UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(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
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _________________ to ________________
Commission File Number 1-12386
LEXINGTON CORPORATE PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
Maryland 13-3717318
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Penn Plaza, Suite 4015
New York, NY 10119
(Address of principal executive offices) (Zip code)
(212) 692-7200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x . No .
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act). Yes x . No .
--- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes x . No .
--- ---
Indicate the number of shares outstanding of each of the registrant's classes of
common shares, as of the latest practicable date: 51,978,259 common shares, par
value $.0001 per share on November 10, 2005.
Explanatory Note
----------------
This Amendment No. 1 on Form 10-Q/A amends the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 2005, as initially filed with the
Securities and Exchange Commission (the "SEC") on November 9, 2005, and is being
filed to correct the following: (1) the amount of interest paid by the Company
in 2005 under Note 12 Supplemental Disclosure of Statement of Cash Flow
Information because the mathematical calculation used to derive that number was
not correct, and (2) the amount of cash dividends paid to the common
shareholders for the nine months ended September 30, 2005 and 2004 under Item 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the heading "Liquidity and Capital Resources - Dividends"
because of two typographical errors. The amount for interest paid by the Company
in 2005 should be revised to $49,882 from $44,540. The cash dividends paid to
common shareholders for the nine months ended September 30, 2005 should be
revised to $53.9 million from $35.3 million, and the comparative figure for the
nine months ended September 30, 2004 should be revised to $48.1 million from
$31.2 million. Item 1 Financial Statements and Item 2 Management's Discussion
and Analysis of Financial Condition and Results of Operations of Part I of the
Quarterly Report as revised are restated in their entirety.
2
PART 1. - FINANCIAL INFORMATION
-------------------------------
ITEM 1. FINANCIAL STATEMENTS
----------------------------
LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2005 (Unaudited) and December 31, 2004
(in thousands, except share and per share data)
September 30, December 31,
2005 2004
--------------- ---------------
Assets:
Real estate, at cost $ 1,932,746 $ 1,407,872
Less: accumulated depreciation and amortization 225,225 180,610
--------------- ---------------
1,707,521 1,227,262
Properties held for sale - discontinued operations 48,222 13,216
Cash and cash equivalents 61,115 146,957
Investment in non-consolidated entities 168,159 132,738
Deferred expenses, net 13,209 7,860
Notes receivable from affiliate - 45,800
Rent receivable - current 2,717 4,123
Rent receivable - deferred 25,688 23,923
Intangible assets, net 137,101 54,736
Notes receivable 11,050 -
Other assets, net 38,819 40,471
--------------- ---------------
$ 2,213,601 $ 1,697,086
=============== ===============
Liabilities and Shareholders' Equity:
Mortgages and notes payable $ 1,186,907 $ 765,144
Liabilities - discontinued operations 26,748 1,688
Accounts payable and other liabilities 13,030 12,406
Accrued interest payable 3,137 5,808
Deferred revenue 5,811 4,173
Prepaid rent 10,015 3,818
--------------- ---------------
1,245,648 793,037
Minority interests 56,401 56,759
--------------- ---------------
1,302,049 849,796
--------------- ---------------
Commitments and contingencies (note 11)
Shareholders' equity:
Preferred shares, par value $0.0001 per share; authorized
10,000,000 shares,Series B Cumulative Redeemable Preferred,
liquidation preference $79,000, 3,160,000 shares issued and
outstanding 76,315 76,315
Series C Cumulative Convertible Preferred, liquidation
preference $155,000 and $135,000 in 2005 and 2004, respectively,
3,100,000 and 2,700,000 shares issued and outstanding in 2005
and 2004, respectively 150,588 131,126
Common shares, par value $0.0001 per share; authorized 160,000,000
and 80,000,000 shares in 2005 and 2004, respectively,
51,974,639, and 48,621,273 shares issued and outstanding in
2005 and 2004, respectively 5 5
Additional paid-in-capital 845,341 766,882
Deferred compensation, net (12,505) (8,692)
Accumulated distributions in excess of net income (148,192) (118,346)
--------------- ---------------
Total shareholders' equity 911,552 847,290
--------------- ---------------
$ 2,213,601 $ 1,697,086
=============== ===============
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three and nine months ended September 30, 2005 and 2004
(Unaudited and in thousands, except share and per share data)
Three Months ended Nine Months ended
September 30, September 30,
2005 2004 2005 2004
----------- ------------ ------------ ------------
Gross revenues:
Rental $ 51,023 $ 35,066 $ 133,309 $ 99,925
Advisory fees 995 1,448 4,186 3,174
Tenant reimbursements 4,213 1,293 7,207 3,958
----------- ------------ ------------ ------------
Total gross revenues 56,231 37,807 144,702 107,057
Expense applicable to revenues:
Depreciation and amortization (20,600) (10,909) (50,322) (27,411)
Property operating (7,929) (2,906) (15,978) (7,704)
General and administrative (4,164) (3,987) (13,175) (9,997)
Non-operating income 337 1,807 1,189 2,563
Interest and amortization expense (18,597) (12,344) (47,264) (33,550)
Debt satisfaction gains, net - - 4,632 -
----------- ------------ ------------ ------------
Income before benefit (provision) for income taxes,
minority interests, equity in earnings of
non-consolidated entities and discontinued
operations 5,278 9,468 23,784 30,958
Benefit (provision) for income taxes 111 (350) 44 (1,817)
Minority interests (791) (673) (3,002) (2,740)
Equity in earnings of non-consolidated entities 2,328 1,862 5,087 5,383
----------- ------------ ------------ ------------
Income from continuing operations 6,926 10,307 25,913 31,784
----------- ------------ ------------ ------------
Discontinued operations, net of minority interest:
Income from discontinued operations 656 1,418 2,676 4,684
Impairment charges (207) (562) (800) (2,775)
Gains on sales of properties 1,595 - 6,656 4,065
----------- ------------ ------------ ------------
Total discontinued operations 2,044 856 8,532 5,974
----------- ------------ ------------ ------------
Net income 8,970 11,163 34,445 37,758
Dividends attributable to preferred shares -
Series B (1,590) (1,590) (4,770) (4,770)
Dividends attributable to preferred shares -
Series C (2,519) - (7,556) -
----------- ------------ ------------ ------------
Net income allocable to common shareholders $ 4,861 $ 9,573 $ 22,119 $ 32,988
=========== ============ ============ ============
Income per common share-basic:
Income from continuing operations $ 0.06 $ 0.18 $ 0.28 $ 0.59
Income from discontinued operations $ 0.04 $ 0.02 $ 0.17 $ 0.13
----------- ------------ ------------ ------------
Net income $ 0.10 $ 0.20 $ 0.45 $ 0.72
=========== ============ ============ ============
Weighted average common shares
outstanding-basic 50,837,178 47,901,818 49,269,497 46,033,992
=========== ============ ============ ============
Income per common share-diluted:
Income from continuing operations $ 0.04 $ 0.17 $ 0.26 $ 0.58
Income from discontinued operations $ 0.04 $ 0.02 $ 0.15 $ 0.13
----------- ------------ ------------ ------------
Net income $ 0.08 $ 0.19 $ 0.41 $ 0.71
=========== ============ ============ ============
Weighted average common shares
outstanding-diluted 57,764,659 53,349,746 56,197,314 51,521,655
=========== ============ ============ ============
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
4
LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2005 and 2004
(Unaudited and in thousands)
2005 2004
------------------ -----------------
Net cash provided by operating activities $ 84,732 $ 70,024
------------------ -----------------
Cash flows from investing activities:
Investment in convertible mortgage note - (19,800)
Investment in real estate properties, including
intangibles (700,921) (137,758)
Collection of notes receivable from affiliate 45,800 -
Net proceeds from sale/transfer of properties 42,130 90,220
Net sale proceeds/distributions - non-consolidated
entity 3,541 -
Collection of note receivable - non-affiliate 3,488 -
Real estate deposits, net 1,449 1,325
Investment in and advances to non-consolidated
entities, net (38,990) (53,586)
Distribution of loan proceeds from non-consolidated
entities - 15,629
Increase in leasing costs (2,727) (197)
Increase in escrow deposits (2,434) (2,022)
------------------ -----------------
Net cash used in investing activities (648,664) (106,189)
------------------ -----------------
Cash flows from financing activities:
Dividends to common and preferred shareholders (64,291) (52,891)
Principal payments on debt, excluding normal
amortization (16,844) (1,264)
Dividend reinvestment plan proceeds 10,509 7,641
Change in credit facility borrowings, net - (94,000)
Principal amortization payments (19,012) (13,980)
Debt deposits 852 (972)
Proceeds of mortgages and notes payable 495,645 145,240
Contribution from minority partner 1,692 -
Increase in deferred costs, net (5,682) (688)
Cash distributions to minority partners (5,251) (7,271)
Proceeds from the sale of common and preferred shares,
net 80,554 144,579
Origination fee amortization payments - (29)
Common shares/partnership units repurchased (82) -
------------------ -----------------
Net cash provided by financing activities 478,090 126,365
------------------ -----------------
Change in cash and cash equivalents (85,842) 90,200
Cash and cash equivalents, at beginning of period 146,957 15,923
------------------ -----------------
Cash and cash equivalents, at end of period $ 61,115 $ 106,123
================== =================
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
5
LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited and dollars in thousands, except per share data)
(1) The Company
-----------
Lexington Corporate Properties Trust (the "Company") is a self-managed
and self-administered real estate investment trust ("REIT") that
acquires, owns and manages a geographically diversified portfolio of net
leased office, industrial and retail properties. As of September 30,
2005, the Company had an ownership interest in 187 properties and
managed an additional two properties. The real properties owned by the
Company are generally subject to triple net leases to corporate tenants.
