,021 --
Dividends to stockholders (9,662) (7,690)
Increase in deferred expenses (1,358) (58)
Cash distributions to minority interests (1,460) (487)
Increase in restricted cash (383) (516)
Decrease in escrow deposits -- 550
-------- --------
Net cash provided by (used in) financing activities 48,836 (8,666)
-------- --------
Increase in cash and cash equivalents 800 275
Cash and cash equivalents at beginning of period 2,468 2,589
-------- --------
Cash and cash equivalents at end of period $ 3,268 $ 2,864
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 12,467 $ 9,353
======== ========
Cash paid during the period for taxes $ 89 $ 132
======== ========
(Continued)
6
LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Nine Months ended September 30, 1997 and 1996
(Unaudited and in thousands)
Supplemental disclosure of non-cash investing and financing activities:
On July 9, 1997, in connection with a property acquisition, the Company assumed
approximately $5.9 million of first mortgage financing.
On March 19, 1997, in connection with an acquisition of properties involving a
partnership, the Company issued partnership units as partial satisfaction of the
purchase price (see notes 3 and 7). The issuance of these partnership units have
been recorded as minority interest in the accompanying consolidated financial
statements.
On May 22, 1996, the Company completed an acquisition transaction involving a
partnership, whereby a property was acquired in exchange for special limited
partnership units, following which the selling partnership was dissolved. Total
assets acquired and total liabilities assumed in the exchange were approximately
$56.9 million and $38.5 million, respectively.
7
LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
(1) The Company
Lexington Corporate Properties, Inc. 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, 1997, the
Company owned controlling interests in forty-five properties (the
"Properties") and minority interests in two additional properties. The
Properties owned by the Company are subject to triple net leases. A
majority of the Company's tenants have debt ratings of investment grade
(based on annual net effective rate). The Company was organized in 1993
to combine and continue to expand the business of two affiliated
limited partnerships (the "Partnerships"). References herein to the
"Company" shall include references to the Company, the Partnerships and
the Company's predecessor, Lexington Corporate Properties, Inc., a
Delaware corporation which was organized in October 1993 and was merged
into the Company on June 27, 1994.
The Company has qualified as a real estate investment trust ("REIT")
under the Internal Revenue Code of 1986, as amended (the "Code"). A
real estate investment trust is generally not subject to Federal income
tax on that portion of its real estate investment trust taxable income
("Taxable Income") and any after-tax net income from foreclosure
properties which is distributed to its stockholders, provided that at
least 95% of such income is distributed. No provision for Federal
income taxes has been made in the consolidated financial statements, as
the Company believes it is in compliance with the Code and has
distributed all of its Taxable Income.
The Company and its consolidated subsidiaries are required to file tax
returns in various states. States vary with respect to the taxation of
REITs. Some states have a tax based on capital within the state; other
states, not recognizing the REIT dividends paid deduction, have a tax
based on apportioned income as applicable to any corporation. There are
states that tax under both methods as well as states that have no
additional taxes other than the minimum state tax requirement. The
provision for state taxes is included in general and administrative
expenses in the consolidated statements of income.
The unaudited financial statements reflect all adjustments which are,
in the opinion of management, necessary to a fair statement of the
results for the interim periods presented. For a more complete
understanding of the Company's operations and financial position,
reference is made to the financial statements previously filed with the
Securities and Exchange Commission with the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
(2) Summary of Significant Accounting Policies
BASIS OF PRESENTATION. The Company's financial statements are prepared
on the accrual basis of accounting for financial and Federal income tax
reporting purposes. Real estate, which is held for investment, is
carried at cost less accumulated depreciation unless declines in values
of the Properties are considered other than temporary. Depreciation for
financial reporting purposes is determined by the straight-line method
over the estimated economic useful lives of the Properties. The Company
depreciates buildings and building improvements over a 40-year period
or the remaining useful lives from the dates of acquisition, land
improvements over a 20-year period, and fixtures and equipment over a
12-year period. Depreciation for tax purposes is determined in
accordance with the Modified Accelerated Cost Recovery System.
Amortization of the land estates for financial reporting and tax
purposes is determined by the straight-line method over the respective
remaining useful lives from the dates of acquisition.
8
The financial statements reflect the accounts of the Company and its
majority-owned subsidiaries, including, Lepercq Corporate Income Fund
L.P. ("LCIF") and Lepercq Corporate Income Fund II L.P. ("LCIF II").
The Company is the sole general partner and majority limited partner of
LCIF and LCIF II as well as a general partner and majority limited
partner in four other partnerships and, accordingly, accounts for them
on a consolidated basis. Entities in which the Company has an interest
of less than 50% are accounted for under the equity method and the
investments in these partnerships are included in other assets in the
accompanying consolidated balance sheets.
REVENUE. The Company has determined that the leases relating to the
Properties are operating leases. Rental revenue is recognized on a
straight-line basis over the minimum lease terms. The Company's rent
receivable, which is included in other assets in the condensed
consolidated balance sheets, primarily consists of the amounts of the
excess of rental revenues recognized on a straight-line basis over the
annual rents collectible under the leases.
DEFERRED FINANCING EXPENSES AND FEES. Deferred expenses, which are
included in other assets in the condensed consolidated balance sheets,
are composed principally of debt placement, mortgage loan and other
loan fees, and are amortized using the straight-line method, which
approximates the interest method, over the terms of the mortgages.
Fees incurred in connection with properties acquired have been
capitalized as a cost of the properties upon acquisition.
Origination fees payable obligations have been discounted using an
annual rate of 13%.
EARNINGS PER SHARE. Primary net income per share is computed by
dividing net income reduced by preferred dividends by the weighted
average number of common and dilutive common equivalent shares
outstanding during the period. Reported primary per-share amounts are
based on 13,252,155 and 9,407,726 common and common equivalent shares
for the quarters ended September 30, 1997 and 1996, and 11,142,774 and
9,383,055 common and common equivalent shares for the nine months ended
September 30, 1997 and 1996, respectively.
Fully diluted net income per share amounts are similarly computed but
include the effect, when dilutive of the Company's other potentially
dilutive securities. Fully diluted net income excludes preferred
dividends. The Company's Convertible Preferred Stock, OP Units and
Exchangeable Notes are excluded from the 1997 computation due to their
anti-dilutive effect during that period. Reported fully diluted per
share amounts are based on 15,921,698 and 11,671,574 common and common
equivalent shares for the quarters ended September 30, 1997 and 1996,
and 13,736,302 and 10,698,871 common and common equivalent shares for
the nine months ended September 30, 1997 and 1996, respectively.
Certain amounts included in the prior year's financial statements have
been reclassified to conform with the current year's presentation.
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(3) Public Equity Offering
In June 1997, the Company completed a public equity offering of 2.8
million shares of Common Stock at $13.75 per share, generating gross
proceeds of $38.5 million. On June 24, 1997, the Company used a portion
of the proceeds from the offering to pay down the entire amount
outstanding under its revolving credit facility (the "Credit
Facility"), which, on that date, was $26.4 million.
Additionally, on July 7, 1997, the Company sold an additional 420,000
shares of Common Stock in connection with the exercise of an
over-allotment option granted to the underwriters of the Company's
equity offering in June 1997, raising additional gross proceeds of
$5.775 million.
9
In the aggregate, the proceeds of the offering, net of underwriting
fees and other offering costs, amounted to approximately $40.984
million. The excess proceeds, after the pay down of the Credit
Facility, were used to fund property acquisitions and for other general
corporate purposes.
