-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F5iKT344zDpdT9dDjcAGW5rngJrUkGcrYjWKSBxe1v6ZOlivqzmpyAMMJ0bepClq DCfSzIa8rq0x9xW0KXKVsg== 0001116679-04-002381.txt : 20041201 0001116679-04-002381.hdr.sgml : 20041201 20041201172247 ACCESSION NUMBER: 0001116679-04-002381 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20041201 ITEM INFORMATION: Other Events ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20041201 DATE AS OF CHANGE: 20041201 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEXINGTON CORPORATE PROPERTIES TRUST CENTRAL INDEX KEY: 0000910108 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 133717318 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12386 FILM NUMBER: 041178280 BUSINESS ADDRESS: STREET 1: 355 LEXINGTON AVE CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2126927260 MAIL ADDRESS: STREET 1: 355 LEXINGTON AVE STREET 2: 14TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10017 FORMER COMPANY: FORMER CONFORMED NAME: LEXINGTON CORPORATE PROPERTIES INC DATE OF NAME CHANGE: 19930816 8-K 1 lex8k.txt DECEMBER 1, 2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported) December 1, 2004 ---------------------------- Lexington Corporate Properties Trust - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Maryland - -------------------------------------------------------------------------------- (State or Other Jurisdiction of Incorporation) 1-12386 13-3717318 - -------------------------------------------------------------------------------- (Commission File Number) (IRS Employer Identification No.) One Penn Plaza, Suite 4015 New York, New York 10119-4015 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (212) 692-7200 - -------------------------------------------------------------------------------- (Registrant's Telephone Number, Including Area Code) - -------------------------------------------------------------------------------- (Former Name or Former Address, if Changed Since Last Report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below): |_| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |_| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |_| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Item 8.01. Other Events. Lexington Corporate Properties Trust (the "Company") is electing to re-issue in an updated format the presentation of its historical financial statements in accordance with the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). During the nine months ended September 30, 2004, the Company sold certain properties and in accordance with SFAS 144 has reported revenue, expenses and gains on sales from these properties as discontinued operations for the periods presented in its quarterly report on Form 10-Q filed on November 9, 2004 for the three months and nine months ended September 30, 2004. This Current Report on Form 8-K updates Items 6, 7, 8 and 15(a)3 of the Company's Form 10-K for the year ended December 31, 2003 (the "Form 10-K"), to reflect those properties sold during 2004 or held for sale as of September 30, 2004 as discontinued operations and includes disclosures of material subsequent events occurring through November 29, 2004. The Company has also reclassified its Consolidated Statements of Income to conform to rule 5-03 of Regulation S-X. All other items of the Form 10-K remain unchanged. Item 9.01. Financial Statements and Exhibits. (a) Not applicable (b) Not applicable (c) Exhibits 23.1 Consent of Independent Registered Public Accounting Firm 99.1 Selected Re-Issued Items on Form 10-K (a) Item 6 Selected Financial Data (b) Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations (c) Item 8 Financial Statements and Supplementary Data (d) Item 15(a) 3 Exhibit 12 - Ratio of Earnings to Combined Fixed Charges and Preferred Dividends 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 hereunto duly authorized. Lexington Corporate Properties Trust Date: December 1, 2004 By: /s/ Patrick Carroll -------------------------------- Patrick Carroll Chief Financial Officer Exhibit Index ------------- Exhibit Number Description 23.1 Consent of Independent Registered Public Accounting Firm 99.1 Selected Re-Issued Items on Form 10-K (a) Item 6 Selected Financial Data (b) Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations (c) Item 8 Financial Statements and Supplementary Data (d) Item 15(a) 3 Exhibit 12 - Ratio of Earnings to Combined Fixed Charges and Preferred Dividends EX-23 2 ex23-1.txt EX. 23.1 - CONSENT OF KPMG LLP Exhibit 23.1 Consent of Independent Registered Public Accounting Firm -------------------------------------------------------- The Shareholders Lexington Corporate Properties Trust: We consent to the incorporation by refence in the registration statements on Form S-3 (Nos. 333-113508, 333-109393, 333-103140, 333-102307, 333-90932, 333-71998, 333-92609, 333-85631, 333-76709, 333-70217, and 333-57853) and on Form S-8 (Nos. 333-102232 and 333-85625) of Lexington Corporate Properties Trust of our report dated February 24, 2004, except as to notes 2, 3, 5, and 19, which are as of November 