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, 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
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(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: 48,469,219
common shares, par value $.0001 per share on November 4, 2004.
PART 1. - FINANCIAL INFORMATION
-------------------------------
ITEM 1. FINANCIAL STATEMENTS
----------------------------
LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2004 (Unaudited) and December 31, 2003
(in thousands, except share and per share data)
September 30, December 31,
2004 2003
---- ----
Assets:
Real estate, at cost $ 1,335,650 $ 1,162,395
Less: accumulated depreciation and amortization 180,660 160,623
----------- ---------
1,154,990 1,001,772
Properties held for sale - discontinued operations 39,327 36,478
Cash and cash equivalents 106,123 15,923
Investment in non-consolidated entities 123,574 69,225
Deferred expenses, net 9,232 10,013
Rent receivable - current 136 --
Rent receivable - deferred 25,313 24,069
Intangible assets, net 27,464 14,736
Other assets 44,057 35,195
----------- ---------
$ 1,530,216 $ 1,207,411
=========== ==========
Liabilities and Shareholders' Equity:
Mortgages and notes payable $ 725,845 $ 455,940
Credit facility borrowings -- 94,000
Mortgage note payable - discontinued operations -- 1,445
Accounts payable and other liabilities 9,749 7,308
Accrued interest payable 2,444 1,576
Deferred revenue 4,089 975
Prepaid rent 5,508 2,482
Origination fees payable, including accrued interest -- 808
------------ ---------
747,635 564,534
Minority interests 58,538 59,220
----------- ---------
806,173 623,754
----------- ---------
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,
48,177,108, and 40,394,113 shares issued and outstanding in 2004 and
2003, respectively 5 4
Additional paid-in-capital 759,817 601,501
Deferred compensation, net (9,063) (6,265)
Accumulated distributions in excess of net income (106,840) (91,707)
------------ ----------
720,234 579,848
----------- ---------
$ 1,530,216 $ 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 nine months ended September 30, 2004 and 2003
(Unaudited and in thousands, except share and per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
Gross revenues:
Rental $ 35,662 $ 27,409 $ 101,605 $ 78,926
Advisory fees 1,448 184 3,174 690
Tenant reimbursements 1,396 1,106 4,270 3,439
---------- ---------- ---------- ----------
Total gross revenues 38,506 28,699 109,049 83,055
Expense applicable to revenues:
Depreciation and amortization (11,198) (7,093) (28,264) (20,203)
Property operating (2,999) (2,193) (8,076) (6,037)
General and administrative (3,969) (2,617) (9,990) (7,291)
Non-operating income 1,815 789 2,586 1,303
Interest and amortization expense (12,578) (8,314) (34,254) (27,425)
Debt satisfaction charges -- -- -- (7,685)
---------- ---------- ---------- ----------
Income before provision for income taxes, minority interests, equity in 9,577 9,271 31,051 15,717
earnings of non-consolidated entities and discontinued
operations
Provision for income taxes (243) -- (1,497) --
Minority interests (766) (1,512) (2,985) (2,390)
Equity in earnings of non-consolidated entities 1,862 1,414 5,383 4,156
---------- ---------- ---------- ----------
Income from continuing operations 10,430 9,173 31,952 17,483
---------- ---------- ---------- ----------
Discontinued operations, net of minority interest:
Income from discontinued operations 1,295 789 4,516 2,582
Impairment charge (562) -- (2,775) --
Gains on sales of properties -- -- 4,065 1,143
---------- ---------- ---------- ----------
Total discontinued operations 733 789 5,806 3,725
---------- ---------- ---------- ----------
Net income 11,163 9,962 37,758 21,208
Dividends attributable to preferred shares - Series B (1,590) (1,590) (4,770) (1,802)
---------- ---------- ---------- ----------
Net income allocable to common shareholders $ 9,573 $ 8,372 $ 32,988 $ 19,406
========== ========== ========== ==========
Income per common share-basic:
Income from continuing operations $ 0.18 $ 0.22 $ 0.59 $ 0.48
Income from discontinued operations 0.02 0.02 0.13 0.12
---------- ---------- ---------- ----------
Net income $ 0.20 $ 0.24 $ 0.72 $ 0.60
========== ========== ========== ==========
Weighted average common shares outstanding-basic 47,901,818 34,780,279 46,033,992 32,579,011
========== ========== ========== ==========
Income per common share-diluted:
Income from continuing operations $ 0.18 $ 0.22 $ 0.59 $ 0.47
Income from discontinued operations 0.01 0.02 0.12 0.11
---------- ---------- ---------- ----------
Net income $ 0.19 $ 0.24 $ 0.71 $ 0.58
========== ========== ========== ==========