(4) Investments in Real Estate
On February 20, 1997, the Company completed the acquisition of a 58,800
square foot industrial property (the "Cottondale Property") in
Cottondale, Alabama for approximately $2.9 million. The Cottondale
Property is leased to Johnson Controls, Inc. under a net lease which
expires in February 2007. The current annual net effective rent is
$289,000 and increases annually by three times the percentage change in
the Consumer Price Index ("CPI"), not to exceed 4.5%.
On March 19, 1997, the Company acquired three industrial properties
(the "Exel Properties") for approximately $27.0 million. The Exel
Properties contain 761,200 square feet on 46.56 acres near Harrisburg,
Pennsylvania and are subject to net leases with Exel Logistics, Inc.
("Exel") which expire in November 2006. The current annual net
effective rent under the leases is $2,537,000 and will increase by
9.27% on December 1, 1997 and by 9.27% every three years thereafter.
The average annual net effective rent payable during the terms of the
leases is approximately $3.0 million, or approximately 11.1% of the
purchase price. The obligations of Exel under the leases are
unconditionally guaranteed by its parent company, NFC plc.
On May 1, 1997, the Company used the net proceeds of an additional sale
of Convertible Preferred Stock to acquire an office/research and
development facility in Rancho Bernardo, California (the "Rancho
Bernardo Property") for approximately $7.7 million. The Rancho Bernardo
Property contains 65,755 net rentable square feet and is leased to
Cymer, Inc. under the terms of a net lease which expires in December
2009. Upon acquisition, the lease provided for annual net effective
rent (including a management fee) of $737,000, which increased to
$755,000 on June 1, 1997 and which will increase by approximately 5%
every two years thereafter. The average annual net effective rent
payable during the lease term is approximately $860,000, or
approximately 11.1% of the purchase price.
On July 9, 1997, the Company acquired a 137,058 square foot office
building leased to Bull HN Information Systems, Inc. (the "Bull
Property") in Phoenix, Arizona for approximately $10.9 million. The
purchase price was satisfied with approximately $600,000 in a
promissory note issued to the seller, the assumption of approximately
$5.9 million of mortgage debt which bears interest at 8.12% per annum,
a credit received by the Company for the transfer of an existing
security deposit of approximately $1.0 million and cash of
approximately $3.4 million. The lease on the Bull Property is a net
lease which expires in October 2005. The current annual net effective
rent is $972,000, which will increase by approximately 4.8% on October
10, 2000 and by approximately 2.5% annually thereafter. The average
annual net effective rent payable during the lease term is
approximately $1.03 million.
On July 22, 1997, the Company acquired a two-story, 126,000 square foot
office/research and development facility on 36.94 acres of land, leased
to Lockheed Martin Corporation (the "Lockheed Property") for $15.5
million. The purchase price was satisfied with a draw-down on the
Credit Facility in the amount of $5.5 million and the balance in cash.
The lease on the Lockheed Property is a net lease which expires on
December 17, 2006. The current annual net effective rent is $1,671,000
and will increase on December 18, 2001 by 75% of the cumulative
increase in the CPI for the preceding sixty months. The obligations of
the lessee under the lease are unconditionally guaranteed by Honeywell,
Inc. Currently, the entire land parcel is subject to the lease;
however, the Company has the right to have approximately 24 acres of
the almost 37 acres removed from the lease without any reduction in the
rent paid by the tenant.
On September 2, 1997, the Company sold its property leased to Stratus
Computer, Inc. in Marlborough, Massachusetts (the "Stratus Property")
for approximately $21.36 million, realizing a gain of approximately
$3.5 million. In connection with the Status Property sale, the Company
realized net cash proceeds of approximately $9.3 million after repaying
a first mortgage loan with a balance of approximately $9.97 million and
a related prepayment premium of approximately $1.86 million. In
addition, the Company incurred a write-off of unamortized loan costs of
approximately $171,000.
10
On September 4, 1997, the Company acquired in a sale/leaseback
transaction the headquarters of FirstPlus Financial Group, Inc. (the
"FirstPlus Property") for $32.56 million. The FirstPlus Property
consists of a 248,000 square foot eight-story office building located
on 8.7 acres in the Stemmons Freeway submarket of Dallas, Texas. At the
closing, the Company entered into a net lease with FirstPlus for
fifteen years, with four five-year renewal options in favor of
FirstPlus at fair market value. The annual net effective rent begins at
$3.22 million, or 9.9% of the purchase price, and will increase by 10%
every five years. The acquisition was financed with proceeds of
approximately $9.5 million from the sale of the Stratus Property and a
draw on the Company's revolving line of credit in the amount of $23
million. The average annual net effective rent payable during the lease
term is approximately $3.56 million.
The following unaudited pro forma operating information for the nine
months ended September 30, 1997 and 1996 was prepared as if the above
acquisitions and dispositions and an acquisition made on October 31,
1997 (see note 11, Subsequent Events) had been consummated as of
January 1, 1996. The information provided does not purport to be
indicative of what the operating results of the Company would have
been had the acquisition and disposition been consummated on the date
assumed. The pro forma amounts are as follows (in thousands, except per
share data):
Unaudited Pro Forma Historical
Nine Months ended Nine Months ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
Revenues $37,485 $36,276 $31,867 $23,136
Income before extraordinary item $ 8,470 $ 9,189 $ 9,528 $ 4,857
Net income $ 8,470 $ 9,189 $ 5,639 $ 4,857
Net income per share:
Primary $ 0.57 $ 0.98 $ 0.42 $ 0.52
Fully diluted $ 0.57 $ 0.94 $ 0.42 $ 0.49
(5) Mortgage Notes Payable
On January 22, 1997, the mortgages secured by four of the Company's
Properties were paid in full. The aggregate principal amount was
$7,997,000 and the aggregate prepayment premiums were approximately
$520,000. The stated interest rate on these four mortgages was 12.625%.
The aggregate payments approximated the fair value assigned to the
mortgages when the related properties were acquired in December 1996.
In March 1997, in connection with the acquisition of the Exel
Properties, LCIF issued and sold $25 million of 8% Exchangeable
Redeemable Secured Notes (the "Exchangeable Notes") to an institutional
investor in a private placement. The Exchangeable Notes bear interest
at a rate of 8.0% per annum and mature in March 2004. The Exchangeable
Notes are secured by first mortgage liens on the Exel Properties, are
fully guaranteed by the Company, and can be exchanged by the holders
thereof for shares of the Company's common stock, par value $.0001 per
share (the "Common Stock"), at $13 per share beginning in the year
2000, subject to adjustment. The Exchangeable Notes require interest
only payments semi-annually in arrears and may be redeemed at the
Company's option after three years at a price of 103.2% of the
principal amount thereof, declining to par after five years. In
connection with the sale of the Exchangeable Notes, the Company entered
into certain related agreements providing for, among other things,
certain demand and piggyback registration rights to the initial
purchaser of the Exchangeable Notes. The Exchangeable Notes are
subordinated in right of payment to the Company's obligations under its
revolving Credit Facility.
On March 31, 1997, the Company repaid in full the bridge financing
secured by a mortgage on the Franklin, North Carolina Property, which
had a principal amount of $2,829,000. This amount was satisfied with
cash and with proceeds from permanent financing obtained on this
Property in the amount of $2.3 million. The new mortgage, which has an
eighteen-year term, bears interest at 8.5% per annum and requires
monthly payments of interest and principal which will be sufficient to
fully amortize the principal balance at maturity on April 1, 2015.
