UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-50268
The Newkirk Master Limited Partnership
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 11-3636084
- --------------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7 Bulfinch Place, Suite 500, Boston, MA 02114-9507
- --------------------------------------- --------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (617) 570-4600
-----------------------------
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date. 64,375,000 Limited Partnership
Units Outstanding as of November 11, 2005.
Table of Contents
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheet at September 30, 2005 and
Condensed Consolidated Balance Sheet at December 31, 2004................................... 3
Unaudited Condensed Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 2005 and September 30, 2004................................. 4
Unaudited Condensed Consolidated Statement of Partners' Equity for the
Nine Months Ended September 30, 2005........................................................ 5
Unaudited Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2005 and September 30, 2004................................. 6
Notes to Unaudited Condensed Consolidated Financial Statements.............................. 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Operations............................................................................ 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................. 36
Item 4. Controls and Procedures.................................................................... 36
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................... 37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds................................ 37
Item 3. Defaults upon Senior Securities............................................................ 37
Item 4. Submission of Matters to a Vote of Security Holders........................................ 37
Item 5. Other Information.......................................................................... 38
Item 6. Exhibits................................................................................... 39
Signatures......................................................................................... 40
Exhibit Index...................................................................................... 41
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
THE NEWKIRK MASTER LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except unit data)
September 30, December 31,
2005 2004
---------------- ----------------
(Unaudited)
ASSETS
Real estate investments:
Land $ 32,741 $ 32,172
Land estates 43,997 43,997
Buildings and improvements 1,465,328 1,502,013
---------------- ----------------
Total real estate investments 1,542,066 1,578,182
Less accumulated depreciation and amortization (573,288) (545,385)
---------------- ----------------
Real estate investments, net 968,778 1,032,797
Real estate held for sale, net of accumulated depreciation of $3,857
and $9,713 12,679 27,536
Cash and cash equivalents 21,055 21,317
Restricted cash 22,967 8,216
Receivables (including $16,058 and $10,119 from related parties) 56,378 68,661
Deferred rental income receivable 22,691 27,052
Equity investments in limited partnerships 13,057 11,107
Deferred financing costs, net of accumulated amortization of $12,062 and $34,991 11,164 15,072
Other assets (including $10,390 and $10,111 from related parties) 25,353 25,127
Other assets of discontinued operations 361 244
---------------- ----------------
Total Assets $ 1,154,483 $ 1,237,129
================ ================
LIABILITIES, MINORITY INTERESTS AND PARTNERS' EQUITY
Liabilities:
Mortgage notes (including $15,536 and $14,871 to a related party) $ 210,023 $ 478,939
Note payable 471,222 165,328
Contract right mortgage notes (including $172,767 and $178,529
to related parties) 183,638 263,072
Accrued interest payable (including $61,260 and $71,279 to related parties) 66,353 102,141
Accounts payable and accrued expenses 4,421 3,758
Liabilities of discontinued operations 11,164 17,497
---------------- ----------------
Total Liabilities 946,821 1,030,735
Contingencies
Minority interests 2,571 2,609
Partners' equity (47,500,000 and 47,864,193 limited partnership units
outstanding at September 30, 2005 and December 31, 2004, respectively) 205,091 203,785
---------------- ----------------
Total Liabilities, Minority Interests and Partners' Equity $ 1,154,483 $ 1,237,129
================ ================
See notes to condensed consolidated financial statements.
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THE NEWKIRK MASTER LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(In thousands, except unit and per unit data)
(Unaudited)
For the Three For the Three For the Nine For the Nine
Months Ended Months Ended Months Ended Months Ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
------------- ------------- ------------- -------------
Revenue:
Rental income $ 60,397 $ 61,250 $ 181,728 $ 185,541
Interest income 855 730 2,407 2,245
Management fees 68 79 227 255
------------ ------------ ------------ ------------
Total revenue 61,320 62,059 184,362 188,041
------------ ------------ ------------ ------------
Expenses:
Interest 17,419 22,345 56,943 67,240
Net loss on early extinguishment of debt 29,168 48 29,168 47
Depreciation 14,803 8,984 32,674 26,917
General and administrative 1,121 939 2,979 2,798
Operating 255 104 478 122
Impairment loss -- -- 28,282 9,600
Amortization 722 692 2,085 2,101
Ground rent 880 767 2,415 2,302
State and local taxes 397 246 1,488 1,156
------------ ------------ ------------ ------------
Total expenses 64,765 34,125 156,512 112,283
------------ ------------ ------------ ------------
(Loss) income from continuing operations before equity
in income from investments in limited partnerships
and minority interest (3,445) 27,934 27,850 75,758
Equity in income from investments in limited
partnerships 796 710 2,317 1,964
Minority interest (4,704) (4,608) (14,016) (13,750)
------------ ------------ ------------ ------------
(Loss) income from continuing operations (7,353) 24,036 16,151 63,972
------------ ------------ ------------ ------------
Discontinued operations:
(Loss) income from discontinued operations (411) (5,662) 2,219 2,188
Impairment loss (550) (3,400) (1,433) (3,465)
Gain from disposal of real estate from discontinued
operations 15,474 38,912 16,082 48,390
------------ ------------ ------------ ------------
Income from discontinued operations 14,513 29,850 16,868 47,113
------------ ------------ ------------ ------------
Net income $ 7,160 $ 53,886 $ 33,019 $ 111,085
============ ============ ============ ============
Other comprehensive income:
Net income $ 7,160 $ 53,886 $ 33,019 $ 111,085
Other comprehensive loss (1,461) -- (1,461) --
------------ ------------ ------------ ------------
Comprehensive income $ 5,699 $ 53,886 $ 31,558 $ 111,085
============ ============ ============ ============
(Loss) income from continuing operations per limited
partnership unit $ (0.16) $ 0.50 $ 0.34 $ 1.34
Income from discontinued operations per limited
partnership unit 0.31 0.62 0.35 0.98
------------ ------------ ------------ ------------
Net income per limited partnership unit $ 0.15 $ 1.12 $ 0.69 $ 2.32
============ ============ ============ ============
Distributions per limited partnership unit $ 0.27 $ 0.24 $ 0.79 $ 0.71
============ ============ ============ ============
Weighted average limited partnership units 47,500,000 47,891,466 47,578,674 47,896,538
============ ============ ============ ============
See notes to condensed consolidated financial statements.
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THE NEWKIRK MASTER LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
(In thousands, except unit data)
(Unaudited)
Limited
Partnership Partners'
Units Equity
----------- -----------
Balance at December 31, 2004 47,864,193 $ 203,785
Distributions -- (37,692)
Minority interest charge -- 9,482
Limited partner buyouts (364,193) (2,042)
Net income -- 33,019
Other comprehensive loss -- (1,461)
----------- -----------
Balance at September 30, 2005 47,500,000 $ 205,091
=========== ===========
See notes to condensed consolidated financial statements.
5 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(In thousands)
(Unaudited)
For the Nine Months Ended
September 30,
-------------------------
2005 2004
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 33,019 $ 111,085
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of deferred costs and land estates 5,199 7,883
Depreciation expense 32,911 27,879
Gain from disposal of real estate (16,082) (48,390)
Net loss from early extinguishment of debt 30,698 6,588
Minority interest expense 14,016 13,848
Impairment loss 29,715 13,065
Straight-lining of rental income 4,218 3,595
Interest earned on restricted cash (80) (42)
Equity in undistributed earnings of limited partnerships (1,941) (1,575)
Changes in operating assets and liabilities:
Decrease in receivables 12,323 14,371
(Increase) decrease in other assets (443) 1,159
Decrease in accounts payable and accrued expenses (689) (4,838)
Decrease in accrued interest-mortgages and contract rights (36,474) (10,080)
---------- ----------
Net cash provided by operating activities 106,390 134,548
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Building improvements and land additions (194) (2,561)
Net proceeds from disposal of real estate 31,341 95,463
Change in restricted cash (14,671) (2,000)
Investments in limited partnership interest (80) (1,101)
---------- ----------
Net cash provided by investing activities 16,396 89,801
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments to satisfy mortgage notes (187,471) (11,746)
Payments to satisfy contract right mortgage notes (78,376) (35,455)
Payments to satisfy note payable (162,911) --
Proceeds from new debt 477,759 --
Principal payments of mortgage notes (81,212) (93,451)
Principal payments of note payable (8,954) (41,658)
Principal payments of contract right mortgage notes (6,766) (4,813)
Mortgage prepayment penalties (23,548) (326)
Distributions to partners (37,692) (34,106)
Limited partner buyouts (2,042) (656)
Distributions to minority interests (4,876) (7,936)
Financing costs (payments) refunds (6,959) 171
---------- ----------
Net cash used in financing activities (123,048) (229,976)
---------- ----------
Net decrease in cash and cash equivalents (262) (5,627)
Cash and Cash Equivalents at Beginning of Period 21,317 32,703
---------- ----------
Cash and Cash Equivalents at End of Period $ 21,055 $ 27,076
========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid for state and local taxes $ 1,695 $ 1,277
========== ==========
Cash paid for interest $ 91,600 $ 84,827
========== ==========
See notes to condensed consolidated financial statements.
6 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(Unaudited)
Supplemental Information
In January 2004, in connection with the sale of a property, the purchaser of the
property assumed $28,460,000 of associated Partnership debt.
In April 2004, the Partnership issued 117,787 units in the Partnership to
holders of minority interests in two partially owned consolidated partnerships.
7 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-Q SEPTEMBER 30, 2005
Note 1 - GENERAL
The Newkirk Master Limited Partnership (the "Partnership"), commenced
operations on January 1, 2002 following the completion of a transaction
(the "Exchange") involving the merger into wholly-owned subsidiaries of
the Partnership of 90 limited partnerships (the "Newkirk Partnerships"),
each of which owned commercial properties and the acquisition by the
Partnership of various assets, including those related to the management
or capital structure of the Newkirk Partnerships.
The condensed consolidated financial statements of the Partnership
included herein have been prepared by the Partnership, without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations, although the Partnership
believes that the disclosures contained herein are adequate to make the
information presented not misleading. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Partnership's
Annual Report on Form 10-K and Form 10-K/A for the year ended December 31,
2004.
The condensed consolidated financial statements reflect, in the opinion of
the Partnership, all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the consolidated financial
position and results of operations for the respective periods in
conformity with accounting principles generally accepted in the United
States of America consistently applied.
The results of operations for the nine months ended September 30, 2005 and
2004 are not necessarily indicative of the results to be expected for the
full year.
Certain reclassifications of prior period amounts were made to conform to
the 2005 presentation. These reclassifications had no effect on net income
previously reported.
