Exhibit 99.1
Set forth below are Items 6,7, 8 and 15(a)3 of the Company's Form 10-K for the
year ending December 31, 2003, which have been updated pursuant to this Form
8-K.
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
The following sets forth selected consolidated financial data for the Company as
of and for each of the years in the five-year period ended December 31, 2003.
The selected consolidated financial data for the Company should be read in
conjunction with the Consolidated Financial Statements and the related notes
appearing elsewhere in this Annual Report on Form 10-K.
($000's, except per share data)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Total gross revenues $ 113,521 $ 92,147 $ 76,561 $ 73,442 $ 70,931
Expenses applicable to revenues (35,653) (27,475) (22,264) (19,860) (18,698)
Interest and amortization expense (35,873) (34,126) (29,675) (29,616) (28,974)
Gain on sale of properties -- -- -- 2,959 5,127
Income from continuing operations 28,147 25,844 15,995 19,945 19,348
Total income from discontinued operations 5,502 4,751 2,067 2,007 1,999
Net income 33,649 30,595 18,062 21,952 21,347
Net income allocable to common
shareholders 30,257 29,902 15,353 19,390 18,827
Income from continuing operations per
common share-basic 0.73 0.93 0.68 1.03 0.99
Income from continuing operations per
common share-diluted 0.72 0.92 0.67 0.99 0.97
Income from discontinued operations-basic 0.16 0.18 0.11 0.12 0.12
Income from discontinued operations-diluted 0.16 0.17 0.10 0.11 0.11
Net income per common share-basic 0.89 1.11 0.79 1.15 1.11
Net income per common share-diluted 0.88 1.09 0.77 1.10 1.08
Cash dividends declared per common share 1.355 1.325 1.290 1.230 1.200
Net cash provided by operating activities 71,815 57,732 41,277 41,175 39,783
Net cash used in investing activities (298,883) (106,030) (64,321) (38,549) (64,942)
Net cash provided by
(used in) financing activities 229,316 46,532 32,115 (6,671) 22,912
Ratio of earnings to combined fixed
charges and preferred dividends 1.57 1.75 1.38 1.51 1.53
Real estate assets, net 1,001,772 779,150 714,047 584,198 606,592
Investments in non-consolidated entities 69,225 54,261 48,764 40,836 11,523
Total assets 1,207,411 902,471 822,153 668,377 656,481
Mortgages, notes payable and credit
facility, including discontinued operations 551,385 491,517 455,771 387,326 372,254
Funds from operations(1) 64,502 61,818 47,126 46,316 40,652
Rent received below straight-line rent 3,790 2,426 2,755 2,804 2,054
The Company believes that the book value of its real estate assets, which
reflects the historical cost of such real estate assets less accumulated
depreciation, is not indicative of the current
- --------
1 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 (or loss), computed in accordance with
generally accepted accounting principles ("GAAP"), excluding gains (or losses)
from sales of property, plus real estate depreciation and amortization and after
adjustments for unconsolidated partnerships and joint ventures." The Company
included in the calculation of FFO the dilutive effect of the deemed conversion
of its outstanding exchangeable notes which were redeemed by the Company in
2001. 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 GAAP, or as a measure of liquidity to other
consolidated income or cash flow statement data as determined in accordance with
GAAP.
1
market value of its properties. Historical operating results are not necessarily
indicative of future operating results.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- -------------
The following, 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
under the Internal Revenue Code of 1986, as amended, acquires and manages net
leased commercial properties throughout the United States. The Company believes
it has operated as a REIT since October 1993. As of December 31, 2003, the
Company owned or had interests in 118 real estate properties encompassing 23
million rentable square feet. During 2003, the Company purchased 19 properties,
including non-consolidated investments, for $414.0 million.
During 2003, the Company sold four properties for net proceeds of $11.1 million,
which resulted in an aggregate gain of $2.2 million. In addition, the Company
contributed 2 properties to the LION joint venture; Clarion paid the Company
directly $23.8 million for their proportionate ownership interest.
As of December 31, 2003, the Company leased properties to 86 tenants in 20
different industries and the weighted average lease term based upon annualized
rental revenue is 7.6 years.
The Company's revenues and cash flows are generated predominantly from property
rent receipts. Growth in revenue and cash flows is directly correlated to the
Company's ability to (i) acquire income producing properties and (ii) to release
properties that are vacant, or may become vacant at favorable rental rates. The
challenge the Company faces in purchasing properties is finding investments that
will provide an attractive return without compromising the Company's real estate
underwriting criteria. The Company believes it has access to acquisition
opportunities due to its relationship with developers, brokers, corporate users
and sellers.
In the past three years, the Company has experienced minimal lease turnover, and
accordingly minimal capital expenditures. There can be no assurance that this
will continue. Through 2008 the Company has 41 leases expiring which generate
approximately $46.8 million in rental revenue. Releasing these properties at
favorable effective rates is the primary focus of the Company.
The primary risks associated with re-tenanting properties are (i) the period of
time required to find a new tenant (ii) whether rental rates will be lower than
previously received (iii) the significant leasing costs such as commissions and
tenant improvement allowances and (iv) the payment of operating costs such as
real estate taxes and insurance while there is no offsetting revenue. The
Company addresses these risks by contacting tenants well in advance of lease
maturity to get an understanding of their occupancy needs, contacting local
brokers to determine the depth of the rental market and, if required, retaining
local expertise to assist in the re-tenanting of a property. As part of the
acquisition underwriting process, the Company focuses on buying general purpose
real estate which can be leased to other tenants without significant
modification to the properties. No assurance can be given that once a property
becomes vacant it will subsequently be re-let.
During 2002, the Company sold five properties (including a 77.3% interest in a
property) and one building in the Palm Beach Gardens, Florida property for $20.8
million, which resulted in an aggregate gain of approximately $1.1 million.
During 2001, the Company sold one property for $4.1 million which approximated
book value.
Critical Accounting Policies
- ----------------------------
The Company's accompanying consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America, which require management to make estimates that affect the amounts
of revenues, expenses, assets and liabilities reported. The following are
critical accounting policies which are 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
2
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 SFAS
No. 66 "Accounting for Sales of Real Estate." The specific timing of the sale is
measured against various criteria in SFAS No. 66 related to the terms of the
transactions and any continuing involvement in the form of management or
financial assistance associated with the properties. If the sales criteria are
not met, the gain is deferred and the finance, installment or cost recovery
method, as appropriate, is applied until the sales criteria are met.
Accounts Receivable. The Company continuously monitors collections from its
tenants and would make a provision for estimated losses based upon historical
experience and any specific tenant collection issues that the Company has
identified.
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 value of in-place leases and value of tenant relationships, based in each
case on their fair values.
The fair value of the tangible assets of an acquired property (which includes
land, building and 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 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.
The aggregate value of other acquired intangible assets, consisting of in-place
leases and tenant relationships, is measured by the excess of (i) the purchase
price paid for a property over (ii) the estimated fair value of the property as
if vacant, determined as set forth above. This aggregate value is allocated
between in-place lease values and tenant relationships based on management's
evaluation of the specific characteristics of each tenant's lease. The value of
in-place leases and customer relationships are amortized to expense over the
remaining non-cancelable periods of the respective leases.
Impairment of Real Estate. The Company evaluates the carrying value of all real
estate held to determine if an impairment has occurred which would require the
recognition of a loss. The evaluation includes reviewing anticipated cash flows
of the property, based on current leases in place, coupled with an estimate of
proceeds to be realized upon sale. However, estimating future sale proceeds is
highly subjective and such estimates could differ materially from actual
results.
Liquidity and Capital Resources
- -------------------------------
Since becoming a public company, the Company's principal sources of capital for
growth has been the public and private equity markets, selective secured
indebtedness, its unsecured credit facility, issuance of OP Units and
undistributed funds from operations. The Company expects to continue to have
access to and use these sources in the future; however, there are factors that
may have a material adverse effect on the Company's access to capital sources.
The Company's ability to incur additional debt to fund acquisitions is dependent
upon its existing leverage, the
3
value of the assets the Company is attempting to leverage and general economic
conditions which may be outside of management's influence.
The Company's current $100.0 million variable rate unsecured revolving credit
facility, which is scheduled to expire in August 2006, has made available funds
to finance acquisitions and meet any short-term working capital requirements. As
of December 31, 2003, $94.0 million was outstanding at an interest rate of
2.64%. Subsequent to year end, the Company repaid its outstanding line balance.
The Company pays an unused facility fee equal to 25 basis points if 50% or less
of the facility is utilized and 15 basis points if greater than 50% of the
facility is utilized. The Company has the option to extend the maturity to
August 2007, if no defaults exist, for a payment of $0.3 million.
Since its formation in 1993, the Company has raised, through the issuance of
common shares, preferred shares and OP Units, aggregate capital of approximately
$484.8 million for the purposes of making acquisitions and retiring
indebtedness. In addition, the Company has purchased $109.8 million in real
estate through the direct issuance of its common shares and OP Units.
During 2003, the Company completed a 4.5 million common share offering at $16.44
per share and a 5.3 million common share offering at $18.98 per share raising an
aggregate of $174.0 million of net proceeds. The Company completed a 3.16
million preferred share offering at $25.00 per share with a 8.05% coupon raising
net proceeds of $76.3 million. The proceeds of these offerings were used to
repay debt and fund acquisitions. During 2004, the Company sold 6.9 million
common shares raising net proceeds of $144.2 million.
Dividends. In connection with its intention to continue to qualify as a REIT for
Federal income tax purposes, the Company expects to continue paying regular
dividends to its shareholders. These dividends are expected to be paid from
operating cash flows and/or 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 as a percentage of FFO,
reserving such amounts as it considers necessary for the maintenance or
expansion of properties in its portfolio, debt reduction, the acquisition of
interests in new properties as suitable opportunities arise, and such other
factors as the Board of Trustees considers appropriate.
Dividends paid to common shareholders increased to $45.8 million in 2003,
compared to $35.8 million in 2002 and $25.0 million in 2001. During 2004,
dividends paid to common shareholders were $65.1 million.
Although the Company receives the majority of its rental payments on a monthly
basis, it intends to continue paying dividends quarterly. The Company's second
largest tenant, as a percentage of revenue, pays its rent quarterly (Northwest
Pipeline Corp.). Amounts accumulated in advance of each quarterly distribution
are invested by the Company in short-term money market or other suitable
instruments.
On November 1, 2004, the tenant in the Company's Dallas, Texas property, VarTec
Telecom, Inc., filed for Chapter 11 bankruptcy. The lease, which expires
September 2015, provides for $3.5 million in annual rental revenue and current
annual cash revenue. In addition, under the terms of the lease, the tenant is
responsible for all operating expenses of the property. On November 24, 2004,
the tenant filed a motion to reject the lease. The Company will, in addition to
losing base rental revenue, be responsible for operating expenses until a
replacement tenant can be found. In the fourth quarter of 2004 the Company will
write off approximately $2.8 million in deferred rent receivable and unamortized
lease costs.
The Company believes 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, as well as other alternatives, will provide the
necessary capital required by the Company. Cash flows from operations as
reported in the Consolidated Statements of Cash Flows increased to $71.8 million
for 2003 from $57.7 million for 2002 and $41.3 million for 2001. Cash flows from
operations was negatively impacted in 2003, 2002 and 2001 by the payment of $7.2
million, $0.3 million and $3.6 million, respectively in prepayment penalties on
debt satisfactions.
Net cash used in investing activities totaled $298.9 million in 2003, $106.0
million in 2002 and $64.3 million in 2001. Cash used in investing activities
related primarily to investments in real estate properties and joint ventures.
Therefore, the fluctuation in investing activities relates
4
primarily to the timing of investments and dispositions. In connection with the
acquisition of the Net Partnerships, the Company acquired $3.8 million of cash
in 2001.
During 2004, the Company purchased 17 properties for an aggregate capitalized
cost of $373.3 million, sold seven properties to third parties for an aggregate
net sale price of $32.5 million and sold seven properties, at cost, to
non-consolidated entities for $176.6 million, which were subject to $97.6
million in non-recourse mortgages.
Net cash provided by financing activities totaled $229.3 million in 2003, $46.5
million in 2002 and $32.1 million in 2001. Cash provided by (used in) financing
activities during each year was primarily attributable to proceeds from equity
offerings, non-recourse mortgages and advances/repayments under the Company's
credit facility coupled with dividend and distribution payments and debt service
payments.
UPREIT Structure. The Company's UPREIT structure permits the Company to effect
acquisitions by issuing to a property owner, as a form of consideration in
exchange for the property, OP Units in partnerships controlled by the Company.
All of such OP Units are redeemable at certain times for common shares on a
one-for-one basis and all of such OP Units require the Company to pay certain
distributions to the holders of such OP Units. The Company accounts for these OP
Units 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, as such OP Units
are redeemed for common shares.
The following table provides certain information with respect to such OP units
as of December 31, 2003 (assuming the Company's annualized dividend rate remains
at the current $1.40 per share).
Current Total Current
Redeemable Total Number Affiliate Annualized Per Annualized
for common shares: of OP Units OP Units OP Unit Distribution Distribution ($000)
- ---------------------- ---------------- -------------- --------------------- -------------------
At any time 3,446,783 1,401,159 $ 1.40 $ 4,825
At any time 1,254,152 120,374 1.08 1,354
At any time 114,059 52,144 1.12 128
March 2004 43,734 -- 0.27 12
March 2004 19,510 -- -- --
November 2004 24,552 2,856 -- --
March 2005 29,384 -- -- --
March 2005 12,893 -- 1.40 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
---------- --------- ---- ------
5,430,454 1,744,212 $ 1.24 $ 6,727
========== ========= ==== ======
Affiliate OP Units, which are included in total OP Units, represent OP Units
held by two executive officers (including their affiliates) of the Company.
Financing
- ---------
Revolving Credit Facility. The Company's $100.0 million unsecured credit
facility, which expires August 2006 and can be extended by the Company for one
year with a payment of $0.3 million, bears interest at 150-250 basis points over
LIBOR depending on the amount of properties the Company owns free and clear of
mortgage debt, and has an interest rate period of one, three, or six months, at
the option of the Company. The credit facility contains various leverage, debt
service coverage, net worth maintenance and other customary covenants. As of
December 31, 2003, $94.0 million was outstanding and $1.8 million was available
to be drawn. During 2004, the Company repaid all outstanding balances on its
line of credit. The Company had six outstanding letters of credit aggregating
$4.2 million which expire in 2004 ($0.9 million), 2005 ($2.5 million), 2007
($0.4 million) and 2010 ($0.4 million). This credit facility replaced
5
the Company's previous $60.0 million credit facility which was scheduled to
expire in March 2004. The previous facility contained similar covenants.
