10-Q 1 lex10q.txt SEPTEMBER 30, 2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2004 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition period from _________________ to ________________ Commission File Number 1-12386 LEXINGTON CORPORATE PROPERTIES TRUST ------------------------------------------------ (Exact name of registrant as specified in its charter) Maryland 13-3717318 ------------------------------ ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Penn Plaza - Suite 4015 New York, NY 10119 ------------------------------ ----------- (Address of principal executive offices) (Zip code) (212) 692-7200 ----------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x . No ---- ---- Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). Yes x . No . ---- ---- Indicate the number of shares outstanding of each of the registrant's classes of common shares, as of the latest practicable date: 48,469,219 common shares, par value $.0001 per share on November 4, 2004. PART 1. - FINANCIAL INFORMATION ------------------------------- ITEM 1. FINANCIAL STATEMENTS ---------------------------- LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS September 30, 2004 (Unaudited) and December 31, 2003 (in thousands, except share and per share data)
September 30, December 31, 2004 2003 ---- ---- Assets: Real estate, at cost $ 1,335,650 $ 1,162,395 Less: accumulated depreciation and amortization 180,660 160,623 ----------- --------- 1,154,990 1,001,772 Properties held for sale - discontinued operations 39,327 36,478 Cash and cash equivalents 106,123 15,923 Investment in non-consolidated entities 123,574 69,225 Deferred expenses, net 9,232 10,013 Rent receivable - current 136 -- Rent receivable - deferred 25,313 24,069 Intangible assets, net 27,464 14,736 Other assets 44,057 35,195 ----------- --------- $ 1,530,216 $ 1,207,411 =========== ========== Liabilities and Shareholders' Equity: Mortgages and notes payable $ 725,845 $ 455,940 Credit facility borrowings -- 94,000 Mortgage note payable - discontinued operations -- 1,445 Accounts payable and other liabilities 9,749 7,308 Accrued interest payable 2,444 1,576 Deferred revenue 4,089 975 Prepaid rent 5,508 2,482 Origination fees payable, including accrued interest -- 808 ------------ --------- 747,635 564,534 Minority interests 58,538 59,220 ----------- --------- 806,173 623,754 ----------- --------- Commitments and contingencies (note 11) Common shares, par value $0.0001 per share, 287,888 shares issued and outstanding, liquidation preference $3,886 3,809 3,809 ----------- --------- Shareholders' equity: Preferred shares, par value $0.0001 per share; authorized 10,000,000 shares, Series B Cumulative Redeemable Preferred, liquidation preference $79,000, 3,160,000 shares issued and outstanding 76,315 76,315 Common shares, par value $0.0001 per share; authorized 80,000,000 shares, 48,177,108, and 40,394,113 shares issued and outstanding in 2004 and 2003, respectively 5 4 Additional paid-in-capital 759,817 601,501 Deferred compensation, net (9,063) (6,265) Accumulated distributions in excess of net income (106,840) (91,707) ------------ ---------- 720,234 579,848 ----------- --------- $ 1,530,216 $ 1,207,411 =========== =========
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three and nine months ended September 30, 2004 and 2003 (Unaudited and in thousands, except share and per share data)
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2004 2003 2004 2003 ---- ---- ---- ---- Gross revenues: Rental $ 35,662 $ 27,409 $ 101,605 $ 78,926 Advisory fees 1,448 184 3,174 690 Tenant reimbursements 1,396 1,106 4,270 3,439 ---------- ---------- ---------- ---------- Total gross revenues 38,506 28,699 109,049 83,055 Expense applicable to revenues: Depreciation and amortization (11,198) (7,093) (28,264) (20,203) Property operating (2,999) (2,193) (8,076) (6,037) General and administrative (3,969) (2,617) (9,990) (7,291) Non-operating income 1,815 789 2,586 1,303 Interest and amortization expense (12,578) (8,314) (34,254) (27,425) Debt satisfaction charges -- -- -- (7,685) ---------- ---------- ---------- ---------- Income before provision for income taxes, minority interests, equity in 9,577 9,271 31,051 15,717 earnings of non-consolidated entities and discontinued operations Provision for income taxes (243) -- (1,497) -- Minority interests (766) (1,512) (2,985) (2,390) Equity in earnings of non-consolidated entities 1,862 1,414 5,383 4,156 ---------- ---------- ---------- ---------- Income from continuing operations 10,430 9,173 31,952 17,483 ---------- ---------- ---------- ---------- Discontinued operations, net of minority interest: Income from discontinued operations 1,295 789 4,516 2,582 Impairment charge (562) -- (2,775) -- Gains on sales of properties -- -- 4,065 1,143 ---------- ---------- ---------- ---------- Total discontinued operations 733 789 5,806 3,725 ---------- ---------- ---------- ---------- Net income 11,163 9,962 37,758 21,208 Dividends attributable to preferred shares - Series B (1,590) (1,590) (4,770) (1,802) ---------- ---------- ---------- ---------- Net income allocable to common shareholders $ 9,573 $ 8,372 $ 32,988 $ 19,406 ========== ========== ========== ========== Income per common share-basic: Income from continuing operations $ 0.18 $ 0.22 $ 0.59 $ 0.48 Income from discontinued operations 0.02 0.02 0.13 0.12 ---------- ---------- ---------- ---------- Net income $ 0.20 $ 0.24 $ 0.72 $ 0.60 ========== ========== ========== ========== Weighted average common shares outstanding-basic 47,901,818 34,780,279 46,033,992 32,579,011 ========== ========== ========== ========== Income per common share-diluted: Income from continuing operations $ 0.18 $ 0.22 $ 0.59 $ 0.47 Income from discontinued operations 0.01 0.02 0.12 0.11 ---------- ---------- ---------- ---------- Net income $ 0.19 $ 0.24 $ 0.71 $ 0.58 ========== ========== ========== ========== Weighted average common shares outstanding-diluted 53,349,746 34,973,430 51,521,655 37,989,563 ========== ========== ========== ==========
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine months ended September 30, 2004 and 2003 (Unaudited and in thousands)
2004 2003 ---------- ----------- Net cash provided by operating activities $ 70,024 $ 50,019 ---------- ----------- Cash flows from investing activities: Investment in convertible mortgage receivable (19,800) -- Investment in real estate properties and intangible assets (137,758) (141,707) Net proceeds from sale/transfer of properties 90,220 7,807 Real estate deposits, net 353 (5,417) Investment in and advances to non-consolidated entities (53,586) (3,854) Increase in escrow deposits (2,022) 775 Distribution of loan proceeds from non-consolidated entities 15,629 -- Increase in deferred lease costs (197) (388) ------------ ----------- Net cash used in investing activities (107,161) (142,784) ------------ ----------- Cash flows from financing activities: Dividends to common and preferred shareholders (52,891) (32,405) Dividend reinvestment plan proceeds 7,641 4,795 Change in credit facility borrowings, net (94,000) (9,500) Principal amortization payments (13,980) (11,048) Principal payments on debt, excluding normal amortization (1,264) (78,084) Proceeds of mortgages and notes payable 145,240 74,882 Increase in deferred costs, net (688) (2,023) Cash distributions to minority partners (7,271) (5,053) Proceeds from the sale of common and preferred shares, net 144,579 150,323 Origination fee amortization payments (29) (292) ------------ ----------- Net cash provided by financing activities 127,337 91,595 ----------- ----------- Cash attributable to newly consolidated entity -- 1,578 ---------- ----------- Change in cash and cash equivalents 90,200 408 Cash and cash equivalents, at beginning of period 15,923 12,097 ---------- ----------- Cash and cash equivalents, at end of period $ 106,123 $ 12,505 ========== ===========
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements 4 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2004 (Unaudited and dollars in thousands, except per share data) (1) The Company ----------- Lexington Corporate Properties Trust (the "Company") is a self-managed and self-administered real estate investment trust ("REIT") that acquires, owns and manages a geographically diversified portfolio of net leased office, industrial and retail properties. As of September 30, 2004, the Company had an ownership interest in 138 properties and managed an additional two properties. The real properties owned by the Company are generally subject to triple net leases to corporate tenants. Of the Company's 138 properties, seven provide for operating expense stops and one is a modified gross lease. The Company believes it has qualified as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, the Company will not be subject to federal income tax, provided that distributions to its shareholders equal at least the amount of its REIT taxable income as defined under the Code. The Company is permitted to participate in certain activities which it was previously precluded from in order to maintain its qualification as a REIT, so long as these activities are conducted in entities which elect to be treated as taxable REIT subsidiaries ("TRS") under the Code. As such, the TRS will be subject to federal income taxes on the income from these activities. The unaudited financial statements reflect all adjustments, which are, in the opinion of management, necessary to present a fair statement of the financial condition and results of operations