Weighted average common shares outstanding-diluted 53,349,746 34,973,430 51,521,655 37,989,563
========== ========== ========== ==========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2004 and 2003
(Unaudited and in thousands)
2004 2003
---------- -----------
Net cash provided by operating activities $ 70,024 $ 50,019
---------- -----------
Cash flows from investing activities:
Investment in convertible mortgage receivable (19,800) --
Investment in real estate properties and intangible assets (137,758) (141,707)
Net proceeds from sale/transfer of properties 90,220 7,807
Real estate deposits, net 353 (5,417)
Investment in and advances to non-consolidated entities (53,586) (3,854)
Increase in escrow deposits (2,022) 775
Distribution of loan proceeds from non-consolidated entities 15,629 --
Increase in deferred lease costs (197) (388)
------------ -----------
Net cash used in investing activities (107,161) (142,784)
------------ -----------
Cash flows from financing activities:
Dividends to common and preferred shareholders (52,891) (32,405)
Dividend reinvestment plan proceeds 7,641 4,795
Change in credit facility borrowings, net (94,000) (9,500)
Principal amortization payments (13,980) (11,048)
Principal payments on debt, excluding normal amortization (1,264) (78,084)
Proceeds of mortgages and notes payable 145,240 74,882
Increase in deferred costs, net (688) (2,023)
Cash distributions to minority partners (7,271) (5,053)
Proceeds from the sale of common and preferred shares, net 144,579 150,323
Origination fee amortization payments (29) (292)
------------ -----------
Net cash provided by financing activities 127,337 91,595
----------- -----------
Cash attributable to newly consolidated entity -- 1,578
---------- -----------
Change in cash and cash equivalents 90,200 408
Cash and cash equivalents, at beginning of period 15,923 12,097
---------- -----------
Cash and cash equivalents, at end of period $ 106,123 $ 12,505
========== ===========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
4
LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 September
30, 2004, the Company had an ownership interest in 138 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 138 properties, seven 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
the general partner and the majority limited partner of LCIF, LCIF II
and Net 3.
In December 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46 (revised December 2003) ("FIN 46R"),
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 September 30,
2004 2003
-------------- --------------
Net income allocable to common shareholders,
as reported $ 9,573 $ 8,372
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 $ 9,509 $ 8,245
=========== ===========
Net income per share - basic
Basic - as reported $ 0.20 $ 0.24
=========== ===========
Basic - pro forma $ 0.20 $ 0.24
=========== ===========
Net income allocable to common shareholders
for diluted earnings per share $ 10,345 $ 8,372
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 $ 10,281 $ 8,245
=========== ===========
Net income per share - diluted
Diluted - as reported $ 0.19 $ 0.24
=========== ===========
Diluted - pro forma $ 0.19 $ 0.24
=========== ===========
Nine Months Ended September 30,
2004 2003
-------------- --------------
Net income allocable to common shareholders,
as reported $ 32,988 $ 19,406
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 191 382
----------- -----------
Pro forma net income - basic $ 32,797 $ 19,024
=========== ===========
Net income per share - basic
Basic - as reported $ 0.72 $ 0.60
=========== ===========
Basic - pro forma $ 0.71 $ 0.58
=========== ===========
Net income allocable to common shareholders
for diluted earnings per share $ 36,559 $ 22,222
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 191 382
----------- -----------
Pro forma net income - diluted $ 36,368 $ 21,840
=========== ===========
Net income per share - diluted
Diluted - as reported $ 0.71 $ 0.58
=========== ===========
Diluted - pro forma $ 0.71 $ 0.58
=========== ===========
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 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 and amortized into rental revenue over the non-cancelable
periods of the respective leases. Above-market leases are recorded as
part of intangibles and are amortized as a direct charge against rental
revenue over the non-cancelable periods of the respective leases.
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
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", as amended ("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 September 30, 2004 and December 31,
2003, the Company did not record an allowance for doubtful accounts.