Of the Company's 187 properties, 14 provide for operating expense stops,
one is a modified gross lease and three are not leased.
The Company believes it has qualified as a REIT under the Internal
Revenue Code of 1986, as amended (the "Code"). Accordingly, the Company
will not be subject to federal income tax, provided that distributions
to its shareholders equal at least the amount of its REIT taxable income
as defined under the Code. The Company is permitted to participate in
certain activities from which it was previously precluded in order to
maintain its qualification as a REIT, so long as these activities are
conducted in entities which elect to be treated as taxable REIT
subsidiaries ("TRS") under the Code. As such, the TRS will be subject to
federal income taxes on the income from these activities.
The unaudited financial statements reflect all adjustments, which are,
in the opinion of management, necessary to present a fair statement of
the financial condition and results of operations for the interim
periods. For a more complete understanding of the Company's operations
and financial position, reference is made to the financial statements
(including the notes thereto) previously filed with the Securities and
Exchange Commission with the Company's Annual Report on Form 10-K for
the year ended December 31, 2004.
(2) Summary of Significant Accounting Policies
------------------------------------------
Basis of Presentation and Consolidation. The Company's consolidated
financial statements are prepared on the accrual basis of accounting.
The financial statements reflect the accounts of the Company and its
controlled subsidiaries, including Lepercq Corporate Income Fund L.P.
("LCIF"), Lepercq Corporate Income Fund II L.P. ("LCIF II"), Net 3
Acquisition L.P. ("Net 3"), Lexington Realty Advisors, Inc. ("LRA"),
Lexington Contributions, Inc. ("LCI"), Six Penn Center L.P and Lexington
Strategic Asset Corp. ("LSAC"). LRA, LCI and LSAC are wholly owned
taxable REIT subsidiaries, and the Company is the sole unitholder of the
general partner and the majority limited partner of each of LCIF, LCIF
II, Net 3 and Six Penn Center L.P. The Company determines whether an
entity for which it holds an interest should be consolidated pursuant to
Financial Accounting Standards Board ("FASB") Interpretation No. 46,
Consolidation of Variable Interest Entities ("FIN 46R"). If not, and the
Company controls the entity's voting shares and similar rights, the
entity is consolidated. FIN 46R requires the Company to evaluate whether
it has a controlling financial interest in an entity through means other
than voting rights.
Recently Issued Accounting Pronouncements. FASB Statement No. 150,
Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity ("SFAS 150"), was issued in May 2003. SFAS
150 establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities
and equity. SFAS 150 also includes required disclosures for financial
instruments within its scope. For the Company, SFAS 150 was effective
for instruments entered into or modified after May 31, 2003 and
otherwise was effective as of January 1, 2004, except for mandatorily
redeemable financial instruments. For certain mandatorily redeemable
financial instruments, SFAS 150 was effective for the Company on January
1, 2005. The effective date has been deferred indefinitely for certain
other types of mandatorily redeemable financial instruments. The Company
currently does not have any financial instruments that are within the
scope of SFAS 150.
In December 2004, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 123, (revised 2004) Share-Based Payment ("SFAS
No. 123R"), which supersedes Accounting Principals Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. SFAS No. 123R establishes standards for the
accounting for transactions in which an entity exchanges its equity
instruments for goods or services. It also addresses transactions in
which an entity incurs liabilities in exchange for goods or services
that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. SFAS
No. 123R focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions.
SFAS No. 123R requires a public entity to measure the cost of employee
services received in exchange for an award of equity instruments based
on the grant date fair value of the award. The cost will be recognized
over the period in which an employee is required to provide services in
exchange for the award. SFAS No. 123R is effective for fiscal years
beginning after January
6
1, 2006, based on new rules issued by the Securities and Exchange
Commission. The impact of adopting this statement is not expected to
have a material impact on the Company's financial position or results of
operations.
In December 2004, the FASB issued Statement No. 153, Exchange of
Non-monetary Assets - an amendment of APB Opinion No. 29 ("SFAS No.
153"). The guidance in APB Opinion No. 29, Accounting for Non-monetary
Transactions, is based on the principle that exchanges of non-monetary
assets should be measured based on the fair value of the assets
exchanged. The guidance in that opinion, however, included certain
exceptions to that principle. SFAS No. 153 amends APB Opinion No. 29 to
eliminate the exception for non-monetary assets that do not have
commercial substance. A non-monetary exchange has commercial substance
if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS No. 153 is effective for
non-monetary asset exchanges, occurring in fiscal periods beginning
after June 15, 2005. The impact of adopting this statement is not
expected to have a material impact on the Company's financial position
or results of operations.
In March 2005, the FASB issued Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations - an Interpretation of SFAS
Statement No. 143 ("FIN 47"). FIN 47 clarifies the timing of liability
recognition for legal obligations associated with the retirement of a
tangible long-lived asset when the timing and/or method of settlement
are conditional on a future event. FIN 47 is effective for fiscal years
ending after December 15, 2005. The application of FIN 47 is not
expected to have a material impact on the Company's consolidated
financial position or results of operations.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections ("SFAS 154") which replaces APB Opinions No. 20 Accounting
Changes and SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements--An Amendment of APB Opinion No. 28. SFAS 154
provides guidance on the accounting for and reporting of accounting
changes and error corrections. It establishes retrospective application
as the required method for reporting a change in accounting principle
and the reporting of a correction of an error. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The impact of adopting this statement
is not expected to have a material impact on the Company's financial
position or results of operations.
In June 2005, the FASB ratified the Emerging Issues Task Force's
("EITF") consensus on EITF 04-05, 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. EITF 04-05
provides a framework for determining whether a general partner controls,
and should consolidate, a limited partnership or a similar entity. It
was 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. The impact of the adoption of EITF 04-05 is not
expected to have a material impact on the Company's financial position
or results of operations.
In 2005, the EITF released Issue No. 05-6, Determining the Amortization
Period for Leasehold Improvements ("EITF 05-6"), which clarifies the
period over which leasehold improvements should be amortized. EITF 05-6
requires all leasehold improvements to be amortized over the shorter of
the useful life of the assets, or the applicable lease term, as defined.
The applicable lease term is determined on the date the leasehold
improvements are acquired and includes renewal periods for which
exercise is reasonably assured. EITF 05-06 was effective for leasehold
improvements acquired in reporting periods beginning after June 29,
2005. The impact of the adoption of EITF 05-6 is not expected to have a
material impact on the Company's financial position or results of
operations.
Use of Estimates. Management has made a number of estimates and
assumptions relating to the reporting of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported amounts
of revenues and expenses to prepare these consolidated financial
statements in conformity with generally accepted accounting principles.
The most significant estimates made include the recoverability of
accounts receivable (primarily related to straight-line rents),
allocation of property purchase price to tangible and intangible assets,
the determination of impairment of long-lived assets and the useful
lives of long-lived assets. Actual results could differ from those
estimates.
Purchase Accounting for Acquisition of Real Estate. The fair value of
the real estate acquired, which includes the impact of mark-to-market
adjustments for assumed mortgage debt related to property acquisitions,
is allocated to the acquired tangible assets, consisting of land,
building and improvements, fixtures and equipment and identified
intangible assets and liabilities, consisting of the value of
above-market and below-market leases, other value of in-place leases and
value of tenant relationships, based in each case on their fair values.