29, 2004, with respect to the consolidated balance sheets of Lexington Corporate Properties Trust and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2003, and the related schedule, which report appears in the December 31, 2003 annual report on Form 10-K of Lexington Corporate Properties Trust, as updated by the Current Report on Form 8-K, dated December 1, 2004. /s/ KPMG LLP New York, New York December 1, 2004 EX-99 3 ex99-1.txt EX. 99.1 - SELECTED RE-ISSUED ITEMS ON FORM 10-K Exhibit 99.1 Set forth below are Items 6,7, 8 and 15(a)3 of the Company's Form 10-K for the year ending December 31, 2003, which have been updated pursuant to this Form 8-K. ITEM 6. SELECTED FINANCIAL DATA - ------------------------------- The following sets forth selected consolidated financial data for the Company as of and for each of the years in the five-year period ended December 31, 2003. The selected consolidated financial data for the Company should be read in conjunction with the Consolidated Financial Statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. ($000's, except per share data)
2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- Total gross revenues $ 113,521 $ 92,147 $ 76,561 $ 73,442 $ 70,931 Expenses applicable to revenues (35,653) (27,475) (22,264) (19,860) (18,698) Interest and amortization expense (35,873) (34,126) (29,675) (29,616) (28,974) Gain on sale of properties -- -- -- 2,959 5,127 Income from continuing operations 28,147 25,844 15,995 19,945 19,348 Total income from discontinued operations 5,502 4,751 2,067 2,007 1,999 Net income 33,649 30,595 18,062 21,952 21,347 Net income allocable to common shareholders 30,257 29,902 15,353 19,390 18,827 Income from continuing operations per common share-basic 0.73 0.93 0.68 1.03 0.99 Income from continuing operations per common share-diluted 0.72 0.92 0.67 0.99 0.97 Income from discontinued operations-basic 0.16 0.18 0.11 0.12 0.12 Income from discontinued operations-diluted 0.16 0.17 0.10 0.11 0.11 Net income per common share-basic 0.89 1.11 0.79 1.15 1.11 Net income per common share-diluted 0.88 1.09 0.77 1.10 1.08 Cash dividends declared per common share 1.355 1.325 1.290 1.230 1.200 Net cash provided by operating activities 71,815 57,732 41,277 41,175 39,783 Net cash used in investing activities (298,883) (106,030) (64,321) (38,549) (64,942) Net cash provided by (used in) financing activities 229,316 46,532 32,115 (6,671) 22,912 Ratio of earnings to combined fixed charges and preferred dividends 1.57 1.75 1.38 1.51 1.53 Real estate assets, net 1,001,772 779,150 714,047 584,198 606,592 Investments in non-consolidated entities 69,225 54,261 48,764 40,836 11,523 Total assets 1,207,411 902,471 822,153 668,377 656,481 Mortgages, notes payable and credit facility, including discontinued operations 551,385 491,517 455,771 387,326 372,254 Funds from operations(1) 64,502 61,818 47,126 46,316 40,652 Rent received below straight-line rent 3,790 2,426 2,755 2,804 2,054
The Company believes that the book value of its real estate assets, which reflects the historical cost of such real estate assets less accumulated depreciation, is not indicative of the current - -------- 1 The Company believes that Funds From Operations ("FFO") enhances an investor's understanding of the Company's financial condition, results of operations and cash flows. The Company believes that FFO is an appropriate, but limited, measure of the performance of an equity REIT. FFO is defined in the April 2002 "White Paper", issued by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT") as "net income (or loss), computed in accordance with generally accepted accounting principles ("GAAP"), excluding gains (or losses) from sales of property, plus real estate depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures." The Company included in the calculation of FFO the dilutive effect of the deemed conversion of its outstanding exchangeable notes which were redeemed by the Company in 2001. FFO should not be considered an alternative to net income as an indicator of operating performance or to cash flows from operating activities as determined in accordance with GAAP, or as a measure of liquidity to other consolidated income or cash flow statement data as determined in accordance with GAAP. 1 market value of its properties. Historical operating results are not necessarily indicative of future operating results. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------- The following, together with other statements and information publicly disseminated by the Company, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Company's future plans, strategies and expectations, are generally identifiable by use of the words "believes," "expects," "intends," "anticipates," "estimates," "projects" or similar expressions. Readers should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond the Company's control and which could materially affect actual results, performances or achievements. In particular, among the factors that could cause actual results to differ materially from current expectations include, but are not limited to, (i) the failure to continue to qualify as a real estate investment trust, (ii) changes in general business and economic conditions, (iii) competition, (iv) increases in real estate construction costs, (v) changes in interest rates, (vi) changes in accessibility of debt and equity capital markets and other risks inherent in the real estate business, including, but not limited to, tenant defaults, potential liability relating to environmental matters, the availability of suitable acquisition opportunities and illiquidity of real estate investments, (vii) changes in governmental laws and regulations, and (viii) increases in operating costs. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Accordingly, there is no assurance that the Company's expectations will be realized. General - ------- The Company, which has elected to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended, acquires and manages net leased commercial properties throughout the United States. The Company believes it has operated as a REIT since October 1993. As of December 31, 2003, the Company owned or had interests in 118 real estate properties encompassing 23 million rentable square feet. During 2003, the Company purchased 19 properties, including non-consolidated investments, for $414.0 million. During 2003, the Company sold four properties for net proceeds of $11.1 million, which resulted in an aggregate gain of $2.2 million. In addition, the Company contributed 2 properties to the LION joint venture; Clarion paid the Company directly $23.8 million for their proportionate ownership interest. As of December 31, 2003, the Company leased properties to 86 tenants in 20 different industries and the weighted average lease term based upon annualized rental revenue is 7.6 years. The Company's revenues and cash flows are generated predominantly from property rent receipts. Growth in revenue and cash flows is directly correlated to the Company's ability to (i) acquire income producing properties and (ii) to release properties that are vacant, or may become vacant at favorable rental rates. The challenge the Company faces in purchasing properties is finding investments that will provide an attractive return without compromising the Company's real estate underwriting criteria. The Company believes it has access to acquisition opportunities due to its relationship with developers, brokers, corporate users and sellers. In the past three years, the Company has experienced minimal lease turnover, and accordingly minimal capital expenditures. There can be no assurance that this will continue. Through 2008 the Company has 41 leases expiring which generate approximately $46.8 million in rental revenue. Releasing these properties at favorable effective rates is the primary focus of the Company. The primary risks associated with re-tenanting properties are (i) the period of time required to find a new tenant (ii) whether rental rates will be lower than previously received (iii) the significant leasing costs such as commissions and tenant improvement allowances and (iv) the payment of operating costs such as real estate taxes and insurance while there is no offsetting revenue. The Company addresses these risks by contacting tenants well in advance of lease maturity to get an understanding of their occupancy needs, contacting local brokers to determine the depth of the rental market and, if required, retaining local expertise to assist in the re-tenanting of a property. As part of the acquisition underwriting process, the Company focuses on buying general purpose real estate which can be leased to other tenants without significant modification to the properties. No assurance can be given that once a property becomes vacant it will subsequently be re-let. During 2002, the Company sold five properties (including a 77.3% interest in a property) and one building in the Palm Beach Gardens, Florida property for $20.8 million, which resulted in an aggregate gain of approximately $1.1 million. During 2001, the Company sold one property for $4.1 million which approximated book value. Critical Accounting Policies - ---------------------------- The Company's accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates that affect the amounts of revenues, expenses, assets and liabilities reported. The following are critical accounting policies which are important to the portrayal of the Company's financial condition and results of operations and which require some of management's most difficult, subjective and complex judgments. The accounting for these matters involves the making of estimates based on current facts, circumstances and assumptions which could change in a manner that would materially affect management's future estimate with 2 respect to such matters. Accordingly, future reported financial conditions and results could differ materially from financial conditions and results reported based on management's current estimates. Revenue Recognition. The Company recognizes revenue in accordance with Statement of