On November 7, 2005, the Partnership effected a 7.5801 to 1 unit split of
the outstanding units to facilitate the UPREIT structure discussed in Note
8. Partners' equity activity for all periods presented has been restated
to give retroactive recognition to the unit split. In addition, all
references in the financial statements and notes to the financial
statements, to weighted average limited partnership units and per limited
partner unit amounts have been restated to give retroactive recognition to
the unit split.
8 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-Q SEPTEMBER 30, 2005
Note 2 - REFINANCING
On August 11, 2005, the Partnership obtained a $477,759,000 loan from
KeyBank National Association and Bank of America, N.A. (the "Lenders")
which bears interest at the election of the Partnership at a rate equal to
either (i) the LIBOR Rate (as defined) plus 200 basis points (reducing to
175 basis points after consummation of the Newkirk Realty Trust Inc.
("Newkirk REIT") initial public offering. (See Notes 6 and 8) or (ii) the
prime rate then charged by KeyBank National Association plus 50 basis
points. The loan was obtained to (i) replace the existing loan from Bank
of America, N.A. which had an outstanding balance including accrued
interest of $163,379,000 and bore interest at the LIBOR Rate plus 450
basis points or prime plus 250 basis points,(ii) satisfy $186,566,000 of
first mortgage debt encumbering the Partnership's real properties, which
constituted substantially all of the Partnership's first mortgage debt and
(iii) satisfy $86,801,000 of second mortgage debt encumbering the
Partnership's real properties. The Partnership incurred $6,945,000 of
closing costs and $23,548,000 of prepayment penalties on the transaction.
The Partnership also advanced closing costs of $3,903,000 for T-Two
Partners, L.P. ("T-Two Partners"), an affiliate of the Newkirk Group.
Excess proceeds from the loan of $6,537,000 were used to make a principal
payment on September 1, 2005.
The loan is scheduled to mature on August 11, 2008, subject to two one
year extensions and will require monthly payments of interest only. In
addition, the loan will require (i) initial principal payments of 50% of
excess cash flow after debt service during the period between August 11,
2005 and the consummation of Newkirk's initial public offering, less any
amounts paid on account of the T-Two Loan (as described below), (ii) a
principal payment equal to $150.0 million less the amount of the initial
principal payments on the closing of Newkirk REIT's initial public
offering made pursuant to (i) above, and (iii) quarterly principal
payments of $1,875,000 during the term of the loan, increasing to
$2,500,000 per quarter during the extension periods, less any amounts paid
on account of the T-Two Loan. The Partnership will also be required to
make principal payments from the proceeds of property sales, refinancings
and other asset sales if proceeds are not reinvested into net leased
properties. The required principal payments will be based on a minimum
release price set forth in the loan agreement for property sales and 100%
of proceeds from refinancings, economic discontinuance, insurance
settlements and condemnations. The loan is secured by a lien on the
Partnership's assets and the assets of the Partnership's subsidiaries,
with certain exceptions such as direct liens on most of the real estate
owned by the Partnership or the Partnership's subsidiaries.
The Partnership can prepay the loan in whole or in part at any time
together with a premium of 1% if such prepayment occurs on or before
August 11, 2006 and thereafter with no premium. The loan is secured by
substantially all of the assets of the Partnership and contains customary
financial and other covenants consistent with the prior loan.
9 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-Q SEPTEMBER 30, 2005
Note 2 - REFINANCING (Continued)
Concurrently with the loan, T-Two Partners also obtained a loan from the
Lenders in the principal amount of $272,241,000 (the "T-Two Loan"), the
proceeds of which were used to satisfy the outstanding balance including
accrued interest on a loan made by Bank of America, N.A. to T-Two Partners
of $271,989,000. The interest rate, maturity date and principal terms of
the T-Two Loan are the same as the Partnership's loan. The Partnership
agreed to guarantee the obligations of T-Two Partners under the T-Two
Loan.
The Partnership and T-Two Partners have entered into the following
agreements in order to limit the exposure to interest rate volatility: (i)
a five year interest rate swap agreement with KeyBank National Association
effectively setting the LIBOR rate at 4.642% for $250 million of the loan
balance; (ii) a LIBOR rate cap agreement at 5% with Bank of America, N.A.
for $450 million through November 2005 and $425 million through November
2006; and (iii) a LIBOR rate cap agreement at 6% with SMBC Derivative
Products Limited for the period from November 2006 until August 2008 for a
notional amount of $290 million.
Note 3 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On August 11, 2005, a portion of the loan with the Lenders was hedged by a
series of agreements as discussed above in Note 2. The Partnership
designated the agreements as hedges to effectively fix the interest rate
on a portion of its loan with the Lenders and to cap the interest rate on
a portion of the loan.
At September 30, 2005, derivatives with a fair value of $478,800 and
$1,351,403 were included in deferred financing costs and in other
liabilities, respectively. The change in net unrealized loss for the three
months and nine months ended September 30, 2005 of ($1,461,000) for
derivatives designated as cash flow hedges is recorded in shareholders'
equity as other comprehensive loss. No hedge ineffectiveness on cash flow
hedges was recognized during the third quarter of 2005. Amounts reported
in accumulated other comprehensive loss related to derivatives will be
reclassified to earnings over time as the hedged items are recognized in
earnings.
The Partnership does not use derivatives for trading or speculative
purposes nor does the Partnership currently have any derivatives that are
not designated as hedges.
Note 4 - RELATED PARTY TRANSACTIONS
Winthrop Financial Associates, A Limited Partnership ("WFA"), an affiliate
of the "Newkirk Group", performs asset management services for the
Partnership and received a fee of $1.4 million for the nine months ended
September 30, 2005 and 2004. The Newkirk Group, which managed the Newkirk
Partnerships, is comprised of certain affiliates of Apollo Real Estate
Fund III, L.P., ("Apollo"), Vornado Realty Trust, ("Vornado") and senior
executives of WFA.
10 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-Q SEPTEMBER 30, 2005
Note 4 - RELATED PARTY TRANSACTIONS (Continued)
The Partnership provides certain asset management, investor and
administrative services to partnerships, whose general partners were
controlled by the Newkirk Group, and which were not merged into the
Partnership (the "Other Partnerships"). The general partners of these
partnerships are owned by the Partnership. The Partnership earned $0.2
million and $0.3 million of management fees for these services for the
nine months ended September 30, 2005 and 2004, respectively. The
Partnership had receivables for management fees of $0.8 million and $0.9
million due from these partnerships at September 30, 2005 and December 31,
2004, respectively.
The Partnership has an ownership interest in the three most junior
tranches of a securitized pool of first mortgages which includes four
first mortgage loans encumbering five Partnership properties and one other
property controlled by affiliates of the general partner. The Partnership
has a loan receivable which is included in other assets, net of discount,
of $10.0 million and $10.1 million at September 30, 2005 and December 31,
2004, respectively, and earned interest income of $1.2 and $1.1 million
for the nine months ended September 30, 2005 and 2004, respectively,
related to this ownership interest.
T-Two Partners is the 100% beneficial owner of certain of the contract
right mortgage notes. T-Two Partners owned the portion of the contract
rights referred to as the T-2 Certificate and during 2003 purchased the
portion of the contract rights referred to as the T-1 Certificate. The
Partnership incurred $16.6 million and $19.2 million ($1.0 million and
$2.2 million of which is included in discontinued operations,
respectively) of interest expense on these contract rights during the nine
months ended September 30, 2005 and 2004, respectively. Contract right
mortgage notes and accrued interest payable includes $233.8 million and
$249.4 million due to T-Two Partners at September 30, 2005 and December
31, 2004, respectively. The Partnership had the right to acquire T-Two
Partners' interest in the contract rights in January 2008 by acquiring
T-Two Partners in exchange for Units. The Newkirk Group had the right to
require the Partnership to purchase this interest in December 2007 in
exchange for Units. During 2003, as described below, the Partnership and
the owners of T-Two Partners modified these rights.
During November 2003, the Partnership obtained a $208.5 million loan with
Bank of America, N.A. At the same time that the Partnership obtained the
loan, T-Two Partners obtained a $316.5 million loan with Bank of America,
N.A. This loan is referred to as the Original T-Two Loan. At the time the
owners of T-Two Partners agreed to eliminate their put option which could
have required the Partnership to purchase T-Two Partners' assets in
December 2007 and the Partnership agreed to guarantee repayment of the
Original T-Two Loan. The Original T-Two Loan was secured by all of the
assets of T-Two Partners, including the contract right mortgage notes
receivable from the Partnership. T-Two Partners also agreed to provide a
credit line to the Partnership bearing interest at LIBOR plus 450 basis
points.
11 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-Q SEPTEMBER 30, 2005
Note 4 - RELATED PARTY TRANSACTIONS (Continued)
In connection with the November 2003 financing transactions described
above, the Partnership and the owners of T-Two Partners modified the
Partnership option in certain respects. First, the Partnership was given
the right to exercise the option at any time before November 24, 2009, or
any other time as agreed upon by the parties. Second, the purchase price
was payable in cash rather than units of the Partnership. Finally, the
formula for determining the purchase price payable by the Partnership if
it exercises the option was revised in a manner that the Partnership's
general partner believed to be significantly more favorable to the
Partnership than the formula previously in effect. Specifically, the
purchase price would be calculated as follows: the sum of $316,526,573
plus T-Two Partners' costs of obtaining the Original T-Two Loan
(approximately $7,346,000), the cost of any refinancing ($3,903,000,
representing amounts allocated in connection with the August 11, 2005
refinancing discussed in Note 2) and the cost of administering the trust
that holds the second mortgage loans, together with interest on the
foregoing sum at the effective rate of interest paid by T-Two Partners on
the Original T-Two Loan, less all payments made from and after November
24, 2003 on the second mortgage loans.
The Partnership has determined that T-Two Partners is a Variable Interest
Entity, ("VIE"), but that the Partnership is not the primary beneficiary
of the VIE.
T-Two Partners will reimburse the Partnership for approximately $7.3
million of closing costs incurred in connection with the Original T-Two
Loan and $3.9 million of closing costs incurred in connection with the
refinancing, together with interest thereon at a rate equal to LIBOR plus
450 basis points. The Partnership earned interest income of $0.3 million
and $0.4 million on this obligation during the nine months ended September
30, 2005 and 2004, respectively. Subsequent to September 30, 2005, the
Partnership acquired all the partnership interests in T-Two partners (see
Note 8).
An affiliate of the general partner owns a portion of the second mortgage
indebtedness of a property in which the Partnership has an interest. The
second mortgage payable and accrued interest owned by the affiliate
aggregated $15.7 million and $15.2 million at September 30, 2005 and
December 31, 2004, respectively. Included in interest expense is $0.6
million and $0.5 million to related parties for the nine months ended
September 30, 2005 and 2004, respectively.