The fair value of the tangible assets of an acquired property (which
includes land, building and improvements and fixtures and equipment) is
determined by valuing the property as if it were vacant, and the
"as-if-vacant" value is then allocated to land, building and
improvements, and fixtures and equipment based on management's
determination of relative fair values of these assets. Factors
considered by management in performing these analyses include an
estimate of carrying costs during the expected lease-up periods
considering current market conditions and costs to execute similar
leases. In estimating carrying costs, management includes real estate
taxes, insurance and other operating expenses and estimates of lost
rental revenue
7
during the expected lease-up periods based on current market demand.
Management also estimates costs to execute similar leases including
leasing commissions.
In allocating the fair value of the identified intangible assets and
liabilities of an acquired property, above-market and below-market
in-place lease values are recorded based on the difference between the
current in-place lease rent and a management estimate of current market
rents. Below-market lease intangibles are recorded as part of deferred
revenue and amortized into rental revenue over the non-cancelable
periods of the respective leases. Above-market leases are recorded as
part of intangible assets and amortized as a direct charge against
rental revenue over the non-cancelable portion of the respective leases.
The aggregate value of other acquired intangible assets, consisting of
in-place leases and tenant relationships, is measured by the excess of
(i) the purchase price paid for a property over (ii) the estimated fair
value of the property as if vacant, determined as set forth above. This
aggregate value is allocated between in-place lease values and tenant
relationships based on management's evaluation of the specific
characteristics of each tenant's lease. The value of in-place leases and
customer relationships are amortized to expense over the remaining
non-cancelable periods of the respective leases.
Revenue Recognition. The Company recognizes revenue in accordance with
Statement of Financial Accounting Standards No. 13 Accounting for
Leases, as amended ("SFAS 13"). SFAS 13 requires that revenue be
recognized on a straight-line basis over the term of the lease unless
another systematic and rational basis is more representative of the time
pattern in which the use benefit is derived from the leased property.
Rentals provided for during renewal option periods where the rental
terms are lower than those in the primary term are excluded from the
calculation of straight line rent if they do not meet the criteria of a
bargain renewal option.
Gains on sales of real estate are recognized pursuant to the provisions
of Statement of Financial Accounting Standards No. 66 Accounting for
Sales of Real Estate, as amended ("SFAS 66"). The specific timing of the
sale is measured against various criteria in SFAS 66 related to the
terms of the transactions and any continuing involvement in the form of
management or financial assistance associated with the properties. If
the sales criteria are not met, the gain is deferred and the finance,
installment or cost recovery method, as appropriate, is applied until
the sales criteria are met.
Accounts Receivable. The Company continuously monitors collections from
its tenants and would make a provision for estimated losses based upon
historical experience and any specific tenant collection issues that the
Company has identified. As of September 30, 2005 and December 31, 2004,
the Company did not record an allowance for doubtful accounts.
Impairment of Real Estate. The Company evaluates the carrying value of
all real estate held when a triggering event under SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, as
amended ("SFAS 144") has occurred to determine if an impairment has
occurred which would require the recognition of a loss. The evaluation
includes reviewing anticipated cash flows of the property, based on
current leases in place, and an estimate of what lease rents will be if
the property is vacant coupled with an estimate of proceeds to be
realized upon sale. However, estimating market lease rents and future
sale proceeds is highly subjective and such estimates could differ
materially from actual results.
Depreciation is determined by the straight-line method over the
remaining estimated economic useful lives of the properties.
Tax Status. The Company and certain of its subsidiaries file a
consolidated federal income tax return. The Company has made an election
to qualify, and believes it is operating so as to qualify, as a REIT for
federal income tax purposes. Accordingly, the Company generally will not
be subject to federal income tax, provided that distributions to its
shareholders equal at least the amount of its REIT taxable income as
defined under Sections 856 through 860 of the Internal Revenue Code, as
amended (the "Code").
The Company is now permitted to participate in certain activities from
which it was previously precluded in order to maintain its qualification
as a REIT, so long as these activities are conducted in entities which
elect to be treated as taxable REIT subsidiaries under the Code. LRA,
LCI and LSAC are taxable REIT subsidiaries. As such, the Company is
subject to federal and state income taxes on the income from these
activities.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax basis and operating loss and tax credit
carry-forwards. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled.
Properties Held For Sale. The Company accounts for properties held for
sale in accordance with SFAS 144. SFAS 144 requires that the assets and
liabilities of properties that meet various criteria in SFAS No. 144 be
presented separately in the statement of financial position, with assets
and liabilities being separately stated. The operating results of these
properties are reflected as discontinued operations in the income
statement. Properties that do not meet the held for sale criteria of
SFAS No. 144 are accounted for as operating properties.
8
Earnings Per Share. Basic net income per share is computed by dividing
net income reduced by preferred dividends by the weighted average number
of common shares outstanding during the period. Diluted net income per
share amounts are similarly computed but include the effect, when
dilutive, of in-the-money common share options, convertible interests of
non-consolidated entities, operating partnership units, convertible
preferred shares and potentially convertible securities.
Common Share Options. The Company has elected to continue to account for
its option plan under the recognition provision of APB Opinion No. 25,
Accounting for Stock Issued to Employees. Accordingly, no compensation
cost has been recognized with regard to options granted in the condensed
consolidated statements of income.
Common share options granted generally vest ratably over a four-year
term and expire five years from the date of grant. The following table
illustrates the effect on net income and earnings per share if the fair
value based method had been applied to all outstanding share option
awards in each period:
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
---- ---- ---- ----
Net income allocable to common shareholders,
as reported $ 4,861 $ 9,573 $ 22,119 $ 32,988
Add: Stock based employee compensation
expense included in reported net income - - - -
Deduct: Total stock based employee
compensation expense determined under
fair value based method for all awards 1 64 5 191
----------- ----------- ----------- -----------
Pro forma net income - basic $ 4,860 $ 9,509 $ 22,114 $ 32,797
=========== =========== =========== ===========
Net income per share - basic
Basic - as reported $ 0.10 $ 0.20 $ 0.45 $ 0.72
=========== =========== =========== ===========
Basic - pro forma $ 0.10 $ 0.20 $ 0.45 $ 0.71
=========== =========== =========== ===========
Net income allocable to common shareholders
for diluted earnings per share $ 4,813 $ 10,345 $ 22,814 $ 36,559
Add: Stock based employee compensation
expense included in reported net income - - - -
Deduct: Total stock based employee
compensation expense determined under
fair value based method for all awards 1 64 5 191
----------- ----------- ----------- -----------
Pro forma net income - diluted $ 4,812 $ 10,281 $ 22,809 $ 36,368
=========== =========== =========== ===========
Net income per share - diluted
Diluted - as reported $ 0.08 $ 0.19 $ 0.41 $ 0.71
=========== =========== =========== ===========
Diluted - pro forma $ 0.08 $ 0.19 $ 0.41 $ 0.71
=========== =========== =========== ===========
Reclassification. Certain amounts included in 2004 financial statements have
been reclassified to conform with the 2005 presentation.