Debt Service Requirements. The Company's principal liquidity needs are the
payment of interest and principal on outstanding indebtedness. As of December
31, 2003, a total of 55 of the Company's 100 consolidated properties, including
one property held for sale, were subject to outstanding mortgages which had an
aggregate principal amount of $457.4 million. As of December 31, 2003 the
weighted average interest rate on the Company's outstanding debt, including line
of credit borrowings, was approximately 6.24%. The scheduled principal
amortization payments for the next five years are as follows: $15.4 million in
2004; $15.5 million in 2005; $16.3 million in 2006, $17.2 million in 2007 and
$11.5 million in 2008. Approximate balloon payment amounts, having a weighted
average interest rate of 6.20%, excluding line of credit borrowings, due the
next five years are as follows: $14.5 million in 2004; $0 million in 2005, $0 in
2006; $0 in 2007 and $70.5 million in 2008. The ability of the Company to make
such balloon payments will depend upon its ability to refinance the mortgage
related thereto, sell the related property, have available amounts under its
unsecured credit facility or access other capital. The ability of the Company to
accomplish such goals will be affected by numerous economic factors affecting
the real estate industry, including the availability and cost of mortgage debt
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.
The Company expects to continue to use property specific, non-recourse mortgages
as it believes that by properly matching a debt obligation, including the
balloon maturity risk, with a lease expiration the Company's cash-on-cash
returns increase and the exposure to residual valuation risk is reduced. During
2004, the Company obtained $358.6 million in non-recourse mortgage debt.
Lease Obligations. Since the Company's tenants bear all or substantially all of
the cost of property operations, maintenance and repairs, the Company does not
anticipate significant needs for cash for these costs. For eight of the
properties, the Company has a level of property operating expense responsibility
and a ninth obligated the Company to pay real estate taxes in 2003 and for the
tenant to be responsible thereafter. The Company generally funds property
expansions with additional secured borrowings, the repayment of which is funded
out of rental increases under the leases covering the expanded properties. To
the extent there is a vacancy in a property, the Company would be obligated for
all operating expenses, including real estate taxes and insurance.
The Company's tenants pay the rental obligations on ground leases either
directly to the fee holder or to the Company as increased rent. The annual
ground lease rental payment obligations for each of the next five years is $0.9
million.
Step Down Renewals
The leases on the following properties contain renewal options, exercisable by
the tenant, with rents per square foot less than that paid in 2003:
Annual Rent per Net Renewal Option Term and
Rentable Rentable Square Foot - Renewal Net Rent
Property Location Tenant (Guarantor) Square Feet 2003 per Square Foot
- -------------------------- ---------------------- ---------------- ----------------------- -------------------------------
295 Chipeta Way Northwest Pipeline 295,000 $29.06 10/01/09 - 09/15/18: $11.73
Salt Lake City, UT Corp. plus base cost component ($.06)
adjusted by CPI, plus ($.03)
450 Stern Street Johnson Controls, Inc. 111,160 $5.75 12/23/06 - 12/22/11: $3.65
Oberlin, OH 12/23/11 - 12/22/16: $4.20
46600 Port Street Johnson Controls, Inc. 134,160 $6.29 12/23/06 - 12/22/11: $4.00
Plymouth, MI 12/23/11 - 12/22/16: $4.60
6
Annual Rent per Net Renewal Option Term and
Rentable Rentable Square Foot - Renewal Net Rent
Property Location Tenant (Guarantor) Square Feet 2003 per Square Foot
- -------------------------- ---------------------- ---------------- ----------------------- -------------------------------
541 Perkins Jones Road Kmart Corp. 1,700,000 $5.51 10/01/07 - 09/30/12: $2.67
Warren, OH 10/01/12 - 09/30/17: $2.67
10/01/17 - 09/30/22: $2.67
10/01/22 - 09/30/27: $2.67
10/01/27 - 09/30/32: $2.67
10/01/32 - 09/30/37: $2.67
10/01/37 - 09/30/42: FMV
10/01/42 - 09/30/47: FMV
10/01/47 - 09/30/52: FMV
10/01/52 - 09/30/57: FMV
24100 Laguna Hills Mall Federated Department 160,000 $4.23 02/01/06 - 04/16/14: $1.81
Laguna Hills, CA Stores, Inc. 04/17/14 - 04/16/29: $1.81
04/17/29 - 04/16/44: $1.81
04/17/44 - 04/16/50: $1.81
7111 Westlake Terrace The Home Depot USA, 95,000 $8.13 05/01/06 - 04/30/16: $3.96
Bethesda, MD Inc. 05/01/16 - 04/30/21: $3.96
05/01/21 - 04/30/26: $3.96
05/01/26 - 04/30/31: $3.17
6910 S. Memorial Highway Toys "R" Us, Inc. 43,123 $8.40 06/01/06 - 05/31/11: $5.92
Tulsa, OK 06/01/11 - 05/31/16: $5.92
06/01/16 - 05/31/21: $5.92
06/01/21 - 05/31/26: $5.92
06/01/26 - 05/31/31: $5.92
12535 SE 82nd Avenue Toys "R" Us, Inc. 42,842 $9.91 06/01/06 - 05/31/11: $6.96
Clackamas, OR 06/01/11 - 05/31/16: $6.96
06/01/16 - 05/31/21: $6.96
06/01/21 - 05/31/26: $6.96
06/01/26 - 05/31/31: $6.96
18601 Alderwood Mall Blvd. Toys "R" Us, Inc. 43,105 $9.18 06/01/06 - 05/31/11: $6.48
Lynnwood, WA 06/01/11 - 05/31/16: $6.48
06/01/16 - 05/31/21: $6.48
06/01/21 - 05/31/26: $6.48
06/01/26 - 05/31/31: $6.48
A1 21 South Wal-Mart Real Estate 56,132 $2.60 02/01/09 - 01/31/14: $2.42
Jacksonville, AL Business Trust plus 1% of gross sales
02/01/14 - 01/31/19: $2.42
plus 1% of gross sales
02/01/19 - 01/31/24: $2.42
plus 1% of gross sales
02/01/24 - 01/31/29: $2.42
plus 1% of gross sales
02/01/29 - 01/31/34: $2.42
plus 1% of gross sales
9580 Livingston Road GFS Realty, Inc. 107,337 $3.80 03/01/14 - 02/29/19: $1.53
Oxon Hill, MD (Giant Food, Inc.) 03/01/19 - 02/29/24: $1.53
03/01/24 - 02/29/29: $1.15
03/01/29 - 02/29/34: $1.15
7
Annual Rent per Net Renewal Option Term and
Rentable Rentable Square Foot - Renewal Net Rent
Property Location Tenant (Guarantor) Square Feet 2003 per Square Foot
- -------------------------- ---------------------- ---------------- ----------------------- -------------------------------
Rockshire Village Center GFS Realty, Inc. 51,682 $4.33 06/20/17 - 05/31/27: $1.78
2401 Wootton Parkway (Giant Food, Inc.) 06/01/27 - 05/31/37: $1.33
Rockville, MD
590 Ecology Lane Owens Corning 193,891 $8.35 01/01/21 - 12/31/25: $6.41
Chester, SC 01/01/26 - 12/31/30: $7.08
Origination Fees Payable. In connection with certain acquisitions, the Company
assumed obligations ($2.2 million in principal plus accrued interest) which bore
interest on the outstanding principal balances only at rates ranging from 12.3%
to 19.0%. During 2003, the Company satisfied $5.6 million in origination fees
payable including accrued interest by issuing 231,763 OP Units which resulted in
a gain of $0.9 million. The scheduled annual payments for each of the next five
years for the remaining origination fees payable is $0.1 per annum. As of
December 31, 2003, $0.8 million is outstanding of which $0.4 million is due to
two executive officers of the Company.
The following summarizes the Company's principal contractual obligations as of
December 31, 2003 ($000's):
2009
and
2004 2005 2006 2007 2008 thereafter Total
----------- ---------- ----------- ----------- ---------- ----------- ------------
Mortgages payable -normal
amortization $ 15,429 $ 15,521 $ 16,303 $ 17,238 $ 11,469 $ 34,944 $ 110,904
Mortgages payable -balloon
maturities 14,456(2) _ _ _ 70,492 261,533 346,481
Credit facility(3) _ _ 94,000 _ _ _ 94,000
Operating lease obligation (1) 1,395 1,395 1,395 1,395 1,395 7,173 14,148
Deferred installment obligation 37 37 85 110 110 429 808
-------- -------- --------- -------- -------- --------- -----------
$ 31,317 $ 16,953 $ 111,783 $ 18,743 $ 83,466 $ 304,079 $ 566,341
======== ======== ========= ======== ======== ========= ===========
(1) Amounts include rent for the Company's corporate office which is fixed
through 2008 and adjusted to fair market value as determined at January 2009.
(2) The Company has the ability to extend the maturity of this mortgage note to
2005 and 2006. Subsequent to year end the Company extended the maturity to 2005.
(3) The Company has $4,164 in outstanding letters of credit.
Capital Expenditures. Due to the 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.
Shares Repurchase. The Company's Board of Trustees has authorized the Company to
repurchase, from time to time, up to 2.0 million common shares and OP Units
depending on market conditions and other factors. As of December 31, 2003, the
Company had repurchased approximately 1.4 million common shares and OP Units, at
an average price of approximately $10.55 per common share/OP Unit. No common
shares or OP Units were repurchased in 2003 and 2002.
Comparison of 2003 to 2002
- --------------------------
Changes in the results of operations for the Company are primarily due to the
growth of its portfolio and costs associated with such growth. Of the increase
in total gross revenues in 2003 of $21.4 million, $19.9 million is attributable
to rental revenue which resulted primarily from (i) properties purchased in 2003
and 2002 ($14.3 million), (ii) the consolidation of LRA ($4.4 million) and (iii)
the expansion of a single property ($1.4 million). The remaining $1.5 million
increase in gross revenues in 2003 was attributable to advisory fees relating to
the consolidation
8
of LRA. The increase in interest and amortization expense of $1.7 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, lower
interest rates and mortgage satisfactions. The increase in depreciation and
amortization of $6.5 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 $4.1 million due primarily to greater
personnel costs ($1.7 million), occupancy costs ($0.2 million), professional
service costs ($0.2 million) and the consolidation of LRA ($1.9 million). The
increase in property operating expenses of $1.6 million is due primarily to
incurring property level operating expenses for properties in which the Company
has operating expense responsibility. Debt satisfaction charges increased $7.1
million in 2003 due to the payoff of certain mortgages. Minority interest
expense decreased in 2003 by $1.3 million due to a decrease in earnings at the
partnership level. Equity in earnings of non-consolidated entities increased
$0.7 million due to an increase in assets owned and net income of
non-consolidated entities (see below). Net income increased in 2003 primarily
due to the positive impact of items discussed above plus $1.1 million increase
in gains on sale offset by a decrease of $0.4 million in income from
discontinued operations. Net income allocable to common shareholders increased
due to the items discussed above offset by an increase in preferred dividends of
$2.7 million on the preferred shares issued in 2003.
The Company's non-consolidated entities had aggregate net income of $16.5
million in 2003 compared to $13.6 million in 2002. The increase in net income is
primarily attributable to an increase in rental income of $6.8 million in 2003
attributable to acquisition of properties and the formation of a new joint
venture. This revenue source was partly offset by an increase in (i) interest
expense of $2.1 million in 2003 due to increased acquisition leverage and (ii)
depreciation expense of $1.6 million in 2003 due to more depreciable assets
owned. The financial information for non-consolidated entities does not include
information for LRA.
Any 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 when such properties are acquired by joint venture or advisory
programs, growth in net income is dependent on index adjusted rents (8 leases),
percentage rents (3 leases), reduced interest expense on amortizing mortgages
and by controlling 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 ($109.7 million as of
December 31, 2003 at a weighted average interest rate of 2.85%) and tenant
monetary defaults.
Comparison of 2002 to 2001
- --------------------------
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 2002 of $15.6 million, $14.4 million is attributable
to rental revenue which resulted primarily from properties purchased in 2002 and
2001 ($16.1 million), offset by (i) an increase in vacancy ($0.3 million) and
(ii) joint venturing of a single property in 2002 ($1.5 million). The remaining
$1.2 million increase in gross revenues in 2002 was attributable to an increase
in tenant reimbursements. The increase in interest and amortization expense of
$4.5 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, lower interest rates and mortgage satisfactions. The
increase in depreciation and amortization of $3.4 million is due primarily to
the growth in real estate due to property acquisitions. The Company's general
and administrative expenses increased by $0.7 million due to the acquisition of
the Net Partnerships. The increase in property operating expenses of $1.8
million is due primarily to incurring property level operating expenses for
properties in which the Company has operating expense responsibility, an
increase in vacancy and an estimate of expenses for the Kmart property. Debt
satisfaction charges decreased by $3.6 million due to the payoff of certain
mortgages. Non-operating income increased $0.4 million primarily due to greater
interest earned. Minority interest expense increased in 2002 by $1.0 million due
to the increase in earnings at the partnership level. Equity in earnings of
non-consolidated entities increased $1.6 million due to an increase in assets
owned and net income of non-consolidated entities (see below). Net income
increased in 2002 primarily due to the positive impact of items discussed above
plus an increase of $1.6 million in income from discontinued operations and a
$1.0 million increase in gains on sales. Net income allocable to common
shareholders increased due to the items discussed above plus a net reduction in
9
preferred dividends of $2.0 milion resulting from the conversion of 2 million
preferred shares to 2 million common shares in 2002.
The Company's non-consolidated entities had aggregate net income of $13.6
million in 2002 compared with $10.4 million in 2001. The increase in net income
is primarily attributable to an increase in rental revenue of $5.8 million in
2002 attributable to the acquisition of properties, the expansion of an existing
property and the joint venturing of a single property in 2002. These revenue
sources was partly offset by an increase in (i) interest expense of $1.5 million
in 2002 due to partially funding of acquisitions with the use of non-recourse
mortgage debt and the joint venturing of a single property in 2002, and (ii)
depreciation expense of $1.1 million in 2002 due to more depreciable assets
owned. The financial information for non-consolidated entities does not include
information for LRA.
Inflation. The Company's long term leases contain provisions to mitigate the
adverse impact of inflation on its operating results. Such provisions include
clauses entitling the Company to receive (i) scheduled fixed base rent increases
and (ii) base rent increases based upon the consumer price index. In addition,
the majority of the Company's leases require tenants to pay operating expenses,
including maintenance, real estate taxes, insurance and utilities, thereby
reducing the Company's exposure to increases in costs and operating expenses
resulting from inflation.
Environmental Matters. Based upon management's ongoing review of its properties,
management is not aware of any environmental condition with respect to any of
the Company's properties, which would be reasonably likely to have a material
adverse effect on the Company. There can be no assurance, however, that (i) the
discovery of environmental conditions, which were previously unknown, (ii)
changes in law, (iii) the conduct of tenants or (iv) activities relating to
properties in the vicinity of the Company's properties, will not expose the
Company to material liability in the future. Changes in laws increasing the
potential liability for environmental conditions existing on properties or
increasing the restrictions on discharges or other conditions may result in
significant unanticipated expenditures or may otherwise adversely affect the
operations of the Company's tenants, which would adversely affect the Company's
financial condition and results of operations.
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 (or loss), computed in accordance with
generally accepted accounting principles ("GAAP"), excluding gains (or losses)
from sales of property, plus real estate depreciation and amortization and after
adjustments for unconsolidated partnerships and joint ventures." The Company
included in the calculation of FFO the dilutive effect of the deemed conversion
of its outstanding exchangeable notes, which were fully satisfied in 2001. 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 GAAP, or as a measure of liquidity to other consolidated
income or cash flow statement data as determined in accordance with GAAP.