Financial Accounting Standards No. 13 "Accounting for Leases", as amended, (SFAS No.13). SFAS No.13 requires that revenue be recognized on a straight-line basis over the term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. Gains on sales of real estate are recognized pursuant to the provisions of SFAS No. 66 "Accounting for Sales of Real Estate." The specific timing of the sale is measured against various criteria in SFAS No. 66 related to the terms of the transactions and any continuing involvement in the form of management or financial assistance associated with the properties. If the sales criteria are not met, the gain is deferred and the finance, installment or cost recovery method, as appropriate, is applied until the sales criteria are met. Accounts Receivable. The Company continuously monitors collections from its tenants and would make a provision for estimated losses based upon historical experience and any specific tenant collection issues that the Company has identified. Purchase Accounting for Acquisition of Real Estate. The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and value of tenant relationships, based in each case on their fair values. The fair value of the tangible assets of an acquired property (which includes land, building and improvements) is determined by valuing the property as if it were vacant, and the "as-if-vacant" value is then allocated to land, building and improvements based on management's determination of relative fair values of these assets. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions. In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the difference between the current in-place lease rent and a management estimate of current market rents. The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the excess of (i) the purchase price paid for a property over (ii) the estimated fair value of the property as if vacant, determined as set forth above. This aggregate value is allocated between in-place lease values and tenant relationships based on management's evaluation of the specific characteristics of each tenant's lease. The value of in-place leases and customer relationships are amortized to expense over the remaining non-cancelable periods of the respective leases. Impairment of Real Estate. The Company evaluates the carrying value of all real estate held to determine if an impairment has occurred which would require the recognition of a loss. The evaluation includes reviewing anticipated cash flows of the property, based on current leases in place, coupled with an estimate of proceeds to be realized upon sale. However, estimating future sale proceeds is highly subjective and such estimates could differ materially from actual results. Liquidity and Capital Resources - ------------------------------- Since becoming a public company, the Company's principal sources of capital for growth has been the public and private equity markets, selective secured indebtedness, its unsecured credit facility, issuance of OP Units and undistributed funds from operations. The Company expects to continue to have access to and use these sources in the future; however, there are factors that may have a material adverse effect on the Company's access to capital sources. The Company's ability to incur additional debt to fund acquisitions is dependent upon its existing leverage, the 3 value of the assets the Company is attempting to leverage and general economic conditions which may be outside of management's influence. The Company's current $100.0 million variable rate unsecured revolving credit facility, which is scheduled to expire in August 2006, has made available funds to finance acquisitions and meet any short-term working capital requirements. As of December 31, 2003, $94.0 million was outstanding at an interest rate of 2.64%. Subsequent to year end, the Company repaid its outstanding line balance. The Company pays an unused facility fee equal to 25 basis points if 50% or less of the facility is utilized and 15 basis points if greater than 50% of the facility is utilized. The Company has the option to extend the maturity to August 2007, if no defaults exist, for a payment of $0.3 million. Since its formation in 1993, the Company has raised, through the issuance of common shares, preferred shares and OP Units, aggregate capital of approximately $484.8 million for the purposes of making acquisitions and retiring indebtedness. In addition, the Company has purchased $109.8 million in real estate through the direct issuance of its common shares and OP Units. During 2003, the Company completed a 4.5 million common share offering at $16.44 per share and a 5.3 million common share offering at $18.98 per share raising an aggregate of $174.0 million of net proceeds. The Company completed a 3.16 million preferred share offering at $25.00 per share with a 8.05% coupon raising net proceeds of $76.3 million. The proceeds of these offerings were used to repay debt and fund acquisitions. During 2004, the Company sold 6.9 million common shares raising net proceeds of $144.2 