Impairment of Real Estate. Annually, and if events and circumstances
require, 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
7
proceeds to be realized upon sale. 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 nine months ended September 30, 2004 and 2003:
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
----------- ---------- ----------- -----------
BASIC
Income from continuing operations $ 10,430 $ 9,173 $ 31,952 $ 17,483
Less preferred dividends (1,590) (1,590) (4,770) (1,802)
----------- ---------- ---------- ----------
Income allocable to common shareholders from
continuing operations 8,840 7,583 27,182 15,681
Total income from discontinued operations 733 789 5,806 3,725
----------- ---------- ---------- ----------
Net income allocable to common shareholders $ 9,573 $ 8,372 $ 32,988 $ 19,406
=========== ========== ========== ==========
Weighted average number of common shares
outstanding 47,901,818 34,780,279 46,033,992 32,579,011
=========== ========== ========== ==========
Income per common share - basic:
Income from continuing operations $ 0.18 $ 0.22 $ 0.59 $ 0.48
Income from discontinued operations 0.02 0.02 0.13 0.12
----------- ---------- ---------- ----------
Net income $ 0.20 $ 0.24 $ 0.72 $ 0.60
=========== ========== ========== ==========
DILUTED
Income allocable to common shareholders from
continuing operations - basic $ 8,840 $ 7,583 $ 27,182 $ 15,681
Incremental income attributed to assumed
conversion of dilutive securities 761 -- 2,980 2,390
----------- ----------- ---------- ---------
Income allocable to common shareholders from
continuing operations - diluted 9,601 7,583 30,162 18,071
Total income from discontinued operations - diluted 744 789 6,397 4,151
----------- ---------- ----------- ----------
Net income allocable to common shareholders -
diluted $ 10,345 $ 8,372 $ 36,559 $ 22,222
=========== ========== ========== ==========
Weighted average number of common shares used in
calculation of basic earnings per share 47,901,818 34,780,279 46,033,992 32,579,011
Add incremental shares representing:
Shares issuable upon exercise of employee share
options 118,533 193,151 129,695 188,988
Shares issuable upon conversion of dilutive
securities 5,329,395 -- 5,357,968 5,221,564
----------- ----------- ----------- ---------
Weighted average number of shares used in
calculation of diluted earnings per common
share 53,349,746 34,973,430 51,521,655 37,989,563
========== ========== ========== ==========
Income per common share-diluted:
Income from continuing operations $ 0.18 $ 0.22 $ 0.59 $ 0.47
Income from discontinued operations 0.01 0.02 0.12 0.11
----------- ---------- ------------ ----------
Net income $ 0.19 $ 0.24 $ 0.71 $ 0.58
=========== ========== ========== ==========
9
(4) Investments in Real Estate
--------------------------
The following acquisitions were consummated during the third quarter of
2004:
o The Company acquired a property in Fort Mill, South Carolina for a
capitalized cost of $29,171 which is net leased to Wells Fargo
Bank N.A. The lease, which expires in May 2014, provides for
average annual net rent of $2,501. The purchase price was
partially funded through a $20,300 non-recourse mortgage note
which bears interest at 5.37%, provides for annual debt service of
$1,106 and matures in May 2014, when a balloon payment of $18,311
is due.
o The Company purchased a property in Chelmsford, Massachusetts for
a capitalized cost of $12,193 which is net leased to Cadence
Design Systems, Inc. through September 2013. The lease provides
for average annual net rent of $1,065. The purchase price was paid
entirely with cash.
o The Company purchased a property in High Point, North Carolina for
a capitalized cost of $13,232 which is net leased to Steelcase,
Inc. through September 2017. The lease provides for average annual
net rent of $1,087. The purchase price was partially funded
through the assumption of an $8,883 non-recourse mortgage note
which bears interest at 5.75%, provides for annual debt service of
$695 and matures in October 2009, when a balloon payment of $7,741
is due.
o The Company purchased a property in San Antonio, Texas for a
capitalized cost of $41,882 which is net leased to Harcourt Brace
through March 2016. The lease provides for average annual net rent
of $3,429. The purchase price was partially funded through the
assumption of a $30,211 non-recourse mortgage note which bears
interest at 6.08%, provides for annual debt service of $2,260 and
matures in October 2012, when a balloon payment of $26,025 is due.
During the third quarter of 2004, the Company sold two properties, at
cost, to a non-consolidated entity in which it has a 25% ownership
interest. The properties were sold for $79,723 (subject to $55,570 in
non-recourse mortgages) and no gain was recognized. During the second
quarter of 2004, the Company sold two properties, at cost, to a
non-consolidated entity in which it has a 30% ownership interest. The
properties were sold for $35,871 (subject to $22,788 in non-recourse
mortgages) and no gain was recognized. During the first quarter of
2004, the Company sold two properties, at cost, to two non-consolidated
entities for an aggregate capitalized cost of $50,805 one of which was
subject to non-recourse mortgage of $12,757. The Company has a 30%
interest in one non-consolidated entity and a 25% interest in the
other.
During the first and second quarters of 2004, the Company purchased
twelve properties for an aggregate capitalized cost of $269,785. The
acquisitions were partially funded through the assumption of
non-recourse mortgage notes valued at $181,198 (face value of $165,716)
and $34,745 in new non-recourse mortgage notes. Detailed information
relating to each acquisition is contained in the June 30, 2004 and
March 31, 2004 Form 10-Q.
During the nine months ended September 30, 2004 the Company has
allocated $22,479 to intangible assets relating to real estate
acquisitions. Of this total, $17,270, $2,352 and $2,857 has been
allocated to origination costs, tenant relationships, and below-market
leases, respectively. These assets are amortized over the life of the
respective tenant leases which, on a weighted average basis, is
approximately 12 years at September 30, 2004.
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 unaudited
Condensed Consolidated Balance Sheets.
(5) Discontinued Operations
-----------------------
During the three months ended September 30, 2004, the Company sold one
property in Marlborough, Massachusetts and one in Milford, Connecticut
for aggregate net proceeds of $13,655. As of September 30, 2004, the
Company had three properties held for sale and for the nine months
ended September 30, 2004 recorded an impairment charge of $2,775,
including $562 recorded in the third quarter, relating to the
difference between the basis for three properties and the estimated net
proceeds expected to be realized upon sale.