In August 2005, WFA loaned $200,000 to a partnership in which the
Partnership has an interest. The loan accrues interest at a rate of prime
plus 2%. The loan is expected to be repaid in the first quarter of 2006.
12 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-Q SEPTEMBER 30, 2005
Note 5 - CONTINGENCIES
The Partnership owns a 707,482 square foot office building in Toledo, Ohio
that is leased to Owens-Illinois for an initial term that expires on
September 30, 2006. The property is encumbered by a non-recourse mortgage
which matures in October 2006 at which time a $32,000,000 balloon payment
will be due. The tenant has six-five year renewal options. This tenant is
presently not using a substantial portion of the building and, although it
has not given notice to the Partnership, has publicly announced that it
will be relocating its headquarters. Thus, the Partnership believes that
the tenant will not renew its lease. While the Partnership will attempt to
sell or re-lease the property there is substantial risk that the
Partnership will not be able to satisfy the balloon payment due on the
mortgage and that the mortgage holder will foreclose on this property. The
Partnership recognized a $11,328,000 impairment loss during the second
quarter of 2005.
In June 2005, the Partnership entered into an agreement with Honeywell
International, Inc., the tenant of four office buildings owned by the
Partnership in Morris Township, New Jersey to restructure the lease on the
properties. Under the restructuring, the tenant waived its right to
exercise its economic discontinuance option and the partnership granted
the tenant an option to purchase the properties in 2007 for $41,900,000.
As a result of this restructuring, the Partnership recognized a
$14,754,000 impairment loss in the second quarter of 2005.
Hershey Foods Corporation ("Hershey") is the tenant of a 430,000 square
foot facility in New Kingston, Pennsylvania. In August 2005, the
Partnership and Hershey agreed that Hershey will exercise its purchase
option on the property for $11,350,000. Hershey will also pay $3,837,659
of deferred rent. The parties have agreed that the transaction will be
consummated on or before November 22, 2005. It is anticipated that the
Partnership will recognize a gain of $1.2 million on the transaction.
The Partnership received a notice dated August 30, 2005 from Albertson's,
Inc. indicating that it intends to exercise its right to terminate the
lease for the property located in Rock Falls, Illinois as of May 8, 2006.
In accordance with the terms of the lease, Albertson's, Inc. has made an
offer to purchase the property for an amount stipulated in the lease of
approximately $861,000. The Partnership can reject this offer by notifying
Albertson's, Inc. by April 18, 2006. The Partnership is currently
evaluating whether the offer should be rejected. The Partnership recorded
an impairment loss of $550,000 on this property during the third quarter
of 2005
The Partnership owns two office buildings in New Orleans, Louisiana,
containing an aggregate of 403,027 square feet of space that are leased to
Hibernia Bank. Both buildings are located in the area affected by
Hurricane Katrina. The tenant has remained current in its rent obligations
and is responsible for all repairs, maintenance and capital expenditures
associated with these properties.
13 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-Q SEPTEMBER 30, 2005
Note 6 - EQUITY
On August 5, 2005, the Partnership entered into an agreement with Newkirk
Realty Trust, Inc., a newly-formed Maryland corporation that intends to
qualify as a real estate investment trust ("Newkirk REIT"), and a number
of other parties pursuant to which, among other things, the Partnership
agreed that upon the consummation of the initial public offering by
Newkirk REIT (See Note 8): (i) Newkirk REIT will be appointed as the
successor general partner of the Partnership in place of MLP GP LLC, the
current general partner; (ii) the partnership agreement of the Partnership
will be amended and restated to provide that limited partners (other than
Newkirk REIT) will have the right, beginning on the 12 month anniversary
of the initial public offering, to cause the Partnership to redeem their
interest in the Partnership at a price that will be based on the trading
price of Newkirk REIT's common stock at the time of redemption, and (iii)
the amended and restated partnership agreement of the Partnership will
contain certain other provisions as are necessary and/or customary to
provide for an umbrella real estate trust (UPREIT) structure.
In addition, in connection with the Newkirk REIT initial public offering,
Newkirk REIT will acquire a controlling interest in the Partnership by
making a capital contribution to the Partnership in exchange for an
ownership interest in the Partnership and acquiring additional interests
in the Partnership from certain existing limited partners.
Each of the foregoing transactions was subject to Newkirk REIT's
consummating its initial public offering (See Note 8).
Note 7 - DISCONTINUED OPERATIONS AND SALES OF REAL ESTATE
During the nine months ended September 30, 2005, the Partnership sold six
properties for a combined net sales price of approximately $31.3 million.
After satisfying existing mortgage indebtedness and other costs, the net
sales proceeds were approximately $17.0 million of which approximately
$2.4 million was applied to a principal payment of the note payable to
Bank of America, N.A. The Partnership recognized a net gain on disposal of
these properties of approximately $16.1 million.
During the nine months ended September 30, 2004, the Partnership sold 51
properties for a combined net sales price of approximately $123.9 million.
After satisfying existing mortgage indebtedness and other costs and
adjustments, the net sales proceeds were approximately $57.5 million of
which $41.7 million was applied to a principal payment on the note
payable. The Partnership recognized a net gain on disposal of these
properties of $48.4 million.
The sale and operations of these properties for all periods presented have
been recorded as discontinued operations in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." In
addition, the Partnership has classified properties which have met all of
the criteria of SFAS No. 144 as real estate held for sale in the
accompanying
14 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-Q SEPTEMBER 30, 2005
Note 7 - DISCONTINUED OPERATIONS AND SALES OF REAL ESTATE (Continued)
consolidated balance sheets and has classified the operations of these
properties and the sold properties as discontinued operations in the
accompanying condensed consolidated statement of operations.
During the third quarter of 2005, two properties previously included in
discontinued operations were placed back in service. The operating results
of these properties are now included in continuing operations for all
periods presented in the financial statements.
Discontinued operations for the nine months ended September 30, 2005 and
2004 are summarized as follows (in thousands):
2005 2004
-------- --------
Revenue $ 5,481 $ 13,180
Expenses (1,732) (4,451)
Impairment loss on real estate (1,433) (3,465)
Net loss from early extinguishment
of debt (1,530) (6,541)
Gain from disposal of real estate 16,082 48,390
-------- --------
Income from discontinued operations $ 16,868 $ 47,113
======== ========
Expenses include interest expense to related parties of $1.0 million and
$2.2 million, for the nine months ended September 30, 2005 and 2004,
respectively.
Other assets of discontinued operations at September 30, 2005 and December
31, 2004 are summarized as follows (in thousands):
2005 2004
---- ----
Receivables $235 $ 81
Other assets 126 163
---- ----
$361 $244
==== ====
15 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-Q SEPTEMBER 30, 2005
Note 7 - DISCONTINUED OPERATIONS AND SALES OF REAL ESTATE (Continued)
Liabilities of discontinued operations at September 30, 2005 and December
31, 2004 are summarized as follows (in thousands):
2005 2004
------- -------
Mortgage notes and accrued interest payable $ 5,030 $ 5,672
Contract right mortgage notes and accrued
interest payable (including $6,134 and
$11,825 to related parties) 6,134 11,825
------- -------
$11,164 $17,497
======= =======
Note 8 - SUBSEQUENT EVENTS
On November 7, 2005, Newkirk REIT completed its initial public offering of
common stock (the "REIT IPO"). The common stock of Newkirk REIT is traded
on the New York Stock Exchange under the symbol "NKT". In connection with
this transaction, on November 7, 2005:
o Newkirk REIT was appointed as the successor general partner of the
Partnership in place of MLP GP LLC;
o the Partnership's agreement of limited partnership was amended and
restated to contain various provisions that are necessary and/or
customary to provide for an umbrella real estate investment trust
(UPREIT) structure, including provisions granting limited partners,
other than Newkirk REIT, the right, beginning on November 7, 2006
and subject to certain limitations, to cause the Partnership to
redeem their interest in the Partnership at a price based on the
closing price of Newkirk REIT's common stock on the New York Stock
Exchange for the ten trading days prior to receipt of a redemption
notice. Newkirk REIT will be permitted to elect to purchase tendered
partnership interests of the Partnership for the redemption price
and to pay the redemption price either in cash or by the issuance of
shares of Newkirk REIT's common stock;
o in order to facilitate the UPREIT structure, the Partnership
effected a 7.5801 to 1 Unit split of the outstanding Units thereby
increasing the outstanding Units to 47,500,000 Units;
o Newkirk REIT and the Partnership retained NKT Advisors LLC (the
"Advisor") pursuant to an advisory agreement to manage the
Partnership's assets and the day-to-day operations of the
Partnership and Newkirk REIT, subject to the supervision of Newkirk
REIT's board of directors;
16 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-Q SEPTEMBER 30, 2005
Note 8 - SUBSEQUENT EVENTS (Continued)
o Newkirk REIT acquired 15,625,000 newly-issued Units (post-split)
from the Partnership in exchange for $235.8 million and an
additional 1,250,000 Units (post-split) in exchange for the
contribution of certain exclusivity rights with respect to net-lease
business opportunities offered to or generated by Michael Ashner,
the Chairman and Chief Executive Officer of Newkirk REIT, that
Newkirk REIT had acquired from First Union Real Estate Equity and
Mortgage Investments. Newkirk REIT also purchased 2,500,000
outstanding Units (post-split) from Apollo Real Estate Investment
Fund III, L.P. and WEM-Brynmawr Associates LLC for $37.7 million.
Following these purchases, Newkirk REIT owns 19,375,000 Units or
30.1% of the 64,375,000 outstanding Units. The per Unit price paid
by Newkirk REIT for such Units (other than the 1,250,000 Units
acquired in respect of exclusivity rights) was equal to the per
share offering price under the REIT IPO, less underwriting
commissions;
o The Advisor was issued special voting preferred stock of Newkirk
REIT entitling it to vote on all matters for which Newkirk REIT
common stockholders are entitled to vote. The number of votes that
the Advisor will be entitled to cast in respect of the special
voting preferred stock will initially be 45,000,000 votes or
approximately 69.9% of the 64,375,000 votes entitled to be cast. The
45,000,000 votes represents the total number of Units outstanding
immediately following consummation of the REIT IPO (excluding Units
held by Newkirk REIT). As Units are redeemed at the option of a
Unitholder, the number of votes attaching to the Advisor's special
voting preferred stock will decrease by an equivalent amount. The
advisory agreement between the Partnership, Newkirk REIT and the
Advisor provides that on all matters for which the Advisor is
entitled to cast votes in respect of its special voting preferred
stock, it will cast its votes in direct proportion to the votes that
are cast by limited partners, other than Newkirk REIT, on such
matters, except that the Advisor (through its managing member) will
be entitled to vote in its sole discretion to the extent that the
voting rights of affiliates of Vornado Realty Trust are limited
under certain circumstances; and
o The Partnership acquired all of the partnership interests in T-Two
Partners, L.P.