for the interim periods. For a more complete understanding of the Company's operations and financial position, reference is made to the financial statements (including the notes thereto) previously filed with the Securities and Exchange Commission with the Company's Annual Report on Form 10-K for the year ended December 31, 2003. (2) Summary of Significant Accounting Policies ------------------------------------------ Basis of Presentation and Consolidation. The Company's consolidated financial statements are prepared on the accrual basis of accounting. The financial statements reflect the accounts of the Company and its controlled subsidiaries, including Lepercq Corporate Income Fund L.P. ("LCIF"), Lepercq Corporate Income Fund II L.P. ("LCIF II"), Net 3 Acquisition L.P. ("Net 3"), Lexington Realty Advisors, Inc. ("LRA"), and Lexington Contributions, Inc. ("LCI"). LRA and LCI are wholly owned taxable REIT subsidiaries, and the Company is the sole unitholder of the general partner and the majority limited partner of LCIF, LCIF II and Net 3. In December 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46 (revised December 2003) ("FIN 46R"), Consolidation of Variable Interest Entities ("VIEs"), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued in January 2003. The Company adopted FIN 46R and it had no impact. Earnings Per Share. Basic net income per share is computed by dividing net income reduced by preferred dividends by the weighted average number of common shares outstanding during the period. Diluted net income per share amounts are similarly computed but include the effect, when dilutive, of in-the-money common share options and operating partnership units. Common Share Options. The Company has elected to continue to account for its option plan under the recognition provision of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees." Accordingly, no compensation cost has been recognized with regard to options granted in the condensed consolidated statements of income. Common share options granted generally vest ratably over a four-year term and expire five years from the date of grant. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding share option awards in each period: 5
Three Months Ended September 30, 2004 2003 -------------- -------------- Net income allocable to common shareholders, as reported $ 9,573 $ 8,372 Add: Stock based employee compensation expense included in reported net income -- -- Deduct: Total stock based employee compensation expense determined under fair value based method for all awards 64 127 ----------- ----------- Pro forma net income - basic $ 9,509 $ 8,245 =========== =========== Net income per share - basic Basic - as reported $ 0.20 $ 0.24 =========== =========== Basic - pro forma $ 0.20 $ 0.24 =========== =========== Net income allocable to common shareholders for diluted earnings per share $ 10,345 $ 8,372 Add: Stock based employee compensation expense included in reported net income -- -- Deduct: Total stock based employee compensation expense determined under fair value based method for all awards 64 127 ----------- ----------- Pro forma net income - diluted $ 10,281 $ 8,245 =========== =========== Net income per share - diluted Diluted - as reported $ 0.19 $ 0.24 =========== =========== Diluted - pro forma $ 0.19 $ 0.24 =========== =========== Nine Months Ended September 30, 2004 2003 -------------- -------------- Net income allocable to common shareholders, as reported $ 32,988 $ 19,406 Add: Stock based employee compensation expense included in reported net income -- -- Deduct: Total stock based employee compensation expense determined under fair value based method for all awards 191 382 ----------- ----------- Pro forma net income - basic $ 32,797 $ 19,024 =========== =========== Net income per share - basic Basic - as reported $ 0.72 $ 0.60 =========== =========== Basic - pro forma $ 0.71 $ 0.58 =========== =========== Net income allocable to common shareholders for diluted earnings per share $ 36,559 $ 22,222 Add: Stock based employee compensation expense included in reported net income -- -- Deduct: Total stock based employee compensation expense determined under fair value based method for all awards 191 382 ----------- ----------- Pro forma net income - diluted $ 36,368 $ 21,840 =========== =========== Net income per share - diluted Diluted - as reported $ 0.71 $ 0.58 =========== =========== Diluted - pro forma $ 0.71 $ 0.58 =========== ===========
6 Use of Estimates. Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses to prepare these condensed consolidated financial statements in conformity with generally accepted accounting principles. The most significant estimates made include the recoverability of accounts receivable (primarily related to straight-line rents) and the useful lives of assets. Actual results could differ from those estimates. Purchase Accounting for Acquisition of Real Estate. The fair value of the real estate acquired, which includes the impact of mark to market adjustments for assumed mortgage debt relating to property acquisitions, is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and value of tenant relationships, based in each case on their fair values. The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, and the "as-if-vacant" value is then allocated to land, building and tenant improvements based on management's determination of relative fair values of these assets. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions. In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the difference between the current in-place lease rent and a management estimate of current market rents. Below-market lease intangibles are recorded as part of deferred revenue and amortized into rental revenue over the non-cancelable periods of the respective leases. Above-market leases are recorded as part of intangibles and are amortized as a direct charge against rental revenue over the non-cancelable periods of the respective leases. The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the excess of (i) the purchase price paid for a property over (ii) the estimated fair value of the property as if vacant, determined as set forth above. This aggregate value is allocated between in-place lease values and tenant relationships based on management's evaluation of the specific characteristics of each tenant's lease. The value of in-place leases and customer relationships are amortized to expense over the non-cancelable periods of the respective leases. Properties Held for Sale. The Company accounts for properties held for sale in accordance with Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 requires that the assets and liabilities of properties that meet various criteria in SFAS No. 144 be presented separately in the statement of financial position, with assets and liabilities being separately stated. The operating results of these properties are reflected as discontinued operations in the income statement. Properties that do not meet the held for sale criteria of SFAS No. 144 are accounted for as operating properties. Revenue Recognition. The Company recognizes revenue in accordance with Statement of Financial Accounting Standards No. 13 "Accounting for Leases", as amended ("SFAS No. 13"). SFAS No. 13 requires that revenue be recognized on a straight line basis over the term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. Gains on sales of real estate are recognized pursuant to the provisions of SFAS No. 66 "Accounting for Sales of Real Estate"("SFAS No. 66"). The specific timing of the sale is measured against various criteria in SFAS No. 66 related to the terms of the transactions and any continuing involvement in the form of management or financial assistance associated with the properties. If the sales criteria are not met, the gain is deferred and the finance, installment or cost recovery method, as appropriate, is applied until the sales criteria are met. Accounts Receivable. The Company continuously monitors collections from its tenants and would make a provision for estimated losses based upon historical experience and any specific tenant collection issues that the Company has identified. As of September 30, 2004 and December 31, 2003, the Company did not record an allowance for doubtful accounts. Impairment of Real Estate. Annually, and if events and circumstances require, the Company evaluates the carrying value of all real estate held to determine if an impairment has occurred which would require the recognition of a loss. The evaluation includes reviewing anticipated cash flows of the property, based on current leases in place, coupled with an estimate of 7 proceeds to be realized upon sale. However, estimating future sale proceeds is highly subjective and such estimates could differ materially from actual results. Income Taxes. Income taxes for the TRS' are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using estimated tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. Reclassification. Certain amounts included in 2003 financial statements have been reclassified to conform with the 2004 presentation. 8 (3) Earnings per Share ------------------ The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the three months and nine months ended September 30, 2004 and 2003:
Three months ended Nine months ended September 30, September 30, 2004 2003 2004 2003 ----------- ---------- ----------- ----------- BASIC Income from continuing operations $ 10,430 $ 9,173 $ 31,952 $ 17,483 Less preferred dividends (1,590) (1,590) (4,770) (1,802) ----------- ---------- ---------- ---------- Income allocable to common shareholders from continuing operations 8,840 7,583 27,182 15,681 Total income from discontinued operations 733 789 5,806 3,725 ----------- ---------- ---------- ---------- Net income allocable to common shareholders $ 9,573 $ 8,372 $ 32,988 $ 19,406 =========== ========== ========== ========== Weighted average number of common shares outstanding 47,901,818 34,780,279 46,033,992 32,579,011 =========== ========== ========== ========== Income per common share - basic: Income from continuing operations $ 0.18 $ 0.22 $ 0.59 $ 0.48 Income from discontinued operations 0.02 0.02 0.13 0.12 ----------- ---------- ---------- ---------- Net income $ 0.20 $ 0.24 $ 0.72 $ 0.60 =========== ========== ========== ========== DILUTED Income allocable to common shareholders from continuing operations - basic $ 8,840 $ 7,583 $ 27,182 $ 15,681 Incremental income attributed to assumed conversion of dilutive securities 761 -- 2,980 2,390 ----------- ----------- ---------- --------- Income allocable to common shareholders from continuing operations - diluted 9,601 7,583 30,162 18,071 Total income from discontinued operations - diluted 744 789 6,397 4,151 ----------- ---------- ----------- ---------- Net income allocable to common shareholders - diluted $ 10,345 $ 8,372 $ 36,559 $ 22,222 =========== ========== ========== ========== Weighted average number of common shares used in calculation of basic earnings per share 47,901,818 34,780,279 46,033,992 32,579,011 Add incremental shares representing: Shares issuable upon exercise of employee share options 118,533 193,151 129,695 188,988 Shares issuable upon conversion of dilutive securities 5,329,395 -- 5,357,968 5,221,564 ----------- ----------- ----------- --------- Weighted average number of shares used in calculation of diluted earnings per common share 53,349,746 34,973,430 51,521,655 37,989,563 ========== ========== ========== ========== Income per common share-diluted: Income from continuing operations $ 0.18 $ 0.22 $ 0.59 $ 0.47 Income from discontinued operations 0.01 0.02 0.12 0.11 ----------- ---------- ------------ ---------- Net income $ 0.19 $ 0.24 $ 0.71 $ 0.58 =========== ========== ========== ==========
9 (4) Investments in Real Estate -------------------------- The following acquisitions were consummated during the third quarter of 2004: o The Company acquired a property in Fort Mill, South Carolina for a capitalized cost of $29,171 which is net leased to Wells Fargo Bank N.A. The lease, which expires in May 2014, provides for average annual net rent of $2,501. The purchase price was partially funded through a $20,300 non-recourse mortgage note which bears interest at 5.37%, provides for annual debt service of $1,106 and matures in May 2014, when a balloon payment of $18,311 is due. o The Company purchased a property in Chelmsford, Massachusetts for a capitalized cost of $12,193 which is net leased to Cadence Design Systems, Inc. through September 2013. The lease provides for average annual net rent of $1,065. The purchase price was paid entirely with cash. o The Company purchased a property in High Point, North Carolina for a capitalized cost of $13,232 which is net leased to Steelcase, Inc. through September 2017. The lease provides for average annual net rent of $1,087. The purchase price was partially funded through the assumption of an $8,883 non-recourse mortgage note which bears interest at 5.75%, provides for annual debt service of $695 and matures in October 2009, when a balloon payment of $7,741 is due. o The Company purchased a property in San Antonio, Texas for a capitalized cost of $41,882 which is net leased to Harcourt Brace through March 2016. The lease provides for average annual net rent of $3,429. The purchase price was partially funded through the assumption of a $30,211 non-recourse mortgage note which bears interest at 6.08%, provides for annual debt service of $2,260 and matures in October 2012, when a balloon payment of $26,025 is due. During the third quarter of 2004, the Company sold two properties, at cost, to a non-consolidated entity in which it has a 25% ownership interest. The properties were sold for $79,723 (subject to $55,570 in non-recourse mortgages) and no gain was recognized. During the second quarter of 2004, the Company sold two properties, at cost, to a non-consolidated entity in which it has a 30% ownership interest. The properties were sold for $35,871 (subject to $22,788 in non-recourse mortgages) and no gain was recognized. During the first quarter of 2004, the Company sold two properties, at cost, to two non-consolidated entities for an aggregate capitalized cost of $50,805 one of which was subject to non-recourse mortgage of $12,757. The Company has a 30% interest in one non-consolidated entity and a 25% interest in the other. During the first and second quarters of 2004, the Company purchased twelve properties for an aggregate capitalized cost of $269,785. The acquisitions were partially funded through the assumption of non-recourse mortgage notes valued at $181,198 (face value of $165,716) and $34,745 in new non-recourse mortgage notes. Detailed information relating to each acquisition is contained in the June 30, 2004 and March 31, 2004 Form 10-Q. During the nine months ended September 30, 2004 the Company has allocated $22,479 to intangible assets relating to real estate acquisitions. Of this total, $17,270, $2,352 and $2,857 has been allocated to origination costs, tenant relationships, and below-market leases, respectively. These assets are amortized over the life of the respective tenant leases which, on a weighted average basis, is approximately 12 years at September 30, 2004. During the second quarter of 2004, the Company issued a $19,800 convertible mortgage note secured by a property in Carrollton, Texas which is net leased to Carlson Restaurants Worldwide, Inc. through December 2018. The Company has the election until December 2004 to convert the note along with an additional $2,200 in cash, into a 100% equity position in the property. The note, which currently bears interest at 8.20%, provides for interest only payments through December 2004. If the note is not converted due to no fault of the borrower the interest rate resets to 6.22% and annual debt service payments of $1,458 commence until the entire note is satisfied. If the note is not converted due to a reason beyond the Company's control, the interest rate resets to 8.00% and annual debt service payments of $1,745 commence until the entire note is satisfied. The convertible mortgage note is included in Other Assets in the accompanying unaudited Condensed Consolidated Balance Sheets. (5) Discontinued Operations ----------------------- During the three months ended September 30, 2004, the Company sold one property in Marlborough, Massachusetts and one in Milford, Connecticut for aggregate net proceeds of $13,655. As of September 30, 2004, the Company had three properties held for sale and for the nine months ended September 30, 2004 recorded an impairment charge of $2,775, including $562 recorded in the third quarter, relating to the difference between the basis for three properties and the estimated net proceeds expected to be realized upon sale. 10 During the first and second quarter of 2004, the Company sold four properties for an aggregate net proceeds of $17,316, which resulted in an aggregate net gain of $4,065. The following presents the operating results for the properties sold and properties held for sale for the applicable periods:
Three Months Ended September 30, 2004 2003 ------------- -------------- Rental revenues $ 1,475 $ 1,278 Pre-tax income, including gains on sale $ 840 $ 789 Nine Months Ended September 30, 2004 2003 ------------- -------------- Rental revenues $ 5,374 $ 4,195 Pre-tax income, including gains on sale $ 6,127 $ 3,725
Of the three properties held for sale as of September 30, 2004, one was subject to a sale agreement which, subsequent to September 30, 2004, the purchaser terminated. (6) Investment in Non-Consolidated Entities --------------------------------------- As of September 30, 2004, the Company has investments in six non-consolidated entities. The entities are Lexington Acquiport Company, LLC ("LAC") (33 1/3% ownership interest), Lexington Acquiport Company II, LLC ("LAC II") (25% ownership interest), Lexington/Lion Venture LP ("LION") (30% ownership interest), Lexington Columbia LLC ("Columbia") (40% ownership interest), Lexington Durham Limited Partnership ("DLP") (33 1/3% ownership interest) and Triple Net Investment Company LLC ("TNI") (30% ownership interest). During the third quarter of 2004, the LION operating agreement was amended to provide for an additional $25,714 and $60,000 in equity commitments from the Company and its partner, respectively. During the third quarter of 2004, LION made the following acquisitions: o purchased a property in Houston, Texas for a capitalized cost of $39,904 which is net leased to Veritas DGC, Inc. The lease, which expires September 2015, provides for average annual net rent of $3,249. o purchased a property in Weston, Florida for a capitalized cost of $12,605 which is net leased to Circuit City Stores, Inc. The lease, which expires February 2017, provides for average annual net rent of $1,047. o purchased a property in Weston, Florida for a capitalized cost of $18,210 which is net leased to Hagemeyer Foods (N.A.), Inc. The lease, which expires December 2012, provides for average annual