9
(3) Earnings per Share
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations for the three and
nine months ended September 30, 2005 and 2004:
Three Months ended Nine Months ended
September 30, September 30,
2005 2004 2005 2004
---------- ----------- ----------- ----------
BASIC
Income from continuing operations
$ 6,926 $ 10,307 $ 25,913 $ 31,784
Less: preferred dividends (4,109) (1,590) (12,326) (4,770)
---------- ----------- ----------- ----------
Income allocable to common shareholders from 2,817 8,717 13,587 27,014
continuing operations
Total income from discontinued operations 2,044 856 8,532 5,974
---------- ----------- ----------- ----------
Net income allocable to common shareholders $ 4,861 $ 9,573 $ 22,119 $ 32,988
========== =========== =========== ==========
Weighted average number of common shares
outstanding 50,837,178 47,901,818 49,269,497 46,033,992
========== =========== =========== ==========
Income per common share - basic:
Income from continuing operations $ 0.06 $ 0.18 $ 0.28 $ 0.59
Income from discontinued operations
0.04 0.02 0.17 0.13
---------- ----------- ----------- ----------
Net income $ 0.10 $ 0.20 $ 0.45 $ 0.72
========== =========== =========== ==========
DILUTED
Income allocable to common shareholders from
continuing operations - basic $ 2,817 $ 8,717 $ 13,587 $ 27,014
Adjustments:
Incremental (loss) income attributed to
assumed conversion of dilutive
securities (48) 673 695 2,740
---------- ----------- ----------- ----------
Income allocable to common shareholders from 2,769 9,390 14,282 29,754
continuing operations - diluted
Total income from discontinued operations -
diluted 2,044 955 8,532 6,805
---------- ----------- ----------- ----------
Net income allocable to common shareholders - $ 4,813 $ 10,345 $ 22,814 $ 36,559
========== =========== =========== ==========
Weighted average number of common shares used
in calculation of basic earnings per share 50,837,178 47,901,818 49,269,497 46,033,992
Add incremental shares representing:
Shares issuable upon exercise of employee
share options 78,046 118,533 78,382 129,695
Shares issuable upon conversion of
dilutive interests 6,849,435 5,329,395 6,849,435 5,357,968
---------- ----------- ----------- ----------
Weighted average number of shares used in 57,764,659 53,349,746 56,197,314 51,521,655
calculation of diluted earnings per common
share
========== =========== =========== ==========
Income per common share - diluted:
Income from continuing operations $ 0.04 $ 0.17 $ 0.26 $ 0.58
Income from discontinued operations
0.04 0.02 0.15 0.13
---------- ----------- ----------- ----------
Net income $ 0.08 $ 0.19 $ 0.41 $ 0.71
========== =========== =========== ==========
In 2005, the common shares issuable upon conversion of dilutive
interests relates to the put option a partner in a non-consolidated
entity has whereby the partner can elect to put its equity position to
the Company. The Company has the option of issuing common shares for
their fair market value of the partner's equity position (as defined) or
cash for 100% of the fair market value of the partner's equity position.
In 2004, the common shares issuable upon conversion of dilutive
interests relate to the operating partnership units.
10
(4) Investments in Real Estate
--------------------------
During the third quarter of 2005, the Company made two acquisitions,
excluding acquisitions made directly by non-consolidated entities, for
an aggregate capitalized cost of $34,140. The Company allocated $3,648
of the capitalized costs of this property to intangibles. One of the
properties is economically owned through the holding of an industrial
revenue bond and related ground lease. The other property was sold, at
cost, to a non-consolidated entity.
During the second quarter of 2005, the Company made 27 real estate
acquisitions, excluding acquisitions made directly by non-consolidated
entities and including properties held for sale, for an aggregate
capitalized cost of $642,296. The Company allocated $95,791 of the
capitalized costs of these properties to intangibles. Two of these
properties are economically owned through the holding of industrial
revenue bonds and related ground leases.
During the second quarter of 2005, one property was acquired through a
newly formed limited partnership in which the Company has a 92%
interest. This partnership acquired an 87.5% interest in a second
partnership which owns the property. The Company has an effective 80.5%
controlling ownership in the property.
Also, during the second quarter of 2005, the Company sold, at cost which
approximates fair market value, a 60% tenancy in common interest in one
of the properties acquired during the second quarter of 2005 for $3,961
in cash and the assumption of $8,849 in mortgage debt. During the first
quarter of 2005, the Company acquired one property for a capitalized
cost of $12,012 and allocated $725 of the purchase price to intangible
assets.
(5) Discontinued Operations
--------------------------
As of September 30, 2005, the Company had five properties held for sale
and recorded impairment charges of $207 and $800 for the three and nine
months ended September 30, 2005, respectively, relating to the
difference between the basis for one of the properties and the estimated
net proceeds expected to be realized upon sale. The Company has
determined that two properties held for sale at June 30, 2005 no longer
meet the criteria as held for sale and accordingly, have been
reclassified as operating properties.
During the third quarter of 2005, the Company sold one property for an
aggregate sales price of $14,500 resulting in a net gain of $1,595. The
Company provided $11,050 in secured financing, to the buyer, at a rate
of 5.46% which matures on August 1, 2035 and requires annual debt
service payments of $750, plus real estate taxes and insurance escrows.
During the second quarter of 2005, the Company sold one property for an
aggregate sales price of $11,599 resulting in a net gain of $4,317.
During the first quarter of 2005, the Company sold two properties for an
aggregate sales price of $4,250 resulting in a gain of $744.
During the nine months ended September 30, 2004, the Company sold six
properties for aggregate net proceeds of $30,971.
The following presents the operating results for the properties sold and
properties held for sale for the applicable periods:
Three Months ended Nine Months ended
September 30, September 30,
2005 2004 2005 2004
----------- ----------- ---------- ------------
Rental revenues $ 1,263 $ 2,071 $ 4,319 $ 7,053
Pre-tax income, including gains on
sale $ 2,044 $ 856 $ 8,532 $ 5,974
(6) Investment in Non-Consolidated Entities
---------------------------------------
As of September 30, 2005, the Company has investments in seven
non-consolidated entities. The entities are Lexington Acquiport Company,
LLC ("LAC") (33 1/3% ownership interest), Lexington Acquiport Company
II, LLC ("LAC II") (25% ownership interest), Lexington/Lion Venture LP
("LION") (30% ownership interest), Lexington Columbia LLC ("Columbia")
(40% ownership interest), Lexington Durham Limited Partnership ("DLP")
(33 1/3% ownership interest), Triple Net Investment Company LLC ("TNI")
(30% ownership interest) and Lexington Oklahoma City, LP ("TIC") (which
owns a 40% tenancy in common interest in a real property).
During the third quarter of 2005, LION made one real estate acquisition
for an aggregate capitalized cost of $36,905.
11
During the third quarter of 2005, LAC II made two real estate
acquisitions for an aggregate capitalized cost of $33,805. One of these
properties was acquired from the Company for $19,761, which approximated
cost. These acquisitions were funded through non-recourse mortgages
aggregating $23,175, which bear interest at a weighted average rate of
5.54%.
During the third quarter of 2005, LAC sold one property for an aggregate
sales price of $23,496 resulting in a net gain of $5,219. The Company
also defeased a loan associated with this property and recorded a debt
satisfaction charge of $1,953.
During the second quarter of 2005, LION made two real estate
acquisitions for an aggregate capitalized cost of $55,477. These
acquisitions were funded through non-recourse mortgages aggregating
$32,700, which bear interest at a weighted average rate of 5.05%.
During the second quarter of 2005, TNI made three real estate
acquisitions for an aggregate capitalized cost of $126,781. These
acquisitions were funded through non-recourse mortgages aggregating
$83,327, which bear interest at a weighted average rate of 5.17%.
During the second quarter of 2005, LAC II made one real estate
acquisition for an aggregate capitalized cost of $121,075. The
acquisition was funded through a non-recourse mortgage of $80,182 which
bears interest at 5.33%.
During the second quarter of 2005, the Company sold, at cost, a 60%
tenancy in common interest in one of the properties acquired during the
second quarter of 2005 for $3,961 in cash and the assumption of $8,849
in mortgage debt.
During the first quarter of 2005, LAC II obtained two non-recourse
mortgages aggregating $45,800 and bearing interest at a weighted average
rate of 5.05%. Also, during the first quarter of 2005, LAC II repaid
$45,800 in advances made by the Company.
The following is a summary of the combined balance sheet data as of
September 30, 2005 and income statement data for the nine months ended
September 30, 2005 and 2004 for the Company's non-consolidated entities
described in the first paragraph of this note:
2005
----
Real estate, net $1,302,412
Intangibles, net $ 143,192
Mortgages payable $ 920,848
2005 2004
---- ----
Revenues $ 104,555 $ 56,938
Expenses (93,656) (41,870)
Debt satisfaction
Gain on sale (1,953) -
5,219 -
------------- ------------
Net income $ 14,165 $ 15,068
============= ============
The Company earns advisory fees from the non-consolidated entities.
During the three and nine month periods ended September 30, 2005 and
2004 the total advisory fees earned from these entities was $976,
$4,129, $1,429 and $3,117, respectively.
(7) Mortgages and Notes Payable
---------------------------
During the third quarter of 2005, the Company obtained an aggregate of
$82,400 in non-recourse notes, with an aggregate weighted average
interest rate of 5.05%. Of this amount, $5,600 is being held in escrow
by the lender until the completion of construction expansions at two of
the properties.
During the second quarter of 2005, the Company obtained an aggregate of
$418,845 in non-recourse notes, with an aggregate weighted average
interest rate of 5.18%. The Company satisfied a mortgage note with a
principal balance of $20,760 for $15,500 and wrote off of $173 in
unamortized deferred loan costs.