10
The following table reflects the calculation of the Company's FFO and cash flow
activities for each of the years in the three year period ended December 31,
2003 ($000):
2003 2002 2001
---- ---- ----
Net income allocable to common shareholders $ 30,257 $ 29,902 $ 15,353
Depreciation and amortization of real estate 27,634 21,480 18,312
Minority interests' share of net income 4,039 5,510 5,215
Gains on sales of properties (2,191) (1,055) --
Amortization of leasing commissions 812 677 769
Deemed conversion of notes payable -- -- 1,000
Joint venture adjustment-depreciation 3,951 4,611 3,768
Preferred shares - Series A -- 693 2,709
--------- --------- ---------
Funds From Operations $ 64,502 $ 61,818 $ 47,126
========= ========= =========
Cash flows from operating activities $ 71,815 $ 57,732 $ 41,277
Cash flows used in investing activities (298,883) (106,030) (64,321)
Cash flows from financing activities 229,316 46,532 32,115
Recently Issued Accounting Standards
- ------------------------------------
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities ("VIEs"), which addresses how
a business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, which was issued in January 2003.
The Company will be required to adopt FIN 46R in the first fiscal period
beginning after March 15, 2004. Upon adoption of FIN 46R, the assets,
liabilities and noncontrolling interests of the VIE initially would be measured
at their carrying amounts with any difference between the net amount added to
the balance sheet and any previously recognized interest being recognized as the
cumulative effect of an accounting change. If determining the carrying amounts
is not practicable, fair value at the date FIN 46R first applies may be used to
measure the assets, liabilities and noncontrolling interest of the VIE. It is
not anticipated that the effect on the Company's Consolidated Financial
Statements would be material.
FASB Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity ("SFAS 150"), was issued in May
2003. SFAS 150 establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. SFAS 150 also includes required disclosures for financial instruments
within its scope. For the Company, SFAS 150 was effective for instruments
entered into or modified after May 31, 2003 and otherwise will be effective as
of January 1, 2004, except for mandatorily redeemable financial instruments. For
certain mandatorily redeemable financial instruments, SFAS 150 will be effective
for the Company on January 1, 2005. The effective date has been deferred
indefinitely for certain other types of mandatorily redeemable financial
instruments. The Company currently does not have any financial instruments that
are within the scope of SFAS 150.
In April 2002, FASB Statement No. 145, Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS
145"), was issued. SFAS 145 amends existing guidance on reporting gains and
losses on the extinguishment of debt to prohibit the classification of the gain
or loss as extraordinary, as the use of such extinguishments have become part of
the risk management strategy of many companies. SFAS 145 also amends FASB
Statement No. 13, Accounting for Leases, to require sale-leaseback accounting
for certain lease modifications that have economic effects similar to
sale-leaseback transactions. The provisions of SFAS 145 related to the
rescission of FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, were applied in fiscal years beginning after May 15,
2002. The provisions of SFAS 145 related to Statement 13 were effective for
transactions occurring after May 15, 2002. The adoption of SFAS 145 required the
Company to record as debt satisfaction charges, as a component of continuing
operations, costs incurred in the early retirement of debt instead of as an
extraordinary item.
11
In June 2002, FASB Statement No. 146, Accounting for Costs Associated with Exit
or Disposal Activities ("SFAS 146"), was issued. SFAS 146 addresses financial
accounting and reporting or costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity. The provisions of SFAS
146 were effective for exit or disposal activities initiated after December 31,
2002, with early application encouraged. The adoption of SFAS 146 had no impact
on the Company.
In November 2002, FASB Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34 ("FIN 45"), was issued. FIN 45
enhances the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees issued. FIN 45 also
clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of FIN 45 were applicable to
guarantees issued or modified after December 31, 2002 and the disclosure
requirements were effective for financial statements of interim or annual
periods ending after December 15, 2002. The adoption of FIN 45 had no impact on
the Company.
In December 2002, FASB Statement No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123
("SFAS 148"), was issued. SFAS 148 amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require prominent disclosures in both annual and interim financial
statements. Disclosures required by this standard are included in the notes to
these consolidated financial statements.
Off-Balance Sheet Arrangements
- ------------------------------
Non-Consolidated Real Estate Entities. As of December 31, 2003, 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.; 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 exceptions 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 consolidated financial statements for summary balance sheet and income
statement data relating to these entities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- -------------------------------------------------------------------
The Company's exposure to market risk relates to its debt. As of December 31,
2003 and 2002 the Company's variable rate indebtedness represented 19.9% and
15.9%, respectively, of total mortgages and notes payable. During 2003 and 2002,
this variable rate indebtedness had a weighted average interest rate of 3.98%
and 4.12%, respectively. Had the weighted average interest rate been 100 basis
points higher the Company's net income would have been reduced by $0.6 million
and $0.8 million in 2003 and 2002, respectively. As of December 31, 2003 and
2002 the Company's fixed rate debt was $441.7 million and $413.2 million,
respectively which represented 80.1% and 84.1%, respectively, of total long-term
indebtness. The weighted average interest rate as of December 30, 2003 of fixed
rate debt was 7.08%, which is approximately 145
12
basis points higher than the fixed rate debt incurred by the Company during
2003. 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 $4.5 million
and $3.9 million, for years ended December 31, 2003 and 2002, respectively.
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
INDEX
Page
----
Independent Auditors' Report 15
Consolidated Balance Sheets as of December 31, 2003 and 2002 16
Consolidated Statements of Income
for the years ended December 31, 2003, 2002 and 2001 17
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2003, 2002 and 2001 18
Consolidated Statements of Cash Flows
for the years ended December 31, 2003, 2002 and 2001 19
Notes to Consolidated Financial Statements 20
Financial Statement Schedule
Schedule III - Real Estate and Accumulated Depreciation 47
14
Report of Independent Registered Public Accounting Firm
The Shareholders
Lexington Corporate Properties Trust:
We have audited the consolidated financial statements of Lexington Corporate
Properties Trust and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lexington Corporate
Properties Trust and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
New York, New York
February 24, 2004, except as to
Notes 2, 3, 5, and 19 which are as of
November 29, 2004.
15
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Consolidated Balance Sheets
($000 except per share amounts)
December 31,
Assets 2003 2002
------------------- -------------------
Real estate, at cost
Buildings and building improvements $ 973,475 $ 770,375
Land and land estates 178,077 131,496
Land improvements 2,666 3,154
Fixtures and equipment 8,177 8,345
------------ ------------
1,162,395 913,370
Less: accumulated depreciation 160,623 134,220
------------ ------------
1,001,772 779,150
Properties held for sale - discontinued operations 36,478 --
Intangible assets, net of accumulated amortization of $299 14,736 --
Investment in and advances to non-consolidated entities 69,225 54,261
Cash and cash equivalents 15,923 12,097
Deferred expenses (net of accumulated amortization
of $4,891 in 2003 and $6,269 in 2002) 10,013 8,168
Rent receivable 24,069 23,650
Other assets, net 35,195 25,145
------------ ------------
$ 1,207,411 $ 902,471
=========== ===========
Liabilities and Shareholders' Equity
Mortgages and notes payable 455,940 $ 460,517
Credit facility borrowings 94,000 31,000
Mortgage note payable - discontinued operations 1,445 --
Origination fees payable, including accrued interest 808 6,565
Accounts payable and other liabilities 8,283 8,003
Accrued interest payable 1,576 2,755
Prepaid rent 2,482 --
------------ -------------
564,534 508,840
Minority interests 59,220 56,846
------------ ------------
623,754 565,686
------------ ------------
Commitments and contingencies (notes 7, 9 and 13)
Common shares, par value $0.0001 per share; 287,888 shares
issued and outstanding, liquidation preference $3,886 3,809 3,809
------------ ------------
Shareholders' equity:
Preferred shares, par value $0.0001 per share;
authorized 10,000,000 shares. Class B Cumulative
Redeemable Preferred, liquidation preference
$79,000, 3,160,000 shares issued and outstanding in 2003 76,315 --
Common shares, par value $0.0001 per share, authorized
80,000,000 shares, 40,394,113 and 29,742,160 shares
issued and outstanding in 2003 and 2002, respectively 4 3
Additional paid-in-capital 601,501 414,989
Deferred compensation, net (6,265) (1,766)
Accumulated distributions in excess of net income (91,707) (77,777)
------------ ------------
579,848 335,449
Less: notes receivable from officers/shareholders -- (2,473)
------------- ------------
Total shareholders' equity 579,848 332,976
------------ ------------
$ 1,207,411 $ 902,471
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
16
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Income
($000 except per share amounts)
2003 2002 2001
---- ---- ----
Gross revenues:
Rental $ 107,594 $ 87,697 $ 73,295
Advisory fees 1,429 -- --
Tenant reimbursements 4,498 4,450 3,266
-------- -------- --------
Total gross revenues 113,521 92,147 76,561
Expense applicable to revenues:
Depreciation and amortization (27,538) (21,001) (17,564)
Property operating (8,115) (6,474) (4,700)
General and administrative (9,664) (5,588) (4,845)
Non-operating income 1,471 1,324 946
Interest and amortization expense (35,873) (34,126) (29,675)
Debt satisfaction charges (7,459) (345) (3,993)
-------- -------- --------
Income before provision for income taxes, minority
interests, equity in earnings of non-consolidated
entities and discontinued operations 26,343 25,937 16,730
Provision for income taxes (259) (136) (174)
Minority interests (3,644) (4,927) (3,889)
Equity in earnings of non-consolidated entities 5,707 4,970 3,328
-------- -------- --------
Income from continuing operations 28,147 25,844 15,995
-------- -------- --------
Discontinued operations, net of minority interest (Note 5):
Income from discontinued operations 3,311 3,696 2,067
Gains on sales of properties 2,191 1,055 --
-------- -------- --------
Total discontinued operations 5,502 4,751 2,067
-------- -------- --------
Net income 33,649 30,595 18,062
Dividends attributable to preferred shares - Series A -- (693) (2,709)
Dividends attributable to preferred shares - Series B (3,392) -- --
-------- -------- --------
Net income allocable to common shareholders $ 30,257 $ 29,902 $ 15,353
========= ========= =========
Income per common share-basic:
Income from continuing operations $ 0.73 $ 0.93 $ 0.68
Income from discontinued operations 0.16 0.18 0.11
-------- -------- --------
Net income $ 0.89 $ 1.11 $ 0.79
========= ========= =========
Weighted average common shares outstanding-basic 34,074,935 27,026,789 19,522,323
========== ========== ==========
Income per common share-diluted:
Income from continuing operations $ 0.72 $ 0.92 $ 0.67
Income from discontinued operations 0.16 0.17 0.10
-------- -------- --------
Net income $ 0.88 $ 1.09 $ 0.77
========= ========= =========
Weighted average common shares outstanding-diluted 39,493,872 27,326,891 19,862,880
========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
17
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
($000 except per share amounts)
Years ended December 31,
Number of Number of Additional
Preferred Common Paid-in
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
Balance at December 31, 2000 -- -- 16,863,394 $ 2 $ 240,112
Net income -- -- -- -- --
Dividends paid to common share-
holders ($1.27 per share) -- -- -- -- --
Dividends paid to preferred share-
holders ($1.3335 per share) -- -- -- -- --
Common shares issued, net 7,368,015 -- 102,206
Amortization of deferred
compensation -- -- -- -- --
Common shares repurchased and
retired -- -- (12,000) -- (157)
Repayments on notes -- -- -- -- --
--------- ----------- ---------- ------ ----------
Balance at December 31, 2001 -- -- 24,219,409 2 342,161
Net income -- -- -- -- --
Dividends paid to common share-
holders ($1.32 per share) -- -- -- -- --
Dividends paid to preferred share-
holders ($0.3465 per share) -- -- -- -- --
Conversion of preferred shares -- -- 2,000,000 -- 24,369
Common shares issued, net -- -- 3,522,751 1 48,459
Amortization of deferred
compensation -- -- -- -- --
--------- ----------- ---------- ------ ----------
Balance at December 31, 2002 -- -- 29,742,160 3 414,989
Net income -- -- -- -- --
Dividends paid to common share-
holders ($1.34 per share) -- -- -- -- --
Dividends paid to preferred share-
holders ($0.5702 per share) -- -- -- -- --
Common shares issued, net -- -- 10,810,177 1 188,985
Issuance of preferred shares, net 3,160,000 76,315 -- -- --
Amortization of deferred
compensation -- -- -- -- --
Repayments on notes -- -- (158,224) -- (2,473)
--------- ----------- ---------- ------ ----------
Balance at December 31, 2003 3,160,000 $ 76,315 40,394,113 $ 4 $ 601,501
========= =========== ========== ====== ==========
Accumulated Notes
Deferred Distributions Receivable Total
Compensation, In Excess of Officers / Shareholders'
net Net Income Shareholders Equity
--- ---------- ------------ ------
Balance at December 31, 2000 $ (1,019) $ (62,227) $ (1,983) $ 174,885
Net income -- 18,062 -- 18,062
Dividends paid to common share-
holders ($1.27 per share) -- (25,004) -- (25,004)
Dividends paid to preferred share-
holders ($1.3335 per share) -- (2,667) -- (2,667)
Common shares issued, net (1,181) -- -- 101,025
Amortization of deferred
compensation 559 -- -- 559
Common shares repurchased and
retired -- -- -- (157)
Repayments on notes -- -- 10 10
---------- ---------- ---------- ----------
Balance at December 31, 2001 (1,641) (71,836) (1,973) 266,713
Net income -- 30,595 -- 30,595
Dividends paid to common share-
holders ($1.32 per share) -- (35,843) -- (35,843)
Dividends paid to preferred share-
holders ($0.3465 per share) -- (693) -- (693)
Conversion of preferred shares -- -- -- 24,369
Common shares issued, net (860) -- (500) 47,100
Amortization of deferred
compensation 735 -- -- 735
---------- ---------- ---------- ----------
Balance at December 31, 2002 (1,766) (77,777) (2,473) 332,976
Net income -- 33,649 -- 33,649
Dividends paid to common share-
holders ($1.34 per share) -- (45,777) -- (45,777)
Dividends paid to preferred share-
holders ($0.5702 per share) -- (1,802) -- (1,802)
Common shares issued, net (5,887) -- -- 183,099
Issuance of preferred shares, net -- -- -- 76,315
Amortization of deferred
compensation 1,388 -- -- 1,388
Repayments on notes -- -- 2,473 --
---------- ---------- ---------- ----------
Balance at December 31, 2003 $ (6,265) $ (91,707) $ -- $ 579,848
========== ========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
18
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows
($000)
Years ended December 31,
2003 2002 2001
-------------------------------------------------
Cash flows from operating activities:
Net income $ 33,649 $ 30,595 $ 18,062
Adjustments to reconcile net income to net cash
provided by operating activities, net of effects
from acquisitions:
Depreciation and amortization 29,572 23,375 19,952
Minority interests 4,276 5,707 4,534
Gains on sales of properties (2,191) (1,055) --
Straight-line rents (3,790) (2,426) (2,755)
Other non-cash charges 2,026 1,016 1,508
Equity in earnings of non-consolidated entities (5,734) (5,079) (3,328)
Distributions from non-consolidated entities 8,495 5,704 4,593
Increase (decrease) in accounts payable and
other liabilities 1,708 539 (2,140)
Other adjustments, net 3,804 (644) 851
-- --------- ------------ -----------
Net cash provided by operating activities 71,815 57,732 41,277
----------- ------------ -----------
Cash flows from investing activities:
Net proceeds from sale/transfer of properties 34,943 20,756 4,107
Acquisition of the Net Partnerships, net of debt assumed
and $3,777 in cash -- -- (27,835)
Investments in properties (327,435) (114,272) (19,363)
Investments in non-consolidated entities (6,824) (5,539) (5,620)
Advances to non-consolidated entities (2,331) (2,158) (4,195)
Investment in and advances to the Net Partnerships -- -- (10,979)
Real estate deposits (23,101) (4,817) (436)
Distribution of loan proceeds from non-consolidated
entities 26,899 -- --
Increase in deferred leasing costs (1,034) -- --
------------ ------------ -----------
Net cash used in investing activities (298,883) (106,030) (64,321)
------------ ------------ -----------
Cash flows from financing activities:
Proceeds of mortgages and notes payable 90,882 49,165 100,194
Change in credit facility borrowing, net 63,000 21,000 (31,821)
Dividends to common and preferred shareholders (47,579) (36,536) (27,671)
Dividend reinvestment plan proceeds 7,095 4,870 2,507
Principal payments on debt, excluding normal amortization (107,942) (10,049) (48,611)
Principal amortization payments (16,121) (14,091) (12,354)
Origination fee amortization payments (406) (372) (372)
Common shares issued, net of offering costs 174,152 41,595 61,021
Preferred shares issued, net of offering costs 76,315 -- --
Cash distributions to minority interests (6,618) (6,304) (6,236)
Change in escrow deposits and restricted cash 451 (1,396) (1,002)
Increase in deferred expenses (3,913) (1,350) (3,203)
Common shares/partnership units repurchased -- -- (348)
Other -- -- 11
------------ ------------ -----------
Net cash provided by financing activities 229,316 46,532 32,115
------------ ------------ -----------
Cash attributable to newly consolidated entity 1,578 -- --
------------ ------------ -----------
Change in cash and cash equivalents 3,826 (1,766) 9,071
Cash and cash equivalents, beginning of year 12,097 13,863 4,792
----------- ----------- -----------
Cash and cash equivalents, end of year $ 15,923 $ 12,097 $ 13,863
=========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
19
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
($000's except per share data)
(1) The Company
Lexington Corporate Properties Trust (the "Company") is a self-managed and
self-administered Maryland statutory real estate investment trust ("REIT") that
acquires, owns, and manages a geographically diversified portfolio of net leased
office, industrial and retail properties and provides investment advisory and
asset management services to institutional investors in the net lease area. As
of December 31, 2003 the Company owned or had interests in 118 properties in 35
states. The real properties owned by the Company are generally subject to triple
net leases to corporate tenants, however six provide for operating expense
stops, two are subject to modified gross leases and one required the Company to
be responsible for real estate taxes in 2003 and for the tenant to be
responsible thereafter.