17 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q SEPTEMBER 30, 2005
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained herein constitute forward-looking statements.
Forward-looking statements include information relating to the
Partnership's intent, belief or current expectations.
Your partnership identifies forward-looking statements in this Form 10-Q
by using words or phrases such as "anticipate," "believe," "estimate,"
"expect," "intend," "may be," "objective," "plan," "predict," "project"
and "will be" and similar words or phrases (or the negative thereof).
The forward-looking information involves important risks and uncertainties
that could cause our actual results, performance or achievements to differ
materially from our anticipated results, performance or achievements
expressed or implied by such forward-looking statements. These risks and
uncertainties include, but are not limited to, those set forth in our
Annual Report on Form 10-K and Form 10-K/A for the year ended December 31,
2004 under "Forward-Looking Statements."
Although we believe the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, your partnership cannot
assure you that such expectations will be attained or that any deviations
will not be material. Your partnership disclaim any obligation or
undertaking to disseminate to you any updates or revisions to any
forward-looking statement contained in this Form 10-Q to reflect any
change in our expectations or any changes in events, conditions or
circumstances on which any statement is based.
Overview
At September 30, 2005, your partnership owned an interest in 204 real
properties. Almost all of the properties are leased to one or more tenants
pursuant to net leases. At September 30, 2005, there were two properties
which were vacant and not leased containing approximately 235,000 square
feet of space. The remaining 16,966,000 square feet or 98.6% are leased.
Your partnership also holds subordinated interests in a securitized pool
of notes evidencing first mortgage indebtedness secured by certain of your
partnership's properties as well as other properties, limited partnership
interests in various partnerships that own commercial net-leased
properties, an interest in a management company that provides services for
your partnership as well as other real estate partnerships, ground leases,
remainder interests or the right to acquire remainder interests in various
properties and miscellaneous other assets. In addition, your partnership,
or an affiliate of your general partner, controls the general partner of
the real estate limited partnerships in which your partnership owns
limited partnership interests, and your partnership had an option to
acquire second mortgage debt secured by a substantial number of your
partnership's properties as well as the properties owned by seven other
partnerships. Your partnership exercised this option in connection with
the REIT IPO as discussed below in "Other Matters".
Your partnership intends to manage the existing properties through lease
renewals and extensions with existing tenants, new leases and/or, if
strategically warranted, sales. Upon expiration of a
18 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q SEPTEMBER 30, 2005
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Overview (Continued)
property's lease, your partnership intends to extend the lease or promptly
re-lease the property to a new tenant. If your partnership is unable to
extend a lease or re-lease the property on a net lease basis, your
partnership's general intention is to either sell that property or
re-lease the property on a non-net leased basis and then sell it. However,
depending on existing market conditions, your partnership may elect to
retain non-net leased properties so as to maximize returns.
The primary risks associated with re-tenanting properties are: (i) the
period of time required to find a new tenant; (ii) whether renewal rental
rates will be lower than in-place rental rates; (iii) 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. Your partnership addresses these risks by
contacting tenants well in advance of their lease expirations to ascertain
their occupancy needs, visiting the properties to determine the physical
condition of the property and meeting with local brokers to determine the
depth of the rental market.
Your partnership's future strategy differs from its historical strategy in
that your partnership intends to employ a portion of the proceeds from the
REIT IPO as well as from future debt or equity financing and redeploy a
portion of your partnership's cash flow from operations and property sales
to engage in significantly more acquisition and investment activity than
your partnership historically has conducted. Your partnership will look
to:
o acquire individual net leased properties and portfolios of net
leased properties;
o complete sale/leaseback transactions, through which we acquire
properties and lease the properties back to the seller or operator
under a net lease;
o acquire controlling and non-controlling interests in private and
public companies primarily engaged in the business of making net
lease investments;
o acquire equity and debt interests in entities that own, develop,
manage or advise third parties with regard to net leased
investments;
o acquire senior and subordinated loans secured by mortgages on net
leased properties, mezzanine loans secured by ownership interests in
entities that own net leased properties as well as commercial
mortgage-backed securities, B Notes and bridge loans, relating to
net leased properties;
o participate in development projects relating to net lease
properties; and
o explore investment opportunities in non-domestic markets.
19 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q SEPTEMBER 30, 2005
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Trends
Competition
Your partnership expects to face increased competition for your
partnership's targeted investments. Your partnership intends to capitalize
on the acquisition and investment opportunities that your partnership's
senior management may bring to your partnership as a result of its
acquisition experience. Through its broad experience, your partnership's
senior management team has established a network of contacts and
relationships in the net leased property industry, including relationships
with operators, financiers, commercial real estate brokers, potential
tenants and other key industry participants. In addition your partnership
believes that Winthrop Financial Associates' significant real estate
management infrastructure will provide your partnership with the economies
of scale associated with Winthrop Financial Associates' current business
operations and thus will provide your partnership with a competitive
advantage when bidding on investment opportunities.
Interest rate environment
The current yield curve indicates that interest rates are likely to
increase. The effect of future interest rate increases on future
acquisitions is not possible to predict but with respect to the effect on
your partnership's floating rate debt, your partnership may utilize a
variety of financial instruments, including interest rate swaps, caps,
options, floors and other interest rate exchange contracts, in order to
limit the effects of fluctuations in interest rates on your partnership's
operations. Toward that end, your partnership and T-Two Partners have
entered into the following agreements in order to limit the exposure to
interest rate volatility: (i) a five year interest rate swap agreement
with KeyBank National Association effectively setting the LIBOR Rate at
4.642% for $250 million of the loan balance; (ii) an interest rate cap
agreement with Fleet Bank for $450 million through November 2005 and $425
million through November 2006 capping the LIBOR Rate at 5%; and (iii) an
interest rate cap agreement with SMBC Derivative Products Limited capping
the LIBOR Rate at 6% for the period from November 2006 until August 2008
for a notional Amount of $290 million related to KeyBank National
Association debt. Your partnership does not intend to utilize derivatives
for speculative or other purposes other than interest rate risk
management.
Liquidity and Capital Resources
Historically, your partnership's principal sources of funds have been
operating cash flows, property sales and borrowings. Operating cash flows
have been, and are expected to continue to be, derived primarily from
rental income received by your partnership from its properties. Pursuant
to the terms of the leases, the tenants are responsible for substantially
all of the operating expenses with respect to the properties, including
maintenance, capital improvements, insurance and taxes. Accordingly, your
partnership does not anticipate significant needs for cash for these
costs. To the extent there is a vacancy in a property, your partnership
would be obligated for all operating expenses, including real estate taxes
and insurance. As of September 30, 2005, two properties were vacant,
representing 1.4% of your partnership's square footage.
20 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q SEPTEMBER 30, 2005
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
In connection with the REIT IPO, your partnership will issue new units,
the proceeds of which will be used to repay $150.0 million of existing
debt and the balance of the proceeds from the sale of new units will be
utilized to fund future acquisitions and fund working capital
requirements. Newkirk REIT will conduct all of its operations through your
partnership. As a public company Newkirk REIT will have access to public
and private equity and debt markets and selective secured indebtedness.
Your partnership may also seek an unsecured credit facility. However,
there are factors that may have a material adverse effect on your
partnership's and Newkirk REIT's access to capital sources. The ability to
incur additional debt to fund acquisitions will be dependent upon your
partnership's existing leverage and its debt covenants, the value of the
assets your partnership is attempting to leverage and general economic
conditions, which are outside of the influence of your partnership and
Newkirk REIT.
Your partnership's UPREIT structure will enable your partnership to
acquire properties for cash and/or by issuing to sellers, as a form of
consideration, limited partnership interests in your partnership. Your
partnership intends to utilize this structure to facilitate your
partnership's ability to acquire individual properties and portfolios of
properties by structuring transactions which will defer tax payable by a
seller while preserving your partnership's available cash for other
purposes, including the payment of dividends and distributions.
Your partnership believes that cash flows from operations will continue to
provide adequate capital to fund the operating and administrative expenses
and regular debt service obligations, as well as dividend payments
required to be made by Newkirk REIT to satisfy REIT requirements, in both
the short-term and long-term. In addition, your partnership anticipates
that cash on hand and net proceeds from the issuance of equity and debt,
as well as other alternatives, will provide the necessary capital required
for acquisitions and future capital costs required as a result of lease
turnover by your partnership.
The level of liquidity based on cash and cash equivalents experienced a
$262,000 decrease at September 30, 2005 as compared to December 31, 2004.
The decrease was due to net cash used in financing activities of
$123,048,000 which was offset by net cash provided by operating activities
of $106,390,000 and net cash provided by investing activities of
$16,396,000. Cash used in financing activities consisted primarily of
mortgage note, contract right mortgage note, and note payable payoffs of
$428,758,000, principal payments on mortgage, contract right and notes
payable of $96,932,000, mortgage prepayment penalties of $23,548,000,
partner distributions of $37,692,000, distributions to minority interests
of $4,876,000, limited partner buyouts of $2,042,000 and an increase in
deferred costs of $6,959,000, which were substantially offset by proceeds
from new debt of $477,759,000. Net cash provided by investing activities
included $31,341,000 of net proceeds from disposal of real estate, which
were offset by building improvements of $194,000, an increase in
restricted cash of $14,671,000, and additional investments in limited
partnership interests of $80,000.
21 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q SEPTEMBER 30, 2005
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Off-Balance Sheet Arrangements
At September 30, 2005, your partnership had $44,022,000, of which
$22,967,000 is restricted, in cash reserves which were invested primarily
in money market mutual funds.
On November 24, 2003, at the same time as your partnership obtained its
loan from Bank of America, N.A., T-Two Partners obtained a $316,526,573
loan from Bank of America, N.A. We refer to this loan as the Original
T-Two Loan. The interest rate, maturity date and principal terms of the
Original T-Two Loan were the same as your partnership's loan. The Original
T-Two Loan was secured by all the assets of T-Two Partners, including the
second mortgage loans receivable from your partnership. Your partnership
guaranteed repayment of the Original T-Two Loan to Bank of America, N.A.
In consideration for your partnership's guarantee, the owners of T-Two
Partners agreed to the elimination of their put option with respect to
T-Two Partners, and to provide a credit line to your partnership bearing
interest at LIBOR plus 450 basis points. Any amounts advanced to your
partnership under the credit line would have to be repaid in full before
your partnership could purchase the interests in T-Two Partners if your
partnership exercised the purchase option described below. There are no
amounts that have been advanced under the credit line.
Your partnership's call option, with respect to T-Two Partners, had
previously provided for the acquisition of the interests in T-Two Partners
in January 2008 in exchange for a number of units in your partnership to
be determined at the time of exercise based on an agreed-upon formula.