million. Dividends. In connection with its intention to continue to qualify as a REIT for Federal income tax purposes, the Company expects to continue paying regular dividends to its shareholders. These dividends are expected to be paid from operating cash flows and/or from other sources. Since cash used to pay dividends reduces amounts available for capital investments, the Company generally intends to maintain a conservative dividend payout ratio as a percentage of FFO, reserving such amounts as it considers necessary for the maintenance or expansion of properties in its portfolio, debt reduction, the acquisition of interests in new properties as suitable opportunities arise, and such other factors as the Board of Trustees considers appropriate. Dividends paid to common shareholders increased to $45.8 million in 2003, compared to $35.8 million in 2002 and $25.0 million in 2001. During 2004, dividends paid to common shareholders were $65.1 million. Although the Company receives the majority of its rental payments on a monthly basis, it intends to continue paying dividends quarterly. The Company's second largest tenant, as a percentage of revenue, pays its rent quarterly (Northwest Pipeline Corp.). Amounts accumulated in advance of each quarterly distribution are invested by the Company in short-term money market or other suitable instruments. On November 1, 2004, the tenant in the Company's Dallas, Texas property, VarTec Telecom, Inc., filed for Chapter 11 bankruptcy. The lease, which expires September 2015, provides for $3.5 million in annual rental revenue and current annual cash revenue. In addition, under the terms of the lease, the tenant is responsible for all operating expenses of the property. On November 24, 2004, the tenant filed a motion to reject the lease. The Company will, in addition to losing base rental revenue, be responsible for operating expenses until a replacement tenant can be found. In the fourth quarter of 2004 the Company will write off approximately $2.8 million in deferred rent receivable and unamortized lease costs. The Company believes that cash flows from operations will continue to provide adequate capital to fund its operating and administrative expenses, regular debt service obligations and all dividend payments in accordance with REIT requirements in both the short-term and long-term. In addition, the Company anticipates that cash on hand, borrowings under its unsecured credit facility, issuance of equity and debt, as well as other alternatives, will provide the necessary capital required by the Company. Cash flows from operations as reported in the Consolidated Statements of Cash Flows increased to $71.8 million for 2003 from $57.7 million for 2002 and $41.3 million for 2001. Cash flows from operations was negatively impacted in 2003, 2002 and 2001 by the payment of $7.2 million, $0.3 million and $3.6 million, respectively in prepayment penalties on debt satisfactions. Net cash used in investing activities totaled $298.9 million in 2003, $106.0 million in 2002 and $64.3 million in 2001. Cash used in investing activities related primarily to investments in real estate properties and joint ventures. Therefore, the fluctuation in investing activities relates 4 primarily to the timing of investments and dispositions. In connection with the acquisition of the Net Partnerships, the Company acquired $3.8 million of cash in 2001. During 2004, the Company purchased 17 properties for an aggregate capitalized cost of $373.3 million, sold seven properties to third parties for an aggregate net sale price of $32.5 million and sold seven properties, at cost, to non-consolidated entities for $176.6 million, which were subject to $97.6 million in non-recourse mortgages. Net cash provided by financing activities totaled $229.3 million in 2003, $46.5 million in 2002 and $32.1 million in 2001. Cash provided by (used in) financing activities during each year was primarily attributable to proceeds from equity offerings, non-recourse mortgages and advances/repayments under the Company's credit facility coupled with dividend and distribution payments and debt service payments. UPREIT Structure. The Company's UPREIT structure permits the Company to effect acquisitions by issuing to a property owner, as a form of consideration in exchange for the property, OP Units in partnerships controlled by the Company. All of such OP Units are redeemable at certain times for common shares on a one-for-one basis and all of such OP Units require the Company to pay certain distributions to the holders of such OP Units. The Company accounts for these OP Units in a manner similar to a minority interest holder. The number of common shares that will be outstanding in the future should be expected to increase, and minority interest expense should be expected to decrease, as such OP Units are redeemed for common shares. The following table provides certain information with respect to such OP units as of December 31, 2003 (assuming the Company's annualized dividend rate remains at the current $1.40 per share).