During the second quarter of 2005, the Company's replaced its original
$100,000 credit facility with a new $200,000 unsecured credit facility
which bears interest at a rate of LIBOR plus 120-170 basis points
depending on the leverage (as defined) of the Company. The credit
facility contains customary financial covenants including restrictions
on the level of indebtedness, amount of variable rate debt to be
borrowed and net worth maintenance provisions. As of September 30, 2005,
the Company was in compliance with all covenants, no borrowings were
outstanding on the facility, $198,770 was available
12
to be borrowed and $1,230 in letters of credit were outstanding. The
Company wrote off the unamortized deferred loan costs of $455 associated
with the $100,000 credit facility.
(8) Concentration of Risk
---------------------
The Company seeks to reduce its operating and leasing risks through
diversification achieved by the geographic distribution of its
properties, tenant industry diversification, avoiding dependency on a
single property and the creditworthiness of its tenants. For the three
and nine months ended September 30, 2005 and 2004, no single tenant
represented greater than 10% of rental revenues.
Cash and cash equivalent balances may exceed insurable amounts. The
Company believes it mitigates risk by investing in or through major
financial institutions.
(9) Minority Interests
------------------
In conjunction with several of the Company's acquisitions in prior
years, sellers were given units in LCIF, LCIF II, or Net 3 as a form of
consideration. All of such interests are redeemable at certain times,
only at the option of the holders, for common shares on a one-for-one
basis at various dates through November 2006 and are not otherwise
mandatorily redeemable by the Company.
As of September 30, 2005, there were 5,371,163 operating partnership
units outstanding. All operating partnership units have stated
distributions in accordance with their respective partnership
agreements. To the extent that the Company's dividend per share is less
than the stated distribution per unit per the applicable partnership
agreement, the distributions per unit are reduced by the percentage
reduction in the Company's dividend. No operating partnership units have
a liquidation preference.
(10) Shareholders' Equity
--------------------
During the third quarter of 2005, the Company sold 2.5 million common
shares, raising net proceeds of $60,723.
During the first quarter of 2005, the Company issued 400,000 preferred
shares raising net proceeds of $19,463. In addition, the Company issued
492,402 and 411,177 common shares under its dividend reinvestment plan
raising net proceeds of $10,509 and $7,641 for the nine months ended
September 30, 2005 and 2004, respectively.
(11) Commitments and Contingencies
-----------------------------
The Company is obligated under certain tenant leases, including leases
for non-consolidated entities, to fund the expansion of the underlying
leased properties. Included in other assets is construction in progress
of $8,936 as of September 30, 2005.
The Company at times is involved in various legal actions occurring in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position, results of
operations or liquidity.
Certain leases contain options whereby the tenant can terminate a lease
if the property becomes obsolete, as defined.
As of September 30, 2005, the Company entered into a letter of intent to
purchase, upon completion of construction and commencement of rent from
a tenant, a property for an estimated obligation of $14,775.
(12) Supplemental Disclosure of Statement of Cash Flow Information
--------------------------------------------------------------
During 2005 and 2004, the Company paid $49,882 and $32,585,
respectively, for interest and $1,659 and $2,957, respectively, for
income taxes.
During the third quarter of 2005, the Company provided $11,050 in
secured financing related to the sale of a property.
During the nine months ended September 30, 2005 the Company assumed
$3,056 in obligations relating to acquisitions of properties.
13
During the second quarter of 2005, the Company sold, at cost which
approximates fair market value, a 60% tenancy in common interest in one
of the properties acquired during the second quarter of 2005 for $3,961
in cash and the assumption of $8,849 in mortgage debt and retained an
interest of $2,641.
During 2005 and 2004, the Company issued 276,608 and 201,029 non-vested
common shares, respectively, to certain employees resulting in $6,253
and $4,066 of deferred compensation, respectively. These common shares
generally vest over five years.
During 2005 and 2004, holders of an aggregate of 33,864 and 101,596
operating partnership units redeemed such units for common shares of the
Company. These redemptions resulted in an increase in shareholders'
equity and a corresponding decrease in minority interest of $398 and
$1,318 in 2005 and 2004, respectively.
(13) Subsequent Events
-----------------
In October 2005, LION entered into a contract to sell undeveloped land
adjacent to a property for $2,490.
In October 2005, the Company entered into contracts to acquire two
properties, that are currently being constructed, for an aggregate of
$36,811.
In October 2005, the Company contributed four properties (three of which
were subject to mortgages) to LSAC in exchange for 3,319,600 common
shares of LSAC. In addition, LSAC sold 6,738,000 common shares, at
$10.00 per common share, generating gross proceeds of $67,380. Due to
the Company's ownership percentage (approximately 32% of the fully
diluted outstanding shares) in LSAC, LSAC will be accounted for under
the equity method. LRA earns an advisory fee, including a promoted
interest, for its management of LSAC. Certain executive officers of the
Company are entitled to 40% of all promoted interest earned by LRA.
Also, certain officers purchased 220,000 common shares of LSAC at its
formation for $110 and an additional 100,000 common shares in the
offering for $1,000. In addition, LSAC obtained a $10,100 non-recourse
mortgage note, secured by one property, which bears interest at 5.46%
and matures in 2020.
In November 2005, the Company acquired a property for $32,000. This
property was then sold to LAC II, at cost. The Company provided $20,800
as a demand mortgage note related to the sale of this property. The
demand mortgage note bears interest at 5.27% and matures in December
2005.
In November 2005, LION obtained a $22,080 non-recourse mortgage with an
interest rate of 5.58%, which matures in 2019.
In November 2005, the Company issued 352,244 operating partnership units
for approximately $7,714. The Company used approximately $3,500 of these
proceeds to purchase a property.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Forward-Looking Statements
--------------------------
The following is a discussion and analysis of the Company's consolidated
financial condition and results of operations for the three and nine month
periods ended September 30, 2005 and 2004, and significant factors that could
affect the Company's prospective financial condition and results of operations.
This discussion should be read together with the unaudited condensed
consolidated financial statements and notes included in the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2005 and with the
Company's consolidated financial statements and notes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2004. Historical
results may not be indicative of future performance.
This report, together with other statements and information publicly
disseminated by the Company, contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The Company
intends such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995 and include this statement for purposes of
complying with these safe harbor provisions. Forward-looking statements, which
are based on certain assumptions and describe the Company's future plans,
strategies and expectations, are generally identifiable by use of the words
"believes," "expects," "intends," "anticipates," "estimates," "projects" or
similar expressions. Readers should not rely on forward-looking statements since
they involve known and unknown risks, uncertainties and other factors which are,
in some cases, beyond the Company's control and which could materially affect
actual results, performances or achievements. In particular, among the factors
that could cause actual results to differ materially from current expectations
include, but are not limited to, (i) the failure to continue to qualify as a
real estate investment trust, (ii) changes in general business and economic
conditions, (iii) competition, (iv) increases in real estate construction costs,
(v) changes in interest rates, (vi) changes in accessibility of debt and equity
capital markets and other risks inherent in the real estate business, including,
but not limited to, tenant defaults, potential liability relating to
environmental matters, the availability of suitable acquisition opportunities
and illiquidity of real estate investments, (vii) changes in governmental laws
and regulations, and (viii) increases in operating costs. The Company undertakes
no obligation to publicly release the results of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
Accordingly, there is no assurance that the Company's expectations will be
realized.
General
-------
The Company, which has elected to qualify as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended, acquires, owns and
manages net leased commercial properties. The Company believes that it has
operated as a REIT since October 1993.
As of September 30, 2005, the Company owned, or had interests in, 187 real
estate properties and managed two additional properties.
Critical Accounting Policies
----------------------------
The Company's accompanying unaudited condensed consolidated financial statements
have been prepared in conformity with accounting principles generally accepted
in the United States of America, which require management to make estimates that
affect the amounts of revenues, expenses, assets and liabilities reported. The
following are critical accounting policies which are both very important to the
portrayal of the Company's financial condition and results of operations and
which require some of management's most difficult, subjective and complex
judgments. The accounting for these matters involves the making of estimates
based on current facts, circumstances and assumptions which could change in a
manner that would materially affect management's future estimates with respect
to such matters. Accordingly, future reported financial conditions and results
could differ materially from financial conditions and results reported based on
management's current estimates.