10
During the first and second quarter of 2004, the Company sold four
properties for an aggregate net proceeds of $17,316, which resulted in
an aggregate net gain of $4,065.
The following presents the operating results for the properties sold
and properties held for sale for the applicable periods:
Three Months Ended September 30,
2004 2003
------------- --------------
Rental revenues $ 1,475 $ 1,278
Pre-tax income, including gains on sale $ 840 $ 789
Nine Months Ended September 30,
2004 2003
------------- --------------
Rental revenues $ 5,374 $ 4,195
Pre-tax income, including gains on sale $ 6,127 $ 3,725
Of the three properties held for sale as of September 30, 2004, one was
subject to a sale agreement which, subsequent to September 30, 2004,
the purchaser terminated.
(6) Investment in Non-Consolidated Entities
---------------------------------------
As of September 30, 2004, the Company has investments in six
non-consolidated entities. The entities are Lexington Acquiport
Company, LLC ("LAC") (33 1/3% ownership interest), Lexington Acquiport
Company II, LLC ("LAC II") (25% ownership interest), Lexington/Lion
Venture LP ("LION") (30% ownership interest), Lexington Columbia LLC
("Columbia") (40% ownership interest), Lexington Durham Limited
Partnership ("DLP") (33 1/3% ownership interest) and Triple Net
Investment Company LLC ("TNI") (30% ownership interest).
During the third quarter of 2004, the LION operating agreement was
amended to provide for an additional $25,714 and $60,000 in equity
commitments from the Company and its partner, respectively.
During the third quarter of 2004, LION made the following acquisitions:
o purchased a property in Houston, Texas for a capitalized cost of
$39,904 which is net leased to Veritas DGC, Inc. The lease, which
expires September 2015, provides for average annual net rent of
$3,249.
o purchased a property in Weston, Florida for a capitalized cost of
$12,605 which is net leased to Circuit City Stores, Inc. The
lease, which expires February 2017, provides for average annual
net rent of $1,047.
o purchased a property in Weston, Florida for a capitalized cost of
$18,210 which is net leased to Hagemeyer Foods (N.A.), Inc. The
lease, which expires December 2012, provides for average annual
net rent of $1,609.
o purchased a property in Santa Clarita, California for a
capitalized cost of $47,118 which is net leased to Specialty
Laboratories, Inc. The lease, which expires August 2024, provides
for average annual net rent of $3,563.
The purchase price for the Texas and Florida properties was funded
entirely with cash, and non-recourse mortgages were obtained subsequent
to September 30, 2004. (See note 13.) The California property was
partially funded though a $28,200, 4.75% interest only non-recourse
mortgage which matures October 2009.
During the third quarter of 2004, LAC II made the following
acquisitions:
o purchased a property in Meridian, Idaho for a capitalized cost of
$13,970 which is net leased to T-Mobile USA, Inc. The lease, which
expires June 2019, provides for average annual net rent of $1,320.
o purchased a property in Streetsboro, Ohio for a capitalized cost
of $29,224 which is net leased to L'Oreal USA, Inc. The lease,
which expires October 2019, provides for average annual net rent
of $2,518.
The Idaho property was partially funded through a $10,460 non-recourse
mortgage which bears interest at 6.01%, provides for annual debt
service of $753 and matures August 2019 when a balloon payment of
$7,670 is due. The Ohio property was partially funded through a $20,200
non-recourse mortgage which bears interest at 5.29%, provides for
annual debt service of $1,082 and matures September 2019 when a balloon
payment of $16,338 is due.
11
In addition, the Company sold two properties to LAC II for $79,723
(subject to $55,570 in non-recourse mortgages which bear interest at
5.83%, provide for annual debt service of $3,285 and mature May 2019,
when an aggregate balloon payment of $47,001 is due) which are net
leased to Employers Reinsurance Corporation.
During the second quarter of 2004 LION made the following acquisitions:
o 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 an $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.
o 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 the second quarter of 2004, 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%. In the second quarter of 2004, 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.
During the second quarter of 2004, 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.
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 $9,279 as of
September 30, 2004.
During the second quarter of 2004, the following non-recourse mortgage
was obtained by LION in addition to those related to acquisitions
discussed above:
Current Annual
Amount Rate Maturity Date Debt Service Balloon
------ ---- ------------- ------------ -------
$ 7,690 4.76% 04/14 $ 371 $ 6,784
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.