On May 30, 1997, the Company completed the refinancing of $22.1 million
of mortgage debt secured by the Salt Lake City, Utah Property. In
connection with the refinancing, the Company borrowed $24.25 million,
with the excess proceeds used to pay a prepayment premium in an amount
of approximately $1.67 million, plus accrued interest and transaction
costs. As a result of the refinancing, the stated rate on the
refinanced amount was reduced from 12.9% to 7.61% per annum, and,
commencing January 1, 1998, the Company's annual debt service payments
will be reduced by approximately $1.35 million. The principal balance
on the refinanced amount will fully amortize at maturity on October 1,
2009. This transaction resulted in an extraordinary loss on early
retirement of debt of approximately $1.8 million in the accompanying
consolidated statements of income.
On July 9, 1997, in connection with the Bull Property acquisition, the
Company assumed approximately $5.9 million of mortgage debt which bears
interest at 8.12% per annum and matures in October 2005 with a balloon
payment of approximately $4.2 million due at that time. Additionally,
the Company issued a promissory note to the seller in an amount of
approximately $600,000 which bears interest at 12% per annum and
matures on September 30, 2005 with all unpaid accrual interest and
principal due on that date.
On September 2, 1997, the Company sold the Stratus Property for
approximately $21.36 million and used a portion of the proceeds to
repay a first mortgage loan encumbering the property which had a
balance of approximately $9.97 million.
11
Since July 1, 1997, in connection with property acquisitions, the
Company drew down a total of $28.5 million of borrowings under its
Credit Facility which remained outstanding as of September 30, 1997 and
was bearing interest at a rate of 7.18% per annum.
At September 30, 1997, the Company was in compliance with the covenants
of its debt agreements.
(6) Leases
Minimum future rents receivable under non-cancelable operating leases
as of September 30, 1997 are as follows (in thousands):
Year ending
December 31
-----------
1997 (3 months) $ 10,496
1998 41,207
1999 40,795
2000 40,432
2001 37,844
2002 35,509
Thereafter 200,288
-------
$ 406,571
===========
Bank One, Arizona, N.A., the tenant which occupies the Company's 178,000
square foot office facility in Phoenix, Arizona, has exercised a five
year renewal effective December 1, 1998 at an annual net effective rent
of $1.9 million. The tenant may terminate the lease on December 1, 2000
by giving one year notice in advance and paying a lease termination
penalty of $2.85 million.
(7) Related Party Transactions
In connection with the origination fees payable, the Company is
obligated to pay The LCP Group, L.P. ("LCP"), a related party to the
Company, an aggregate principal amount of $1,778,000 for rendering
services in connection with the original acquisitions of certain
properties. Simple interest is payable quarterly from available net
cash flow of the respective original properties on the various
unpaid principal portions of the fees, at annual rates ranging from
12.25% to 19%. Monthly or quarterly installment payments are to
commence at various dates to satisfy principal and current interest
payments as well as any unpaid accrued interest outstanding. The
original principal amounts have been discounted at an annual rate of
13%. Accumulated accretion on origination fees payable was $441,000
and $395,000 at September 30, 1997 and December 31, 1996,
respectively.
(8) Minority Interests
In conjunction with several of the Company's acquisitions, sellers were
given interests in partnerships controlled by the Company as a form of
consideration. All of such interests are convertible at certain times
into shares of Common Stock on a one-for-one basis at various dates
through May 2006. See "Liquidity and Capital Resources - Operating
Partnership Structure."
In connection with the acquisition of the Exel Properties, an
unaffiliated partnership (the "Exel Partnership") merged into LCIF. As a
result of the merger, LCIF issued 480,028 OP Units exchangeable for
Common Stock, which units are entitled to distributions at the same
dividend rate as Common Stock. At the time of the merger, the Exel
Partnership's sole assets were approximately $6.0 million of cash (from
the prior sale of a property) and the right to acquire the Properties in
a tax-free exchange under Internal Revenue Code Section 1031. The
proceeds from the issuance of these OP Units were recorded as minority
interest in the accompanying consolidated financial statements.
Following the acquisition of the Exel Properties, the total number of OP
Units of LCIF outstanding as of September 30, 1997 was 3,000,445. These
OP Units, subject to certain adjustments through the date of conversion,
have distributions per OP Unit in varying amounts up to $1.16 per OP
Unit.
12
Minority interests in the accompanying consolidated financial
statements relate to interests in such partnerships held by parties
other than the Company.
(9) Preferred Stock
In December 1996, the Company entered into an agreement with Five
Arrows Realty Securities, L.L.C. ("Five Arrows") providing for the sale
of up to 2,000,000 shares of Convertible Preferred Stock. In connection
with this transaction, the Company designated 2,000,000 shares as
"Class A Senior Cumulative Convertible Preferred Stock" and reserved
for issuance up to 2,000,000 shares of its Common Stock upon the
conversion of the Convertible Preferred Stock. Under the terms of the
agreement, the Company may sell the Convertible Preferred Stock to Five
Arrows at up to three closings, at the Company's option, during 1997
for an aggregate price of approximately $25 million. The Convertible
Preferred Stock, which is convertible into Common Stock on a
one-for-one basis at $12.50 per share, subject to adjustment, beginning
in 1998, is entitled to quarterly distributions equal to the greater of
$.295 or 105% of the quarterly distribution on the Common Stock. The
Convertible Preferred Stock may be redeemed by the Company after five
years at a 6% premium over the liquidation preference of $12.50 per
share (plus accrued and unpaid dividends), with such premium declining
to zero on or after December 31, 2011. Each share of Convertible
Preferred Stock is entitled to one vote per share and holders will be
entitled to vote on all matters submitted to a vote of holders of
outstanding Common Stock. In connection with such sale, the Company has
entered into certain related agreements with Five Arrows, providing,
among other things, for certain demand and piggyback registration
rights with respect to such shares and the right to designate a member
or members of the Board of Directors under certain circumstances. John
D. McGurk is currently serving as Five Arrows' designee to the Board of
Directors of the Company.
On January 21, 1997, the Company sold 700,000 shares of Convertible
Preferred Stock to Five Arrows and used the net proceeds of $8.4
million to repay $7,997,000 of mortgage debt, including prepayments of
$520,000. Such mortgage debt had been bearing interest at a stated rate
of 12.625% per annum and would have required interest and principal
payments of approximately $1.45 million in 1997.
On April 28, 1997, the Company sold an additional 625,000 shares of
Convertible Preferred Stock to Five Arrows. Net proceeds to the Company
were approximately $7.8 million. On May 1, 1997, the Company used the
net proceeds to acquire the Rancho Bernardo Property for $7,725,000.
Pursuant to the agreement with Five Arrows, the Company may sell an
additional 675,000 shares of Convertible Preferred Stock for a sale
price of $8.4 million before December 31, 1997.
(10) Legal Proceedings
Ross Stores, the tenant of the Company's Ross Stores Newark Property,
has exercised an option in the lease to purchase the Ross Stores Newark
Property for its fair market value, which was determined by arbitration
based on estimates of fair market value submitted by Ross Stores and the
Company. Under the terms of the arbitration, the arbitrator was required
to select the submission of either the Company or Ross Stores whichever
more closely approximated the arbitrator's own opinion of fair market
value, and was not permitted any discretion to select another valuation.