net rent of $1,609. o purchased a property in Santa Clarita, California for a capitalized cost of $47,118 which is net leased to Specialty Laboratories, Inc. The lease, which expires August 2024, provides for average annual net rent of $3,563. The purchase price for the Texas and Florida properties was funded entirely with cash, and non-recourse mortgages were obtained subsequent to September 30, 2004. (See note 13.) The California property was partially funded though a $28,200, 4.75% interest only non-recourse mortgage which matures October 2009. During the third quarter of 2004, LAC II made the following acquisitions: o purchased a property in Meridian, Idaho for a capitalized cost of $13,970 which is net leased to T-Mobile USA, Inc. The lease, which expires June 2019, provides for average annual net rent of $1,320. o purchased a property in Streetsboro, Ohio for a capitalized cost of $29,224 which is net leased to L'Oreal USA, Inc. The lease, which expires October 2019, provides for average annual net rent of $2,518. The Idaho property was partially funded through a $10,460 non-recourse mortgage which bears interest at 6.01%, provides for annual debt service of $753 and matures August 2019 when a balloon payment of $7,670 is due. The Ohio property was partially funded through a $20,200 non-recourse mortgage which bears interest at 5.29%, provides for annual debt service of $1,082 and matures September 2019 when a balloon payment of $16,338 is due. 11 In addition, the Company sold two properties to LAC II for $79,723 (subject to $55,570 in non-recourse mortgages which bear interest at 5.83%, provide for annual debt service of $3,285 and mature May 2019, when an aggregate balloon payment of $47,001 is due) which are net leased to Employers Reinsurance Corporation. During the second quarter of 2004 LION made the following acquisitions: o purchased a property in West Chester, Pennsylvania for a capitalized cost of $19,400 which is net leased to ING USA Annuity and Life Insurance Company. The lease, which expires May 2010, provides for average annual net rent of $2,038. The purchase price was partially funded through the assumption of an $11,379 non-recourse mortgage which bears interest at 6.75%, provides for annual debt service of $1,204 and fully amortizes by maturity in July 2019. o purchased a property in Herndon, Virginia for a capitalized cost of $20,773 which is net leased to Equant N.V. The lease, which expires April 2015, provides for average annual net rent of $2,011. The purchase price was partially funded through a $12,450 non-recourse mortgage which bears interest at 5.92%, provides for annual debt service of $888 and matures in April 2015, when a balloon payment of $10,371 is due. During the second quarter of 2004, TNI was formed. The Company and its partner have committed to fund $15,000 and $35,000, respectively to TNI. The partners share profits, losses, and cash flows pro-rata in proportion to their funding commitment, except that the Company does receive a promoted interest of 15% of any return in excess of an internal rate of return of 12%. In the second quarter of 2004, TNI acquired a property in Antioch, Tennessee for a capitalized cost of $25,400 which is net leased to Dana Corporation. The lease, which expires October 2021, provides for average annual net rent of $2,585. The purchase price was partially funded through the assumption of a $14,900 non-recourse mortgage which bears interest at 7.94%, provides for annual debt service of $1,580 and matures in October 2011, when a balloon payment of $11,177 is due. During the second quarter of 2004, the Company sold two properties to TNI for $35,871 (subject to $22,788 in non-recourse mortgages) which are net leased to The Shaw Group, Inc. and Bell South Corporation. During the second quarter of 2004, the Company purchased the entire 77.3% interest it did not already own in Lexington Florence LLC, which owns a property that is net leased to Washington Mutual Home Loans, Inc. for $6,137 and accordingly, consolidates the property. The property is subject to a non-recourse mortgage of $9,279 as of September 30, 2004. During the second quarter of 2004, the following non-recourse mortgage was obtained by LION in addition to those related to acquisitions discussed above: Current Annual Amount Rate Maturity Date Debt Service Balloon ------ ---- ------------- ------------ ------- $ 7,690 4.76% 04/14 $ 371 $ 6,784 During the first quarter of 2004, LION purchased a property for a capitalized cost of $28,651 and partially funded the acquisition with a $17,400 non-recourse mortgage note. In addition, the Company contributed a property to LION for a capitalized cost of $20,519 (subject to a $12,757 non-recourse mortgage note) and a second property to LAC II for a capitalized cost of $30,286 on which LAC II obtained a $22,000 non-recourse mortgage note. The following is summary combined balance sheet and income statement data as of September 30, 2004 and for the nine months ended September 30, 2004 and 2003 for the Company's non-consolidated entities described in the first paragraph of this note: 2004 ---- Real estate, net $ 842,052 Intangibles, net $ 42,489 Mortgages payable $ 523,331 2004 2003 ---- ---- Revenues $ 56,938 $ 36,241 Expenses $ 41,870 $ 24,971 --------------- -------------- Net income $ 15,068 $ 11,270 =============== ============== 12 During the nine months ended September 30, 2004, the Company made net equity investments in each of the non-consolidated entities as follows: LAC II $ 11,709 LION $ 35,257 TNI $ 7,122 The non-consolidated entities pay the Company acquisition, debt placement and asset management fees. The fees earned by the Company were $1,429 and $3,117 for the three and nine months ended September 30, 2004 and $165 and $633 for the three and nine months ended September 30, 2003. (7) Mortgages and Notes Payable --------------------------- During the first and second quarter of 2004, the Company obtained an aggregate of $90,195 in non-recourse mortgage notes, in addition to the amounts discussed in note 4, with a weighted average fixed interest rate of 5.66%. During the nine months ended September 30, 2004, the Company repaid $94,000 on its line of credit. (8) Concentration of Risk --------------------- The Company seeks to reduce its operating and leasing risks through diversification achieved by the geographic distribution of its properties, tenant industry diversification, avoiding dependency on a single property and the creditworthiness of its tenants. For the three months and nine months ended September 30, 2004 and 2003, no single tenant represented greater than 10% of rental revenues. Cash and cash equivalent balances may exceed insurable amounts. The Company believes it mitigates risk by investing in or through major financial institutions. (9) Minority Interests ------------------ In conjunction with several of the Company's acquisitions in prior years, sellers were given units in LCIF, LCIF II, or Net 3 as a form of consideration. All of such interests are redeemable at certain times, only at the option of the holders, for common shares on a one-for-one basis at various dates through November 2006 and are not otherwise mandatorily redeemable by the Company. As of September 30, 2004, there were 5,328,858 units outstanding. All units have stated distributions in accordance with their respective partnership agreements. To the extent that the Company's dividend per share is less than the stated distribution per unit per the applicable partnership agreement, the distributions per unit are reduced by the percentage reduction in the Company's dividend. No units have a liquidation preference. (10) Shareholders' Equity -------------------- During the first quarter of 2004, the Company issued 6,900,000 common shares at $20.92 per share raising net proceeds of $144,206. In addition, for the nine months ended September 30, 2004 and 2003, the Company has issued 411,177 and 296,143 common shares, respectively, under its dividend reinvestment plan raising net proceeds of $7,641 and $4,795, respectively. (11) Commitments and Contingencies ----------------------------- The Company is obligated under certain tenant leases, including leases for non-consolidated entities, to fund the expansion of the underlying leased properties. As of September 30, 2004, three expansions have commenced and the Company is obligated to fund an aggregate $20,578, of which $4,181 has been capitalized and included in Other Assets. The Company at times is involved in various legal actions occurring in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. As of September 30, 2004, the Company has entered into letters of intent to purchase four properties upon completion of (i) construction and commencement of rent from the tenants and/or (ii) the seller fulfilling its contractual obligation concerning 13 certain deliverables. The aggregate estimated obligation is $78,699. Subsequent to September 30,2004, LION purchased one of the properties for $31,800. (12) Supplemental Disclosure of Statement of Cash Flow Information ------------------------------------------------------------- During 2004 and 2003, the Company paid $32,585 and $28,001, respectively, for interest and $3,303 and $282, respectively, for income taxes. During 2004 and 2003, the Company issued 201,029 and 336,992 non-vested common shares, respectively, to certain employees and trustees resulting in $4,066 and $5,750 of deferred compensation, respectively. These common shares generally vest over 5 years. However, in certain situations the vesting only occurs if certain performance criteria are met. During 2004 and 2003, holders of an aggregate of 101,596 and 71,567 operating partnership units redeemed such units for common shares of the Company. These redemptions resulted in an increase in shareholders' equity and corresponding decrease in minority interest of $1,318 and $915, respectively. During 2003, three officers repaid recourse notes due the Company, including accrued interest thereon, of $2,522 by delivering to the Company 156,189 common shares. See footnotes 4, 5 and 6 for additional non-cash disclosures. (13) Subsequent Events ----------------- Subsequent to September 30, 2004, LION purchased a property in Rancho Cordova, California for $31,800 net leased through July 2012 to Progressive Casualty Insurance Company for average annual net rent of $2,804. In connection with the acquisition, LION assumed a $17,380 non-recourse mortgage which bears interest at 7.28%, provides for annual debt service of $1,457 and matures September 2014 when a balloon payment of $14,633 is due. In addition, LION obtained the following non-recourse mortgages:
Current Annual Property Amount Rate Maturity Debt Service Balloon -------- ------ ---- -------- ------------ ------- Houston, TX $23,910 5.41% 10/15 $ 1,311 $21,846 Weston, FL $10,860 5.42% 11/14 $ 733 $ 9,066 Weston, FL $ 7,500 5.52% 11/17 $ 512 $ 5,758
On November 1, 2004, the Company's tenant in its Dallas, Texas property, VarTec Telcom, Inc., filed for Chapter 11 bankruptcy. The lease, which expires September 2015, provides for $3,486 in annual rental revenue. As of September 30, 2004 the Company had the following assets relating to this property: Real estate, net $28,910 Rent receivable - deferred $ 1,570 Deferred expenses, net $ 1,456 In addition, the Company has a $21,025 non-recourse mortgage encumbering this property which bears interest at 7.49%, provides for annual debt service of $2,020 and matures in December 2012 when a balloon payment of $16,030 is due. As of this filing date, the lease has neither been rejected nor affirmed by the tenant. If the tenant rejects the lease it is likely the Company will record an impairment charge relating to the real estate and write-off all deferred assets relating to the lease. However, management has not quantified the potential impact. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ----------------------------------- Forward-Looking Statements -------------------------- The following is a discussion and analysis of the Company's consolidated financial condition and results of operations for the three and nine month periods ended September 30, 2004 and 2003, and significant factors that could affect our prospective financial condition and results of operations. You should read this discussion together with the accompanying unaudited condensed consolidated financial statements and notes and with the Company's consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003 and the Company's quarterly reports on Form 10-Q for the three months ended March 31, 2004 and June 30, 2004. Historical results may not be indicative of future performance. This quarterly report on Form 10-Q, together with other statements and information publicly disseminated by the Company contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Company's future plans, strategies and expectations, are generally identifiable by use of the words "believes," "expects," "intends," "anticipates," "estimates," "projects" or similar expressions. Readers should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond the Company's control and which could materially affect actual results, performances or achievements. In particular, among the factors that could cause actual results to differ materially from current expectations include, but are not limited to, (i) the failure to continue to qualify as a real estate investment trust, (ii) changes in general business and economic conditions, (iii) competition, (iv) increases in real estate construction costs, (v) changes in interest rates, (vi) changes in accessibility of debt and equity capital markets and other risks inherent in the real estate business, including, but not limited to, tenant defaults, potential liability relating to environmental matters, the availability of suitable acquisition opportunities and illiquidity of real estate investments, (vii) changes in governmental laws and regulations, and (viii) increases in operating costs. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Accordingly, there is no assurance that the Company's expectations will be realized. General ------- The Company, which has elected to qualify as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended, acquires, owns and manages net-leased commercial properties. The Company believes that it has operated as a REIT since October 1993. As of September 30, 2004, the Company owned, or had interests in, 138 real estate properties and managed 2 additional properties. Critical Accounting Policies ---------------------------- The Company's accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates that affect the amounts of revenues, expenses, assets and liabilities reported. The following are critical accounting policies which are both very important to the portrayal of the Company's financial condition and results of operations and which require some of management's most difficult, subjective and complex judgments. The accounting for these matters involves the making of estimates based on current facts, circumstances and assumptions which could change in a manner that would materially affect management's future estimate with respect to such matters. Accordingly, future reported financial conditions and results could differ materially from financial conditions and results reported based on management's current estimates. Revenue Recognition. The Company recognizes revenue in accordance with Statement of Financial Accounting Standards No. 13 "Accounting for Leases", as amended (SFAS No. 13). SFAS No. 13 requires that revenue be recognized on a straight line basis over the term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. Gains on sales of real estate are recognized pursuant to the provisions of Statement of Financial Accounting Standards No. 66 "Accounting for Sales of Real Estate" (SFAS No. 66). The specific timing of the sale is measured against various criteria in SFAS No. 66 related to the terms of the transactions and any continuing involvement in the form of management or financial assistance associated with the properties. If the sales criteria are not met, the gain is deferred and the finance, installment or cost recovery method, as appropriate, is applied until the sales criteria are met. 15 Accounts Receivable. The Company continuously monitors collections from its tenants and would make a provision for estimated losses based upon historical experience and any specific tenant collection issues that the Company has identified. Purchase Accounting for Acquisition of Real Estate. The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other values of in-place leases and value of tenant relationships, based in each case on their fair values. The fair value of the tangible assets of an acquired property (which includes land, building and improvements) is determined by valuing the property as if it were vacant, and the "as-if-vacant" value is then allocated to land, building and improvements based on management's determination of relative fair values of these assets. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demands. Management also estimates costs to execute similar leases including leasing commissions. In allocating the fair market value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the difference between the current in-place lease rent and a management estimate of current market rents. Below market lease intangibles are recorded as part of deferred revenue and amortized into rental revenue over the remaining non-cancelable periods of the respective leases. Above-market leases are recorded as part of intangibles and are amortized as a direct charge against rental revenue over the non-cancelable periods of the respective leases. The aggregate value of the other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the excess of (i) the purchase price paid for a property over (ii) the estimated fair value of the property as if vacant, determined as set forth above. This aggregate value is allocated between in-place lease values and tenant relationships based on management's evaluation of the specific characteristics of each tenant's lease. The value of in-place leases and customer relationships are amortized to expense over the remaining non-cancelable periods of the respective leases. Impairment of Real Estate. Annually and if events and circumstances require, the Company evaluates the carrying value of all real estate held to determine if impairment has occurred which would require the recognition of a loss. The evaluation includes reviewing anticipated cash flows of the property, based on current leases in place, coupled with an estimate of proceeds to be realized upon sale. However, estimating future sale proceeds is highly subjective and such estimates could differ materially from actual results. Liquidity and Capital Resources ------------------------------- Real Estate Assets. As of September 30, 2004, the Company's real estate assets were located in 34 states and contained an aggregate of