The following is summary combined balance sheet and income statement
data as of September 30, 2004 and for the nine months ended September
30, 2004 and 2003 for the Company's non-consolidated entities described
in the first paragraph of this note:
2004
----
Real estate, net $ 842,052
Intangibles, net $ 42,489
Mortgages payable $ 523,331
2004 2003
---- ----
Revenues $ 56,938 $ 36,241
Expenses $ 41,870 $ 24,971
--------------- --------------
Net income $ 15,068 $ 11,270
=============== ==============
12
During the nine months ended September 30, 2004, the Company made net
equity investments in each of the non-consolidated entities as follows:
LAC II $ 11,709
LION $ 35,257
TNI $ 7,122
The non-consolidated entities pay the Company acquisition, debt
placement and asset management fees. The fees earned by the Company
were $1,429 and $3,117 for the three and nine months ended September
30, 2004 and $165 and $633 for the three and nine months ended
September 30, 2003.
(7) Mortgages and Notes Payable
---------------------------
During the first and second quarter of 2004, the Company obtained an
aggregate of $90,195 in non-recourse mortgage notes, in addition to the
amounts discussed in note 4, with a weighted average fixed interest
rate of 5.66%.
During the nine months ended September 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 nine months ended September 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.
As of September 30, 2004, there were 5,328,858 units outstanding. All
units have stated distributions in accordance with their respective
partnership agreements. To the extent that the Company's dividend per
share is less than the stated distribution per unit per the applicable
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. In
addition, for the nine months ended September 30, 2004 and 2003, the
Company has issued 411,177 and 296,143 common shares, respectively,
under its dividend reinvestment plan raising net proceeds of $7,641
and $4,795, respectively.
(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. As of September 30, 2004, three expansions have
commenced and the Company is obligated to fund an aggregate $20,578, of
which $4,181 has been capitalized and included in Other Assets.
The Company at times 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.
As of September 30, 2004, the Company has entered into letters of
intent to purchase four properties upon completion of (i) construction
and commencement of rent from the tenants and/or (ii) the seller
fulfilling its contractual obligation concerning
13
certain deliverables. The aggregate estimated obligation is $78,699.
Subsequent to September 30,2004, LION purchased one of the properties
for $31,800.
(12) Supplemental Disclosure of Statement of Cash Flow Information
-------------------------------------------------------------
During 2004 and 2003, the Company paid $32,585 and $28,001,
respectively, for interest and $3,303 and $282, respectively, for
income taxes.
During 2004 and 2003, the Company issued 201,029 and 336,992 non-vested
common shares, respectively, to certain employees and trustees
resulting in $4,066 and $5,750 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 101,596 and 71,567
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 $1,318 and
$915, 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, 5 and 6 for additional non-cash disclosures.
(13) Subsequent Events
-----------------
Subsequent to September 30, 2004, LION purchased a property in Rancho
Cordova, California for $31,800 net leased through July 2012 to
Progressive Casualty Insurance Company for average annual net rent of
$2,804. In connection with the acquisition, LION assumed a $17,380
non-recourse mortgage which bears interest at 7.28%, provides for
annual debt service of $1,457 and matures September 2014 when a balloon
payment of $14,633 is due.
In addition, LION obtained the following non-recourse mortgages:
Current Annual
Property Amount Rate Maturity Debt Service Balloon
-------- ------ ---- -------- ------------ -------
Houston, TX $23,910 5.41% 10/15 $ 1,311 $21,846
Weston, FL $10,860 5.42% 11/14 $ 733 $ 9,066
Weston, FL $ 7,500 5.52% 11/17 $ 512 $ 5,758
On November 1, 2004, the Company's tenant in its Dallas, Texas
property, VarTec Telcom, Inc., filed for Chapter 11 bankruptcy. The
lease, which expires September 2015, provides for $3,486 in annual
rental revenue. As of September 30, 2004 the Company had the following
assets relating to this property:
Real estate, net $28,910
Rent receivable - deferred $ 1,570
Deferred expenses, net $ 1,456
In addition, the Company has a $21,025 non-recourse mortgage
encumbering this property which bears interest at 7.49%, provides for
annual debt service of $2,020 and matures in December 2012 when a
balloon payment of $16,030 is due.
As of this filing date, the lease has neither been rejected nor
affirmed by the tenant. If the tenant rejects the lease it is likely
the Company will record an impairment charge relating to the real
estate and write-off all deferred assets relating to the lease.
However, management has not quantified the potential impact.
14
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 nine month
periods ended September 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 reports on
Form 10-Q for the three months ended March 31, 2004 and June 30, 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 September 30, 2004, the Company owned, or had interests in, 138 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", as amended
(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 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.
15
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. Below market lease
intangibles are recorded as part of deferred revenue and amortized into rental
revenue over the remaining non-cancelable periods of the respective leases.
Above-market leases are recorded as part of intangibles and are amortized as a
direct charge against rental revenue over the non-cancelable periods of the
respective leases.
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. Annually and if events and circumstances require, 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 September 30, 2004, the Company's real estate assets
were located in 34 states and contained an aggregate of approximately 30.0
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 138 properties, seven provide for
operating expense stops and one is subject to a modified gross lease.
Approximately 98.8% of square feet is subject to a lease.
During the nine months ended September 30, 2004, the Company purchased 26
properties (including through non-consolidated entities) for a capitalized cost
of $621.5 million (including $280.2 million by non-consolidated entities) and
sold six properties to third parties resulting in a net gain, after impairment
charges, of $1.3 million.