The Company's Board of Trustees authorized the Company to repurchase, from time
to time, up to 2.0 million common shares and/or operating partnership units ("OP
Units") in it's three controlled operating partnership subsidiaries, depending
on market conditions and other factors. As of December 31, 2003, the Company
repurchased approximately 1.4 million common shares/OP Units at an average price
of approximately $10.55 per common share/ OP Unit. No shares or OP Units were
repurchased in 2003 or 2002.
(2) Summary of Significant Accounting Policies
Basis of Presentation and Consolidation. The Company's consolidated financial
statements are prepared on the accrual basis of accounting. The financial
statements reflect the accounts of the Company and its controlled subsidiaries,
including Lepercq Corporate Income Fund L.P. ("LCIF"), Lepercq Corporate Income
Fund II L.P. ("LCIF II"), Net 3 Acquisition L.P. ("Net 3"), Lexington Realty
Advisors, Inc. ("LRA") and Lexington Contributions, Inc. ("LCI"), a wholly owned
subsidiary. The Company is the sole equity owner of each of the general partner
and majority limited partner of LCIF, LCIF II and Net 3. Effective January 1,
2003, the Company converted its non-voting interest in LRA to a 100% voting
interest and accordingly has consolidated LRA in 2003 while it was accounted for
under the equity method in 2002 and 2001.
Earnings Per Share. Basic net income per share is computed by dividing net
income reduced by preferred dividends, if applicable, by the weighted average
number of common shares outstanding during the period. Diluted net income per
share amounts are similarly computed but include the effect, when dilutive, of
in-the-money common share options and OP Units.
Recently Issued Accounting Standards. In December 2003, the FASB issued FASB
Interpretation No. 46 (revised December 2003), Consolidation of Variable
Interest Entities ("VIEs"), which addresses how a business enterprise should
evaluate whether it has a controlling financial interest in an entity through
means other than voting rights and accordingly should consolidated the entity.
FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest
Entities, which was issued in January 2003. The Company will be required to
adopt FIN 46R in the first fiscal period beginning after March 15, 2004. Upon
adoption of FIN 46R, the assets, liabilities and noncontrolling interests of the
VIE initially would be measured at their carrying amounts with any difference
between the net amount added to the balance sheet and any previously recognized
interest being recognized as the cumulative effect of an accounting change. If
determining the carrying amounts is not practicable, fair value at the date FIN
46R first applies may be used to measure the assets, liabilities and
noncontrolling interest of the VIE. It is not anticipated that the effect on the
Company's Consolidated Financial Statements would be material.
20
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
($000's except per share data)
FASB Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity ("SFAS 150"), was issued in May
2003. SFAS 150 establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. SFAS 150 also includes required disclosures for financial instruments
within its scope. For the Company, SFAS 150 was effective for instruments
entered into or modified after May 31, 2003 and otherwise will be effective as
of January 1, 2004, except for mandatorily redeemable financial instruments. For
certain mandatorily redeemable financial instruments, SFAS 150 will be effective
for the Company on January 1, 2005. The effective date has been deferred
indefinitely for certain other types of mandatorily redeemable financial
instruments. The Company currently does not have any financial instruments that
are within the scope of SFAS 150.
In April 2002, FASB Statement No. 145, Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS
145"), was issued. SFAS 145 amends existing guidance on reporting gains and
losses on the extinguishment of debt to prohibit the classification of the gain
or loss as extraordinary, as the use of such extinguishments have become part of
the risk management strategy of many companies. SFAS 145 also amends FASB
Statement No. 13, Accounting for Leases, to require sale-leaseback accounting
for certain lease modifications that have economic effects similar to
sale-leaseback transactions. The provisions of Statement 145 related to the
rescission of FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, were applied in fiscal years beginning after May 15,
2002. The provisions of SFAS 145 related to SFAS 13 were effective for
transactions occurring after May 15, 2002. The adoption of SFAS 145 required the
Company to record as debt satisfaction charges, as a component of continuing
operations, costs incurred in the early retirement of debt instead of as an
extraordinary item.
In June 2002, FASB Statement No. 146, Accounting for Costs Associated with Exit
or Disposal Activities ("SFAS 146"), was issued. SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity. The provisions of SFAS
146 were effective for exit or disposal activities initiated after December 31,
2002, with early application encouraged. The adoption of SFAS 146 had no impact
on the Company.
In November 2002, FASB Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34 ("FIN 45"), was issued. FIN 45
enhances the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees issued. FIN 45 also
clarifies that a guarantor is required to recognized, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the FIN 45 were applicable to
guarantees issued or modified after December 31, 2002 and the disclosure
requirements were effective for financial statements of interim or annual
periods ending after December 15, 2002. The adoption of FIN 45 had no impact on
the Company.
21
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
($000's except per share data)
In December 2002, FASB Statement No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123
("SFAS 148"), was issued. SFAS 148 amends FASB SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require prominent disclosures in both annual and interim financial
statements. Disclosures required by this standard are included in the notes to
these consolidated financial statements.
Use of Estimates. Management has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, the disclosure of
contingent assets and liabilities and the reported amounts of revenues and
expenses to prepare these consolidated financial statements in conformity with
generally accepted accounting principles. The most significant estimates made
include the recoverability of accounts receivable (primarily related to
straight-line rents) and the useful lives of assets. Actual results could differ
from those estimates.
Purchase Accounting for Acquisition of Real Estate. The fair value of the real
estate acquired is allocated to the acquired tangible assets, consisting of
land, building and improvements, and identified intangible assets and
liabilities, consisting of the value of above-market and below-market leases,
other value of in-place leases and value of tenant relationships, based in each
case on their fair values.
The fair value of the tangible assets of an acquired property (which includes
land, building and 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 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.
22
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
($000's except per share data)
The aggregate value of other acquired intangible assets, consisting of in-place
leases and tenant relationships, is measured by the excess of (i) the purchase
price paid for a property over (ii) the estimated fair value of the property as
if vacant, determined as set forth above. This aggregate value is allocated
between in-place lease values and tenant relationships based on management's
evaluation of the specific characteristics of each tenant's lease. The value of
in-place leases and customer relationships are amortized to expense over the
remaining non-cancelable periods of the respective leases.
Revenue Recognition. The Company recognizes revenue in accordance with Statement
of Financial Accounting Standards No. 13 Accounting for Leases, as amended
("SFAS 13"). SFAS 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 66"). The specific timing of the sale is measured against various
criteria in SFAS 66 related to the terms of the transactions and any continuing
involvement in the form of management or financial assistance associated with
the properties. If the sales criteria are not met, the gain is deferred and the
finance, installment or cost recovery method, as appropriate, is applied until
the sales criteria are met.
Accounts Receivable. The Company continuously monitors collections from its
tenants and would make a provision for estimated losses based upon historical
experience and any specific tenant collection issues that the Company has
identified.
Real Estate. The Company evaluates the carrying value of all real estate held to
determine if an impairment has occurred which would require the recognition of a
loss. The evaluation includes reviewing anticipated cash flows of the property,
based on current leases in place, coupled with an estimate of proceeds to be
realized upon sale. However, estimating future sale proceeds is highly
subjective and such estimates could differ materially from actual results.
Depreciation is determined by the straight-line method over the remaining
estimated economic useful lives of the properties. The Company generally
depreciates buildings and building improvements over periods not exceeding 40
years, land improvements over a 20-year period, and fixtures and equipment over
a 12-year period.
Only costs incurred to third parties in acquiring properties are capitalized. No
internal costs (rents, salaries, overhead) are capitalized. Expenditures for
maintenance and repairs are charged to operations as incurred. Significant
renovations which extend the useful life of the properties are capitalized.
Investments in non-consolidated entities. The Company accounts for its
investments in less than 50% owned entities under the equity method unless
pursuant to FIN 46R consolidation is required.
Deferred Expenses. Deferred expenses consist primarily of debt placement costs,
and are amortized using the straight-line method, which approximates the
interest method, over the terms of the debt instruments and leasing costs which
are amortized over the life of the lease.
Deferred Compensation. Deferred compensation consists of the value of non-vested
common shares issued by the Company to employees and trustees. The deferred
compensation is amortized ratably over the vesting period which generally is
five years.
23
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
($000's except per share data)
Tax Status. The Company has made an election to qualify, and believes it is
operating so as to qualify, as a REIT under the Internal Revenue Code. A REIT is
generally not subject to Federal income tax on that portion of its REIT taxable
income which is distributed to its shareholders, provided that at least 90% of
taxable income is distributed. As distributions have equaled or exceeded taxable
income, no provision for Federal income taxes has been made. State and local
income taxes, which are not significant, have been provided for those states and
localities in which the Company operates and is subject to an income tax. LRA
and LCI have elected to be treated as taxable REIT subsidiaries.
A summary of the average taxable nature of the Company's common dividends for
each of the years in the three year period ended December 31, 2003 is as
follows:
2003 2002 2001
----------------------------------------------
Total common dividends per share $ 1.34 $ 1.32 $ 1.27
======= ======= =======
Ordinary income 68.94% 77.89% 95.46%
Short-term capital gain -- 2.27 --
15% rate gain 3.10 -- --
20% rate gain -- 4.12 --
25% rate gain 0.70 5.65 --
Return of capital 27.26 10.07 4.54
------- ------- ------
100.00% 100.00% 100.00%
======= ======= ======
Cash and Cash Equivalents. The Company considers all highly liquid instruments
with maturities of three months or less from the date of purchase to be cash
equivalents.
Common Share Options. The Company has elected to continue to account for its
option plan under the recognition provisions 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
Consolidated Statements of Income.
24
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
($000's except per share data)
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 common share option awards in each period:
2003 2002 2001
-------------- --------------- ---------------
Net income allocable to common shareholders,
as reported - basic $ 30,257 $ 29,902 $ 15,353
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 509 975 1,409
--------- --------- ---------
Pro forma net income - basic $ 29,748 $ 28,927 $ 13,944
========= ========= =========
Net income per share - basic
Basic - as reported $ 0.89 $ 1.11 $ 0.79
========= ========= =========
Basic - pro forma $ 0.87 $ 1.07 $ 0.71
========= ========= =========
Net income allocable to common shareholders,
as reported - diluted $ 34,740 $ 29,902 $ 15,353
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 509 975 1,409
--------- --------- ---------
Pro forma net income - diluted $ 34,231 $ 28,927 $ 13,944
========= ========= =========
Net income per share - diluted
Diluted - as reported $ 0.88 $ 1.09 $ 0.77
========= ========= =========
Diluted - pro forma $ 0.87 $ 1.06 $ 0.70
========= ========= =========
The per share weighted average fair value of options granted during 2002 and
2001 were estimated to be $2.42 and $2.00, respectively, using a Black-Scholes
option pricing formula. The more significant assumptions underlying the
determination of such fair values include: (i) a risk free interest rate of
3.32% in 2002 and 3.35% in 2001; (ii) an expected life of five years; (iii)
volatility factors of 15.11% and 15.79% for 2002 and 2001, respectively; and
(iv) actual dividends paid. The value of common share options issued in 2003
were estimated to be $2.42.
Reclassifications. Certain amounts included in prior years' financial statements
have been reclassified to conform with the current year presentation, including
conforming the Consolidated Statements of Income to rule 5-03 of Regulation S-X.
In addition, the Company has reclassified certain income statement captions as a
result of properties held for sale as of September 30, 2004 and properties sold
during 2004, which are presented as discontinued operations.