The opinion of value selected by the arbitrator is deemed the purchase
price. The estimate of fair market value of the Ross Stores Newark
Property submitted by Ross Stores more closely approximated the
arbitrator's opinion of value and, accordingly, was selected by the
arbitrator and confirmed by the Superior Court of the State of
California (the "Superior Court"). The arbitrator's opinion of value was
based on numerous factors, including current and future market rental
rates, the length of the Ross Stores Newark Property lease, the
creditworthiness of Ross Stores and rates of return required by
investors who acquire similar properties. The arbitration decision would
have allowed Ross Stores to purchase the Ross Stores Newark Property for
$24.8 million on or about September 1, 1997. The Company has appealed
the Superior Court decision which has resulted in a stay of Ross Stores'
exercise of its purchase right. The outcome of such appeal cannot be
determined at this time. If the Company is successful on its appeal, the
parties will go back to the arbitration process and await a new opinion
of value. On August 26, 1997, the Superior Court ruled in favor of a
motion made by Ross Stores to require the Company to post a bond
equivalent to one year's rent, in the amount of approximately $3.4
million, securing the Company's potential reimbursement of Ross Stores
for rental payments made following September 1, 1997 in the event
13
that the sale was deemed to be consummated as of such date. The Company
has posted the bond at a cost of approximately $17,000. The net book
value of the Ross Stores Newark Property at September 30, 1997 was $25.0
million, which includes approximately $1.5 million of deferred rent and
deferred expenses related to the Company's refinancing of certain
properties, which were allocated to the Ross Stores Newark Property. If
the Company does not prevail on its appeal of the Superior Court
decision, the potential loss on the sale of the Ross Stores Newark
Property as of September 1, 1997 would have been approximately $400,000,
after a write-off of $515,000 of deferred financing expenses. As of
December 31, 1996, the annual net effective rent for the Ross Stores
Newark Property was approximately $3.3 million, which increased to
approximately $3.4 million commencing September 1, 1997. Revenue derived
from the Ross Stores Newark Property accounted for approximately 10.0%
and 7.8% of the Company's consolidated rental revenue for 1996 and for
the nine months ended September 30, 1997, respectively. Unless offset by
other revenue sources, the loss of such annual rental revenue from the
Ross Stores Newark Property will adversely affect the Company's results
of operations.
(11) Subsequent Events
On October 20, 1997, the Company declared a dividend of $.29 per share
of Common Stock to stockholders of record on October 30, 1997 to be paid
on November 14, 1997.
On October 31, 1997, the Company acquired a newly constructed 276,480
square foot, build-to-suit, warehouse/distribution facility in
Waterloo, Iowa (the "Ryder Property") for approximately $9.3 million.
The Ryder Property is 100% net leased to Ryder Integrated Logistics, a
wholly owned subsidiary of Ryder Systems, Inc. under a net lease which
expires in 2012. The acquisition was financed by a draw-down from the
Credit Facility. The current annual net effective rent is $891,000, or
9.6% of the purchase price, which will escalate at the end of the fifth
year of the lease to an annual net effective rent of $998,000 and at
the end of the tenth year to an annual net effective rent of
$1,117,000. Rent payments for the Ryder Property are guaranteed by the
tenant's parent, Ryder Systems, Inc. The average annual net effective
rent payable on the Ryder Acquisition during the lease term is
$1,002,000.
(12) Commitments - Pending Acquisitions
The Company has entered into a definitive agreement to acquire a 179,300
square foot, build-to-suit, office facility in Florence, South Carolina
for $15.02 million which will be net leased to Fleet Mortgage Group,
Inc. for ten years. On the basis of a project cost of $15.02 million,
the annual net effective rent during the first five years of the lease
would be $1,520,000, or 10.1% of the estimated purchase price, which
would escalate at the end of the fifth lease year by 17% to $1,780,000.
The average annual effective net rent payable during the lease term
would be approximately $1.65 million, or 10.99% of the purchase price.
Construction of the property is scheduled for completion in the third
quarter of 1998 with the acquisition by the Company expected to close
shortly thereafter, subject to certain contingencies including
acceptance of the property by the tenant. The purchase price and rental
rates are subject to adjustment based upon the completed project cost.
There can be no assurance that the acquisition will be consummated, or
if consummated, as to the timing thereof.
Additionally, the Company has entered into a definitive agreement with
Corporate Realty Income Trust I ("CRIT") pursuant to which CRIT will
merge with and into the Company (the "CRIT Acquisition"). The Company
will acquire three properties, totaling approximately 560,000 net
rentable square feet, which are net leased to Circuit City Stores,
Inc., Allegiance Healthcare Corporation (guaranteed by Baxter
International, Inc.) and Dana Corporation and are located in Richmond,
Virginia; Bessemer, Alabama; and Gordonsville, Tennessee, respectively.
The weighted average lease term for the properties will be
approximately 11 years as of the closing date of the CRIT
Acquisition, anticipated to occur in December 1997. The Company will
assume approximately $15.3 million of mortgage indebtedness (with an
average weighted interest rate thereon of 8.97%) and will make a
payment of approximately $18.2 million, of which at least $17.2 million
will be comprised of the Company's Common Stock, with the balance
payable in cash or shares of the Company's Common Stock, at the option
of CRIT. The total combined current annual net effective rent on the
properties is approximately $3.3 million. The average annual net
effective rent payable during the remaining lease terms is
approximately $3.6 million. The closing of the CRIT
14
Acquisition is subject to the approval of CRIT's stockholders and to
the satisfaction of certain other customary closing conditions, and
there can be no assurance that the CRIT Acquisition will consummated.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this Form 10-Q Report, the words "believes," expects," "estimates"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties which could cause
actual results to differ materially. In particular, among the factors that could
cause actual results to differ materially are continued qualification as a real
estate investment trust, general business and economic conditions, competition,
increases in real estate construction costs, interest rates, accessibility of
debt and equity capital markets and other risks inherent in the real estate
business including tenant defaults, potential liability relating to
environmental matters and illiquidity of real estate investments. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release the results of any revisions to these forward-looking
statements which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
General
Lexington Corporate Properties, Inc. is a self-managed and self-administered
real estate investment trust ("REIT") that acquires, owns and manages a
geographically diversified portfolio of net leased office, industrial and retail
properties. The Company currently owns controlling interests in forty-six
properties (the "Properties") and minority interests in two additional
properties. The Properties owned by the Company are subject to triple net
leases. The majority of the Company's tenants have debt ratings of investment
grade (based on annual net effective rent). The Company was organized in 1993 to
combine and continue to expand the business of two affiliated limited
partnerships (the "Partnerships"). References herein to the "Company" shall
include references to the Company, the Partnerships and the Company's
predecessor, Lexington Corporate Properties, Inc., a Delaware corporation which
was organized in October 1993 and was merged into the Company on June 27, 1994.
The Company was organized to combine, continue and expand the business of
Lepercq Corporate Income Fund L.P. ("LCIF") and Lepercq Corporate Income Fund II
L.P. ("LCIF II") (together, the "Partnerships"), which own, operate and manage a
diverse portfolio of real properties. The Company, which has elected to qualify
as a real estate investment trust under the Internal Revenue Code of 1986,
acquired the Partnerships through mergers which were effected as of October 12,
1993. In connection with the mergers, the Company issued 9,303,409 shares of its
Common Stock, 169,109 units of special limited partner interest in the
Partnerships (which are exchangeable for an equivalent number of shares of
Common Stock) and $1,877,000 in principal amount of 7.75% Subordinated Notes due
2000.
The mergers were accounted for as business combinations of entities under common
control using the "as if pooling-of-interest" method of accounting, with the
Company as the surviving entity. Under this method, the assets and liabilities
of the Partnerships have been recorded by the Company at their carrying values.
As of September 30, 1997, the Company was the indirect or direct owner of
forty-five real estate properties (or interests therein) (the "Properties")
triple net leased to corporations, and owned minority interests in two
additional triple net leased properties.