Your partnership and the owners of T-Two Partners modified your
partnership's option in certain respects. First, the option can now be
exercised by your partnership at any time before November 24, 2009, or at
any other time as mutually agreed upon by the parties. Second, the
purchase price is payable in cash rather than units in your partnership.
Finally, the formula for determining the purchase price payable by your
partnership if it exercises the option has been revised in a manner that
your partnership's general partner believes to be significantly more
favorable to your partnership than the formula previously in effect.
Specifically, the purchase price is calculated as follows: the sum of
$316,526,573 plus T-Two Partners' costs of obtaining the Original T-Two
Loan (approximately $7,346,000), the cost of any refinancing ($3,903,000
representing amounts allocated in connection with the August 11, 2005
refinancing with KeyBank National Association and Bank of America, N.A.)
and administering the trust that holds the second mortgage loans, together
with interest on the foregoing sum at the effective rate of interest paid
by T-Two Partners on the T-Two Loan, less all payments made from and after
November 24, 2003 on the second mortgage loans. Under the original option,
the formula for determining the purchase price was based upon the face
amount of the outstanding contract rights. The revised formula begins with
an initial amount of $316,526,573 which represents a substantial discount
off the face amount of the outstanding contract rights. In addition, under
the revised formula, your partnership's purchase price is reduced by the
difference between the payments made by your partnership to T-Two Partners
under the terms of the contract rights and the amount paid by T-Two
Partners under the terms of the T-Two Loan, thus giving the benefit of the
lower T-Two Loan interest rate to your partnership. Because of the
interest rate swap and cap agreements acquired in connection with the Bank
of America note payable and the T-Two Loan, there is no increase in our
market risk. Subsequent to September 30, 2005, your partnership exercised
this option as discussed below in "Other Matters".
22 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q SEPTEMBER 30, 2005
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Capital Expenditures
Due to the net lease nature of your partnership's leases, your partnership
does not incur significant expenditures in the ordinary course of business
to maintain its properties. However, as leases expire, your partnership
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.
Other Matters
In January 2005, your partnership sold a property located in Flagstaff,
Arizona for $2,300,000. After payment of closing costs, the net sales
proceeds were approximately $2,200,000 of which approximately $1,620,000
was used to pay a portion of the Partnership's note payable to Bank of
America, N.A.
In February 2005, your partnership acquired for $10,000 approximately .29%
of the total limited partnership units outstanding in a partially owned
partnership. Your partnership currently owns approximately 23.84% in the
partnership.
In March 2005, your partnership recorded a $2,200,000 impairment loss on a
property located in Evanston, Wyoming. Your partnership had attempted to
sell the property and thus recorded its activity as discontinued
operations prior to the third quarter of 2005. Your partnership has
reevaluated this property and is now attempting to lease the property; as
such, the operating results of the property are now included in continuing
operations.
In March 2005, your partnership acquired from its limited partners 364,026
of its units of limited partnership interest at a purchase price of $5.61
per unit.
In April 2005, your partnership sold a property located in Dallas, Texas
for $150,000. After satisfaction of existing mortgage indebtedness and
other costs, the net proceeds to your partnership were approximately
$54,000.
In May 2005, your partnership sold a property located in Rockdale, Texas
for $530,000. Net proceeds to your partnership were approximately $279,000
after satisfying existing mortgage indebtedness and other costs.
Approximately $209,000 of the net proceeds was used to pay a portion of
the Partnership's note payable to Bank of America, N.A.
Your partnership sold a property located in Woodville, Texas in June 2005
for $300,000. After satisfaction of existing mortgage indebtedness and
other costs, the net proceeds were approximately $67,000 of which
approximately $50,000 was used to pay a portion of your partnership's note
payable to Bank of America, N.A.
In June 2005, your partnership entered into an agreement with Honeywell
International, Inc., the
23 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q SEPTEMBER 30, 2005
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Other Matters (Continued)
tenant of four office buildings owned by your partnership in Morris
Township, New Jersey to restructure the lease on the properties. Under the
restructuring, the tenant waived its right to exercise its economic
discontinuance option and your partnership granted the tenant an option to
purchase the properties in 2007 for $41,900,000. As a result of this
restructuring, your partnership recognized a $14,754,000 impairment loss
in the second quarter of 2005.
In June 2005, your partnership acquired for $35,000 an additional limited
partnership unit in one partially owned consolidated partnership. Your
partnership owned approximately 46.35% of the limited partnership
following the acquisition.
In June 2005, your partnership acquired 167 units of limited partnership
interest from a limited partner at a price of $5.61 per unit.
Your partnership owns a 707,482 square foot office building in Toledo,
Ohio that is leased to Owens-Illinois for an initial term that expires on
September 30, 2006. The property is encumbered by a non-recourse mortgage
which matures in October 2006 at which time a $32,000,000 balloon payment
will be due. This tenant is presently not using a substantial portion of
the building and, although it has not given notice to your partnership,
has publicly announced that it will not be renewing its lease. Thus, your
partnership believes that the tenant will not renew its lease. While your
partnership will attempt to sell or re-lease the property there is a
substantial risk that we will not be able to satisfy the balloon payment
due on the mortgage and that your partnership will lose this property
through foreclosure. Your partnership recorded an $11,328,000 impairment
loss in the second quarter of 2005 on this property.
Hershey Foods Corporation ("Hershey") is the tenant of a 430,000 square
foot facility in New Kingston, Pennsylvania. In August 2005, your
partnership and Hershey agreed that Hershey will exercise its purchase
option on the property for $11,350,000. Hershey will also pay $3,837,659
of deferred rent. The parties have agreed that the transaction will be
consummated on or before November 22, 2005. It is anticipated that your
partnership will recognize a gain of $1.2 million on the transaction.
Your partnership owns two office buildings in New Orleans, Louisiana,
containing an aggregate of 403,027 square feet of space that are leased to
Hibernia Bank. Both buildings are located in the area affected by
Hurricane Katrina. The tenant has remained current in its rent obligations
and is responsible for all repairs, maintenance and capital expenditures
associated with these properties.
In July 2005, your partnership sold a vacant property located in Taylor,
Texas for $1,200,000. After satisfying existing mortgage indebtedness and
other costs, the net proceeds were approximately $0.7 million of which
approximately $0.5 million was applied to a principal payment on the note
payable to Bank of America, N.A.
In August 2005, your partnership sold a property in Colton, California for
$27,500,000. Net
24 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q SEPTEMBER 30, 2005
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Other Matters (Continued)
proceeds were approximately $13,900,000 after satisfying existing mortgage
indebtedness and other costs. A portion of these proceeds, approximately
$10.4 million, were deposited into a restricted capital improvement
reserve at KeyBank National Association in accordance with the loan
agreement.
Your partnership received a notice dated August 30, 2005 from Albertson's,
Inc. indicating that it intends to exercise its right to terminate the
lease for the property located in Rock Falls, Illinois as of May 8, 2006.
In accordance with the terms of the lease, Albertson's, Inc. has made an
offer to purchase the property for an amount stipulated in the lease of
approximately $861,000. Your partnership can reject this offer by
notifying Albertson's, Inc. by April 18, 2006. Your partnership is
currently evaluating whether the offer should be rejected. Your
partnership recorded an impairment loss of $550,000 on this property
during the third quarter of 2005.
In September 2005, your partnership acquired for $35,000 an additional
limited partnership unit in one partially owned consolidated partnership.
Your partnership currently owns approximately 47.51% of the limited
partnership.
On November 7, 2005, Newkirk REIT completed its initial public offering of
common stock (the "REIT IPO"). The common stock of Newkirk REIT is traded
on the New York Stock Exchange under the symbol "NKT". In connection with
this transaction, on November 7, 2005:
o Newkirk REIT was appointed as the successor general partner of your
partnership in place of MLP GP LLC;
o Your partnership's agreement of limited partnership was amended and
restated to contain various provisions that are necessary and/or
customary to provide for an umbrella real estate investment trust
(UPREIT) structure, including provisions granting limited partners,
other than Newkirk REIT, the right, beginning on November 7, 2006
and subject to certain limitations, to cause your partnership to
redeem their interest in the Partnership at a price based on the
closing price of Newkirk REIT's common stock on the New York Stock
Exchange for the ten trading days prior to receipt of a redemption
notice. Newkirk REIT will be permitted to elect to purchase tendered
partnership interests of your partnership for the redemption price
and to pay the redemption price either in cash or by the issuance of
shares of Newkirk REIT's common stock;
o in order to facilitate the UPREIT structure, your partnership
effected a 7.5801 to 1 Unit split of the outstanding Units thereby
increasing the outstanding Units to 47,500,000 Units;
o Newkirk REIT and your partnership retained NKT Advisors LLC (the
"Advisor") pursuant to an advisory agreement to manage your
partnership's assets and the day-to-day operations of your
partnership and Newkirk REIT, subject to the supervision of Newkirk
REIT's board of directors;
25 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q SEPTEMBER 30, 2005
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Other Matters (Continued)
o Newkirk REIT acquired 15,625,000 newly-issued Units (post-split)
from your partnership in exchange for $235.8 million and an
additional 1,250,000 Units (post split) in exchange for the
contribution of certain exclusivity rights with respect to net-lease
business opportunities offered to or generated by Michael Ashner,
the Chairman and Chief Executive Officer of Newkirk REIT, that
Newkirk REIT had acquired from First Union Real Estate Equity and
Mortgage Investments. Newkirk REIT also purchased 2,500,000
outstanding Units (post-split) from Apollo Real Estate Investment
Fund III, L.P. and WEM-Brynmawr Associates LLC for $37.7 million.
Following these purchases, Newkirk REIT owns 19,375,000 Units or
30.1% of the 64,375,000 outstanding Units. The per Unit price paid
by Newkirk REIT for such Units (other than the 1,250,000 Units
acquired in respect of exclusivity rights) was equal to the per
share offering price under the REIT IPO, less underwriting
commissions;
o The Advisor was issued special voting preferred stock of Newkirk
REIT entitling it to vote on all matters for which Newkirk REIT
common stockholders are entitled to vote. The number of votes that
the Advisor will be entitled to cast in respect of the special
voting preferred stock will initially be 45,000,000 votes or
approximately 69.9% of the 64,375,000 votes entitled to be cast. The
45,000,000 votes represents the total number of Units outstanding
immediately following consummation of the REIT IPO (excluding Units
held by Newkirk REIT). As Units are redeemed at the option of a
Unitholder, the number of votes attaching to the Advisor's special
voting preferred stock will decrease by an equivalent amount. The
advisory agreement between your partnership, Newkirk REIT and the
Advisor provides that on all matters for which the Advisor is
entitled to cast votes in respect of its special voting preferred
stock, it will cast its votes in direct proportion to the votes that
are cast by limited partners, other than Newkirk REIT, on such
matters, except that the Advisor (through its managing member) will
be entitled to vote in its sole discretion to the extent that the
voting rights of affiliates of Vornado Realty Trust are limited
under certain circumstances; and
o Your partnership acquired all of the partnership interests in T-Two
Partners, L.P.