25
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
($000's except per share data)
(3) Earnings Per Share
The following is a reconciliation of numerators and denominators of the basic
and diluted earnings per share computations for each of the years in the three
year period ended December 31, 2003:
2003 2002 2001
------------ ------------- -----------------
BASIC
Income from continuing operations $ 28,147 $ 25,844 $ 15,995
Less - dividends attributable to preferred shares (3,392) (693) (2,709)
----------- ----------- ----------
Income attributed to common shareholders from
continuing operations 24,755 25,151 13,286
Total income from discontinued operations 5,502 4,751 2,067
---------- ---------- ----------
Net income attributed to common shareholders $ 30,257 $ 29,902 $ 15,353
========== ========== ==========
Weighted average number of common shares
outstanding 34,074,935 27,026,789 19,522,323
========== ========== ==========
Income per common share - basic:
Income from continuing operations $ 0.73 $ 0.93 $ 0.68
Income from discontinued operations 0.16 0.18 0.11
---------- ---------- ----------
Net income $ 0.89 $ 1.11 $ 0.79
========== ========== ==========
DILUTED
Income attributed to common shareholders from
continuing operations - basic $ 24,755 $ 25,151 $ 13,286
Add - incremental income attributed to assumed
conversion of dilutive securities 3,644 -- --
---------- ----------- ---------
Income attributed to common shareholders from
continuing operations 28,399 25,151 13,286
Income from discontinued operations 6,341 4,751 2,067
---------- ---------- ----------
Net income attributed to common shareholders $ 34,740 $ 29,902 $ 15,353
========== ========== ==========
Weighted average number of shares used in
caculation of basic earnings per share 34,074,935 27,026,789 19,522,323
Add - incremental shares representing:
Shares issuable upon exercise of employee
share options 202,504 300,102 340,557
Shares issuable upon conversion of dilutive
securities 5,216,433 -- --
---------- ----------- ---------
Weighted average number of shares used in
calculation of diluted earnings per common
share 39,493,872 27,326,891 19,862,880
============ ============ ============
Income per common share - diluted:
Income from continuing operations $ 0.72 $ 0.92 $ 0.67
Income from discontinued operations 0.16 0.17 0.10
---------- ---------- ----------
Net income $ 0.88 $ 1.09 $ 0.77
========== ========== ==========
26
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
($000's except per share data)
(4) Investments in Real Estate
During 2003 and 2002, the Company made the following acquisitions, excluding
acquisitions made by non-consolidated entities:
Net
Rentable
Date of Acquisition Lease Square
Acquisition Tenant Location Cost Expires Feet
------------ ------------------------------- ----------------- ------------ ------- ----------
2003
----
February Oce Printing Systems USA, Inc. Boca Raton, FL $ 23,551 2020 143,290
June Owens Corning Minneapolis, MN 4,610 2015 18,620
July The McGraw-Hill Companies, Inc. Dubuque, IA 11,424 2017 330,988
August Verizon Wireless Greenville, SC 21,745 2012 192,884
September Tower Automotive Products
Company Plymouth, MI 20,710 2012 290,133
October Nextel Communications of
Texas, Inc. Temple, TX 15,301 2016 108,800
October Nextel West Corporation Bremerton, WA 11,301 2016 60,200
December Employees Reinsurance
Corporation Overland Park, KS 53,779 2018 320,198
December Employees Reinsurance
Corporation Kansas City, MO 25,676 2019 166,641
December Bell South Mobility, Inc. Baton Rouge, LA 10,742 2012 70,100
December Minnesota Mining and
Manufacturing Wallingford, CT 5,525 2010 44,400
December Siemens Dematic Postal
Automation L.P. Arlington, TX 30,286 2014 233,783
December James Hardie Building
Products, Inc. Waxahachie, TX 32,568 2020 425,816
-------- -------
$ 267,218 2,405,853
======== =========
2002
----
March Apria Healthcare Group, Inc. Lake Forest, CA $ 16,970 2012 100,012
August Quest Diagnostics, Inc. Valley Forge, PA 19,500 2011 109,281
August AdvancePCS, Inc. Knoxville, TN 8,100 2013 59,748
September Anda Pharmaceuticals, Inc Groveport, OH 11,800 2012 354,676
December North American Van Lines Westmont, IL 24,825 2015 269,715
December Wells Fargo Home Mortgage Fort Mill, SC 17,933 2013 169,083
-------- -------
$ 99,128 1,062,515
======== =========
The 2003 acquisitions do not include the purchases of a property in Novato,
California and Malvern, Pennsylvania which were acquired by the Company and
subsequently transferred to a joint venture during 2003. The Company received
$23,849 in cash resulting from these transfers.
The Company sold four properties, to unrelated parties, in 2003, four properties
and one building in the Palm Beach Gardens, Florida property in 2002 and one
property in 2001 for aggregate net proceeds of $11,094, $16,342 and $4,107,
respectively, which resulted in gains in 2003, 2002 and 2001 of $2,191, $1,055
and $0, respectively. In addition, the Company sold in 2002 a 77.3% interest in
a property (along with the related non-recourse mortgage) in Florence, South
Carolina for net proceeds of $4,414 and deferred a $671 gain on sale since the
purchasers can put their interests in the property to the Company for a six
month period commencing January 2004 for $4,581.
During 2002, the Company expanded its property in Lancaster, California net
leased to Michaels Stores, Inc. The expansion, which cost $15,200, is leased to
the tenant through September 2019 for an annual rent of $1,808. In connection
with the expansion, the initial lease term was also extended to September 2019.
27
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
($000's except per share data)
(5) Discontinued Operations and Assets Held For Sale
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets ("SFAS 144"). SFAS 144 established criteria beyond that
previously specified in Statement of Financial Accounting Standard No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of ("SFAS 121"), to determine when a long-lived asset is classified
as held for sale, and it provides a single accounting model for the disposal of
long-lived assets. SFAS 144 was effective beginning January 1, 2002. In
accordance with SFAS 144, the Company now reports as discontinued operations
assets held for sale (as defined by SFAS 144) as of the end of the current
period and assets sold subsequent to January 1, 2002. All results of these
discontinued operations are included in a separate component of income on the
Consolidated Statements of Income under discontinued operations.
At December 31, 2003, the Company has three properties held for sale with an
aggregate carrying value of $36,478, two of which were sold in 2004. One of
these properties is encumbered by a non-recourse mortgage payable of $1,445.
In addition, the Company has also classified properties held for sale at
September 30, 2004 and properties sold in 2004 as discontinued operations.
The following presents the operating results for the properties sold and held
for sale during the nine months ended September 30, 2004 and the years ended
December 31, 2003 and 2002 for the applicable periods:
Year ended December 31,
2003 2002 2001
---- ---- ----
Rental revenues $ 5,477 $ 6,186 $ 5,107
Pre-tax income, including gains on sales $ 5,663 $ 4,751 $ 2,067
(6) Investment in Non-Consolidated Entities
The Company has investments in various real estate joint ventures. The business
of each joint venture is to acquire, finance, hold for investment or sell single
tenant net leased real estate.
28
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
($000's except per share data)
Lexington Acquiport Company, LLC
- --------------------------------
Lexington Acquiport Company, LLC ("LAC"), is a joint venture with the
Comptroller of the State of New York as Trustee for the Common Retirement Fund
("CRF"). The joint venture agreement expires in December 2011. The Company and
CRF originally committed to contribute up to $50,000 and $100,000, respectively,
to invest in high quality office and industrial net leased real estate. Through
December 31, 2003 total contributions to LAC were $144,332. In 2003, the Company
and CRF purchased a property outside the LAC joint venture which required an
aggregate capital contribution of $3,751. The partners agreed that the aggregate
of these contributions would close the funding obligations to LAC. LRA earns
annual management fees of 2% of rent collected and acquisition fees equaling 75
basis points of purchase price of each property investment. All allocations of
profit, loss and cash flows are made one-third to the Company and two-thirds to
CRF.
During 2001, the Company and CRF announced the formation of Lexington Acquiport
Company II, LLC ("LAC II"). The Company and CRF have committed $50,000 and
$150,000, respectively. In addition to the fees LRA currently earns on
acquisitions and asset management in LAC, LRA will also earn 50 basis points on
all mortgage debt directly placed in LAC II. All allocations of profit, loss and
cash flows from all properties acquired by this joint venture will be allocated
25% to the Company and 75% to CRF. As of December 31, 2003, LAC II has not made
any investments.
CRF can presently elect to put their equity position in LAC to the Company. The
Company has the option of issuing common shares for the fair market value of
CRF's equity position (as defined) or cash for 110% of the fair market value of
CRF's equity position. The per common share value of shares issued for CRF's
equity position will be the greater of (i) the price of the Company's common
shares on the closing date (ii) the Company's funds from operations per share
(as defined) multiplied by 8.5 or (iii) $13.40 for LAC properties (all
properties that are currently owned) and $15.20 for LAC II properties purchased.
The Company has the right not to accept any property (thereby reducing the fair
market value of CRF's equity position) that does not meet certain underwriting
criteria (e.g. lease term and tenant credit). In addition, the operating
agreement contains a mutual buy-sell provision in which either partner can force
the sale of any property.
During 2003 and 2002, LAC made the following investments:
Net
Rentable
Date of Acquisition Lease Square
Acquisition Tenant Location Cost Expires Feet
-------------- ---------------------------- --------------- ----------- ------- ------------
2003
March Motorola, Inc. Farmington $ 32,650 2016 119,829
Hills, MI
December Honeywell, International, Colorado
Inc. Springs, CO 16,800 2013 166,575
------ ---------
$ 49,450 286,404
====== =========
2002
August TNT Logistics North Laurens, SC $ 27,100 2012 1,164,000
America, Inc.
August TNT Logistics North Temperance, MI
America, Inc. 18,186 2012 752,000
------ ---------
$ 45,286 1,916,000
====== =========
29
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
($000's except per share data)
Summarized balance sheet data as of December 31, 2003 and 2002 and income
statement data for the years ended December 31, 2003, 2002 and 2001 is as
follows:
2003 2002
--------- ---------
Real estate, net $ 328,525 $ 286,311
Note receivable 11,009 11,009
Cash and cash equivalents 2,309 3,989
Other assets 11,712 6,580
--------- ---------
$ 353,555 $ 307,889
========= =========
Mortgages payable $ 211,071 $ 180,223
Other liabilities 6,617 1,934
Equity 135,867 125,732
--------- ---------
$ 353,555 $ 307,889
========= =========
2003 2002 2001
--------- --------- ---------
Revenues $ 36,696 $ 31,228 $ 28,661
Interest expense (14,453) (12,628) (11,910)
Depreciation of real estate (6,786) (5,408) (4,932)
Other (3,147) (2,925) (3,147)
---------- ---------- ---------
Net income $ 12,310 $ 10,267 $ 8,672
========= ========= =========
As of December 31, 2003, the LAC properties are 100% leased and have scheduled
lease expiration dates ranging from 2009 to 2016.
Minimum future rental receipts under the non-cancelable portion of the tenant
leases, assuming no new or negotiated leases, for the next five years and
thereafter are as follows:
Year ending
December 31,
------------
2004 $ 36,259
2005 38,262
2006 38,842
2007 39,468
2008 39,912
Thereafter 67,275
-----------
$ 260,018
===========
30
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
($000's except per share data)
The mortgages payable bear interest at rates ranging from 5.42% to 8.19% and
mature at various dates ranging from 2010 to 2012. Scheduled principal
amortization and balloon payments for the mortgages for the next five years and
thereafter are as follows:
Year ending Scheduled Balloon
December 31, Amortization Payments Total
------------ ------------ -------- -----
2004 $ 2,881 $ -- $ 2,881
2005 3,160 -- 3,160
2006 3,410 -- 3,410
2007 3,705 -- 3,705
2008 3,969 -- 3,969
Thereafter 11,738 182,208 193,946
-------- ---------- --------
$ 28,863 $ 182,208 $ 211,071
======== ========== ========
In 2003, the Company and CRF have purchased a property outside the LAC
partnership for $22,700. The property is subject to a lease through 2021, but
can be canceled by the tenant in September 2011 with a payment of $23,433. If
cancelled after September 2011 the termination payment is determined based upon
a scheduled amount. In all situations the termination payment exceeds the
estimated balance outstanding on the non-recourse mortgage encumbering the
property.
The property acquisition was partially funded through the assumption of a
$19,182 non-recourse mortgage that bears interest at 6.73% and matures in 2021.
There are no principal amortization payments required under this note from 2004
through 2008.
During 2003, LRA earned an acquisition fee of $114. All allocations of profit,
loss and cash flows are made one-third to the Company and two-thirds to CRF. In
addition, LRA earns fees under the same structure as the LAC agreement.
Minimum future rental receipts under the non-cancelable portion of the tenant
lease, assuming no new or negotiated lease, for the next five years and
thereafter are as follows:
Year ending
December 31,
------------
2004 $ 1,833
2005 1,833
2006 1,665
2007 1,665
2008 1,315
Thereafter 3,884
-----------
$ 12,195
===========
31
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
($000's except per share data)
Lexington Columbia LLC
Lexington Columbia LLC ("Columbia") is a joint venture established December 30,
1999 with a private investor. Its sole purpose is to own a property in Columbia,
South Carolina net leased to Blue Cross Blue Shield of South Carolina, Inc.
through September 2009. The purchase price of the property was approximately
$42,500 and was partially funded through a 10 year, $25,300 non-recourse
mortgage note bearing interest at 7.85%. In accordance with the operating
agreement, net cash flows, as defined, will be allocated 40% to the Company and
60% to the partner until both parties have received a 12.5% return on capital.
Thereafter cash flows will be distributed 60% to the Company and 40% to the
partner.
During 2001, Columbia expanded the property by 107,894 square feet bringing the
total square feet of the property to 456,304. The $10,900 expansion was funded
40% by the Company and 60% by the partner. The tenant has leased the expansion
through September 2009 for an average annual rent of $2,000. Cash flows from the
expansion will be distributed 40% to the Company and 60% to the partner.
LRA earns annual asset management fees of 2% of rents collected.
Summarized financial information for the underlying property investment as of
December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and
2001 is as follows:
2003 2002
---------- ----------
Real estate, net $ 46,465 $ 48,454
Other assets 2,727 2,438
---------- ----------
$ 49,192 $ 50,892
========== ==========
Mortgage payable $ 24,410 $ 24,653
Accrued interest 165 167
Equity 24,617 26,072
---------- ----------
$ 49,192 $ 50,892
========== ==========
2003 2002 2001
--------- --------- ---------
Rental income $ 6,930 $ 6,930 $ 5,412
Interest expense (1,952) (1,970) (1,851)
Depreciation (1,988) (1,988) (1,664)
Other (184) (196) (133)
---------- ---------- ----------
Net income $ 2,806 $ 2,776 $ 1,764
========= ========= =========
Minimum future rental receipts under the non-cancelable operating lease,
assuming no new or renegotiated lease, for the next five years and thereafter is
as follows:
Year ending
December 31,
2004 $ 6,655
2005 7,377
2006 7,377
2007 7,377
2008 7,377
Thereafter 5,531
-----------
$ 41,694
===========
32
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
($000's except per share data)
Scheduled principal amortization and balloon payment for the mortgage payable
for the next five years and thereafter is as follows:
Year ending Scheduled Balloon
December 31, Amortization Payment Total
------------ ------------ ------- -----
2004 $ 257 $ -- $ 257
2005 284 -- 284
2006 307 -- 307
2007 332 -- 332
2008 355 -- 355
Thereafter 289 22,586 22,875
-------- --------- --------
$ 1,824 $ 22,586 $ 24,410
======== ========= ========
Lexington/Lion Venture L.P.
Lexington/Lion Venture LP ("LION") was formed on October 1, 2003 by the Company
and CLPF-LXP/Lion Venture GP, LLC ("Clarion"), to invest in high quality single
tenant net leased retail, office and industrial real estate. The limited
partnership agreement provides for a ten-year term unless terminated sooner
pursuant to the terms of the partnership agreement. The limited partnership
agreement provides for the Company and Clarion to invest up to $30,000 and
$70,000, respectively, and to leverage these investments up to a maximum of 60%.