The Company's principal sources of liquidity are revenues generated from the
properties, interest on cash balances, amounts available under its unsecured
credit facility and amounts that may be raised through the sale of securities in
private or public offerings. For the nine months ended September 30, 2004, the
leases on the consolidated properties generated $101.6 million in rental revenue
compared to $78.9 million during the same period in 2003.
On November 1, 2004, the tenant in the Company's Dallas, Texas property, Vartec
Telcom, Inc., filed for Chapter 11 bankruptcy. The lease, which expires
September 2015, provides for $3,486 in annual rental revenue and $3,445 in
current annual cash revenue. In addition, under the terms of the lease, the
tenant is responsible for all operating expenses of the property. If the tenant
rejects the lease the Company will, in addition to losing base rental revenue,
be responsible for operating expenses until a replacement tenant can be found.
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 October 29, 2004, payable on November 15,
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 October 29, 2004, payable on November 15,
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
16
flows which are expected to increase over time due to property acquisitions and
growth in rental revenues in the existing portfolio and from other sources.
Since cash used to pay dividends reduces amounts available for capital
investments, the Company generally intends to maintain a conservative dividend
payout ratio, reserving such amounts as it considers necessary for the expansion
of properties in its portfolio, debt reduction, the acquisition of interests in
new properties as suitable opportunities arise, and such other factors as the
Company's board of trustees considers appropriate.
Cash dividends paid to common shareholders increased to $48.1 million in 2004
compared to $32.2 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 capital raising alternatives will be
available to fund the necessary capital required by the Company. Cash flows from
operations were $70.0 million and $50.0 million for the nine months ended
September 30, 2004 and 2003, respectively.
Net cash used in investing activities totaled $107.2 million and $142.8 million
for the nine months ended September 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 $127.3 million and $91.6
million for the nine months ended September 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 September 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 3,446,138 1,401,159 $ 1.40 $ 4,825
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
------------- ----------- -------- ----------
5,328,858 1,708,212 $ 1.25 $ 6,675
============= =========== ======== ==========
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 September 30, 2004, 1.4
million common shares/operating partnership units have been repurchased and the
last repurchase occurred in September 2001.
17
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 September 30, 2004, the
Company was in compliance with all covenants, there were no borrowings
outstanding on the facility, $96.1 million was available to be borrowed and $3.9
million in letters of credit were outstanding.
Financing Transactions. During the nine months ending September 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
- -------- ------ ---- ------- --------- -------
Santa Clarita, CA(3) $ 28,200 4.75% $ 1,285 10/09 $ 28,200
Fort Mill, SC 20,300 5.37% 1,106 05/14 18,311
Streetsboro, OH(3) 20,200 5.29% 1,082 09/19 16,338
Meridian, ID(3) 10,460 6.01% 753 08/19 7,670
San Antonio, TX 30,211 6.08% 2,260 10/12 26,025
High Point, NC 8,883 5.75% 695 10/09 7,741
Herndon, VA(3) 12,450 5.92% 888 04/15 10,371
Jackson, TN 10,400 5.93% 743 07/14 8,820
Overland Park, KS(3) 37,620 5.83% 2,224 05/19 31,819
Kansas City, MO(3) 17,950 5.83% 1,061 05/19 15,182
Baton Rouge, LA(3) 6,955 4.90% 443 10/12 5,943
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 4,454
Antioch, TN(3) 14,900 7.94% 1,580 10/11 11,177
Waterloo, IA 6,800 5.61% 672 02/13 3,505
Mechanicsburg, PA 13,870 5.73% 1,045 03/14 10,538
Newport, OR 7,000 5.03% 470 08/11 5,980
Arlington, TX(3) 22,000 5.81% 1,551 02/14 18,605
Moody, AL 7,675 4.98% 493 01/14 6,350
New Lenox, IL(3) 17,400 5.51% 972 02/14 17,400
Mission, TX 6,570 5.78% 462 06/15 5,371
Redmond, OR 10,100 5.62% 697 04/14 8,484
Houston, TX(1) 123,642 6.25% 10,784 09/15 33,811
Wall, NJ(2) 30,036 6.25% 2,013 01/21 --
Centennial, CO(3) 15,891 6.15% 1,177 02/13 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 as of September 30, 2004.
Debt Service Requirements. The Company's principal liquidity needs are for the
payment of interest and principal on outstanding mortgage debt. As of September
30, 2004, a total of 69 of the Company's 105 consolidated properties were
subject to outstanding mortgages, which had an aggregate principal amount of
$725.8 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 $5.4 million, $21.6 million, $22.1 million, $27.3 million and
$21.2 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 generally bear all or
substantially all of the cost of property operations, maintenance and repairs,
the Company does not anticipate significant needs for cash for these costs. For
eight of the properties, the Company does have a level of property operating
expense responsibility. The Company generally funds property expansions with
available cash and 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 September 30, 2004, the Company had two vacant properties.