Purchase Accounting for Acquisition of Real Estate. The fair value of the real
estate acquired, which includes the impact of mark-to-market adjustments for
assumed mortgage debt related to property acquisitions, is allocated to the
acquired tangible assets, consisting of land, building and improvements,
fixtures and equipment and identified intangible assets and liabilities,
consisting of the value of above-market and below-market leases, other value of
in-place leases and value of tenant relationships, based in each case on their
fair values.
The fair value of the tangible assets of an acquired property (which includes
land, building and improvements and fixtures and equipment) is determined by
valuing the property as if it were vacant, and the "as-if-vacant" value is then
allocated to land, building and improvements and fixtures and equipment based on
management's determination of relative fair values of these assets. Factors
considered by management in performing these analyses include an estimate of
carrying costs during the expected lease-up periods considering current market
conditions and costs to execute similar leases. In estimating carrying costs,
management includes real
15
estate taxes, insurance and other operating expenses and estimates of lost
rental revenue during the expected lease-up periods based on current market
demand. Management also estimates costs to execute similar leases including
leasing commissions.
In allocating the fair value of the identified intangible assets and liabilities
of an acquired property, above-market and below-market in-place lease values are
recorded based on the difference between the current in-place lease rent and a
management estimate of current market rents. Below-market lease intangibles are
recorded as part of deferred revenue and amortized into rental revenue over the
non-cancelable periods of the respective leases. Above-market leases are
recorded as part of intangible assets and amortized as a direct charge against
rental revenue over the non-cancelable portion of the respective leases.
The aggregate value of other acquired intangible assets, consisting of in-place
leases and tenant relationships, is measured by the excess of (i) the purchase
price paid for a property over (ii) the estimated fair value of the property as
if vacant, determined as set forth above. This aggregate value is allocated
between in-place lease values and tenant relationships based on management's
evaluation of the specific characteristics of each tenant's lease. The value of
in-place leases and customer relationships are amortized to expense over the
remaining non-cancelable periods of the respective leases.
Revenue Recognition. The Company recognizes revenue in accordance with Statement
of Financial Accounting Standards No. 13, Accounting for Leases, as amended
("SFAS 13"). SFAS 13 requires that revenue be recognized on a straight-line
basis over the term of the lease unless another systematic and rational basis is
more representative of the time pattern in which the use benefit is derived from
the leased property. Rentals provided during renewal option periods where with
rental terms that are lower than those in the primary term are excluded from the
calculation of straight line rent if they do not meet the criteria of a bargain
renewal option.
Gains on sales of real estate are recognized pursuant to the provisions of
Statement of Financial Accounting Standards No. 66, Accounting for Sales of Real
Estate, as amended ("SFAS 66"). The specific timing of the sale is measured
against various criteria in SFAS 66 related to the terms of the transactions and
any continuing involvement in the form of management or financial assistance
associated with the properties. If the sales criteria are not met, the gain is
deferred and the finance, installment or cost recovery method, as appropriate,
is applied until the sales criteria are met.
Accounts Receivable. The Company continuously monitors collections from its
tenants and would make a provision for estimated losses based upon historical
experience and any specific tenant collection issues that the Company has
identified. As of September 30, 2005 and December 31, 2004, the Company did not
record an allowance for doubtful accounts.
Impairment of Real Estate. The Company evaluates the carrying value of all real
estate held when a triggering event under Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, as amended ("SFAS 144") has occurred to determine if an impairment has
occurred which would require the recognition of a loss. The evaluation includes
reviewing anticipated cash flows of the property, based on current leases in
place, and an estimate of what lease rents will be if the property is vacant
coupled with an estimate of proceeds to be realized upon sale. However,
estimating market lease rents and future sale proceeds is highly subjective and
such estimates could differ materially from actual results.
Depreciation is determined by the straight-line method over the remaining
estimated economic useful lives of the properties.
Tax Status. The Company and its certain subsidiaries file a consolidated federal
income tax return. The Company has made an election to qualify, and believes it
is operating so as to qualify, as a REIT for Federal income tax purposes.
Accordingly, the Company generally will not be subject to federal income tax,
provided that distributions to its shareholders equal at least the amount of its
REIT taxable income as defined under Sections 856 through 860 of the Internal
Revenue Code, as amended (the "Code").
The Company is now permitted to participate in certain activities from which it
was previously precluded in order to maintain its qualification as a REIT, so
long as these activities are conducted in entities which elect to be treated as
taxable subsidiaries under the Code. LRA, LCI and LSAC are taxable REIT
subsidiaries. As such, the Company is subject to federal and state income taxes
on the income from these activities.
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis and operating loss and tax credit carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or settled.
Properties Held For Sale. The Company accounts for properties held for sale in
accordance with Statement of SFAS No. 144. SFAS 144 requires that the assets and
liabilities of properties that meet various criteria in SFAS No. 144 be
presented separately in the statement of financial position, with assets and
liabilities being separately stated. The operating results of these properties
are reflected as discontinued operations in the income statement. Properties
that do not meet the held for sale criteria of SFAS 144 are accounted for as
operating properties.
Basis of Consolidation. The Company determines whether an entity for which it
holds an interest should be consolidated pursuant to Financial Accounting
Standards Board Interpretation No. 46, Consolidation of Variable Interest
Entities ("FIN 46R"). If not, and the Company controls the entity's voting
shares and similar rights, the entity is consolidated. FIN 46R requires the
Company to evaluate whether it has a controlling financial interest in an entity
through means other than voting rights.
16
Liquidity and Capital Resources
-------------------------------
Real Estate Assets. As of September 30, 2005, the Company's real estate assets
were located in 38 states and contained an aggregate of approximately 40.2
million square feet of net rentable space. The properties are generally subject
to triple net leases, which are generally characterized as leases in which the
tenant pays all or substantially all of the cost and cost increases for real
estate taxes, capital expenditures, insurance, utilities and ordinary
maintenance of the property. Of the Company's 187 properties, 14 provide for
operating expense stops, one is subject to a modified gross lease and three are
not leased. Approximately 97.7% of the total square feet is subject to a lease.
During the nine months ended September 30, 2005, the Company purchased 38
properties (including through non-consolidated entities) for a capitalized cost
of $1.0 billion (including $395.6 million for non-consolidated entities) and
sold four properties to third parties resulting in a net gain of $6.7 million.
The Company's principal sources of liquidity are revenues generated from the
properties, interest on cash balances, amounts available under its unsecured
credit facility and amounts that may be raised through the sale of securities in
private or public offerings. For the nine months ended September 30, 2005, the
leases on the consolidated properties generated $133.3 million in gross rental
revenue compared to $99.9 million during the same period in 2004.
On November 1, 2004, the tenant in the Company's Dallas, Texas property, filed
for Chapter 11 bankruptcy and rejected the lease. Accordingly, in addition to
losing base rental revenue, the Company is responsible for operating expenses
until a replacement tenant can be found. The Company also has two other vacant
properties located in Phoenix, Arizona and Mansfield, Ohio.
Dividends. The Company has made quarterly distributions since October 1986
without interruption. The Company declared a common dividend of $0.36 per share
to common shareholders of record as of October 31, 2005, payable on November 15,
2005. The Company's annualized common dividend rate is currently $1.44 per
share. The Company also declared a preferred dividend on its Series C preferred
shares of $0.8125 per share to preferred shareholders of record as of October
31, 2005, payable on November 15, 2005. The annual preferred dividend rate on
the Series C shares is $3.25 per share. The Company also declared a preferred
dividend on its Series B preferred shares of $0.503125 per share to preferred
shareholders of record as of October 31, 2005, payable on November 15, 2005. The
annual preferred dividend rate on the Series B shares is $2.0125 per share.
In connection with its intention to continue to qualify as a REIT for federal
income tax purposes, the Company expects to continue paying regular common and
preferred dividends to its shareholders. These dividends are expected to be paid
from operating cash flows which are expected to increase over time due to
property acquisitions and growth in rental revenues in the existing portfolio
and from other sources. Since cash used to pay dividends reduces amounts
available for capital investments, the Company generally intends to maintain a
conservative dividend payout ratio, reserving such amounts as it considers
necessary for the expansion of properties in its portfolio, debt reduction, the
acquisition of interests in new properties as suitable opportunities arise, and
such other factors as the Company's board of trustees considers appropriate.
Cash dividends paid to common shareholders increased to $53.9 million for the
nine months ended September 30, 2005 compared to $48.1 million for the nine
months ended September 30, 2004.