LRA earns acquisition and asset management fees as defined in the operating
agreement. All allocation of profit, loss and cash flows are made 30% to the
Company and 70% to Clarion until each partner receives a 12% internal rate of
return. The Company is eligible to receive a promoted interest of 15% of the
internal rate of return in excess of 12%. No promoted interest was earned in
2003.
Clarion can elect to put their equity position in LION to the Company commencing
when $100,000 in capital is contributed to the venture or January 2, 2006,
whichever occurs first. The Company has the option of issuing common shares for
the fair market value of Clarion's equity position (as defined) or cash for 100%
of the fair market value of Clarion's equity position. The per common share
value of shares issued for Clarion's equity position will be the greater of (i)
the price of the Company's common shares on the closing date (ii) the Company's
funds from operations per share (as defined) multiplied by 9.5 or (iii) $19.00.
The Company has the right not to accept any property (thereby reducing the fair
market value of Clarion's equity position) that does not meet certain
underwriting criteria (e.g. lease term and tenant credit). In addition, the
operating agreement contains a mutual buy-sell provision in which either partner
can force the sale of any property.
33
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
($000's except per share data)
Summarized balance sheet data as of December 31, 2003 and income statement data
for the period October 1, 2003 (date of inception) to December 31, 2003 is as
follows:
Real estate, net $ 70,648
Cash 1,006
Other assets 4,331
---------
$ 75,985
=========
Mortgages payable $ 36,206
Other liabilities 791
Equity 38,988
---------
$ 75,985
=========
Rental income $ 1,334
---------
Interest expense (268)
Operating expenses (321)
Depreciation and amortization expenses (313)
----------
(902)
---------
Net income $ 432
=========
As of December 31, 2003, LION owns the following properties:
Net
Rentable
Date of Acquisition Lease Square
Acquisition Tenant Location Cost Expires Feet
-------------- ---------------------------- --------------- ----------- ------- ----------
October Greenpoint Mortgage Novato, CA
Funding, Inc. $ 39,574 2011 124,600
October Linens `n Things, Inc. Logan
Township, NJ 12,586 2009 262,644
December Ikon Office Solutions, Inc. Malvern, PA 22,399 2013 106,855
------ -------
$ 74,559 494,099
====== =======
The Novato, California and Malvern, Pennsylvania properties were contributed by
the Company and the Logan Township, New Jersey property was contributed by
Clarion. In addition, Clarion paid the Company $23,849 for its net equity
position in the properties.
34
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
($000's except per share data)
Minimum future rental receipts under non-cancelable tenant operating leases,
assuming no new or negotiated leases, for the next five years and thereafter are
as follows:
Year ending
December 31,
------------
2004 $ 7,481
2005 7,646
2006 7,831
2007 8,052
2008 8,237
Thereafter 23,609
-----------
$ 62,856
===========
Scheduled principal amortization and balloon payments for the mortgages payable
for the next five years and thereafter are as follows:
Year ending Scheduled Balloon
December 31, Amortization Payments Total
---------------- ---------------- ------------ ------------
2004 $ 441 $ -- $ 441
2005 473 -- 473
2006 501 -- 501
2007 531 -- 531
2008 557 -- 557
Thereafter 2,160 31,543 33,703
------- --------- --------
$ 4,663 $ 31,543 $ 36,206
======= ========= ========
Lexington Florence LLC
- ----------------------
Lexington Florence LLC ("Florence") is a joint venture established in January
2002 with unaffiliated investors. Its sole purpose is to own a property in
Florence, South Carolina net leased to Washington Mutual Home Loans, Inc.
through June 2008. The property is encumbered by a non- recourse mortgage
bearing interest at 7.50% per annum which matures February 2009. The Company
sold a 77.3% interest in Florence to the unaffiliated investors for $4,581. The
investors have the right to put their interests in Florence to the Company for
OP Units in LCIF (valued at $4,581). The number of OP Units issued will have a
minimum price of $13.92 and a maximum price of $15.82. The put is effective
beginning in January 2004 and expires in June 2004.
LRA earns annual asset management fees of 3.5% of rents collected.
35
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
($000's except per share data)
Summarized financial information for the underlying property investment as of
December 31, 2003 and 2002 and for the year ended December 31, 2003 and for the
period January 25, 2002 (date of inception) to December 31, 2002 is as follows:
2003 2002
---- ----
Real estate, net $ 15,227 $ 15,544
Other assets 876 656
---------- ----------
$ 16,103 $ 16,200
========== ==========
Mortgage payable $ 9,395 $ 9,544
Other liabilities 164 163
Equity 6,544 6,493
---------- ----------
$ 16,103 $ 16,200
========== ==========
Rental income $ 1,699 $ 1,576
Interest expense (720) (676)
Depreciation (317) (304)
Other (56) (46)
---------- ----------
Net income $ 606 $ 550
========== ==========
Minimum future rental receipts under the non-cancelable operating lease,
assuming no new or renegotiated lease, for the next five years and thereafter is
as follows:
Year ending
December 31,
------------
2004 $ 1,750
2005 1,750
2006 1,750
2007 1,750
2008 875
-------
$ 7,875
Scheduled principal amortization and balloon payment for the mortgage payable
for the next five years and thereafter is as follows:
Year ending Scheduled Balloon
December 31, Amortization Payment Total
---------------- ---------------- ------------ ------------
2004 $ 158 $ -- $ 158
2005 173 -- 173
2006 186 -- 186
2007 201 -- 201
2008 216 -- 216
Thereafter 18 8,443 8,461
-------- -------- --------
$ 952 $ 8,443 $ 9,395
======== ======== ========
36
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
($000's except per share data)
(7) Mortgages and Notes Payable
The following table sets forth certain information regarding the Company's
mortgage and notes payable as of December 31, 2003 and 2002:
2004
Estimated
Annual
Debt
Property Level Debt - Fixed Interest Service Balloon
Rate 2003 2002 Rate Maturity (g) Payment
- ------------------------------- ------------ ----------- ----------- ----------- ---------- ----------
Gainesville, GA (first) $ 18 $ 219 13.000% 01-01-04 $ 18 $ --
Oxon Hill, MD 94 457 6.250% 03-01-04 95 --
Bethesda, MD -- 1,955 9.250% 05-01-06 -- --
Warren, OH 21,172 25,615 7.000% 10-01-07 6,160 --
Bristol, PA 9,729 9,833 7.400% 02-01-08 831 9,262
Boca Raton, FL (f) 15,275 -- 5.250% 03-01-08 802 15,275
Decatur, GA 6,695 6,830 6.720% 06-01-08 579 6,049
Phoenix, AZ 14,231 14,553 7.890% 06-05-08 1,434 12,591
Palm Beach Gardens, FL 11,341 11,509 7.010% 06-15-08 970 10,418
Dubuque, IA 7,351 -- 4.890% 08-01-08 513 6,588
Canton, OH 3,325 3,395 7.150% 08-11-08 313 2,936
Spartanburg, SC 2,762 2,819 7.150% 08-11-08 260 2,438
Hebron, KY 5,340 5,414 7.000% 10-23-08 451 4,935
Gainesville, GA (e) (second) 902 837 7.500% 01-01-09 200 --
Ocala, FL 13,059 13,429 7.250% 02-01-09 1,332 10,700
Canton, OH 1,578 1,823 9.490% 02-28-09 388 --
Baton Rouge, LA 1,898 1,969 7.375% 03-01-09 208 1,478
Bristol, PA 6,053 6,190 7.250% 04-01-09 571 5,228
Livonia, MI (2 properties) 11,026 11,133 7.800% 04-01-09 992 10,236
Henderson, NC 4,414 4,497 7.390% 05-01-09 417 3,854
Westland, MI 2,938 3,320 10.500% 09-01-09 683 --
Salt Lake City, UT 13,409 15,204 7.610% 10-01-09 2,901 --
Richmond, VA 16,472 16,633 8.100% 02-01-10 1,511 15,257
Hampton, VA 4,473 4,512 8.260% 04-01-10 415 4,144
Hampton, VA 7,294 7,357 8.270% 04-01-10 677 6,758
Tampa, FL (Queen Palm Dr.) 6,034 6,096 6.880% 08-01-10 485 5,495
Tampa, FL (North 30th) 8,342 8,427 6.930% 08-01-10 674 7,603
Herndon, VA 18,807 18,964 8.180% 12-05-10 1,723 17,301
San Diego, CA 4,252 4,347 7.500% 01-01-11 411 3,420
Tuscon, AZ 2,444 2,483 7.500% 01-01-11 226 2,076
Columbia, SC 3,419 3,472 7.540% 01-01-11 317 2,905
Valley Forge, PA 13,080 13,306 7.120% 02-10-11 1,166 10,927
Glendale, AZ 14,777 14,930 7.400% 04-01-11 1,258 13,365
Auburn Hills, MI 7,198 7,325 7.010% 06-01-11 637 5,918
Plymouth, MI 4,787 4,866 7.960% 07-01-11 463 3,949
Greenville, SC 13,886 -- 4.415% 01-01-12 841 11,806
New Kingston, PA 7,265 7,364 7.790% 01-01-12 678 6,101
Mechanicsburg, PA 5,363 5,437 7.780% 01-01-12 500 4,503
New Kingston, PA 3,462 3,509 7.780% 01-01-12 323 2,906
Lake Forest, CA 10,832 10,939 7.260% 02-01-12 901 9,708
Groveport, OH (c) 7,800 7,800 6.030% 10-01-12 535 6,860
Plymouth, MI 12,776 -- 6.220% 12-10-12 1,026 10,026
Dallas, TX 21,348 21,785 7.490% 12-31-12 2,020 16,030
Fort Mill, SC 11,523 11,657 6.000% 01-01-13 839 9,904
Lancaster, CA (first) 10,611 10,761 7.020% 09-01-13 900 8,637
Lancaster, CA (second) 8,903 -- 5.920% 09-01-13 642 7,518
Knoxville, TN (d) 5,295 5,330 5.950% 09-01-13 381 4,496
Eau Claire, WI 2,220 2,360 8.000% 07-01-14 313 --
Franklin, NC 1,965 2,053 8.500% 04-01-15 263 --
Southborough, MA 2,132 2,251 7.500% 09-01-15 275 --
37
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
($000's except per share data)
2004
Estimated
Annual
Property Level Debt - Fixed Interest Debt Balloon
Rate 2003 2002 Rate Maturity Service(g) Payment
- ------------------------------- ------------ ----------- ----------- ----------- ---------- ----------
Danville, IL 6,623 -- 9.000% 01-01-16 692 4,578
Temple, TX 9,200 -- 6.090% 01-01-16 668 7,446
Bremerton, WA 6,800 -- 6.090% 04-01-16 494 5,465
Dillon, SC 12,111 -- 7.900% 12-01-16 1,263 5,273
Westmont, IL 16,170 -- 6.210% 03-01-18 1,292 9,662
REMIC Financing (i) -- 63,054 -- -- -- --
Salt Lake City, UT (i) -- 5,145 -- -- -- --
------- ------ -------- ------- -------
440,274 413,164 7.073% 44,927 332,025
------- ------- -------- ------- -------
Property Level Debt - Variable
Rate
- -------------------------------
Milpitas, CA (a) (b) 15,666 17,100 4.140% 07-01-04 2,253 14,456
Marlborough, MA (i) -- 8,102 -- -- -- --
Hebron, OH (i) -- 9,651 -- -- -- --
------- ------ --------- ------ -------
15,666 34,853 4.140% 2,253 14,456
------ ------ -------- ------ -------
Corporate Level Debt
- --------------------
Credit Facility (h) 94,000 31,000 2.640% 08-01-06 2,516 94,000
Warren, OH (i) -- 12,500 -- -- -- --
------ ------ -------- ------ -------
94,000 43,500 2.640% 2,516 94,000
------ ------ -------- ------ -------
Total $ 549,940 $ 491,517 6.232% $ 49,696 $ 440,481
======= ======= ======== ====== ========
(a) Floating rate debt, 30 day LIBOR plus 297 basis points. The Company has the
ability to extend maturity date to July 1, 2005 (spread increases to 350 basis
points) and to July 1, 2006 (spread increases to 400 basis points).
(b) All property cash flows net of interest expense are used for principal
amortization.
(c) Interest only through April 2004, and $563 in annual debt service
thereafter.
(d) Interest only through May 2003, and $381 in annual debt service thereafter.
(e) Mortgage is accrual only through 01/31/04. Commencing 02/01/04 annual debt
service of $218 is due.
(f) Interest only through maturity.
(g) For mortgages with less than twelve months to maturity, amounts represent
remaining payments.
38
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
($000's except per share data)
(h) In 2003, the Company obtained a $100,000 unsecured revolving credit
facility, which expires August 2006, bears interest at 150-250 basis points over
LIBOR depending on the amount of properties the Company owns free and clear of
mortgage debt and has an interest rate period of one, three or six months, at
the option of the Company, which rate at December 31, 2003 was 2.64%. The credit
facility is provided by Fleet National Bank, as Administrative Agent and
Wachovia Bank, National Association, as Syndication Agent. The credit facility
contains various leverage, debt service coverage, net worth maintenance and
other customary covenants with which the Company is in compliance as of December
31, 2003. Approximately $1,836 was available to the Company at December 31,
2003. The Company has six outstanding letters of credit aggregating $4,164 which
mature between 2004 and 2010. The Company pays an unused facility fee equal to
25 basis points if 50% or less of the facility is utilized and 15 basis points
if greater than 50% of the facility is utilized. This facility replaced a
$60,000 facility which bore interest at the same spread to LIBOR.
(i) The Company satisfied these mortgages in 2003, along with a mortgage on a
previously non-consolidated property, which resulted in debt satisfaction
charges of $8,462.
Scheduled principal amortization and balloon payments for mortgages and notes
payable, including mortgages payable related to discontinued operations and the
credit facility for the next five years and thereafter are as follows:
Years ending Scheduled Balloon
December 31, Amortization Payments Total
------------ ------------ -------------- --------
2004 $ 15,429 $ 14,456 $ 29,885
2005 15,521 -- 15,521
2006 16,303 94,000 110,303
2007 17,238 -- 17,238
2008 11,469 70,492 81,961
Thereafter 34,944 261,533 296,477
---------- ----------- ------------
$ 110,904 $ 440,481 $ 551,385
========== =========== ============
(8) Origination Fees Payable
In connection with certain acquisitions the Company assumed obligations which
currently bear interest, on the outstanding principal balances only of 12.5%.
During 2003, the Company satisfied $5,641 of these obligations by issuing
231,763 OP Units. The difference between the carrying value of the obligations
and the fair value of the OP Units on the date of issuance resulted in a gain of
$896 that is netted in debt satisfaction charges on the Consolidated Statements
of Income. As of December 31, 2003, $414 in origination fees payable are owed to
two executive officers of the Company.
The scheduled payments of this obligation for the next five years and thereafter
is as follows:
Years ending
December 31,
------------
2004 $ 37
2005 37
2006 85
2007 110
2008 110
Thereafter 429
----------
$ 808
==========
39
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
($000's except per share data)
(9) Leases
Minimum future rental receipts under noncancellable tenant operating leases,
assuming no new or negotiated leases, for the next five years and thereafter are
as follows:
Year ending
December 31,
------------
2004 $ 128,545
2005 126,408
2006 114,579
2007 102,665
2008 87,595
Thereafter 456,700
-----------
$ 1,016,492
===========
The Company holds various leasehold interests in properties. The ground rent on
these properties are either directly paid by the tenants or reimbursed to the
Company as additional rent.