Current Total Current Redeemable Total Number Affiliate Annualized Per Annualized for common shares: of OP Units OP Units OP Unit Distribution Distribution ($000) - ---------------------- ---------------- -------------- --------------------- ------------------- At any time 3,446,783 1,401,159 $ 1.40 $ 4,825 At any time 1,254,152 120,374 1.08 1,354 At any time 114,059 52,144 1.12 128 March 2004 43,734 -- 0.27 12 March 2004 19,510 -- -- -- November 2004 24,552 2,856 -- -- March 2005 29,384 -- -- -- March 2005 12,893 -- 1.40 18 January 2006 171,168 416 -- -- January 2006 231,763 120,662 1.40 324 February 2006 28,230 1,743 -- -- May 2006 9,368 -- 0.29 3 November 2006 44,858 44,858 1.40 63 ---------- --------- ---- ------ 5,430,454 1,744,212 $ 1.24 $ 6,727 ========== ========= ==== ======
Affiliate OP Units, which are included in total OP Units, represent OP Units held by two executive officers (including their affiliates) of the Company. Financing - --------- Revolving Credit Facility. The Company's $100.0 million unsecured credit facility, which expires August 2006 and can be extended by the Company for one year with a payment of $0.3 million, bears interest at 150-250 basis points over LIBOR depending on the amount of properties the Company owns free and clear of mortgage debt, and has an interest rate period of one, three, or six months, at the option of the Company. The credit facility contains various leverage, debt service coverage, net worth maintenance and other customary covenants. As of December 31, 2003, $94.0 million was outstanding and $1.8 million was available to be drawn. During 2004, the Company repaid all outstanding balances on its line of credit. The Company had six outstanding letters of credit aggregating $4.2 million which expire in 2004 ($0.9 million), 2005 ($2.5 million), 2007 ($0.4 million) and 2010 ($0.4 million). This credit facility replaced 5 the Company's previous $60.0 million credit facility which was scheduled to expire in March 2004. The previous facility contained similar covenants. Debt Service Requirements. The Company's principal liquidity needs are the payment of interest and principal on outstanding indebtedness. As of December 31, 2003, a total of 55 of the Company's 100 consolidated properties, including one property held for sale, were subject to outstanding mortgages which had an aggregate principal amount of $457.4 million. As of December 31, 2003 the weighted average interest rate on the Company's outstanding debt, including line of credit borrowings, was approximately 6.24%. The scheduled principal amortization payments for the next five years are as follows: $15.4 million in 2004; $15.5 million in 2005; $16.3 million in 2006, $17.2 million in 2007 and $11.5 million in 2008. Approximate balloon payment amounts, having a weighted average interest rate of 6.20%, excluding line of credit borrowings, due the next five years are as follows: $14.5 million in 2004; $0 million in 2005, $0 in 2006; $0 in 2007 and $70.5 million in 2008. The ability of the Company to make such balloon payments will depend upon its ability to refinance the mortgage related thereto, sell the related property, have available amounts under its unsecured credit facility or access other capital. The ability of the Company to accomplish such goals will be affected by numerous economic factors affecting the real estate industry, including the availability and cost of mortgage debt at the time, the Company's equity in the mortgaged properties, the financial condition of the Company, the operating history of the mortgaged properties, the then current tax laws and the general national, regional and local economic conditions. The Company expects to continue to use property specific, non-recourse mortgages as it believes that by properly matching a debt obligation, including the balloon maturity risk, with a lease expiration the Company's cash-on-cash returns increase and the exposure to residual valuation risk is reduced. During 2004, the Company obtained $358.6 million in non-recourse mortgage debt. Lease Obligations. Since the Company's tenants bear all or substantially all of the cost of property operations, maintenance