Results of Operations
Comparison of the nine months ended September 30, 2005 to the nine months
ended September 30, 2004
Income from Continuing Operations
Income from continuing operations decreased by $47,821,000 to $16,151,000
for the nine months ended September 30, 2005 from $63,972,000 for the nine
months ended September 30, 2004. As more fully described below, this
decrease is attributable to a decrease in total revenue of $3,679,000, an
increase in total expenses of $44,229,000 and an increase in minority
interest expense of $266,000, which was partially offset by an increase in
equity in income from investments in limited
26 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q SEPTEMBER 30, 2005
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations (Continued)
Income from Continuing Operation (Continued)
partnerships of $353,000.
Rental Income
Rental income decreased by $3,813,000 or 2.1% to $181,728,000 for the nine
months ended September 30, 2005 from $185,541,000 for the nine months
ended September 30, 2004. Approximately $2,437,000 of the decrease was due
to the vacancy of a property located in Bedford, Texas. The decrease was
also due to lower rental income resulting from lease renewals at rates
that are lower than the primary term rates. Leased square footage remained
consistent at approximately 99%.
Interest Income
Interest income increased by $162,000 or 7.2% to $2,407,000 for the nine
months ended September 30, 2005 from $2,245,000 for the nine months ended
September 30, 2004. The increase was due to maintenance of higher invested
cash balances.
Management Fee Income
Management fee income decreased by $28,000 or approximately 11.0% to
$227,000 for the nine months ended September 30, 2005 from $255,000 for
the nine months ended September 30, 2004. The decrease is attributable to
fewer non-consolidated properties under management resulting from the sale
of properties under management.
Interest Expense
Interest expense decreased by $10,297,000 or approximately 15.3% to
$56,943,000 for the nine months ended September 30, 2005 compared to
$67,240,000 for the nine months ended September 30, 2004. The decrease was
primarily due to interest savings of $7,677,000 as a result of the
combination of loan payoffs and a lower interest rate on the new
refinanced debt and a decrease in amortization expense on deferred costs
of $2,620,000.
Net Loss on Extinguishment of Debt
Net loss on extinguishment of debt increased by $29,121,000 or
approximately 619.6% to $29,168,000 for the nine months ended September
30, 2005 from $47,000 for the nine months ended September 30, 2004. The
increase was primarily due to the refinancing of partnership debt which
occurred on August 11, 2005. Your partnership incurred approximately
$23,548,000 of prepayment penalties and approximately $7,323,000 of
deferred mortgage costs were written off as
27 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q SEPTEMBER 30, 2005
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations (Continued)
Net Loss on Extinguishment of Debt (Continued)
a result of the refinancing. Your partnership also recorded a net gain on
the extinguishment of the debt refinanced of approximately $1,703,000 as
the carrying value for financial reporting purposes was higher than the
amount paid off.
Depreciation
Depreciation expense increased by $5,757,000 or approximately 21.4% to
$32,674,000 for the nine months ended September 30, 2005 compared to
$26,917,000 for the nine months ended September 30, 2004. An increase of
$5,977,000 is attributable to the shortening of the useful life of five
properties. Also, two properties were classified into continuing
operations from discontinued operations during the third quarter of 2005.
As a result, an additional depreciation expense was incurred in the third
quarter of 2005 as no depreciation was taken on these properties while
they were in discontinued operations. This increase is partially offset by
a decrease in depreciation expense attributed to fully depreciated
properties.
General and Administrative
General and administrative expenses increased by $181,000 or 6.5% to
$2,979,000 for the nine months ended September 30, 2005 compared to
$2,798,000 for the nine months ended September 30, 2004. The increase is
the result of a charge to bad debt expense of approximately $317,000 which
was partially offset by a decrease in professional fees.
Operating
Operating expenses increased by $356,000 or 291.8% to $478,000 for the
nine months ended September 30, 2005 compared to $122,000 for the nine
months ended September 30, 2004. The operating expenses are the result of
two vacant properties which have been vacant for all of 2005 as compared
to only a portion of 2004.
Impairment Loss
Your partnership recorded a $28,282,000 impairment loss for the nine
months ended September 30, 2005. An $11,328,000 impairment loss was
recorded on a property located in Toledo, Ohio in which the tenant is not
expected to renew their lease. Your partnership also recorded a
$14,754,000 impairment loss as a result of a restructuring of a tenant's
lease of four properties in Morris Township, New Jersey. Additionally, an
impairment loss of $2,200,000 was recorded on a property located in
Evanston, Wyoming due to an offer to purchase the property which was lower
than the properties carrying value. For the nine months ended September
30, 2004, your partnership recorded an impairment loss of $9,600,000 on a
property located in Bedford, Texas.
28 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q SEPTEMBER 30, 2005
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations (Continued)
Amortization Expense
Amortization expense decreased by $16,000 or less than 1.0% to $2,085,000
for the nine months ended September 30, 2005 compared to $2,101,000 for
the nine months ended September 30, 2004. The decrease is primarily the
result of a slight decrease in land estate amortization as a result of
several properties' land estates maturing.
Ground Rent
Ground rent expense increased by $113,000 or 4.9% to $2,415,000 for the
nine months ended September 30, 2005 compared to $2,302,000 for the nine
months ended September 30, 2004. The increase was primarily due to a
ground lease extension for a property located in Orlando, Florida. Under
the ground lease extension, the ground rent increased by approximately
$106,000 for the nine months ended September 30, 2005.
State and Local Taxes
State and local tax expense increased by $332,000 or approximately 28.7%
to $1,488,000 for the nine months ended September 30, 2005 compared to
$1,156,000 for the nine months ended September 30, 2004. The increase is
primarily the result of a payment of approximately $262,000 to the State
of Tennessee in the second quarter of 2005 as a result of an audit of
prior periods. The increase was also attributable to a new entity-level
tax imposed by the State of Kentucky.
Equity in Income from Investments in Limited Partnerships
Equity in income from investments in limited partnerships increased by
$353,000 or approximately 18.0% to $2,317,000 for the nine months ended
September 30, 2005 compared to $1,964,000 for the nine months ended
September 30, 2004. The increase is primarily the result of lower interest
expense at the limited partnerships due to scheduled debt amortization and
additional purchases of equity positions in two limited partnerships.
Minority Interest Expense
Minority interest expense increased by $266,000 or approximately 1.9% to
$14,016,000 for the nine months ended September 30, 2005 compared to
$13,750,000 for the nine months ended September 30, 2004. The increase was
the result of higher earnings primarily as a result of lower interest
expense at the non-wholly owned consolidated properties.
Discontinued Operations
During the nine months ended September 30, 2005, your partnership sold six
properties for a combined net sales price of approximately $31,300,000.
Your partnership recognized a net gain on
29 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q SEPTEMBER 30, 2005
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations (Continued)
Discontinued Operations (Continued)
disposal of these properties of $16,082,000. The sale and operations of
these properties for all periods presented has been recorded as
discontinued operations in compliance with the provisions of SFAS No. 144.
The loss from discontinued operations included a $1,433,000 impairment
loss. An impairment loss of $883,000 was taken on two properties located
in Texas which were sold in the second quarter. Also a $550,000 impairment
loss on a property located in Rock Falls, Illinois was taken during the
third quarter of 2005 once your partnership was notified of the tenant's
offer to purchase the property.
During the nine months ended September 30, 2004, your partnership sold 51
properties for a combined net sales price of approximately $123,900,000.
Your partnership recognized a net gain on disposal of these properties of
$48,390,000. The income from discontinued operations included a $3,465,000
impairment loss, primarily related to a property located in Pennsylvania
which is currently expected to be sold in the fourth quarter of 2005.
Comparison of the three months ended September 30, 2005 to the three
months ended September 30, 2004
Income from Continuing Operations
Income from continuing operations decreased by $31,389,000 to a loss of
$7,353,000 for the three months ended September 30, 2005 from $24,036,000
for the three months ended September 30, 2004. As more fully described
below, this decrease is attributable to a decrease in total revenue of
$739,000, an increase in total expenses of $30,640,000 and an increase in
minority interest expense of $96,000, which was partially offset by an
increase in equity income from investments in limited partnerships of
$86,000.
Rental Income
Rental income decreased by $853,000 or approximately 1.4% to $60,397,000
for the three months ended September 30, 2005 from $61,250,000 for the
three months ended September 30, 2004. The decrease was primarily due to
lower rental income resulting from lease renewals at rates that are lower
than the primary terms.
Interest Income
Interest income increased by $125,000 or approximately 17.1% to $855,000
for the three months ended September 30, 2005 from $730,000 for the three
months ended September 30, 2004. The increase was due to maintenance of
higher invested cash balances.
30 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q SEPTEMBER 30, 2005
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations (Continued)
Management Fee Income
Management fee income decreased by $11,000 or approximately 13.9% to
$68,000 for the three months ended September 30, 2005 from $79,000 for the
three months ended September 30, 2004. The decrease is attributable to
sales of properties previously under management.
Interest Expense
Interest expense decreased by $4,926,000 or approximately 22.0% to
$17,419,000 for the three months ended September 30, 2005 compared to
$22,345,000 for the three months ended September 30, 2004. The decrease
was primarily due to interest savings of $3,586,000 as a result of the
combination of loan payoffs and lower interest rate on the new refinanced
debt and a decrease in amortization expense on deferred costs of
$1,340,000.
Net Loss on Extinguishment of Debt
Net loss on extinguishment of debt increased by $29,120,000 or
approximately 606.7% to $29,168,000 for the three months ended September
30, 2005 from $48,000 for the three months ended September 30, 2004. The
increase was primarily due to the refinancing of partnership debt which
occurred on August 11, 2005. Your partnership incurred approximately
$23,548,000 of prepayment penalties and approximately $7,323,000 of
deferred mortgage costs were written off as a result of the refinancing.
Your partnership also recorded a net gain on the extinguishment of the
debt refinanced of approximately $1,703,000 as the carrying value for
financial reporting purposes was higher than the amount paid off.
Depreciation
Depreciation expense increased by $5,819,000 or approximately 64.8% to
$14,803,000 for the three months ended September 30, 2005 compared to
$8,984,000 for the three months ended September 30, 2004. An increase of
$5,619,000 is primarily attributed to the shortening of the useful life of
five properties. Also, two properties were classified into continuing
operations from discontinued operations during the third quarter of 2005.
As such, an additional depreciation expense of approximately $420,000 was
incurred for these properties as compared to the third quarter of 2004.