Minimum future rental payments under all noncancellable leasehold interests for
the next five years and thereafter are as follows:
Year ending
December 31,
------------
2004 $ 898
2005 898
2006 898
2007 898
2008 898
Thereafter 7,173
-----------
$ 11,663
===========
During 2003 the Company entered into a new lease for its corporate office. The
lease expires December 2015, with rent fixed at $497 per annum through December
2008 and will be adjusted to fair market value, as defined, thereafter. The
Company is also responsible for its proportionate share of operating expense and
real estate taxes. As an incentive to enter the lease the Company received a
payment of $845 which it is amortizing as a reduction of rent expense through
December 2008. Rent expense for 2003, 2002 and 2001 was $546, $243 and $237 ,
respectively.
(10) Minority Interests
In conjunction with several of the Company's acquisitions, property owners were
issued OP Units as a form of consideration in exchange for the property. All of
such interests are redeemable at certain times for common shares on a
one-for-one basis. As of December 31, 2003, there were 5,430,454 OP Units
outstanding of which 4,814,994 were currently redeemable for common shares. Of
the total OP Units outstanding, 1,744,212 are held by two executive officers of
the Company. As of December 31, 2003 these OP Units, subject to certain
adjustments through the date of conversion, had annual distributions per OP Unit
in varying amounts from $0 to $1.40 per unit with a weighted average
distribution of $1.24 per OP Unit.
40
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
($000's except per share data)
(11) Preferred and Common Shares
During 2003 and 2002, the Company issued 9,800,000 and 2,690,000 common shares
raising $174,023 and $40,508 in proceeds, respectively, which was used to retire
mortgage debt and fund acquisitions.
During 2003, the Company issued 3,160,000 Series B Cumulative Redeemable
Preferred Shares raising net proceeds of $76,315. These shares have a fixed
dividend of $2.0125 per share per annum, have a liquidation preference of
$79,000, have no voting rights, and are redeemable by the Company at $25.00 per
share ($79,000) commencing June 2008.
During 2003 and 2002, holders of an aggregate of 71,567 and 50,997 OP Units
redeemed such OP Units for common shares of the Company. These redemptions
resulted in an increase in shareholders' equity and corresponding decrease in
minority interest of $915 and $619, respectively.
During 2003, three officers repaid recourse notes to the Company including
accrued interest thereon, of $2,522 by delivering to the Company 158,724 common
shares.
During 2003 and 2002, the Company issued 336,992 and 64,249 common shares,
respectively, to certain employees and trustees resulting in $5,887 and $996 of
deferred compensation, respectively. These common shares generally vest ratably,
primarily over a 5 year period, however in certain situations the vesting is
cliff based after 5 years and in other cases vesting only occurs if certain
performance criteria are met.
During 2002, the Company issued 34,483 common shares in respect of a 15 year, 8%
interest only recourse note to an officer for $500. This note was satisfied in
2003.
During 2002, the holders of the Company's outstanding 2,000,000 Series A
preferred shares converted these shares into 2,000,000 common shares.
41
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
($000's except per share data)
(12) Benefit Plans
The Company maintains a common share option plan pursuant to which qualified and
non-qualified options may be issued. Options granted under the plan generally
vest over a period of one to four years and expire five years from date of
grant. No compensation cost is reflected in net income as all options granted
under the plan had an exercise price equal to the market value of the underlying
common shares on the date of grant.
Share option activity during the years indicated is as follows:
Weighted-Average
Number of Shares Exercise Price Per Share
Balance at December 31, 2000 1,978,023 $ 11.63
Granted 568,000 11.99
Exercised (603,142) 11.02
Forfeited (9,308) 12.17
Expired (5,000) 11.25
------------ ---------
Balance at December 31, 2001 1,928,573 11.93
Granted 411,500 15.50
Exercised (1,050,866) 11.59
Forfeited (53,650) 11.98
Expired (2,500) 14.25
------------- ---------
Balance at December 31, 2002 1,233,057 13.39
Granted 30,000 16.15
Exercised (687,527) 12.94
Forfeited (10,500) 15.97
Expired (43,500) 15.25
------------- ---------
Balance at December 31, 2003 521,530 $ 13.94
============ =========
The following is additional disclosures for common share options outstanding at
December 31, 2003:
Options Outstanding Exercisable Options
--------------------------------------- ------------------------
Weighted Weighted
Range of Average Remaining Average
Exercise Exercise Life Exercise
Prices Number Price (Years) Number Price
-------------- ------------- --------- --------- -------- -------
$9.00-$10.875 12,857 $ 9.55 0.8 12,857 $ 9.55
$11.8125-$12.5625 191,475 11.89 1.6 156,967 11.91
$13.1875-$15.50 317,198 15.36 3.0 176,677 15.22
------------ ------- ---- -------- ------
521,530 $ 13.94 2.4 346,501 $ 13.51
============ ======= ==== ======== ======
42
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
($000's except per share data)
There are 1,449,252 options available for grant at December 31, 2003.
The Company has a 401(k) retirement savings plan covering all eligible
employees. The Company will match 25% of the first 4% of employee contributions.
In addition, based on its profitability, the Company may make a discretionary
contribution at each fiscal year end to all eligible employees. The matching and
discretionary contributions are subject to vesting under a schedule providing
for 25% annual vesting starting with the first year of employment and 100%
vesting after four years of employment. Approximately $127, $124 and $112 were
contributed in 2003, 2002 and 2001, respectively.
The Company has established a trust for certain officers in which nonvested
common shares, which vest ratably over five years, granted for the benefit of
the officers are deposited. The officers exert no control over the common shares
in the trust and the common shares are available to the general creditors of the
Company. As of December 31, 2003 and 2002, there were 405,110 and 265,385 common
shares, respectively, in the trust. In addition, certain officers can delay, to
a specified date, the receipt of common shares that would be received upon
exercise of common share options. These common shares are deposited in the
trust. As of December 31, 2003 and 2002 there were 295,076 and 222,615 common
shares, respectively deposited in the trust.
(13) Commitments and Contingencies
The Company is involved in various legal actions arising in the ordinary course
of business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity.
The Company, including its non-consolidated entities, are obligated under
certain tenant leases to fund the expansion of the underlying leased properties.
The Company has entered into a binding letter of intent to purchase, upon
completion and rent commencement from the tenant, an office facility in
Meridian, Idaho for an estimated obligation of $14,722. The facility was
completed in 2004 and acquired by LAC II.
(14) Related Party Transactions
During 2003, the Company issued 231,763 OP Units to satisfy outstanding
obligations that resulted in a gain of $896. Of the OP Units issued, the
Chairman and the Vice Chairman of the Board of Trustees of the Company received
120,662 units.
During 2003, three executive officers repaid recourse notes to the Company
including accrued interest thereon, of $2,522 by delivering to the Company
158,724 common shares.
As of December 31, 2003 the Company is obligated for $808 resulting from the
acquisition of certain properties in 1996. Of the $808, the Chairman and the
Vice Chairman of the Board of Trustees are owed $414.
In 2002, the Company issued 34,483 common shares in respect of a 15-year, 8%
interest only recourse note to the Chief Financial Officer of the Company for
$500. This note was satisfied in 2003.
On November 28, 2001, the Company acquired Net 1 L.P. and Net 2 L.P.
(collectively, the "Net Partnerships"), in a merger transaction valued at
approximately $136,300, which owned twenty-three properties in fourteen states.
The Company issued 2,143,840 common shares (valued at $31,622), 44,858 OP Units
(valued at $661), $31,612 in cash and assumed approximately $61,389 of third
party mortgage debt (excluding $11,114 in Net Partnership obligations to the
Company). The Company's Chairman was the controlling shareholder of the general
partners of the Net Partnerships. The general partners received 44,858 OP Units
valued on the same basis as
43
the limited partners for their 1% ownership interest in the Net Partnerships.
The OP Units, which receive distributions equal to the dividends on common
shares, are convertible into the Company's common shares on a one-for-one basis
beginning November 2006.
During 2001, the Company issued 24,620 common shares to acquire a company
controlled by the Chairman of the Company, whose sole asset was a mortgage note
receivable from a 64% owned partnership of the Company.
During 2001, the Company renegotiated $1,973 in notes receivable from the
current Chief Executive Officer and the Vice-Chairman of the Board of Trustees
of the Company. The notes were issued in connection with the officers' purchases
of 131,000 common shares at $15.25 per common share. The new notes had a 15-year
maturity, were 8% interest only, recourse to the officers and provide for
forgiveness of the principal balances if certain operating results are achieved.
These notes were satisfied in 2003.
All related party acquisitions, sales and loans were approved by the independent
members of the Board of Trustees.
In addition, the Company earns fees from it's joint venture investments (See
note 6).
(15) Fair Market Value of Financial Instruments
Cash Equivalents, Restricted Cash, Accounts Receivable and Accounts Payable
- ----------------------------------------------------------------------------
The Company estimates that the fair value approximates carrying value due to the
relatively short maturity of the instruments.
Mortgages and Notes Payable
- ---------------------------
The Company determines the fair value of these instruments based on a discounted
cash flow analysis using a discount rate that approximates the current borrowing
rates for instruments of similar maturities. Based on this, the Company has
determined that the fair value of these instruments approximates carrying
values.
(16) Concentration of Risk
The Company seeks to reduce its operating and leasing risks through
diversification achieved by the geographic distribution of its properties,
avoiding dependency on a single property and the creditworthiness of its
tenants.
For the years ended December 31, 2003 and 2002, no tenant represented 10% or
more of rental revenue. For the year ended December 31, 2001 the following
tenants represented 10% or greater of rental revenue:
Northwest Pipeline Corporation 11%
Kmart Corporation 11%
Both of these tenants are publicly registered companies subject to the
Securities Exchange Act of 1934, as amended and accordingly file financial
information with the Securities and Exchange Commission.
44
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
($000's except per share data)
(17) Supplemental Disclosure of Statement of Cash Flow Information
During 2003, the Company issued 231,763 OP Units to satisfy $5,641 in
outstanding obligations which resulted in a gain of $896.
During 2003, 2002 and 2001, the Company paid $36,467, $32,255 and $30,624,
respectively, for interest and $282, $262 and $204, respectively, for taxes.
During 2003, three executive officers repaid recourse notes to the Company
including accrued interest thereon, of $2,522 by delivering to the Company
158,724 common shares.
During 2003, 2002 and 2001, holders of an aggregate of 71,567, 50,997, and
418,411 OP Units, respectively, redeemed such units for common shares of the
Company. These redemptions resulted in increases in shareholders' equity and
corresponding decreases in minority interests of $915, $619 and $5,713,
respectively.
During 2003, 2002 and 2001, the Company issued 336,992, 64,249 and 100,000
common shares to certain employees and trustees resulting in $5,887, $996 and
$1,181 of deferred compensation.
During 2002, the holder of the Company's 2,000,000 Series A preferred shares
converted them into 2,000,000 common shares.
In 2003, 2002 and 2001, the Company contributed properties (along with
non-recourse mortgage notes) to joint venture entities for capital contributions
of $11,649, $643 and $1,168, respectively.
During 2001, the Company purchased the Net Partnerships by issuing, in addition
to $31,612 in cash, 2,143,840 common shares (valued at $31,622), 44,858 OP Units
(valued at $661), assumed $61,389 in third party debt and $11,114 in Net
Partnership debt obligations to the Company.
During 2003, LRA became a consolidated subsidiary of the Company. The assets and
liabilities of LRA as of January 1, 2003 were as follows:
Real estate, net $ 41,613
Cash 1,579
Other assets 1,221
Mortgage payable 30,028
Other liabilities 1,468
45
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
($000's except per share data)
(18) Unaudited Quarterly Financial Data
2003
-----------------------------------------------------------------------
3/31/03 6/30/03 9/30/03 12/31/03
----------- ----------- ----------- ------------
Gross revenues (1) $ 27,064 $ 27,317 $ 28,677 $ 30,463
Net income $ 8,763 $ 2,483 $ 9,962 $ 12,441
Net income allocable to common $ 8,763 $ 2,271 $ 8,372 $ 10,851
shareholders
Net income allocable to common
shareholders -per share:
Basic $ 0.29 $ 0.07 $ 0.24 $ 0.28
Diluted $ 0.29 $ 0.06 $ 0.24 $ 0.28
2002
--------------------------------------------------------------------
3/31/02 6/30/02 9/30/02 12/31/02
----------- ----------- ----------- ------------
Gross revenues (1) $ 22,391 $ 22,497 $ 22,977 $ 24,282
Net income $ 7,961 $ 7,879 $ 7,646 $ 7,109
Net income allocable to common $ 7,268 $ 7,879 $ 7,646 $ 7,109
shareholders
Net income allocable to common
shareholders -per share:
Basic $ 0.30 $ 0.30 $ 0.28 $ 0.24
Diluted $ 0.29 $ 0.29 $ 0.28 $ 0.24
(1) All periods have been adjusted to reflect the impact of properties sold
during nine months ended September 30, 2004 and the years ended December 31,
2003 and 2002, and properties classified as held for sale as of September 30,
2004, which are reflected in discontinued operations in the Consolidated
Statements of Income.
The sum of the quarterly income per common share amounts may not equal the full
year amounts primarily because the computations of the weighted average number
of common shares outstanding for each quarter and the full year are made
independently.
(19) Subsequent Events
Subsequent to December 31, 2003, the following events occurred:
The Company:
o Purchased 17 properties, for a capitalized cost of $373,322, with tenant
leases which expire at various dates between 2012 to 2021.
o Obtained $358,577 in non-recourse fixed rate mortgages, including assumed
mortgages relating to certain acquisitions. The mortgages have fixed interest
rates ranging from 4.55% to 6.25% and mature at various dates between 2009 to
2021.
o Recorded impairment charges of $2,775 relating to properties sold and held for
sale.
o Sold seven properties to third parties for an aggregate net sale price of
$32,451, which resulted in a gain of $4,065.
o Sold seven properties, at cost to non-consolidated entities for $176,567,
which were subject to $97,641 in non-recourse mortgages.
o Invested $19,800 in a convertible mortgage note which currently bears interest
at 8.20% per annum.
46
o Was informed that the tenant in its Dallas, Texas property, VarTec Telecom,
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 capitalized real estate, deferred rent receivable and deferred
expenses of $28,910, $1,570 and $1,456, respectively. The property is encumbered
by a $21,025 non-recourse mortgage 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. The Company has issued a $2,500 letter of credit to
the lender as additional collateral. On November 24, 2004, the tenant filed a
motion to reject the lease and the Company will write off deferred rent
receivable and unamortized lease costs of approximately $2,800 in the fourth
quarter of 2004.
o Sold 6,900,000 Common Shares raising net proceeds of $144,206.
o Made cash and property contributions to non-consolidated entities of $62,774.
o Paid common and preferred dividends of $65,085 and $6,360, respectively.
o Repaid $94,000 on its line of credit.
o As of November 29, 2004 the Company has entered into letters of intent to
purchase 10 properties in which the due diligence period has expired thereby
obligating the Company to purchase the properties upon the completion of certain
seller obligations. The aggregate obligation for the properties is $47,520 plus
the assumption of $57,141 in non-recourse mortgages.