Although the Company receives the majority of its rental payments on a monthly
basis, it intends to continue paying dividends quarterly. Amounts accumulated in
advance of each quarterly distribution are invested by the Company in short-term
money market or other suitable instruments.
The Company anticipates that cash flows from operations will continue to provide
adequate capital to fund its operating and administrative expenses, regular debt
service obligations and all dividend payments in accordance with REIT
requirements in both the short-term and long-term. In addition, the Company
anticipates that cash on hand, borrowings under its unsecured credit facility,
issuances of equity and debt, and other capital raising alternatives will be
available to fund the necessary capital required by the Company. Cash flows from
operations were $84.7 million and $70.0 million for the nine months ended
September 30, 2005 and 2004, respectively.
Net cash used in investing activities totaled $648.7 million and $106.2 million
for the nine months ended September 30, 2005 and 2004, respectively. Cash used
in investing activities was primarily attributable to the acquisition of real
estate and the investment in non-consolidated entities. Cash provided by
investing activities relates primarily to the sale of properties and the
collection of notes receivable. Therefore, the fluctuation in investing
activities relates primarily to the timing of investments and dispositions.
Net cash provided by financing activities totaled $478.1 million and $126.4
million for the nine months ended September 30, 2005 and 2004, respectively.
Cash used in financing activities was primarily attributable to repayments under
the Company's credit facility, dividends (net of proceeds reinvested under the
Company's dividend reinvestment plan), distributions to limited partners, debt
service payments and deferred financing costs. Cash provided by financing
activities relates primarily to proceeds from equity offerings and debt
financings.
UPREIT Structure. The Company's UPREIT structure permits the Company to effect
acquisitions by issuing to a seller, as a form of consideration, interests in
operating partnerships controlled by the Company. All of such interests are
redeemable, at the option of the holder, at certain times for common shares on a
one-for-one basis and all of such interests require the Company to pay certain
17
distributions to the holders of such interests in accordance with the respective
operating partnership agreements. The Company accounts for these interests in a
manner similar to a minority interest holder. The number of common shares that
will be outstanding in the future should be expected to increase, and minority
interest expense should be expected to decrease, from time to time, as such
operating partnership interests are redeemed for common shares. The table set
forth below provides certain information with respect to such operating
partnership interests as of September 30, 2005, based on the current $1.44
annual dividend.
Total
Current Current
Total Annualized Annualized
Number of Affiliate Per Unit Distribution
Redemption Date Units Units Distribution ($000)
--------------- ----- ----- ------------ ------
At any time 3,479,572 1,404,015 $ 1.44 $ 5,011
At any time 1,199,652 65,874 1.08 1,296
At any time 108,724 52,144 1.12 122
January 2006 171,168 416 - -
January 2006 231,763 120,662 1.44 334
February 2006 28,230 1,743 - -
May 2006 9,368 - 0.29 3
May 2006 97,828 27,212 1.44 141
November 2006 44,858 44,858 1.44 65
------------- ----------- ------------- -------------
5,371,163 1,716,924 $ 1.30 $ 6,972
============= =========== ============= =============
Affiliate units are held by two executive officers of the Company and are
included in the total number of units.
Share Repurchase Program
------------------------
The Company's board of trustees has authorized the repurchase of up to 2.0
million common shares/operating partnership units. As of September 30, 2005, 1.4
million common shares/operating partnership units have been repurchased.
Financing
---------
Revolving Credit Facility. The Company's $200 million unsecured credit facility
bears interest at a rate of LIBOR plus 120-170 basis points depending on the
leverage (as defined) of the Company and matures in June 2008. The credit
facility contains customary financial covenants including restrictions on the
level of indebtedness, amount of variable rate debt to be borrowed and net worth
maintenance provisions. As of September 30, 2005, the Company was in compliance
with all covenants, no borrowings were outstanding on the facility, $198.8
million was available to be borrowed and $1.2 million in letters of credit were
outstanding. The new credit facility replaced an existing credit facility of
$100 million. During the second quarter of 2005, the Company wrote off the
unamortized deferred loan costs of $0.5 million associated with the $100 million
credit facility.
Debt Service Requirements. The Company's principal liquidity needs are for the
payment of interest and principal on outstanding mortgage debt. As of September
30, 2005, a total of 101 of the Company's 131 consolidated properties were
subject to outstanding mortgages, which had an aggregate principal amount of
$1.2 billion. The weighted average interest rate on the Company's total
consolidated debt on such date was approximately 5.25%. The estimated scheduled
principal amortization payments for the remainder of 2005 and for 2006, 2007,
2008 and 2009 are $5.8 million, $28.8 million, $36.3 million, $31.1 million and
$32.2 million, respectively. As of September 30, 2005, the estimated scheduled
balloon payments for the remainder of 2005 and for 2006, 2007, 2008 and 2009 are
$0, $11.9 million, $0, $65.6 million and $47.7 million, respectively.
Lease Obligations. Since the Company's tenants generally bear all or
substantially all of the cost of property operations, maintenance and repairs,
the Company does not anticipate significant needs for cash for these costs. For
15 properties, the Company does have a level of property operating expense
responsibility. The Company generally funds property expansions with available
cash and additional secured borrowings, the repayment of which is funded out of
rental increases under the leases covering the expanded properties. To the
extent there is a vacancy in a property, the Company would be obligated for all
operating expenses, including real estate taxes and insurance. As of September
30, 2005, the Company had three properties that were not leased.
The Company's tenants pay the rental obligation on ground leases either directly
to the fee holder or to the Company as increased rent. The annual ground lease
rental payment obligation for each of the next five years is $1.3 million.
Capital Expenditures. Due to the triple net lease structure, the Company does
not incur significant expenditures in the ordinary course of business to
maintain its properties. However, in the future, as leases expire, the Company
expects to incur costs in extending the existing tenant lease or re-tenanting
the properties. The amounts of these expenditures can vary significantly
depending on tenant negotiations, market conditions and rental rates. These
expenditures are expected to be funded from operating cash flows or borrowings
on the credit facility. As of September 30, 2005, the Company has entered into a
letter of intent to purchase upon
18
completion of construction and commencement of rent from the tenant, a property
for an aggregate estimated obligation of $14.8 million.
Results of Operations
---------------------
Three months ended September 30, 2005 compared with September 30, 2004
----------------------------------------------------------------------
Changes in the results of operations for the Company are primarily due to the
growth of its portfolio and costs associated with such growth. Of the increase
in total gross revenues for the three months ended September 30, 2005 of $18.4
million, $15.9 million is attributable to rental revenue, which resulted
primarily from (i) properties purchased in 2004 and owned during 2005 ($3.4
million), (ii) properties purchased and expanded in 2005 ($14.6 million), offset
by (iii) an increase in vacancy ($1.0 million), (iv) an increase in properties
transferred to non-consolidated entities ($1.1 million) and (v) rental
reductions due to lease extensions ($0.3 million). Advisory fees (comprised of
acquisition, debt placement and asset management fees) decreased $0.5 million
due to a decrease in assets purchased by non-consolidated entities, and related
debt placement completed during the three months ended September 30, 2005.
Tenant reimbursements increased $2.9 million due to an increase in properties in
which the Company has operating expense responsibilities offset by an increase
in vacancy. The increase in interest and amortization expense of $6.3 million is
due to the growth of the Company's portfolio and has been offset by interest
savings resulting from scheduled principal amortization payments and mortgage
satisfactions. The increase in depreciation and amortization of $9.7 million is
due primarily to the increase in real estate and intangibles due to property
acquisitions. The increase in property operating expenses of $5.0 million is due
primarily to the Company acquiring properties in which it has property level
operating expense responsibility and an increase in vacancy. Non-operating
income decreased by $1.5 million primarily due to reduced reimbursements of
expenses incurred associated with properties that were owned by the Company and
sold to a joint venture and reduced interest income. The reduction in income tax
provision of $0.5 million relates primarily to the reduced earnings of the
taxable REIT subsidiaries. Equity in earnings of non-consolidated entities
increased $0.5 million due to an increase in net income of non-consolidated
entities (see below). Net income decreased in 2005 primarily due to the net
impact of items discussed above offset by an increase of $1.2 million in income
from discontinued operations comprised of an increase in gains on sales of
properties $1.6 million and a decrease in impairment charges of $0.4 million
offset by a decrease of income from discontinued operations of $0.8 million.