Liquidity and Capital Resources
LIQUIDITY. The Company's principal sources of liquidity are revenue generated
from the Properties, interest on cash balances, amounts available under its
Credit Facility described below and proceeds from capital market transactions.
REAL ESTATE ASSETS. As of September 30, 1997, the Company's real estate assets
consisted of the Properties and two minority interests. The Properties are
located in twenty-three states and contain an aggregate of 6,430,057 square feet
of net rentable space. Each Property is subject to a single tenant triple net
lease, which is generally characterized as a lease 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.
PUBLIC EQUITY OFFERING. In June 1997, the Company completed a public equity
offering of 2.8 million shares of Common Stock at $13.75 per share, generating
net proceeds of approximately $35.6 million. On July 7, 1997, the Company sold
an additional 420,000 shares in connection with the exercise of an
over-allotment option granted to the underwriters of the Company's offering in
June 1997, raising additional net proceeds of approximately $5.4 million. In the
aggregate, the proceeds of the offering, net of underwriting fees and other
offering costs, amounted to approximately $41.0 million.
DEBT SERVICE REQUIREMENTS. The Company's principal liquidity needs are the
payment of interest and principal on outstanding mortgage debt. As of September
30, 1997, a total of thirty-seven properties were subject to outstanding
mortgages which had an aggregate principal amount, including accrued interest,
of $199,550,000. The weighted average interest rate on the Company's debt on
such date was approximately 8.06% per annum. Approximate balloon payment
16
amounts for the next five calendar years are due as follows: $10 million in 1998
and $5.6 million in 1999. There are no balloon payments due during the fourth
quarter of 1997 or 2000, 2001 or 2002. The ability of the Company to make such
balloon payments will depend upon its ability to refinance the relevant
mortgages, sell the mortgaged properties or draw from the Credit Facility
sufficient amounts to satisfy such balloon payments. The ability of the Company
to accomplish such goals may be affected by economic factors affecting the real
estate industry generally, including the available mortgage rates at the time,
the Company's equity in the mortgaged properties, the financial condition of the
Company, the operating history of the mortgaged properties, the then current tax
laws and the general national, regional and local economic conditions at the
time. As of September 30, 1997, the Company's total consolidated indebtedness
(including origination fees payable and the related accrued interest) was
approximately $206 million.
MORTGAGE REFINANCING. In May, 1997, the Company completed the refinancing of
$22.1 million of mortgage debt secured by the Salt Lake City, Utah Property. In
connection with the refinancing, the Company borrowed $24.25 million, with the
excess proceeds used to pay a prepayment premium in an amount of approximately
$1.67 million, plus accrued interest and transaction costs. As a result of the
refinancing, the stated rate on the refinanced amount was reduced from 12.9% to
7.61% per annum, and commencing January 1, 1998, the Company's annual debt
service payments will be reduced by approximately $1.35 million. The principal
balance on the refinanced amount will fully amortize at maturity on October 1,
2009. This transaction resulted in an extraordinary loss on early retirement of
debt of approximately $1.8 million in the accompanying consolidated statements
of income.
LEASE OBLIGATIONS. Because the Company's tenants bear all or substantially all
of the cost of property maintenance and capital improvements, the Company does
not anticipate significant needs for cash for property maintenance or repairs.
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.
DIVIDENDS. The Company paid a dividend of $.27 per share to stockholders in
respect of each of the calendar quarters of 1995 and the first quarter of 1996,
$.28 per share in respect of the second and third quarters of 1996, and $.29 per
share in respect of the fourth quarter of 1996 and the first and second quarters
of 1997. On October 20, 1997, the Company declared a dividend in respect of the
third quarter of 1997 of $.29 per share to stockholders of record as of October
30, 1997 to be paid on November 14, 1997. The Company's annualized dividend rate
is currently $1.16 per share.
REVOLVING CREDIT FACILITY. The Company's Credit Facility provides for a maximum
committed amount of $60 million. Borrowings under the Credit Facility bear
interest at 1.5% over LIBOR. On June 24, 1997, the Company used a portion of the
proceeds from the public equity offering to pay down the entire remaining
outstanding $26.4 million balance. Since July 1, 1997, in connection with
property acquisitions, the Company drew down a total of $28.5 million of
borrowings under its Credit Facility which remained outstanding as of September
30, 1997. The Credit Facility is collateralized by seven of the Company's
Properties.
PREFERRED STOCK SALE. In December 1996, the Company entered into an agreement
with Five Arrows Realty Securities, L.L.C. ("Five Arrows") providing for the
sale of up to 2,000,000 shares of Convertible Preferred Stock. In connection
with this transaction, the Company designated 2,000,000 shares as "Class A
Senior Cumulative Convertible Preferred Stock" and reserved for issuance up to
2,000,000 shares of its Common Stock upon the conversion of the Convertible
Preferred Stock. Under the terms of the agreement, the Company may sell the
Convertible Preferred Stock to Five Arrows at up to three closings, at the
Company's option, during 1997 for an aggregate price of approximately $25
million. The Convertible Preferred Stock, which is convertible into Common Stock
on a one-for-one basis at $12.50 per share, subject to adjustment, beginning in
1998, is entitled to quarterly distributions equal to the greater of $.295 or
the product of 1.05 and the per share quarterly distribution on Common Stock.
The Convertible Preferred Stock may be redeemed by the Company after five years
at a 6% premium over the liquidation preference of $12.50 per share (plus
accrued and unpaid dividends), with such premium declining to zero on or after
December 31, 2011. Each share of Convertible Preferred Stock is entitled to one
vote per share and holders will be entitled to vote on all matters submitted to
a vote of holders of outstanding Common Stock. In connection with such sale, the
Company has entered into certain related agreements with Five Arrows, providing,
among other things, for certain demand and piggyback registration rights with
respect to such shares and the right to designate a member or members
17
of the Board of Directors under certain circumstances. John D. McGurk is
currently serving as Five Arrows' designee to the Board of Directors of the
Company.
On January 21, 1997, the Company sold 700,000 shares of Convertible Preferred
Stock to Five Arrows and used the proceeds to repay $7,997,000 of mortgage debt,
including prepayment premiums of $520,000. Such mortgage debt had been bearing
interest at 12.625% per annum and would have required interest and principal
payments of approximately $1.45 million in 1997.
On April 28, 1997, the Company sold an additional 625,000 shares of Convertible
Preferred Stock to Five Arrows, and on May 1, 1997 used the proceeds in a $7.725
million property acquisition.
Pursuant to the agreement with Five Arrows, the Company may sell an additional
675,000 shares of Convertible Preferred Stock for a sale price of $8.5 million
before December 31, 1997.
EXCHANGEABLE REDEEMABLE SECURED NOTES. In March 1997, in connection with the
acquisition of the Exel Properties, LCIF issued and sold $25 million of 8%
Exchangeable Redeemable Secured Notes (the "Exchangeable Notes") to an
institutional investor in a private placement. The Exchangeable Notes bear
interest at a rate of 8.0% per annum and mature in March 2004. The Exchangeable
Notes are secured by first mortgage liens on the Exel Properties, are fully
guaranteed by the Company, and can be exchanged by the holders thereof for
shares of the Company's Common stock, par value $.0001 per share ("Common
Stock"), at $13 per share beginning in the year 2000, subject to adjustment. The
Exchangeable Notes require interest only payments semi-annually in arrears and
may be redeemed at the Company's option after three years at a price of 103.2%
of the principal amount thereof, declining to par after five years. In
connection with the sale of the Exchangeable Notes, the Company entered into
certain related agreements providing for, among other things, certain demand and
piggyback registration rights to the initial purchaser of the Exchangeable
Notes. The Exchangeable Notes are subordinated in right of payment to the
Company's obligations under the Credit Facility.