These increases were partially offset by a decrease in depreciation
expense attributed to fully depreciated properties.
General and Administrative
General and administrative expenses increased by $182,000 or approximately
19.4% to $1,121,000 for the three months ended September 30, 2005 compared
to $939,000 for the three months ended September 30, 2004. The increase is
the result of a charge to bad debt expense of approximately $299,000 which
was offset by a decrease in professional fees.
31 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q SEPTEMBER 30, 2005
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations (Continued)
Operating
Operating expenses increased by $151,000 or 145.2% to $255,000 for the
three months ended September 30, 2005 compared to $104,000 for the three
months ended September 30, 2004. The operating expenses are the result of
two vacant properties which have been vacant for all of 2005 as compared
to only a portion of 2004.
Amortization Expense
Amortization expense increased by $30,000 or approximately 4.3% to
$722,000 for the three months ended September 30, 2005 compared to
$692,000 for the three months ended September 30, 2004. The increase is
primarily the result of an increase in amortization expense on deferred
costs as a result of the new loan of approximately $48,000. This increase
was partially offset by a decrease in land estate amortization as several
properties' land estates matured.
Ground Rent
Ground rent expense increased slightly by $113,000 or approximately 14.7%
to $880,000 for the three months ended September 30, 2005 compared to
$767,000 for the three months ended September 30, 2004. The increase was
primarily due to a ground lease extension for a property located in
Orlando, Florida. Under the ground lease extension, the ground rent
increased by approximately $106,000 for the nine months ended September
30, 2005.
State and Local Taxes
State and local tax expense increased by $151,000 or approximately 61.4%
to $397,000 for the three months ended September 30, 2005 compared to
$246,000 for the three months ended September 30, 2004. The increase is
primarily due to a new entity-level tax imposed by the State of Kentucky.
Equity in Income from Investments in Limited Partnerships
Equity in income from investments in limited partnerships increased by
$86,000 or approximately 12.1% to $796,000 for the three months ended
September 30, 2005 compared to $710,000 for the three months ended
September 30, 2004. The increase is the result of lower interest expense
at the limited partnerships due to normal debt amortization and additional
purchases of equity positions in limited partnerships.
Minority Interest Expense
Minority interest expense increased by $96,000 or approximately 2.1% to
$4,704,000 for the three months ended September 30, 2005 compared to
$4,608,000 for the three months ended September 30, 2004. The increase was
the result of higher earnings, primarily as a result of lower interest
32 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q SEPTEMBER 30, 2005
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations (Continued)
Minority Interest Expense (Continued)
expense at the non-wholly owned consolidated properties.
Discontinued Operations
During the three months ended September 30, 2005, your partnership sold
two properties for a combined net sales price of approximately
$28,200,000. Your partnership recognized a net gain on sale of these
properties of approximately $15,474,000. The loss from discontinued
operations includes a $550,000 impairment loss on a property located in
Rock Falls, Illinois which your partnership has received an offer to
purchase during May 2006.
During the three months ended September 30, 2004, your partnership sold 31
properties for a combined net sales price of $65,098,000. Your partnership
recognized a net gain on disposal of these properties of $38,912,000. The
loss from discontinued operations includes a $3,400,000 realizability
allowance primarily related to a property located in Pennsylvania which is
currently expected to be sold in the fourth quarter of 2005.
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions in certain
circumstances that affect amounts reported in the accompanying
consolidated financial statements and related notes. In preparing these
consolidated financial statements, management has made its best estimates
and judgments of certain amounts included in the consolidated financial
statements, giving due consideration to materiality. Your partnership does
not believe there is a great likelihood that materially different amounts
would be reported related to the accounting policies described below.
However, application of these accounting policies involves the exercise of
judgment and use of assumptions as to future uncertainties and, as a
result, actual results could differ from these estimates.
Impairment of long-lived assets. At September 30, 2005, your partnership
had $968,778,000 of real estate (net) and $12,679,000 of real estate held
for sale (net), which combined, account for approximately 85% of your
partnership's total assets. Buildings and improvements are carried at cost
net of adjustments for depreciation and amortization. The fair values of
your partnership's buildings and improvements are dependent on the
performance of the properties.
Your partnership evaluates recoverability of the net carrying value of its
real estate and related assets at least annually, and more often if
circumstances dictate. If there is an indication that the carrying value
of a property might not be recoverable, your partnership prepares an
estimate of the future undiscounted cash flows expected to result from the
use of the property and its eventual disposition, generally over a
five-year holding period. In performing this review, management takes
33 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q SEPTEMBER 30, 2005
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Critical Accounting Policies (Continued)
into account, among other things, the existing occupancy, the expected
leasing prospects of the property and the economic situation in the region
where the property is located.
If the sum of the expected future undiscounted cash flows is less than the
carrying amount of the property, your partnership recognizes an impairment
loss and reduces the carrying amount of the asset to its estimated fair
value. Fair value is the amount at which the asset could be bought or sold
in a current transaction between willing parties, that is, other than in a
forced or liquidation sale. Management estimates fair value using
discounted cash flows or market comparables, as most appropriate for each
property. Independent certified appraisers are utilized to assist
management when warranted. During the nine months ended September 30, 2005
and September 30, 2004, your partnership recorded $29,715,000 and
$13,065,000, respectively, in allowances for impairment.
Because the cash flows used to evaluate the recoverability of the assets
and their fair values are based upon projections of future economic
events, such as property occupancy rates, rental rates, operating cost
inflation and market capitalization rates, which are inherently
subjective, the amounts ultimately realized at disposition may differ
materially from the net carrying values at the balance sheet dates. The
cash flows and market comparables used in this process are based on good
faith estimates and assumptions developed by management.
Unanticipated events and circumstances may occur, and some assumptions may
not materialize; therefore, actual results may vary from the estimates,
and variances may be material. Your partnership may provide additional
write-downs, which could be material in subsequent years if real estate
markets or local economic conditions change.
Your partnership owns a 707,482 square foot office building in Toledo,
Ohio that is leased to Owens-Illinois Inc. for an initial term that
expires on September 30, 2006. The property is encumbered by a
non-recourse mortgage which matures in October 2006 at which time a
$32,000,000 balloon payment will be due. The tenant has six five-year
renewal options. This tenant is presently not using a substantial portion
of the building and, although it has not given notice to your partnership,
has publicly announced that it will be relocating its headquarters. Thus,
your partnership believes that the tenant will not renew its lease. While
your partnership will attempt to sell or re-lease the property there is
substantial risk that your partnership will not be able to satisfy the
balloon payment due on the mortgage and that the mortgage holder will
foreclose on this property. Your partnership recognized an $11,328,000
impairment loss during the second quarter of 2005.
In the second quarter of 2005, your partnership entered into an agreement
with Honeywell International, Inc., the tenant of four office buildings
owned by your partnership in Morris Township, New Jersey to restructure
the lease on the properties. Under the restructuring, the tenant waived
its right to exercise its economic discontinuance option and your
partnership granted the tenant an option to purchase the properties in
2007 for $41,900,000. As a result of this
34 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q SEPTEMBER 30, 2005
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Critical Accounting Policies (Continued)
restructuring, your partnership recognized a $14,754,000 impairment loss
in the second quarter of 2005.
Useful lives of long-lived assets. Building and improvements and certain
other long-lived assets are depreciated or amortized over their useful
lives. Depreciation and amortization are computed using the straight-line
method over the useful life of the building and improvements. The cost of
properties represents the initial cost of the properties to your
partnership plus acquisition and closing costs less impairment
adjustments.
Recently Issued Accounting Standards. In June 2005, the FASB ratified the
EITF's consensus on Issue 04-5, "Determining Whether a General Partner, or
the General Partners as a Group, Controls a Limited Partnership or Similar
Entity When the Limited Partners Have Certain Rights." Issue 04-5 provides
a framework for determining whether a general partner controls, and should
consolidate, a
limited partnership or a similar entity. It is effective after June 29,
2005, for all newly formed limited partnerships and for any pre-existing
limited partnerships that modify their partnership agreements after that
date. General partners of all other limited partnerships will apply the
consensus no later than the beginning of the first reporting period in
fiscal years beginning after December 15, 2005. Your partnership believes
that the adoption of the consensus in EITF 04-5 will not have a material
effect on your partnership's consolidated financial statements.
35 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q SEPTEMBER 30, 2005
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Your partnership has both fixed and variable rate debt. To mitigate the
effects of fluctuations in interest rates on the variable rate portion of
this debt, your partnership owns one interest rate cap. All financial
instruments were entered into for other than trading purposes. A change in
interest rates on the fixed rate portion of the debt portfolio or the
interest rate cap impacts the net financial instrument position, but has
no impact on interest incurred or cash flows. A change in interest rates
on the variable portion of the debt portfolio impacts the interest
incurred and cash flows, but does not impact the net financial instrument
position.
At September 30, 2005, your partnership had one loan which had a variable
interest rate. The loan which had an outstanding balance of $471.2 million
at September 30, 2005, was obtained on August 11, 2005 and has a
three-year term. Interest on the outstanding balance accrues at a rate
equal to, at your partnership's option, either, (i) LIBOR rate (as
defined) plus 200 basis points or (ii) the bank's prime rate plus 50 basis
points. Your partnership purchased an interest rate cap on the loan so
that the LIBOR interest rate would be capped at 5%.
Your partnership elected to pay the loan based on the LIBOR rate. The
following table shows what the annual effect of a change in the LIBOR rate
(3.69% at September 30, 2005) will have on interest expense based upon
increases up to the cap of 7% all in interest rate.
Change in LIBOR
(In thousands)
-------------------------
1% 1.31%
-- -----
Additional interest expense $ 4,712 $ 6,173
Item 4. CONTROLS AND PROCEDURES
Your partnership's management, with the participation of your
partnership's chief executive officer and chief financial officer, has
evaluated the effectiveness of your partnership's disclosure controls and
procedures (as such term is defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended) as of the end of the period covered by
this report. Based on such evaluation, your partnership's chief executive
officer and chief financial officer have concluded that, as of the end of
such period, your partnership's disclosure controls and procedures are
effective.
There have not been any changes in your partnership's internal controls
over financial reporting (as defined in Rule 13a-15(f) under the
Securities and Exchange Act of 1934, as amended) during the fiscal quarter
to which this report relates that have materially affected, or are
reasonably likely to materially affect, your partnership's internal
controls over financial reporting.
36 of 47
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q SEPTEMBER 30, 2005
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Legal
On December 27, 2004 Hershey Foods Corporation ("Hershey"), the tenant of
a 430,000 square foot facility in New Kingston, Pennsylvania filed a
complaint against Newkirk Dautec L.P., the wholly-owned subsidiary of your
partnership that owns the facility, in the Court of Common Pleas,
Cumberland County, Pennsylvania. Hershey sought a declaratory judgment
declaring the correct methodology and formula for calculating the sum
Hershey is required to pay your partnership for the purchase of the
facility pursuant to a purchase option.