Equity in earning of non-consolidated entities increased by $0.5 million. The
Company's non-consolidated entities had aggregate net income of $6.2 million for
the three months ended September 30, 2005 compared to $5.3 million in the
comparable period in 2004. The increase in net income is primarily attributable
to (i) an increase in rental revenue and tenant reimbursements of $16.5 million
in 2005 due to properties purchased in 2004 and held in 2005 as well as
properties purchased in 2005 and (ii) a gain on the sale of a property of $5.2
million, offset by (i) an increase in depreciation expense of $9.8 million in
2005 due to ownership of more depreciable assets, (ii) an increase in interest
expense of $6.5 million in 2005 due to partially funding acquisitions with the
use of non-recourse mortgage debt, (iii) an increase in property operating
expenses of $2.3 million due to an increase in the number of properties owned
and (iv) a debt satisfaction charge of $2.0 million.
The increase in net income in future periods will be closely tied to the level
of acquisitions made by the Company. Without acquisitions, which in addition to
generating rental revenue, generate acquisition, debt placement and asset
management fees from non-consolidated entities, the sources of growth in net
income are limited to index adjusted rents (such as the consumer price index),
percentage rents, reduced interest expense on amortizing mortgages and by
controlling other variable overhead costs. However, there are many factors
beyond management's control that could offset these items including, without
limitation, increased interest rates on variable debt ($12.3 million as of
September 30, 2005 at an interest rate of 7.7%) and tenant monetary defaults.
Nine months ended September 30, 2005 compared with September 30, 2004
---------------------------------------------------------------------
Changes in the results of operations for the Company are primarily due to the
growth of its portfolio and costs associated with such growth. Of the increase
in total gross revenues in 2005 of $37.6 million, $33.4 million is attributable
to rental revenue which resulted primarily from (i) properties purchased in 2004
and owned during 2005 ($18.6 million), (ii) properties purchased and expanded in
2005 ($24.1 million), offset by (iii) an increase in vacancy ($3.1 million),
(iv) properties transferred to non-consolidated entities ($5.7 million) and (v)
rental reductions due to lease extensions ($0.5 million). Advisory fees
(comprised of acquisition, debt placement and asset management fees) increased
$1.0 million due to an increase in assets purchased by non-consolidated entities
and related debt placement completed during the nine months ended September 30,
2005. Tenant reimbursements increased $3.2 million due to an increase in
properties in which the Company has operating expense responsibilities offset by
an increase in vacancy. The increase in interest and amortization expense of
$13.7 million is due to the growth of the Company's portfolio and has been
partially offset by interest savings resulting from scheduled principal
amortization payments and mortgage satisfactions. The increase in depreciation
and amortization of $22.9 million is due primarily to the increase in real
estate and intangibles due to property acquisitions. The Company's general and
administrative expenses increased by $3.2 million due primarily to increased
personnel costs, including employee benefits ($1.3 million), professional fees
($0.7 million), terminated deal costs ($0.3 million) and technology costs ($0.3
million). The increase in property operating expenses of $8.3 million is due
primarily to incurring property level operating expenses for properties in which
the Company has operating expense responsibility and an increase in vacancy.
Debt satisfaction gains, net of $4.6 million, relates to the satisfaction of a
mortgage note that resulted in a gain offset by the write-off of unamortized
deferred
19
financing costs. The provision for income taxes decreased $1.9 million
predominantly due to a reduction in the earnings from real estate investments
held by the Company's taxable REIT subsidiaries. Equity in earnings of
non-consolidated entities decreased $0.3 million due to the expensing of a fee
paid by the Company and a decrease of net income of non-consolidated entities
(see below). Net income decreased in 2005 primarily due to the net impact of
items discussed above, offset by an increase of $2.6 million in income from
discontinued operations comprised of an increase of $2.6 million in gains on
sale of properties and a decrease in impairment charges of $2.0 million offset
by a decrease of income from discontinued operations of $2.0 million.
Equity in earnings of non-consolidated entities decreased by $0.3 million. The
Company's non-consolidated entities had aggregate net income of $14.2 million
for the nine months ended September 30, 2005 compared to $15.1 million in the
comparable period in 2004. The decrease in net income is primarily attributable
to (i) an increase in depreciation expense of $26.3 million in 2005 due to
ownership of more depreciable assets, (ii) an increase in interest expense of
$18.9 million in 2005 due to partially funding acquisitions with the use of
non-recourse mortgage debt, (iii) an increase in property operating expenses of
$6.1 million due to an increase in the number of properties owned, (iv) a debt
satisfaction charge of $2.0 million and (v) an increase in non-reimbursable
operating expenses of $0.3 million. These expenses were partially offset by an
increase (i) in rental revenue and tenant reimbursements of $47.6 million in
2005 attributable to the acquisition of properties in 2004 and 2005 and (ii) a
gain on the sale of a property of $5.2 million.
Funds From Operations
---------------------
The Company believes that Funds From Operations ("FFO") enhances an investor's
understanding of the Company's financial condition, results of operations and
cash flows. The Company believes that FFO is an appropriate, but limited,
measure of the performance of an equity REIT. FFO is defined in the April 2002
"White Paper", issued by the National Association of Real Estate Investment
Trusts, Inc. as "net income (computed in accordance with generally accepted
accounting principles), excluding gains (or losses) from sales of property, plus
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. Adjustments for unconsolidated partnerships and
joint ventures will be calculated to reflect funds from operations on the same
basis." Impairment charges recorded are not added back to net income in arriving
at FFO. FFO should not be considered an alternative to net income as an
indicator of operating performance or to cash flows from operating activities as
determined in accordance with generally accepted accounting principles, or as a
measure of liquidity to other consolidated income or cash flow statement data as
determined in accordance with generally accepted accounting principles.
The following table reconciles net income allocable to common shareholders to
the Company's FFO for the nine months ended September 30, 2005 and 2004
($000's):
2005 2004
-------------- ------------
Net income allocable to common shareholders $ 22,119 $ 32,988
Adjustments:
Depreciation and amortization 50,251 27,874
Minority interest's share of net income 3,055 2,880
Amortization of leasing commissions 395 549
Gains on sale of properties (6,656) (4,065)
Joint venture adjustment - depreciation 12,374 4,902
Joint venture adjustment - gain on sale of
properties (1,740) -
Preferred share dividend - Series C 7,556 -
-------------- ------------
Funds From Operations $ 87,354 $ 65,128
============== ============
Cash flows from operating activities $ 84,732 $ 70,024
Cash flows from investing activities $ (648,664) $(106,189)
Cash flows from financing activities $ 478,090 $ 126,365
Off-Balance Sheet Arrangements
Non-Consolidated Real Estate Entities. As of September 30, 2005, the Company has
investments in various real estate entities with varying structures. These
investments include the Company's 33 1/3% non-controlling interest in Lexington
Acquiport Company, LLC; its 25% non-controlling interest in Lexington Acquiport
Company II, LLC; its 40% non-controlling interest in Lexington Columbia LLC; its
30% non-controlling interest in Lexington/Lion Venture L.P.; its 30%
non-controlling interest in Triple Net Investment Company LLC; its 33 1/3%
non-controlling interest in Lexington Durham Limited Partnership and through
Lexington Oklahoma City, LP its 40% non-controlling tenancy in common interest
in a real property. The properties owned by the entities are financed with
individual non-recourse mortgage loans. Non-recourse mortgage debt is generally
defined as debt whereby the lender's sole recourse with respect to borrower
defaults is limited to the value of the property collateralized by the mortgage.
The lender generally does not have recourse against any other assets owned by
the borrower or any of the members of the borrower, except for
20
certain specified expectations listed in the particular loan documents. These
exceptions generally relate to limited circumstances including breaches of
material representations.
The Company invests in entities with third parties to increase portfolio
diversification, reduce the amount of equity invested in any one property and to
increase returns on equity due to the realization of advisory fees. See footnote
6 to the unaudited condensed consolidated financial statements for combined
summary balance sheet and income statement data relating to these entities.
21
PART II - OTHER INFORMATION
ITEM 6. Exhibits
31.1 Certification of Chief Executive Officer pursuant to rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
31.2 Certification of Chief Financial Officer pursuant to rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (furnished herewith).
22
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Lexington Corporate Properties Trust
Date: November 15, 2005 By: /s/ T. Wilson Eglin
----------------------------
T. Wilson Eglin
Chief Executive Officer,
President and Chief Operating
Officer
Date: November 15, 2005 By: /s/ Patrick Carroll
----------------------------
Patrick Carroll
Chief Financial Officer,
Executive Vice President and
Treasurer
23