approximately 30.0 million square feet of net rentable space. The properties are generally subject to triple net leases, which are generally characterized as leases in which the tenant pays all or substantially all of the cost and cost increases for real estate taxes, capital expenditures, insurance, utilities and ordinary maintenance of the property. Of the Company's 138 properties, seven provide for operating expense stops and one is subject to a modified gross lease. Approximately 98.8% of square feet is subject to a lease. During the nine months ended September 30, 2004, the Company purchased 26 properties (including through non-consolidated entities) for a capitalized cost of $621.5 million (including $280.2 million by non-consolidated entities) and sold six properties to third parties resulting in a net gain, after impairment charges, of $1.3 million. The Company's principal sources of liquidity are revenues generated from the properties, interest on cash balances, amounts available under its unsecured credit facility and amounts that may be raised through the sale of securities in private or public offerings. For the nine months ended September 30, 2004, the leases on the consolidated properties generated $101.6 million in rental revenue compared to $78.9 million during the same period in 2003. On November 1, 2004, the tenant in the Company's Dallas, Texas property, Vartec Telcom, Inc., filed for Chapter 11 bankruptcy. The lease, which expires September 2015, provides for $3,486 in annual rental revenue and $3,445 in current annual cash revenue. In addition, under the terms of the lease, the tenant is responsible for all operating expenses of the property. If the tenant rejects the lease the Company will, in addition to losing base rental revenue, be responsible for operating expenses until a replacement tenant can be found. Dividends. The Company has made quarterly distributions since October 1986 without interruption. The Company declared a common dividend of $0.35 per share to common shareholders of record as of October 29, 2004, payable on November 15, 2004. The Company's annualized common dividend rate is currently $1.40 per share. The Company also declared a preferred dividend of $0.503125 per share to preferred shareholders of record as of October 29, 2004, payable on November 15, 2004. The annual preferred dividend rate is $2.0125 per share. In connection with its intention to continue to qualify as a REIT for Federal income tax purposes, the Company expects to continue paying regular common and preferred dividends to its shareholders. These dividends are expected to be paid from operating cash 16 flows which are expected to increase over time due to property acquisitions and growth in rental revenues in the existing portfolio and from other sources. Since cash used to pay dividends reduces amounts available for capital investments, the Company generally intends to maintain a conservative dividend payout ratio, reserving such amounts as it considers necessary for the expansion of properties in its portfolio, debt reduction, the acquisition of interests in new properties as suitable opportunities arise, and such other factors as the Company's board of trustees considers appropriate. Cash dividends paid to common shareholders increased to $48.1 million in 2004 compared to $32.2 million in 2003. Although the Company receives the majority of its rental payments on a monthly basis, it intends to continue paying dividends quarterly. Amounts accumulated in advance of each quarterly distribution are invested by the Company in short-term money market or other suitable instruments. The Company anticipates that cash flows from operations will continue to provide adequate capital to fund its operating and administrative expenses, regular debt service obligations and all dividend payments in accordance with REIT requirements in both the short-term and long-term. In addition, the Company anticipates that cash on hand, borrowings under its unsecured credit facility, issuance of equity and debt, and other capital raising alternatives will be available to fund the necessary capital required by the Company. Cash flows from operations were $70.0 million and $50.0 million for the nine months ended September 30, 2004 and 2003, respectively. Net cash used in investing activities totaled $107.2 million and $142.8 million for the nine months ended September 30, 2004 and 2003, respectively. Cash used in investing activities during each period was primarily attributable to the acquisition of and deposits made for real estate and the investment in non-consolidated entities. Cash provided by investing activities relates primarily to the sale of properties. Therefore, the fluctuation in investing activities relates primarily to the timing of investments and dispositions. Net cash provided by financing activities totaled $127.3 million and $91.6 million for the nine months ended September 30, 2004 and 2003, respectively. Cash used in financing activities during each period was primarily attributable to repayments under the Company's credit facility, dividends (net of proceeds reinvested under the Company's dividend reinvestment plan), distributions to limited partners and debt service payments. Cash provided by financing activities relates primarily to proceeds from equity offerings and mortgage financings. UPREIT Structure. The Company's UPREIT structure permits the Company to effect acquisitions by issuing to a seller, as a form of consideration, interests in operating partnerships controlled by the Company. All of such interests are redeemable, at the option of the holder, at certain times for common shares on a one-for-one basis and all of such interests require the Company to pay certain distributions to the holders of such interests in accordance with the respective operating partnership agreements. The Company accounts for these interests in a manner similar to a minority interest holder. The number of common shares that will be outstanding in the future should be expected to increase, and minority interest expense should be expected to decrease, from time to time, as such operating partnership interests are redeemed for common shares. The table set forth below provides certain information with respect to such operating partnership interests as of September 30, 2004, based on the current $1.40 annual dividend.
Current Total Current Total Annualized Annualized Number Affiliate Per Unit Distribution Redemption Date Of Units Units Distribution ($000) --------------- ---------- ------- ------------ ------- At any time 3,446,138 1,401,159 $ 1.40 $ 4,825 At any time 1,218,152 84,374 1.08 1,316 At any time 112,352 52,144 1.12 126 November 2004 24,552 2,856 -- -- March 2005 29,384 -- -- -- March 2005 12,893 -- 1.40 18 January 2006 171,168 416 -- -- January 2006 231,763 120,662 1.40 324 February 2006 28,230 1,743 -- -- May 2006 9,368 -- 0.29 3 November 2006 44,858 44,858 1.40 63 ------------- ----------- -------- ---------- 5,328,858 1,708,212 $ 1.25 $ 6,675 ============= =========== ======== ==========
Affiliate units are held by two executive officers of the Company and are included in the total number of units. Share Repurchase Program ------------------------ The Company's board of trustees has authorized the repurchase of up to 2.0 million common shares/operating partnership units. As of September 30, 2004, 1.4 million common shares/operating partnership units have been repurchased and the last repurchase occurred in September 2001. 17 Financing --------- Revolving Credit Facility. The Company's $100.0 million unsecured credit facility bears interest at a rate of LIBOR plus 150-250 basis points depending on the amount of properties owned by the Company free and clear of mortgage debt. The credit facility contains customary financial covenants including restrictions on the level of indebtedness, amount of variable rate debt to be borrowed and net worth maintenance provisions. As of September 30, 2004, the Company was in compliance with all covenants, there were no borrowings outstanding on the facility, $96.1 million was available to be borrowed and $3.9 million in letters of credit were outstanding. Financing Transactions. During the nine months ending September 30, 2004, the Company, including non-consolidated entities, completed the following financing transactions ($000's): Current Annual Debt Maturity Property Amount Rate Service (Mo./Yr.) Balloon -------- ------ ---- ------- --------- ------- Santa Clarita, CA(3) $ 28,200 4.75% $ 1,285 10/09 $ 28,200 Fort Mill, SC 20,300 5.37% 1,106 05/14 18,311 Streetsboro, OH(3) 20,200 5.29% 1,082 09/19 16,338 Meridian, ID(3) 10,460 6.01% 753 08/19 7,670 San Antonio, TX 30,211 6.08% 2,260 10/12 26,025 High Point, NC 8,883 5.75% 695 10/09 7,741 Herndon, VA(3) 12,450 5.92% 888 04/15 10,371 Jackson, TN 10,400 5.93% 743 07/14 8,820 Overland Park, KS(3) 37,620 5.83% 2,224 05/19 31,819 Kansas City, MO(3) 17,950 5.83% 1,061 05/19 15,182 Baton Rouge, LA(3) 6,955 4.90% 443 10/12 5,943 Logan Township, NJ(3) 7,690 4.76% 371 04/14 6,784 West Chester, PA(3) 11,379 6.75% 1,204 07/19 -- Southfield, MI 11,629 4.55% 1,058 02/15 4,454 Antioch, TN(3) 14,900 7.94% 1,580 10/11 11,177 Waterloo, IA 6,800 5.61% 672 02/13 3,505 Mechanicsburg, PA 13,870 5.73% 1,045 03/14 10,538 Newport, OR 7,000 5.03% 470 08/11 5,980 Arlington, TX(3) 22,000 5.81% 1,551 02/14 18,605 Moody, AL 7,675 4.98% 493 01/14 6,350 New Lenox, IL(3) 17,400 5.51% 972 02/14 17,400 Mission, TX 6,570 5.78% 462 06/15 5,371 Redmond, OR 10,100 5.62% 697 