18
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
September 30, 2004 ($000's):
Remaining 2009 and
Contractual Obligations 2004 2005 2006 2007 2008 thereafter Total
- ----------------------- ---- ---- ---- ---- ---- ---------- -----
Mortgages payable - normal
amortization $ 5,361 $ 21,570 $ 22,147 $ 27,253 $ 21,162 $145,877 $243,370
Mortgages payable -
balloon maturities -- 12,643(2) -- -- 70,492 399,340 482,475
Credit facility(3) -- -- -- -- -- -- --
Operating lease obligations (1) 378 1,514 1,514 1,514 1,514 9,281 15,715
-------- -------- -------- -------- -------- -------- --------
$ 5,739 $ 35,727 $ 23,661 $ 28,767 $ 93,168 $554,498 $741,560
======== ======== ======== ======== ======== ======== ========
(1) Amounts disclosed through 2008 include rent for the Company's corporate
office which is fixed through 2008 and adjusted to fair market value as
determined at January 2009. Therefore the amounts for 2009 and
thereafter do not include any corporate office rent.
(2) The Company has the ability to extend the maturity of this mortgage to
2006.
(3) The Company has issued $3,864 in outstanding letters of credit.
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. As of September 30, 2004, the Company has entered into
letters of intent to purchase four properties upon completion of (i)
construction and commencement of rent from the tenants and/or (ii) the seller
fulfilling its contractual obligation concerning certain deliverables. As of
September 30, 2004, the aggregate estimated obligation was $78.7 million.
Subsequent to September 30, 2004, a non-consolidated entity in which the Company
has a 30% interest, purchased one of the properties for $31.8 million.
Results of Operations
Three months ended September 30, 2004 compared with September 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, $8.3 million is attributable to
rental revenue which resulted primarily from (i) properties purchased in 2003
and owned during 2004 ($1.5 million) and, (ii) properties purchased in 2004
($7.5 million), offset by an increase in vacancy ($0.6 million). The remaining
$1.5 million increase in gross revenues in 2004 was primarily attributable to an
increase in LRA advisory fees of $1.3 million ($0.9 million in acquisition fees,
$0.3 million in debt placement fees and $0.1 million in asset management fees).
The increase in interest and amortization expense of $4.3 million is due to the
growth of the Company's portfolio and has been offset by interest savings
resulting from scheduled principal amortization payments and mortgage
satisfactions. The increase in depreciation and amortization of $4.1 million is
due primarily to the growth in real estate and intangibles due to property
acquisitions. The increase in property operating expenses of $0.8 million is due
primarily to the Company acquiring properties in which it has property level
operating expense responsibility and an increase in vacancy. The increase in
general and administrative expenses of $1.4 million is due primarily to
severance costs for a former executive officer ($0.5 million), an increase in
professional fees ($0.5 million), amortization of deferred compensation ($0.2
million), and personnel costs ($0.2 million). Non-operating income increased by
$1.0 million primarily due to the reimbursement of expenses incurred associated
with properties that were owned by the Company and sold to a joint venture. The
Company recorded a provision for income taxes of $0.2 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 decreased $0.7
million due to a reduction in earnings at the partnership level and an increase
in the Company's ownership level. Equity in earnings of non-consolidated
entities increased $0.4 million due to an increase in assets owned and net
income of non-consolidated entities (see below). Net income increased in 2004
primarily due to the net impact of items discussed above plus an increase of
$0.5 million in income from discontinued operations offset by a $0.6 million
impairment charge in 2004.
Equity in earning of non-consolidated entities increased by $0.4 million as
described as follows. The Company's non-consolidated entities had aggregate net
income of $5.3 million for the three months ended September 30, 2004 compared to
$3.8 million in the comparable period in 2003. The increase in net income is
primarily attributable to an increase in rental revenue of $9.2 million in 2004
attributable to the acquisition of properties in 2003 and 2004. This revenue
source was partially offset by an increase in (i) interest expense of $3.6
million in 2004 due to partially funding of acquisitions with the use of
non-recourse mortgage debt, (ii) depreciation expense of $3.6 million in 2004
due to more depreciable assets owned and (iii) an increase in non-reimbursable
operating expenses of $0.4 million.
19
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 ($14.1 million as of
September 30, 2004 at a weighted average interest rate of 5.17%) and tenant
monetary defaults.