In August 2005, this action was settled and your partnership and Hershey
agreed that Hershey would exercise its purchase option on the property for
$11,350,000. Your partnership will also receive $3,837,659 of deferred
rent. The parties have agreed that the transaction will be consummated on
or before November 22, 2005. It is anticipated that your partnership will
recognize a gain of $1.2 million on the transaction.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) N/A
(b) N/A
(c) N/A
Item 3. DEFAULTS UPON SENIOR SECURITIES
N/A
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 17, 2005, affiliates of Apollo Real Estate Investment Fund III,
L.P., Vornado Realty Trust and entities through which employees and
executive officers of Winthrop Financial Associates hold units,
representing approximately 80% of the outstanding units of your
partnership, executed a consent in favor of the actions described in the
Definitive Information Statement on Schedule 14C filed by your partnership
on such date. Reference is made to such Definitive Information Statement
for additional information.
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THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q SEPTEMBER 30, 2005
Item 5. OTHER INFORMATION
In connection with a loan obtained by your partnership on August 11, 2005,
T-Two Partners, L.P. ("T-Two Partners"), an affiliate of your partnership
also obtained a loan from the same lenders in the principal amount of
$272,241,000 (the "T-Two Loan"), the proceeds of which were used to
satisfy the outstanding balance on a loan made by Bank of America, N.A. to
T-Two Partners. The interest rate, maturity date and principal terms of
the T-Two Loan are the same as your partnership's loan. As with the prior
loan, your partnership agreed to guarantee the obligations of T-Two
Partners under the T-Two Loan. Subsequent to September 30, 2005, your
partnership exercised an option to acquire all of the partnership
interests in T-Two Partners and assumed the obligations on T-Two Partners
under the T-Two Loan.
Your partnership and T-Two Partners have entered into the following
agreements in order to limit the exposure to interest rate volatility: (i)
a five year interest rate swap agreement with KeyBank National Association
effectively setting the LIBOR rate at 4.642% for $250 million of the loan
balance; (ii) an interest rate cap agreement at 5% with Bank of America,
N.A. for $450 million through November 2005 and $425 million through
November 2006; and (iii) a LIBOR rate cap agreement at 6% with SMBC
Derivative Products Limited for the period from November 2006 until August
2008 for a notional amount of $290 million.
On November 7, 2005, Newkirk REIT completed its initial public offering of
common stock (the "REIT IPO"). The common stock of Newkirk REIT is traded
on the New York Stock Exchange under the symbol "NKT". In connection with
this transaction, on November 7, 2005:
o Newkirk REIT was appointed as the successor general partner of your
partnership in place of MLP GP LLC;
o Your partnership's agreement of limited partnership was amended and
restated to contain various provisions that are necessary and/or
customary to provide for an umbrella real estate investment trust
(UPREIT) structure, including provisions granting limited partners,
other than Newkirk REIT, the right, beginning on November 7, 2006
and subject to certain limitations, to cause your partnership to
redeem their interest in the Partnership at a price based on the
closing price of Newkirk REIT's common stock on the New York Stock
Exchange for the ten trading days prior to receipt of a redemption
notice. Newkirk REIT will be permitted to elect to purchase tendered
partnership interests of your partnership for the redemption price
and to pay the redemption price either in cash or by the issuance of
shares of Newkirk REIT's common stock;
o in order to facilitate the UPREIT structure, your partnership
effected a 7.5801 to 1 Unit split of the outstanding Units thereby
increasing the outstanding Units to 47,500,000 Units;
o Newkirk REIT and your partnership retained NKT Advisors LLC (the
"Advisor") pursuant to an advisory agreement to manage your
partnership's assets and the day-to-day operations of your
partnership and Newkirk REIT, subject to the supervision of Newkirk
REIT's board of directors;
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THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q SEPTEMBER 30, 2005
Item 5. OTHER INFORMATION (Continued)
o Newkirk REIT acquired 15,625,000 newly-issued Units (post-split)
from your partnership in exchange for $235.8 million and an
additional 1,250,000 Units (post split) in exchange for the
contribution of certain exclusivity rights with respect to net-lease
business opportunities offered to or generated by Michael Ashner,
the Chairman and Chief Executive Officer of Newkirk REIT, that
Newkirk REIT had acquired from First Union Real Estate Equity and
Mortgage Investments. Newkirk REIT also purchased 2,500,000
outstanding Units (post-split) from Apollo Real Estate Investment
Fund III, L.P. and WEM-Brynmawr Associates LLC for $37.7 million.
Following these purchases, Newkirk REIT owns 19,375,000 Units or
30.1% of the 64,375,000 outstanding Units. The per Unit price paid
by Newkirk REIT for such Units (other than the 1,250,000 Units
acquired in respect of exclusivity rights) was equal to the per
share offering price under the REIT IPO, less underwriting
commissions;
o The Advisor was issued special voting preferred stock of Newkirk
REIT entitling it to vote on all matters for which Newkirk REIT
common stockholders are entitled to vote. The number of votes that
the Advisor will be entitled to cast in respect of the special
voting preferred stock will initially be 45,000,000 votes or
approximately 69.9% of the 64,375,000 votes entitled to be cast. The
45,000,000 votes represents the total number of Units outstanding
immediately following consummation of the REIT IPO (excluding Units
held by Newkirk REIT). As Units are redeemed at the option of a
Unitholder, the number of votes attaching to the Advisor's special
voting preferred stock will decrease by an equivalent amount. The
advisory agreement between your partnership, Newkirk REIT and the
Advisor provides that on all matters for which the Advisor is
entitled to cast votes in respect of its special voting preferred
stock, it will cast its votes in direct proportion to the votes that
are cast by limited partners, other than Newkirk REIT, on such
matters, except that the Advisor (through its managing member) will
be entitled to vote in its sole discretion to the extent that the
voting rights of affiliates of Vornado Realty Trust are limited
under certain circumstances; and
o Your partnership acquired all of the partnership interests in T-Two
Partners, L.P.
Item 6. EXHIBITS
Exhibits required by Item 601 of Regulation S-K are filed herewith or
incorporated herein by reference and are listed in the attached Exhibit
Index.
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THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q SEPTEMBER 30, 2005
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE NEWKIRK MASTER LIMITED PARTNERSHIP
BY: MLP GP LLC
General Partner
BY: NEWKIRK MLP CORP
Manager
BY: /s/ Michael L. Ashner
------------------------------------
Michael L. Ashner
Chief Executive Officer
BY: /s/ Thomas C. Staples
------------------------------------
Thomas C. Staples
Chief Financial Officer
Dated: November 14, 2005
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THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q SEPTEMBER 30, 2005
Exhibit Index
Exhibit Description
- ------- -----------
2.1 Agreement and Plan of Merger between the Newkirk Master Limited
Partnership and each of the Merger Partnerships set forth on
Schedule A, dated December 6, 2001 (incorporated by reference to
exhibit 2.1 of the Partnership's Form 10 filed April 30, 2003).
2.2 Assignment and Assumption Agreement by and between Newkirk Stock
LLC, The Newkirk Master Limited Partnership, Newkirk NL Holdings
LLC and VNK Corp. dated as of December 26, 2001 (incorporated by
reference to exhibit 2.2 of the Partnership's Form 10 filed April
30, 2003).
2.3 Assignment and Assumption Agreement by and between Newkirk
Eastgar LLC, Newkirk Partner Interest LLC, The Newkirk Master
Limited Partnership and Newkirk MLP Unit LLC dated as of December
26, 2001 (incorporated by reference to exhibit 2.3 of the
Partnership's Form 10 filed April 30, 2003).
2.4 Assignment and Assumption Agreement by and between Vornado Realty
L.P., Vornado Newkirk LLC, The Newkirk Master Limited
Partnership, and Newkirk MLP Unit LLC, dated as of December 26,
2001 (incorporated by reference to exhibit 2.4 of the
Partnership's Form 10 filed April 30, 2003).
2.5 Assignment and Assumption Agreement between Newkirk RE Associates
LLC, The Newkirk Master Limited Partnership, Newkirk RE Holdings
and Vornado Newkirk LLC dated as of December 26, 2001
(incorporated by reference to exhibit 2.5 of the Partnership's
Form 10 filed April 30, 2003).
2.6 Assignment and Assumption Agreement by and between Newkirk
Associates LLC, The Newkirk Master Limited Partnership, Newkirk
NL Holdings LLC and Vornado Newkirk LLC dated as of December 26,
2001 (incorporated by reference to exhibit 2.6 of the
Partnership's Form 10 filed April 30, 2003).
2.7 Agreement and Plan of Merger by and between The Newkirk Master
Limited Partnership, Lanmar Associates Limited Partnership and
Newkirk Lanmar L.P., dated as of December 6, 2001 (incorporated
by reference to exhibit 2.7 of the Partnership's Form 10 filed
April 30, 2003).
3. Certificate of Limited Partnership of the Newkirk Master Limited
Partnership (incorporated by reference to exhibit 3 of the
Partnership's Form 10 filed April 30, 2003).
4.1 Agreement of Limited Partnership of The Newkirk Master Limited
Partnership, by and among MLP GP LLC, Newkirk Manager Corp. and
all other persons who shall, pursuant to the Exchange or
otherwise become limited partners of the Partnership, dated as of
October 23, 2001 (incorporated by reference to exhibit 4.1 of the
Partnership's Form 10 filed April 30, 2003).
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THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q SEPTEMBER 30, 2005
Exhibit Index
(Continued)
Exhibit Description
- ------- -----------
4.2 Additional provisions incorporated by reference into the
Agreement of Limited Partnership of the Newkirk Master Limited
Partnership (incorporated by reference to exhibit 4.2 of the
Partnership's Form 10 filed April 30, 2003).
4.3 Limited Liability Agreement of MLP GP LLC (incorporated by
reference to exhibit 4.3 of the Partnership's Form 10 filed April
30, 2003).
4.4 Amended and Restated Agreement of Limited Partnership of The
Newkirk Master Limited Partnership dated as of November 7, 2005
(incorporated by reference to Exhibit 10.3 to the Form 8-K filed
by Newkirk Realty Trust, Inc. on November 14, 2005).
10.1 Advisory Agreement, dated as of November 7, 2005, by and between
the Newkirk Master Limited Partnership, Newkirk Realty Trust and
NKT Advisors LLC (incorporated by reference to Exhibit 10.1 to
the Form 8-K filed by Newkirk Realty Trust, Inc. on November 14,
2005).
31.1 Chief Executive Officer's Certificate, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer's Certificate, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32 Certificate of Chief Executive Officer and Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
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