OPERATING PARTNERSHIP STRUCTURE. The Company controls two principal operating
partnerships. This operating partnership structure enables the Company to
acquire properties by issuing to a seller, as a form of consideration, operating
partnership interests ("OP Units"). All of such OP Units are convertible at
certain times into shares of Common Stock on a one-for-one basis and currently,
a majority of such interests require the Company to pay certain distributions to
the holders of such interests. As a result, the Company's cash available for
distribution to holders of Common Stock and Convertible Preferred Stock is
reduced by the amount of the distributions required by the terms of such OP
Units, and the number of shares of Common Stock that will be outstanding in the
future should be expected to increase, from time to time, as such OP Units and
shares of Convertible Preferred Stock are converted into shares of Common Stock.
The Company accounts for these OP Units as minority interests. The table set
forth below provides certain information with respect to such OP Units as of
September 30, 1997.
18
Total Annual
1997 Convertible Distribution
Annualized Shares of in 1997
Number of Per Unit Common Stock (in
Partnership or Class Units Issued Distribution as of: thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
LCIF - Special Limited Partners 112,229 $ 1.16 At any time $ 130
LCIF II - Special Limited Partners 56,880 $ 1.16 At any time $ 66
------- --------
Subtotal: Special Limited Partners 169,109 $ 196
------- --------
Barnes Partnerships:
Barngiant Livingston 52,335 $ 0.27 3/04 $ 14
Barnhale Modesto 23,267 $ - 2/06 N/A
Barnes Rockshire 36,825 $ - 3/05 N/A
Barnvyn Bakersfield 7,441 $ - 1/03 N/A
-
Barnhech Montgomery 11,766 $ 0.29 5/06 $ 4
Barnward Brownsville 35,400 $ - 11/04 N/A
------- --------
Subtotal: Barnes Partnerships 167,034 $ 18
------- --------
Red Butte Creek Associates 1,715,294 $ 0.66 5/98 $ 1,132
114,006 $ 1.08 5/98 $ 123
------- --------
Subtotal: Red Butte Creek Associates 1,829,300 $ 1,255
--------- --------
Fort Street Partners 207,728 $ - 1/06 N/A
-
17,259 $ 1.12 1/99 $ 19
--------- --------
Subtotal: Fort Street Partners 224,987 $ 19
--------- --------
Toy Properties Associates II 94,999 $ 1.12 1/99 $ 107
Toy Properties Associates V 34,988 $ 1.12 1/99 $ 39
Exel Partnership 480,028 $ 1.16 4/99 $ 557
--------- --------
Grand Total 3,000,445 $ 2,191
========= ========
Holders of the LCIF and LCIF II OP Units receive distributions that are equal to
distributions on Common Stock. Holders of the Barnes Partnerships units receive
distributions as described in the table above until such units become eligible
for conversion to Common Stock, upon which date they will receive distributions
based on their respective partnership interest ownership percentages. The
distribution to the class of Red Butte Creek Associates units consisting of
1,715,294 units will increase to $1.08 per unit annually in January 1998. The
holders of the class of Red Butte Creek Associates Units consisting of 114,006
units receive distributions that are equal to distributions on Common Stock,
with an annual cap of $1.08 per unit. Holders of the class of Fort Street
Partners units consisting of 17,259 units, the Toy Properties Associates II
units and Toy Properties Associates V units receive distributions that are equal
to distributions on Common Stock, with an annual cap of $1.12. The holders of
the class of Fort Street Partners units consisting of 207,728 units will receive
distributions that are equal to distributions on Common Stock, with an annual
cap of $1.12, when they become eligible for conversion into Common Stock. The
holders of the Exel Partnership units receive distributions that are equal to
distributions on Common Stock.
PARTNERSHIP MERGER. In connection with the acquisition of the Exel Properties,
an unaffiliated partnership (the "Exel Partnership") merged into LCIF. As a
result of the merger, LCIF issued 480,028 partnership units exchangeable for
Common Stock, which units are entitled to distributions at the same dividend
rate as Common Stock. At the time of the merger, the Exel Partnership's sole
assets were approximately $6.0 million of cash (from the prior sale of a
property) and the right to acquire the Properties in a tax-free exchange under
Internal Revenue Code Section 1031. The proceeds from the issuance of these
partnership units were recorded as minority interest in the accompanying
consolidated financial statements.
19
During the nine months ended September 30, 1997, the Company completed the
following acquisitions:
COTTONDALE, ALABAMA PROPERTY. On February 20, 1997, the Company completed the
acquisition of a 58,800 square foot industrial property (the "Cottondale
Property") in Cottondale, Alabama for approximately $2.9 million. The Cottondale
Property is leased to Johnson Controls, Inc. under a net lease which expires in
February 2007. The current annual net effective rent is $289,000 and increases
annually by three times the percentage change in the Consumer Price Index
("CPI"), not to exceed 4.5%.
EXEL LOGISTICS PROPERTIES. On March 19, 1997, the Company acquired three
industrial properties (the "Exel Properties") for $27.0 million. The Exel
Properties contain 761,200 square feet on 46.56 acres near Harrisburg,
Pennsylvania and are subject to net-leases with Exel Logistics, Inc. ("Exel")
which expire in November 2006. The current net effective rent under the leases
is $2,537,000 and will increase by 9.27% on December 1, 1997 and by 9.27% every
three years thereafter. The average annual net effective rent payable during the
terms of the leases is approximately $3.0 million, or approximately 11.1% of the
purchase price. The obligations of Exel under the leases are unconditionally
guaranteed by its parent company, NFC plc.
RANCHO BERNARDO PROPERTY. On May 1, 1997, the Company used the proceeds of an
additional Convertible Preferred Stock sale to acquire an office/research and
development facility in Rancho Bernardo, California (the "Rancho Bernardo
Property") for approximately $7.7 million. The Rancho Bernardo Property contains
65,755 net rentable square feet and is leased to Cymer, Inc. under the terms of
a net lease which expires in December 2009. Upon acquisition, the lease provided
for annual net effective rent payments (including a management fee) of $737,000,
which increased to $755,000 on June 1, 1997 and which will increase by
approximately 5% every two years thereafter. The average annual net effective
rent payable during the lease term is approximately $860,000, or approximately
11.1% of the purchase price.
BULL PROPERTY. On July 9, 1997, the Company acquired a 137,058 square foot
office building leased to Bull HN Information Systems, Inc. (the "Bull
Property") in Phoenix, Arizona for approximately $10.9 million. The purchase
price was satisfied with approximately $600,000 in a promissory note issued to
the seller, the assumption of approximately $5.9 million of mortgage debt which
bears interest at 8.12% per annum and matures in October 2005 with a balloon
payment of approximately $4.2 million due at that time, a credit received by the
Company for the transfer of an existing security deposit of approximately $1.0
million and cash of approximately $3.4 million. The lease on the Bull Property
is a net lease which expires October 10, 2005. The current annual net effective
rent is $972,000, which will increase by approximately 4.8% on October 10, 2000
and by approximately 2.5% annually thereafter.