Nine months ended September 30, 2004 compared with September 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 $26.0 million, $22.7 million is attributable
to rental revenue which resulted primarily from (i) properties purchased in 2003
and owned during 2004 ($8.8 million), (ii) properties purchased in 2004 ($14.9
million), and (iii) new leases and extensions in 2004 ($0.1 million) offset by
an increase in vacancy ($1.3 million). The remaining $3.3 million increase in
gross revenues in 2004 was attributable to an increase in LRA advisory fees of
$2.5 million ($1.9 million in acquisition fees, $0.2 million in debt placement
fees and $0.4 million in asset management fees) and an increase ($0.8 million)
in tenant reimbursements. The increase in interest and amortization expense of
$6.8 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 and mortgage satisfactions. The increase in depreciation
and amortization of $8.1 million is due primarily to the growth in real estate
and intangibles due to property acquisitions. The Company's general and
administrative expenses increased by $2.7 million due primarily to the greater
deferred compensation expense amortization ($0.4 million), trustee fees ($0.3
million), personnel costs ($0.4 million), occupancy costs ($0.3 million),
severance costs for a former executive ($0.5 million), professional fees ($0.3
million) and depreciation of office equipment ($0.2 million). The increase in
property operating expenses of $2.0 million is due primarily to incurring
property level operating expenses for properties in which the Company has
operating expense responsibility and an increase in vacancy. Debt satisfaction
charges of $7.7 million were incurred in 2003 due to the payoff of certain
mortgages. Non-operating income increased $1.3 million primarily due to the
reimbursement of expenses incurred associated with properties that were owned by
the Company and sold to a joint venture. In 2004, the Company recorded a
provision for income taxes of $1.5 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 $0.6 million due to
the increase in earnings at the partnership level offset by an increase in the
Company's ownership level. Equity in earnings of non-consolidated entities
increased $1.2 million due to an increase in assets owned and net income of
non-consolidated entities (see below). Net income increased in 2004 primarily
due to the positive impact of items discussed above plus an increase of $1.9
million in income from discontinued operations and a $2.9 million increase in
gains on sale offset by a $2.8 million impairment charge in 2004.
Equity in earnings of non-consolidated entities increased by $1.2 million as
described as follows. The Company's non-consolidated entities had aggregate net
income of $15.1 million for the nine months ended September 30, 2004 compared to
$11.3 million in the comparable period in 2003. The increase in net income is
primarily attributable to an increase in rental revenue of $19.6 million in 2004
attributable to the acquisition of properties in 2003 and 2004. This revenue
source was partially offset by an increase in (i) interest expense of $7.5
million in 2004 due to partially funding of acquisitions with the use of
non-recourse mortgage debt, (ii) depreciation expense of $7.0 million in 2004
due to more depreciable assets owned and (iii) an increase in non-reimbursable
operating expenses of $1.0 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.
20
The following table reconciles net income allocable to common shareholders to
the Company's FFO for the nine months ended September 30, 2004 and 2003
($000's):
2004 2003
--------- ----------
Net income allocable to common shareholders $ 32,988 $ 19,406
Adjustments:
Depreciation and amortization 27,874 20,330
Minority interest's share of net income 2,880 2,704
Amortization of leasing commissions 549 606
Gains on sale of properties (4,065) (1,143)
Joint venture adjustment - depreciation 4,902 2,867
----------- -----------
Funds From Operations $ 65,128 $ 44,770
=========== ===========
Cash flows from operating activities $ 70,024 $ 50,019
Cash flows from investing activities $ (107,161) $ (142,784)
Cash flows from financing activities $ 127,337 $ 91,595
Off-Balance Sheet Arrangements
- ------------------------------
Non-Consolidated Real Estate Entities. As of September 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.
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.
21
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 September 30, 2004 and 2003, the Company's variable rate
indebtedness was $14,142 and $67,586, respectively, which represented 2.0% and
13.6% of total long-term indebtedness, respectively. During the three months and
nine months ended September 30, 2004 and 2003, this variable rate indebtedness
had a weighted average interest rate of 5.0% and 3.5%, and 3.8% and 4.0%,
respectively. Had the weighted average interest rate been 100 basis points
higher, the Company's net income for the three months ended September 30, 2004
and 2003 would have been reduced by approximately $37 and $74, respectively, and
for the nine months ended September 30, 2004 and 2003 net income would have been
reduced by $255 and $377, respectively. As of September 30, 2004 and 2003 the
Company's fixed rate debt was $711,703 and $430,230, respectively which
represented 98.0% and 86.4%, respectively, of total long-term indebtness. The
weighted average interest rate as of September 30, 2004 of fixed rate debt was
6.6%, which is approximately 75 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 $1,791 and $4,810, for the three and nine
months ended September 30, 2004 and by $1,048 and $3,430 for the three and nine
months ended September 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.
22
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings - not applicable.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds - not
applicable.
ITEM 3. Defaults Upon Senior Securities - not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders - not
applicable.
ITEM 5. Other Information - not applicable.
ITEM 6. Exhibits.
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).
23
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Lexington Corporate Properties Trust
Date: November 9, 2004 By: /s/ T. Wilson Eglin
--------------------------------------------------
T. Wilson Eglin
Chief Executive Officer, President and Chief
Operating Officer
Date: November 9, 2004 By: /s/ Patrick Carroll
--------------------------------------------------
Patrick Carroll
Chief Financial Officer, Executive Vice President
and Treasurer
24