04/14 8,484 Houston, TX(1) 123,642 6.25% 10,784 09/15 33,811 Wall, NJ(2) 30,036 6.25% 2,013 01/21 -- Centennial, CO(3) 15,891 6.15% 1,177 02/13 13,555 (1) Face amount of debt is $110,696 and the stated interest rate is 8.04%. (2) Face amount of debt is $27,500 and the stated interest rate is 7.32%. (3) Property owned by a non-consolidated entity as of September 30, 2004. Debt Service Requirements. The Company's principal liquidity needs are for the payment of interest and principal on outstanding mortgage debt. As of September 30, 2004, a total of 69 of the Company's 105 consolidated properties were subject to outstanding mortgages, which had an aggregate principal amount of $725.8 million. The weighted average interest rate on the Company's total consolidated debt on such date was approximately 6.61%. The estimated scheduled principal amortization payments for the remainder of 2004 and for 2005, 2006, 2007 and 2008 are $5.4 million, $21.6 million, $22.1 million, $27.3 million and $21.2 million, respectively. The estimated scheduled balloon payments for the remainder of 2004 and for 2005, 2006, 2007 and 2008 are $0, $12.6 million, $0, $0 and $70.5 million, respectively. Lease Obligations. Since the Company's tenants generally bear all or substantially all of the cost of property operations, maintenance and repairs, the Company does not anticipate significant needs for cash for these costs. For eight of the properties, the Company does have a level of property operating expense responsibility. The Company generally funds property expansions with available cash and additional secured borrowings, the repayment of which is funded out of rental increases under the leases covering the expanded properties. To the extent there is a vacancy in a property, the Company would be obligated for all operating expenses, including real estate taxes and insurance. As of September 30, 2004, the Company had two vacant properties. 18 The Company's tenants pay the rental obligation on ground leases either directly to the fee holder or to the Company as increased rent. The annual ground lease rental payment obligation for each of the next five years is $1.0 million. The following summarizes the Company's principal contractual obligations as of September 30, 2004 ($000's):
Remaining 2009 and Contractual Obligations 2004 2005 2006 2007 2008 thereafter Total ----------------------- ---- ---- ---- ---- ---- ---------- ----- Mortgages payable - normal amortization $ 5,361 $ 21,570 $ 22,147 $ 27,253 $ 21,162 $145,877 $243,370 Mortgages payable - balloon maturities -- 12,643(2) -- -- 70,492 399,340 482,475 Credit facility(3) -- -- -- -- -- -- -- Operating lease obligations (1) 378 1,514 1,514 1,514 1,514 9,281 15,715 -------- -------- -------- -------- -------- -------- -------- $ 5,739 $ 35,727 $ 23,661 $ 28,767 $ 93,168 $554,498 $741,560 ======== ======== ======== ======== ======== ======== ========
(1) Amounts disclosed through 2008 include rent for the Company's corporate office which is fixed through 2008 and adjusted to fair market value as determined at January 2009. Therefore the amounts for 2009 and thereafter do not include any corporate office rent. (2) The Company has the ability to extend the maturity of this mortgage to 2006. (3) The Company has issued $3,864 in outstanding letters of credit. Capital Expenditures. Due to the triple net lease structure, the Company does not incur significant expenditures in the ordinary course of business to maintain its properties. However, in the future, as leases expire, the Company expects to incur costs in extending the existing tenant lease or re-tenanting the properties. The amounts of these expenditures can vary significantly depending on tenant negotiations, market conditions and rental rates. These expenditures are expected to be funded from operating cash flows or borrowings on the credit facility. As of September 30, 2004, the Company has entered into letters of intent to purchase four properties upon completion of (i) construction and commencement of rent from the tenants and/or (ii) the seller fulfilling its contractual obligation concerning certain deliverables. As of September 30, 2004, the aggregate estimated obligation was $78.7 million. Subsequent to September 30, 2004, a non-consolidated entity in which the Company has a 30% interest, purchased one of the properties for $31.8 million. Results of Operations Three months ended September 30, 2004 compared with September 30, 2003 ---------------------------------------------------------------------- Changes in the results of operations for the Company are primarily due to the growth of its portfolio and costs associated with such growth. Of the increase in total gross revenues in 2004 of $9.8 million, $8.3 million is attributable to rental revenue which resulted primarily from (i) properties purchased in 2003 and owned during 2004 ($1.5 million) and, (ii) properties purchased in 2004 ($7.5 million), offset by an increase in vacancy ($0.6 million). The remaining $1.5 million increase in gross revenues in 2004 was primarily attributable to an increase in LRA advisory fees of $1.3 million ($0.9 million in acquisition fees, $0.3 million in debt placement fees and $0.1 million in asset management fees). The increase in interest and amortization expense of $4.3 million is due to the growth of the Company's portfolio and has been offset by interest savings resulting from scheduled principal amortization payments and mortgage satisfactions. The increase in depreciation and amortization of $4.1 million is due primarily to the growth in real estate and intangibles due to property acquisitions. The increase in property operating expenses of $0.8 million is due primarily to the Company acquiring properties in which it has property level operating expense responsibility and an increase in vacancy. The increase in general and administrative expenses of $1.4 million is due primarily to severance costs for a former executive officer ($0.5 million), an increase in professional fees ($0.5 million), amortization of deferred compensation ($0.2 million), and personnel costs ($0.2 million). Non-operating income increased by $1.0 million primarily due to the reimbursement of expenses incurred associated with properties that were owned by the Company and sold to a joint venture. The Company recorded a provision for income taxes of $0.2 million in 2004 relating to the advisory fees generated and the earnings from real estate investments held by its taxable REIT subsidiaries. Minority interest expense decreased $0.7 million due to a reduction in earnings at the partnership level and an increase in the Company's ownership level. Equity in earnings of non-consolidated entities increased $0.4 million due to an increase in assets owned and net income of non-consolidated entities (see below). Net income increased in 2004 primarily due to the net impact of items discussed above plus an increase of $0.5 million in income from discontinued operations offset by a $0.6 million impairment charge in 2004. Equity in earning of non-consolidated entities increased by $0.4 million as described as follows. The Company's non-consolidated entities had aggregate net income of $5.3 million for the three months ended September 30, 2004 compared to $3.8 million in the comparable period in 2003. The increase in net income is primarily attributable to an increase in rental revenue of $9.2 million in 2004 attributable to the acquisition of properties in 2003 and 2004. This revenue source was partially offset by an increase in (i) interest expense of $3.6 million in 2004 due to partially funding of acquisitions with the use of non-recourse mortgage debt, (ii) depreciation expense of $3.6 million in 2004 due to more depreciable assets owned and (iii) an increase in non-reimbursable operating expenses of $0.4 million. 19 The increase in net income in future periods will be closely tied to the level of acquisitions made by the Company. Without acquisitions, which in addition to generating rental revenue, generate acquisition, debt placement and asset management fees from non-consolidated entities, the sources of growth in net income are limited to index adjusted rents (such as the consumer price index), percentage rents, reduced interest expense on amortizing mortgages and by controlling other variable overhead costs. However, there are many factors beyond management's control that could offset these items including, without limitation, increased interest rates of variable debt ($14.1 million as of September 30, 2004 at a weighted average interest rate of 5.17%) and tenant monetary defaults. Nine months ended September 30, 2004 compared with September 30, 2003 --------------------------------------------------------------------- Changes in the results of operations for the Company are primarily due to the growth of its portfolio and costs associated with such growth. Of the increase in total gross revenues in 2004 of $26.0 million, $22.7 million is attributable to rental revenue which resulted primarily from (i) properties purchased in 2003 and owned during 2004 ($8.8 million), (ii) properties purchased in 2004 ($14.9 million), and (iii) new leases and extensions in 2004 ($0.1 million) offset by an increase in vacancy ($1.3 million). The remaining $3.3 million increase in gross revenues in 2004 was attributable to an increase in LRA advisory fees of $2.5 million ($1.9 million in acquisition fees, $0.2 million in debt placement fees and $0.4 million in asset management fees) and an increase ($0.8 million) in tenant reimbursements. The increase in interest and amortization expense of $6.8 million is due to the growth of the Company's portfolio and has been partially offset by interest savings resulting from scheduled principal amortization payments and mortgage satisfactions. The increase in depreciation and amortization of $8.1 million is due primarily to the growth in real estate and intangibles due to property acquisitions. The Company's general and administrative expenses increased by $2.7 million due primarily to the greater deferred compensation expense amortization ($0.4 million), trustee fees ($0.3 million), personnel costs ($0.4 million), occupancy costs ($0.3 million), severance costs for a former executive ($0.5 million), professional fees ($0.3 million) and depreciation of office equipment ($0.2 million). The increase in property operating expenses of $2.0 million is due primarily to incurring property level operating expenses for properties in which the Company has operating expense responsibility and an increase in vacancy. Debt satisfaction charges of $7.7 million were incurred in 2003 due to the payoff of certain mortgages. Non-operating income increased $1.3 million primarily due to the reimbursement of expenses incurred associated with properties that were owned by the Company and sold to a joint venture. In 2004, the Company recorded a provision for income taxes of $1.5 million relating to the advisory fees generated and the earnings from real estate investments held by its taxable REIT subsidiaries. Minority interest expense increased in 2004 by $0.6 million due to the increase in earnings at the partnership level offset by an increase in the Company's ownership level. Equity in earnings of non-consolidated entities increased $1.2 million due to an increase in assets owned and net income of non-consolidated entities (see below). Net income increased in 2004 primarily due to the positive impact of items discussed above plus an increase of $1.9 million in income from discontinued operations and a $2.9 million increase in gains on sale offset by a $2.8 million impairment charge in 2004. Equity in earnings of non-consolidated entities increased by $1.2 million as described as follows. The Company's non-consolidated entities had aggregate net income of $15.1 million for the nine months ended September 30, 2004 compared to $11.3 million in the comparable period in 2003. The increase in net income is primarily attributable to an increase in rental revenue of $19.6 million in 2004 attributable to the acquisition of properties in 2003 and 2004. This revenue source was partially offset by an increase in (i) interest expense of $7.5 million in 2004 due to partially funding of acquisitions with the use of non-recourse mortgage debt, (ii) depreciation expense of $7.0 million in 2004 due to more depreciable assets owned and (iii) an increase in non-reimbursable operating expenses of $1.0 million. Funds From Operations --------------------- The Company believes that Funds From Operations ("FFO") enhances an investor's understanding of the Company's financial condition, results of operations and cash flows. The Company believes that FFO is an appropriate, but limited, measure of the performance of an equity REIT. FFO is defined in the April 2002 "White Paper", issued by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT") as "net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis." Impairment charges recorded are not added back to net income in arriving at FFO. FFO should not be considered an alternative to net income as an indicator of operating performance or to cash flows from operating activities as determined in accordance with generally accepted accounting principles, or as a measure of liquidity to other consolidated income or cash flow statement data as determined in accordance with generally accepted accounting principles. 20 The following table reconciles net income allocable to common shareholders to the Company's FFO for the nine months ended September 30, 2004 and 2003 ($000's):
2004 2003 --------- ---------- Net income allocable to common shareholders $ 32,988 $ 19,406 Adjustments: Depreciation and amortization 27,874 20,330 Minority interest's share of net income 2,880 2,704 Amortization of leasing commissions 549 606 Gains on sale of properties (4,065) (1,143) Joint venture adjustment - depreciation 4,902 2,867 ----------- ----------- Funds From Operations $ 65,128 $ 44,770 =========== =========== Cash flows from operating activities $ 70,024 $ 50,019 Cash flows from investing activities $ (107,161) $ (142,784) Cash flows from financing activities $ 127,337 $ 91,595
Off-Balance Sheet Arrangements ------------------------------ Non-Consolidated Real Estate Entities. As of September 30, 2004, the Company has investments in various real estate entities with varying structures. These investments include the Company's 33 1/3% non-controlling interest in Lexington Acquiport Company, LLC; its 25% non-controlling interest in Lexington Acquiport Company II, LLC; its 40% non-controlling interest in Lexington Columbia LLC; its 30% non-controlling interest in Lexington/Lion Venture L.P.; its 30% non-controlling interest in Triple Net Investment Company LLC; and its 33 1/3% non-controlling interest in Lexington Durham Limited Partnership. The properties owned by the entities are financed with individual non-recourse mortgage loans. Non-recourse mortgage debt is generally defined as debt whereby the lenders' sole recourse with respect to borrower defaults is limited to the value of the property collateralized by the mortgage. The lender generally does not have recourse against any other assets owned by the borrower or any of the members of the borrower, except for certain specified expectations listed in the particular loan documents. These exceptions generally relate to limited circumstances including breaches of material representations. The Company invests in entities with third parties to increase portfolio diversification, reduce the amount of equity invested in any one property and to increase returns on equity due to the realization of advisory fees. See footnote 6 to the condensed consolidated financial statements for combined summary balance sheet and income statement data relating to these entities. 21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ($000's) -------------------------------------- The Company's exposure to market risk relates primarily to its variable rate and fixed rate debt. As of September 30, 2004 and 2003, the Company's variable rate indebtedness was $14,142 and $67,586, respectively, which represented 2.0% and 13.6% of total long-term indebtedness, respectively. During the three months and nine months ended September 30, 2004 and 2003, this variable rate indebtedness had a weighted average interest rate of 5.0% and 3.5%, and 3.8% and 4.0%, respectively. Had the weighted average interest rate been 100 basis points higher, the Company's net income for the three months ended September 30, 2004 and 2003 would have been reduced by approximately $37 and $74, respectively, and for the nine months ended September 30, 2004 and 2003 net income would have been reduced by $255 and $377, respectively. As of September 30, 2004 and 2003 the Company's fixed rate debt was $711,703 and $430,230, respectively which represented 98.0% and 86.4%, respectively, of total long-term indebtness. The weighted average interest rate as of September 30, 2004 of fixed rate debt was 6.6%, which is approximately 75 basis points higher than the fixed rate debt incurred by the Company during 2004. With no fixed rate debt maturing until 2008, the Company believes it has limited market risk exposure to rising interest rates as it relates to its fixed rate debt obligations. However, had the fixed interest rate been higher by 100 basis points, the Company's net income would have been reduced by $1,791 and $4,810, for the three and nine months ended September 30, 2004 and by $1,048 and $3,430 for the three and nine months ended September 30, 2003. ITEM 4. CONTROLS AND PROCEDURES ------------------------------- Evaluation of Disclosure Controls and Procedures ------------------------------------------------ (a) Disclosure Controls and Procedures. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective. Internal Control Over Financial Reporting ----------------------------------------- (b) Internal Control Over Financial Reporting. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 22 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings - not applicable. ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds - not applicable. ITEM 3. Defaults Upon Senior Securities - not applicable. ITEM 4. Submission of Matters to a Vote of Security Holders - not applicable. ITEM 5. Other Information - not applicable. ITEM 6. Exhibits. 31.1 Certification of Chief Executive Officer pursuant to rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 31.2 Certification of Chief Financial Officer pursuant to rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). 23 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Lexington Corporate Properties Trust Date: November 9, 2004 By: /s/ T. Wilson Eglin -------------------------------------------------- T. Wilson Eglin Chief Executive Officer, President and Chief Operating Officer Date: November 9, 2004 By: /s/ Patrick Carroll -------------------------------------------------- Patrick Carroll Chief Financial Officer, Executive Vice President and Treasurer 24