LOCKHEED PROPERTY. On July 22, 1997, the Company acquired a two-story, 126,000
square foot office/research and development facility on 36.94 acres of land,
leased to Lockheed Martin Corporation (the "Lockheed Property") for $15.5
million. The purchase price was satisfied with a draw-down on the Credit
Facility in the amount of $5.5 million and the balance in cash. The lease on the
Lockheed Property is a net lease which expires on December 17, 2006. The current
annual net effective rent is $1,671,000 and will increase on December 18, 2001
by 75% of the cumulative increase in the CPI for the preceding sixty months. The
obligations of the lessee under the lease are unconditionally guaranteed by
Honeywell, Inc. Currently, the entire land parcel is subject to the leases;
however, the Company has the right to have approximately 24 acres of the almost
37 acres removed from the lease without any reduction in the rent paid by the
tenant.
FIRSTPLUS PROPERTY. On September 4, 1997, the Company acquired in a
sale/leaseback transaction the headquarters of FirstPlus Financial Group, Inc.
(the "FirstPlus Property") for $32.56 million. The FirstPlus Property consists
of a 248,000 square foot eight-story office building located on 8.7 acres in the
Stemmons Freeway submarket of Dallas, Texas. At the closing, the Company entered
into a net lease with FirstPlus for fifteen years, with four five-year renewal
options in favor of FirstPlus at fair market value. The annual net effective
rent begins at $3.22 million, or 9.9% of the purchase price, and will increase
by 10% every five years. The acquisition was financed with proceeds of
approximately $9.5 million from the sale of the Stratus Property and a draw on
the Company's Credit Facility in the amount of $23 million. The average annual
net effective rent payable during the lease term is approximately $3.56 million.
During October 1997, the Company completed one additional acquisition, described
as follows:
20
RYDER PROPERTY. On October 31, 1997, the Company acquired a newly constructed
276,480 square foot, build-to-suit, warehouse/distribution facility in Waterloo,
Iowa (the "Ryder Property") for approximately $9.3 million. The Ryder Property
is 100% net leased to Ryder Integrated Logistics, a wholly owned subsidiary of
Ryder Systems, Inc. under a net lease which expires in 2012. The acquisition was
financed by a draw-down from the Credit Facility. The current annual net
effective rent is $891,000, or 9.6% of the purchase price, which will escalate
at the end of the fifth year of the lease to an annual net effective rent of
$998,000 and at the end of the tenth year to an annual net effective rent of
$1,117,000. Rent payments for the Ryder Property are guaranteed by the tenant's
parent, Ryder Systems, Inc. The average annual net effective rent payable on the
Ryder Acquisition during the lease term is $1,002,000.
PROPERTY SALE. On September 2, 1997, the Company sold its property leased to
Stratus Computer, Inc. in Marlborough, Massachusetts for approximately $21.36
million, realizing a gain of approximately $3.5 million. In connection with the
Stratus Property sale, the Company realized net cash proceeds of approximately
$9.3 million after repaying a first mortgage loan with a balance of $9.97
million and a related prepayment premium of approximately $1.86 million. In
addition, the Company incurred a write-off of unamortized loan costs of
approximately $171,000.
PENDING ACQUISITIONS. The Company has entered into a definitive agreement to
acquire a 179,300 square foot "build-to-suit" office facility in Florence, South
Carolina for $15.02 million which will be net-leased to Fleet Mortgage Group,
Inc. for ten years. On the basis of a project cost of $15.02 million, the annual
net rent during the first five years of the lease would be $1,520,000, or 10.1%
of the estimated purchase price, which would escalate at the end of the fifth
lease year by 17% to $1,780,000. The average annual net rent payable during the
lease term would be approximately $1.65 million, or 10.99% of the purchase
price. Construction of the property is scheduled for completion in the third
quarter of 1998 with the acquisition by the Company expected to close shortly
thereafter, subject to certain contingencies including acceptance of the
property by the tenant. The purchase price and rental rates are subject to
adjustment based upon the completed project cost. There can be no assurance that
the acquisition will be consummated, or if consummated, as to the timing
thereof.
Additionally, the Company has entered into a definitive agreement with Corporate
Realty Income Trust I ("CRIT") pursuant to which CRIT will merge with and into
the Company (the "CRIT Acquisition"). The Company will acquire three properties,
totaling approximately 560,000 net rentable square feet, which are net leased to
Circuit City Stores, Inc., Allegiance Healthcare Corporation (guaranteed by
Baxter International, Inc.) and Dana Corporation and are located in Richmond,
Virginia; Bessemer, Alabama; and Gordonsville, Tennessee, respectively. The
weighted average lease term for the properties will be approximately 10.8 years
as of the closing date of the CRIT Acquisition, anticipated to occur in December
1997. The Company will assume approximately $15.3 million of mortgage
indebtedness (with an average weighted interest rate thereon of 8.97%) and will
make a payment of approximately $18.2 million, of which at least $17.2 million
will be comprised of the Company's Common Stock, with the balance payable in
cash or shares of the Company's Common Stock, at the option of CRIT. The total
combined current annual net effective rent on the properties is approximately
$3.3 million. The average annual net effective rent payable during the remaining
lease terms is approximately $3.6 million. The closing of the CRIT Acquisition
is subject to the approval of CRIT's stockholders and to the satisfaction of
certain other customary closing conditions, and there can be no assurance that
the CRIT Acquisition will consummated.
Results of Operations
Quarter and nine months ended September 30, 1997 compared to quarter and nine
months ended September 30, 1996
Total Revenues. Total revenues for the quarter and nine months ended September
30, 1997 were $11,405,000 and $31,867,000, representing increases of $2,750,000
and $8,731,000 from the same periods in 1996. The increases in revenues were
primarily attributable to increases in rental revenue of $2,690,000 and
$8,615,000 for the quarter and nine month periods, respectively. Rental revenue
increased primarily due to revenues from properties acquired since May 1996.
Interest and other revenues for the quarter and nine months ended September 30,
1997 increased $60,000 and $116,000 from the same periods in 1996 primarily due
to higher interest-bearing cash balances during the nine months ended September
30, 1997.
Total Expenses. Total expenses for the quarter and nine months ended September
30, 1997 were $8,210,000 and $24,698,000, representing increases of $1,370,000
and $6,879,000 from the same periods in 1996. The increases were
21
primarily attributable to increases in interest expense, depreciation and
amortization of real estate, general and administrative expenses and
amortization of deferred expenses, all of which increased principally as a
result of property acquisitions and increased property portfolio activity.
Interest expense for the quarter and nine months ended September 30, 1997
increased $432,000 and $3,415,000 from the same periods in 1996 primarily due to
interest expense incurred on $131 million of gross additional debt obtained or
assumed in connection with the property acquisitions since May 1996. The
increase has been offset, particularly in the quarter ended September 30, 1997,
by a lower average borrowing rate as a result of refinancings, and the use of
proceeds from equity placements to reduce the overall leverage of the Company.
Depreciation and amortization of real estate for the quarter and nine months
ended September 30, 1997 increased $727,000 and $2,410,000 from the same periods
in 1996 primarily due to property acquisitions. General and administrative
expenses for the quarter and nine months ended September 30, 1997 increased
$114,000 and $738,000 from the same periods in 1996 as a result of increases in
certain operating costs due to the incremental growth of the Company.
Additionally, property arbitration litigation expenses relating to the Ross
Stores Newark Property of $167,000 were incurred during the quarter ended June
30, 1997. Amortization of deferred expenses for the quarter and nine months
ended September 30, 1997 increased $81,000 and $199,000 from the same periods in
1996 due to an increase in amortizable deferred loan expenses incurred in
connection with debt obtained or assumed in property acquisitions.