Non-consolidated entities:
o Purchased 13 properties for a capitalized cost of $350,835, with tenant leases
which expire at various dates between 2010 to 2024.
o Obtained $221,743 in non-recourse fixed rate mortgages, including assumed
mortgages relating to certain acquisitions. The mortgages have fixed interest
rates ranging from 4.75% to 7.94% and mature at various dates between 2009 to
2019.
o Expanded the LION venture by obtaining additional capital commitments of
$25,714 and $60,000 from the Company and its partner, respectively.
o Formed a new venture to acquire single tenant net lease real estate in which
the Company and its partner have committed to fund $15,000 and $35,000,
respectively.
47
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Real Estate and Accumulated Depreciation and Amortization Schedule III ($000)
Initial cost to Company and Gross Amount at which carried at End of Year (A)
- ----------------------------------------------------------------------------------------------------------------------------------
Accu-
mulated Useful life
Depre- computing
Land ciation depreciation in
and Buildings and Date latest income
Land and Amorti- Date Con- statements
Description Location Encumbrances Estates Improvements Total zation Acquired structed (years)
- ------------------------------------------------------------------------------------------------------------------------------------
Office Southington, CT $ - $ 3,240 $ 20,440 $ 23,680 $ 9,809 Oct. 1986 1983 40 & 12
Research & Development Glendale, AZ 14,777 4,996 24,392 29,388 12,473 Nov. 1986 1985 40 & 12
Retail/Health Club Countryside, IL - 628 3,722 4,350 1,880 Jul. 1987 1987 40 & 12
Retail/Health Club Voorhees NJ - 577 4,820 5,397 2,342 Jul. 1987 1987 40 & 12
Retail/Health Club DeWitt, NY - 445 3,043 3,488 1,479 Aug. 1987 1977 & 1987 40 & 12
Warehouse &
Distribution Mansfield, OH - 120 5,965 6,085 2,289 Jul. 1987 1970 40, 20 & 12
Industrial Marshall, MI - 33 3,378 3,411 1,601 Aug. 1987 1968 & 1972 40, 20 & 12
Industrial Marshall, MI - 14 926 940 440 Aug. 1987 1979 40, 20 & 12
Retail Newport, OR - 1,400 7,270 8,670 3,489 Sept. 1987 1986 40, 20 & 12
Office & Warehouse Memphis, TN - 1,053 11,174 12,227 5,912 Feb. 1988 1987 40
Warehouse &
Distribution Mechanicsburg, PA - 1,439 13,987 15,426 4,309 Oct. 1990 1985 & 1991 40
Office & Warehouse Tampa, FL 6,034 1,389 7,763 9,152 3,348 Nov. 1987 1986 40 & 20
Retail Klamath Falls, OR - 727 9,160 9,887 3,616 Mar. 1988 1986 40
Office Tampa, FL 8,342 1,900 9,854 11,754 3,767 Jul. 1988 1986 40
Warehouse &
Industrial Jacksonville, FL - 240 3,637 3,877 1,237 Jul. 1988 1958 & 1969 40 & 20
Retail Sacramento, CA - 885 2,705 3,590 1,309 Oct. 1988 1988 40, 20 & 12
Office Phoenix, AZ - 2,804 13,921 16,725 7,035 Nov. 1988 1960 & 1979 40 & 3
Retail Reno, NV - 1,200 1,904 3,104 897 Dec. 1988 1988 40, 20 & 12
Retail Rockville, MD - - 1,784 1,784 744 Aug. 1995 1977 22.375, 16.583
& 15.583
Retail Oxon Hill, MD 94 403 2,765 3,168 1,098 Aug. 1995 1976 21.292
Retail Laguna Hills, CA - 255 5,035 5,290 2,021 Aug. 1995 1974 20 & 20.5
Retail Riverdale, GA - 333 2,233 2,566 446 Dec. 1995 1985 40
Retail/Health Club Canton, OH 1,578 602 3,820 4,422 764 Dec. 1995 1987 40
Office Salt Lake City, UT 13,409 - 55,404 55,404 16,284 May 1996 1982 25.958
Manufacturing Franklin, NC 1,965 386 3,062 3,448 536 Dec. 1996 1996 40
Industrial Oberlin, OH - 276 4,515 4,791 790 Dec. 1996 1996 40
Retail Tulsa, OK - 447 2,432 2,879 947 Dec. 1996 1981 23.583 & 13.583
Retail Clackamas, OR - 523 2,847 3,370 1,109 Dec. 1996 1981 23.583 & 13.583
Retail Lynwood, WA - 488 2,658 3,146 1,035 Dec. 1996 1981 23.583 & 13.583
Retail Honolulu, HI - - 11,147 11,147 3,218 Dec. 1996 1980 24.33
Warehouse New Kingston, PA
(Silver Springs) 3,462 674 5,360 6,034 910 Mar. 1997 1981 40
Warehouse New Kingston, PA
(Cumberland) 7,265 1,380 10,963 12,343 1,861 Mar. 1997 1989 40
Warehouse Mechanicsburg, PA
(Hampden IV) 5,363 1,012 8,039 9,051 1,365 Mar. 1997 1985 40
Office/ Research &
Development Marlborough, MA - 2,013 13,834 15,847 2,233 Jul. 1997 1960 & 1988 40
Office Dallas, TX 21,348 3,582 30,598 34,180 4,692 Sept. 1997 1986 40
Warehouse Waterloo, IA - 1,025 8,296 9,321 1,288 Oct. 1997 1996 & 1997 40
Office/ Research &
Development Milpitas, CA 15,666 3,542 18,603 22,145 2,790 Dec. 1997 1985 40
Industrial Gordonsville, TN - 52 3,325 3,377 574 Dec. 1997 1983 & 1985 34.75
Office Decatur, GA 6,695 975 13,677 14,652 2,052 Dec. 1997 1983 40
Office Richmond, VA 16,472 - 27,282 27,282 5,076 Dec. 1997 1990 32.25
Office/Warehouse Bristol, PA 9,729 2,508 10,031 12,539 1,442 Mar. 1998 1982 40
Office Hebron, KY 5,340 1,615 6,462 8,077 929 Mar. 1998 1987 40
Office Livonia, MI 5,430 1,554 6,859 8,413 895 Mar. 1998 1987 & 1988 40
Office Valley Forge, PA 13,080 3,960 15,880 19,840 546 Aug. 2002 1985 & 2001 40
Research &
Development Livonia, MI 5,596 1,733 6,936 8,669 997 Mar. 1998 1987 & 1988 40
Office Palm Beach Gardens, FL 11,341 3,578 14,249 17,827 2,004 May 1998 1996 40
Warehouse/
Distribution Lancaster, CA 19,514 2,028 28,183 30,211 2,296 Jun. 1998 1998 40
Industrial Auburn Hills, MI 7,198 2,788 11,151 13,939 1,515 Jul. 1998 1989 & 1998 40
48
- ------------------------------------------------------------------------------------------------------------------------------------
Accu-
mulated Useful life
Depre- computing
Land ciation depreciation in
and Buildings and Date latest income
Land and Amorti- Date Con- statements
Description Location Encumbrances Estates Improvements Total zation Acquired structed (years)
- ------------------------------------------------------------------------------------------------------------------------------------
Warehouse/
Distribution Warren, OH 21,172 10,231 51,110 61,341 11,445 Aug. 1998 1982 10 &40
Warehouse/
Distribution Baton Rouge, LA 1,898 685 2,742 3,427 356 Oct. 1998 1998 40
Retail Columbia, MD - 1,002 4,872 5,874 567 Dec. 1998 1983 40
Office Bristol, PA 6,053 1,073 7,709 8,782 779 Dec. 1999 1998 40
Office Southborough, MA 2,132 456 4,291 4,747 434 Dec. 1999 1984 40
Office Herndon, VA 18,807 5,127 20,553 25,680 2,061 Dec. 1999 1987 40
Office Hampton, VA 4,473 1,353 5,441 6,794 516 Mar. 2000 2000 40
Office Phoenix, AZ 14,231 4,666 18,664 23,330 1,691 May 2000 1997 40
Industrial Hebron, OH - 1,063 4,271 5,334 218 Dec. 2001 2000 40
Industrial Hebron, OH - 1,681 6,754 8,435 345 Dec. 2001 1999 40
Retail Phoenix, AZ - 1,126 4,501 5,627 239 Nov. 2001 1988 40
Retail Stockton, CA - 259 1,037 1,296 55 Nov. 2001 1968 40
Retail Lynchburg, VA - 159 638 797 34 Nov. 2001 1986 40
Office San Diego, CA 4,252 1,740 6,960 8,700 370 Nov. 2001 1989 40
Office Phoenix, AZ - 2,287 9,149 11,436 486 Nov. 2001 1985 & 1994 40
Industrial Henderson, NC 4,414 1,488 5,954 7,442 316 Nov. 2001 1998 40
Industrial Columbus, OH - 319 1,275 1,594 68 Nov. 2001 1990 40
Office Tuscon, AZ 2,444 657 2,627 3,284 140 Nov. 2001 1988 40
Retail Eau Claire, WI 2,220 860 3,442 4,302 183 Nov. 2001 1994 40
Office Milford, CT - 567 2,265 2,832 120 Nov. 2001 1994 40
Retail Westland, MI 2,938 1,444 5,777 7,221 307 Nov. 2001 1987 & 1997 40
Retail Canton, OH 3,325 883 3,534 4,417 188 Nov. 2001 1995 40
Retail Spartanburg, SC 2,762 833 3,334 4,167 177 Nov. 2001 1996 40
Office Wilsonville, OR - 2,666 10,662 13,328 566 Nov. 2001 1980 & 1998 40
Industrial Ocala, FL 13,059 3,803 15,210 19,013 808 Nov. 2001 1976 40
Industrial Columbia, SC 3,419 928 3,710 4,638 197 Nov. 2001 1968 & 1998 40
Office Hampton, VA 7,294 2,333 9,351 11,684 496 Nov. 2001 1999 40
Industrial Plymouth, MI 4,787 1,533 6,130 7,663 326 Nov. 2001 1996 40
Retail Gainesville, GA 920 526 2,105 2,631 112 Nov. 2001 1984 40
Office Lake Forest, CA 10,832 3,442 13,769 17,211 617 Mar. 2002 2001 40
Office Knoxville, TN 5,295 1,624 6,496 8,120 223 Aug. 2002 2002 40
Industrial Groveport, OH 7,800 2,386 9,546 11,932 308 Sep. 2002 2002 40
Office Westmont, IL 16,170 4,978 19,894 24,872 519 Dec. 2002 1989 40
Office Fort Mill, SC 11,523 3,601 14,404 18,005 375 Dec. 2002 2002 40
Industrial Chester, SC - 535 14,875 15,410 3,095 Jan. 2001 2001 40
Industrial Dubuque, IA 7,351 2,052 8,207 10,259 94 Jul. 2003 2002 40
Office Boca Raton, FL 15,275 4,290 17,161 21,451 375 Feb. 2003 1983 & 2002 40
Office Greenville, SC 13,886 4,059 16,236 20,295 186 Jul. 2003 2000 & 2001 40
Office Temple, TX 9,200 2,890 11,561 14,451 60 Oct. 2003 2001 40
Office Bremerton, WA 6,800 2,144 8,577 10,721 45 Oct. 2003 2001 40
Industrial Dillon, SC 12,111 3,223 12,900 16,123 658 Dec. 2001 2001 40
Industrial Plymouth, MI 12,776 3,932 15,728 19,660 115 Sep. 2003 1996 & 1998 40
Industrial Danville, IL 6,623 1,796 7,182 8,978 548 Dec. 2000 2000 40
Industrial Minneapolis, MN - 922 3,688 4,610 42 Jul. 2003 2003 40
Office Wallingford, CT - 1,049 4,198 5,247 4 Dec. 2003 1978 & 1985 40
Office Baton Rouge, LA - 2,023 8,094 10,117 8 Dec. 2003 1997 40
Office Overland Park, KS - 10,008 40,031 50,039 42 Dec. 2003 1980 & 2003 40
Office Kansas City, MO - 4,758 19,031 23,789 20 Dec. 2003 1963 & 2003 40
Office Arlington, TX - 5,795 23,181 28,976 - Dec. 2003 2003 40
-------------------------------------------------------
Total $455,940 $178,077 $984,318 $1,162,395 $160,623
======================================================
49
LEXINGTON CORPORATE PROPERTIES TRUST
AND CONSOLIDATED SUBSIDIARIES
Real Estate and Accumulated Depreciation and Amortization
Schedule III ($000) - (continued)
(A) The initial cost includes the purchase price paid by the Company and
acquisition fees and expenses. The total cost basis of the Company's
properties at December 31, 2003 for Federal income tax purposes was
approximately $895 million.
Reconciliation of real estate owned:
2003 2002 2001
----------------------------------------------
Balance at the beginning of year $ 913,370 $ 830,788 $ 682,627
Additions during year 312,209 116,264 166,668
Properties sold during year (9,978) (18,621) (4,107)
Property contributed to joint venture during year (58,837) (15,061) (14,400)
Properties consolidated effective 1/1/2003 43,499 - -
Reclassify held for sale properties (37,868) - -
-----------------------------------------------
Balance at end of year $ 1,162,395 $ 913,370 $ 830,788
===============================================
Balance of beginning of year $ 134,220 $ 116,741 $ 98,429
Depreciation and amortization expense 27,335 21,480 18,312
Accumulated depreciation and amortization of properties sold during year (1,428) (2,934) -
Accumulated depreciation of property contributed to joint venture - (1,067) -
Accumulated depreciation of properties consolidated effective 1/1/2003 1,886 - -
Accumulated depreciation reclassify as held for sale (1,390) - -
-----------------------------------------------
Balance at end of year $ 160,623 $ 134,220 $ 116,741
===============================================
50
Item 15(a) 3 Exhibits
Exhibit 12
Lexington Corporate Properties Trust
Ratio of earnings to combined fixed charges and preferred dividends
For the year ended December 31,
($000's)
Earnings 2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Income from continuing operations $ 28,147 $ 25,844 $ 15,995 $ 19,945 $ 19,348
Interest expense 41,840 33,308 32,312 28,579 28,033
Amortization expense - debt cost 1,493 1,163 1,356 1,037 941
Equity in earnings from joint
ventures (5,735) (4,561) (3,502) (1,428) (61)
Cash received from joint ventures 7,823 5,660 4,110 810 --
---------- --------- --------- --------- --------
Total $ 73,568 $ 61,414 $ 50,271 $ 48,943 $ 48,261
========== ========= ========= ========= =========
Fixed Charges
Interest expense $ 41,840 $ 33,308 $ 32,312 $ 28,579 $ 28,033
Capitalized interest expense 142 24 168 241 --
Preferred stock dividend 3,392 693 2,709 2,562 2,520
Amortization expense - debt cost 1,493 1,163 1,356 1,037 941
---------- --------- --------- --------- ---------
Total $ 46,867 $ 35,188 $ 36,545 $ 32,419 $ 31,494
========== ========== ========== ========== =========
Ratio 1.57 1.75 1.38 1.51 1.53
========== ========== ========== ========== =========
51