Excluding the property arbitration litigation expenses incurred during the
quarter ended June 30, 1997, general and administrative expenses for the quarter
and nine months ended September 30, 1997 were approximately 7.8% and 8.6% of
rental revenues, compared to approximately 8.6% and 9.4% for the same periods in
1996.
Net Income. Net income for the quarter and nine months ended September 30, 1997
was $3,825,000 and $5,639,000, representing increases of $2,270,000 and $782,000
from the same periods in 1996. The increases were primarily attributable to the
increases in rental revenues, offset by the increases in interest expense,
depreciation and amortization of real estate, general and administrative
expenses and amortization of deferred expenses, all described above.
Additionally, during the quarter and nine months ended September 30, 1997, a
gain on the sale of the Stratus Property in the amount of $3,517,000 was
recognized, and extraordinary losses on extinguishment of debt were incurred as
follows: $2,033,000 in connection with the Stratus Property mortgage repayment
during the quarter ended September 30, 1997 and $1,787,000 in connection with
the Salt Lake City debt refinancing during the quarter ended June 30, 1997.
Income before gain on sale of property and extraordinary item for the quarter
and nine months ended September 30, 1997 increased $786,000 and $1,154,000 from
the same periods in 1996.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128").
SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, Earnings Per
Share ("APB 15") and specifies the computation, presentation, and disclosure
requirements for earnings per share ("EPS") for entities with publicly held
common stock or potential common stock. SFAS No. 128 replaces the presentation
of primary EPS with a presentation of basic EPS and fully diluted EPS with
diluted EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures
and requires reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
This statement will be adopted for both interim and annual periods ending after
December 15, 1997.
22
The following table reflects what the Company's basic and diluted EPS would have
been under SFAS 128 for the quarters and nine months ended September 30, 1997
and 1996:
Quarter Quarter Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
Basic:
Income before extraordinary item $0.43 $0.17 $0.81 $0.52
Extraordinary item - loss on
extinguishment of debt (0.16) --- (0.37) ---
------ ----- ------ -----
Net income $0.27 $0.17 $0.44 $0.52
==== ==== ==== ====
Diluted:
Income before extraordinary item $0.39 $0.15 $0.70 $0.49
Extraordinary item - loss on
extinguishment of debt (0.13) --- (0.28) ---
------ ----- ------ -----
Net income $0.26 $0.15 $0.42 $0.49
===== ==== ==== ====
Funds from Operations
The Company believes that Funds From Operations enhances an investor's
understanding of the Company's financial condition, results of operations and
cash flows. The Company believes that Funds From Operations is an appropriate
measure of the performance of an equity REIT, and it can be one measure of a
REIT's ability to make cash distributions. Funds From Operations is defined by
the National Association of Real Estate Investment Trusts, Inc. as "net income
(or loss) (computed in accordance with generally accepted accounting
principles), excluding gains (or losses) from debt restructuring and sales of
property, plus real estate depreciation and amortization and after adjustments
for unconsolidated partnerships and joint ventures." The Company's method of
calculating Funds From Operations excludes other non-recurring revenue and
expense items and may be different from methods used by other REITs and,
accordingly, is not comparable to other such REITs. Funds From Operations should
not be considered an alternative to net income, as an indicator of the Company's
operating performance or to cash flows from operating activities as determined
in accordance with generally accepted accounting principles ("GAAP"), or as a
measure of liquidity to other consolidated income or cash flow statement data as
determined in accordance with GAAP.
The Company reports Funds From Operations ("FFO") on a fully diluted basis
(Total FFO) assuming the conversion of all operating partnership units. This
reporting method treats all operating partnership units as common stock
equivalents even though many units are not immediately convertible and receive
distributions below the level paid in respect of the Company's common stock.
The following table reflects the Company's FFO for the quarter and nine months
ended September 30, 1997 and 1996 (in thousands, except share data):
23
Quarter Ended Nine Months Ended
-------------- -----------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
Net income $3,825 $1,555 $5,639 $4,857
Add back:
Depreciation and amortization of real estate 2,844 2,117 7,920 5,510
Minority interests share of income 854 260 1,158 460
Losses from debt restructuring 2,033 --- 3,889 ---
Property arbitration litigation expense --- --- 167 ---
Less:
Gain on sale of property (3,517) --- (3,517) ---
------ ----- ------ ------
Total Funds From Operations before item below 6,039 3,932 15,256 10,827
Non-recurring stock compensation(1) --- 147 --- 441
------ ----- ------ ------
Total FFO-for shares and partnership units 6,039 4,079 15,256 11,268
Less:
Minority interests share of depreciation (495) (258) (1,301) (424)
Minority interests share of income (854) (260) (1,158) (460)
------ ----- ------ ------
FFO - for common and preferred shares only $4,690 $3,561 $12,797 $10,384
====== ====== ======= =======
Weighted average common and preferred
shares outstanding 13,984,172 9,407,726 11,692,785 9,383,055
Weighted average OP units outstanding 3,000,445 2,165,444 2,866,811 1,217,412
--------- --------- --------- ---------
Total weighted average shares and units 16,984,617 11,573,170 14,559,596 10,600,467
========== ========== ========== ==========
Below are the cash flows provided by (used in) operating, investing and
financing activities for the quarters and nine months ended September 30, 1997
and 1996 (in thousands):
Quarter Quarter Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
Cash flows provided by (used in):
Operating activities $6,692 $4,258 $16,196 $11,173
Investing activities (31,849) --- (64,232) (2,232)
Financing activities 16,558 (3,825) 48,836 (8,666)
====== ======= ====== =======
The number of weighted average shares used by the Company in calculating FFO
differs from those used in calculating earnings per share under generally
accepted accounting principles.
The Company's total declared dividends (including preferred dividends) and
partnership distributions, on a weighted average basis, amounted to
approximately 77% of the Company's Total FFO for the quarter ended September 30,
1997.
- --------------------------------------------------------------------------------
(1) For purposes of the calculation of Funds From Operations, the Company has
added back to net income amounts for non-recurring stock compensation, which
management believes to be an appropriate adjustment based on the
non-recurring and unusual nature of such amounts. The Company's method of
calculating Funds From Operations may be different from methods used by
other REITs. Non-recurring stock compensation represents the expense of a
simultaneous exercise and re-granting of options to the Company's management
during the period between July 1995 and January 1996, which was intended to
increase management's ownership in the Company (a practice which has been
discontinued). The Board of Directors has determined that the Company will
not engage in such practices in the future.
24
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings - not applicable.
ITEM 2. Changes in Securities - not applicable.
ITEM 3. Defaults under the Senior Securities - not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders -
not applicable.
ITEM 5. Other Information - not applicable.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -
Exhibit No. Exhibit
----------- -------
11 Schedule of Computations of Per
Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended
September 30, 1997.
Announcement of a definitive agreement on May 29,
1997 to acquire three properties through a merger
with CRIT - filed June 2, 1997, Amendment No. 1
thereto, containing audited financial statements of
CRIT for the year ended December 31 1996 and pro
forma financial statements filed June 17, 1997, and
Amendment No. 2 thereto, containing Rule 3-14
financial statements filed August 4, 1997.
Acquisition of a property on September 4, 1997, and
an announcement of a sale of a property filed
September 19, 1997.
25
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, Inc.
Date: November 14, 1997 By: /s/ E. Robert Roskind
----------------- ----------------------
E. Robert Roskind
Chairman and Co-Chief Executive Officer
Officer
Date: November 14, 1997 By: /s/ Paul R. Wood
----------------- ----------------------
Paul R. Wood
Vice President and Chief Accounting Officer