and repairs, the Company does not anticipate significant needs for cash for these costs. For eight of the properties, the Company has a level of property operating expense responsibility and a ninth obligated the Company to pay real estate taxes in 2003 and for the tenant to be responsible thereafter. The Company generally funds property expansions with additional secured borrowings, the repayment of which is funded out of rental increases under the leases covering the expanded properties. To the extent there is a vacancy in a property, the Company would be obligated for all operating expenses, including real estate taxes and insurance. The Company's tenants pay the rental obligations on ground leases either directly to the fee holder or to the Company as increased rent. The annual ground lease rental payment obligations for each of the next five years is $0.9 million. Step Down Renewals The leases on the following properties contain renewal options, exercisable by the tenant, with rents per square foot less than that paid in 2003:
Annual Rent per Net Renewal Option Term and Rentable Rentable Square Foot - Renewal Net Rent Property Location Tenant (Guarantor) Square Feet 2003 per Square Foot - -------------------------- ---------------------- ---------------- ----------------------- ------------------------------- 295 Chipeta Way Northwest Pipeline 295,000 $29.06 10/01/09 - 09/15/18: $11.73 Salt Lake City, UT Corp. plus base cost component ($.06) adjusted by CPI, plus ($.03) 450 Stern Street Johnson Controls, Inc. 111,160 $5.75 12/23/06 - 12/22/11: $3.65 Oberlin, OH 12/23/11 - 12/22/16: $4.20 46600 Port Street Johnson Controls, Inc. 134,160 $6.29 12/23/06 - 12/22/11: $4.00 Plymouth, MI 12/23/11 - 12/22/16: $4.60
6
Annual Rent per Net Renewal Option Term and Rentable Rentable Square Foot - Renewal Net Rent Property Location Tenant (Guarantor) Square Feet 2003 per Square Foot - -------------------------- ---------------------- ---------------- ----------------------- ------------------------------- 541 Perkins Jones Road Kmart Corp. 1,700,000 $5.51 10/01/07 - 09/30/12: $2.67 Warren, OH 10/01/12 - 09/30/17: $2.67 10/01/17 - 09/30/22: $2.67 10/01/22 - 09/30/27: $2.67 10/01/27 - 09/30/32: $2.67 10/01/32 - 09/30/37: $2.67 10/01/37 - 09/30/42: FMV 10/01/42 - 09/30/47: FMV 10/01/47 - 09/30/52: FMV 10/01/52 - 09/30/57: FMV 24100 Laguna Hills Mall Federated Department 160,000 $4.23 02/01/06 - 04/16/14: $1.81 Laguna Hills, CA Stores, Inc. 04/17/14 - 04/16/29: $1.81 04/17/29 - 04/16/44: $1.81 04/17/44 - 04/16/50: $1.81 7111 Westlake Terrace The Home Depot USA, 95,000 $8.13 05/01/06 - 04/30/16: $3.96 Bethesda, MD Inc. 05/01/16 - 04/30/21: $3.96 05/01/21 - 04/30/26: $3.96 05/01/26 - 04/30/31: $3.17 6910 S. Memorial Highway Toys "R" Us, Inc. 43,123 $8.40 06/01/06 - 05/31/11: $5.92 Tulsa, OK 06/01/11 - 05/31/16: $5.92 06/01/16 - 05/31/21: $5.92 06/01/21 - 05/31/26: $5.92 06/01/26 - 05/31/31: $5.92 12535 SE 82nd Avenue Toys "R" Us, Inc. 42,842 $9.91 06/01/06 - 05/31/11: $6.96 Clackamas, OR 06/01/11 - 05/31/16: $6.96 06/01/16 - 05/31/21: $6.96 06/01/21 - 05/31/26: $6.96 06/01/26 - 05/31/31: $6.96 18601 Alderwood Mall Blvd. Toys "R" Us, Inc. 43,105 $9.18 06/01/06 - 05/31/11: $6.48 Lynnwood, WA 06/01/11 - 05/31/16: $6.48 06/01/16 - 05/31/21: $6.48 06/01/21 - 05/31/26: $6.48 06/01/26 - 05/31/31: $6.48 A1 21 South Wal-Mart Real Estate 56,132 $2.60 02/01/09 - 01/31/14: $2.42 Jacksonville, AL Business Trust plus 1% of gross sales 02/01/14 - 01/31/19: $2.42 plus 1% of gross sales 02/01/19 - 01/31/24: $2.42 plus 1% of gross sales 02/01/24 - 01/31/29: $2.42 plus 1% of gross sales 02/01/29 - 01/31/34: $2.42 plus 1% of gross sales 9580 Livingston Road GFS Realty, Inc. 107,337 $3.80 03/01/14 - 02/29/19: $1.53 Oxon Hill, MD (Giant Food, Inc.) 03/01/19 - 02/29/24: $1.53 03/01/24 - 02/29/29: $1.15 03/01/29 - 02/29/34: $1.15
7
Annual Rent per Net Renewal Option Term and Rentable Rentable Square Foot - Renewal Net Rent Property Location Tenant (Guarantor) Square Feet 2003 per Square Foot - -------------------------- ---------------------- ---------------- ----------------------- ------------------------------- Rockshire Village Center GFS Realty, Inc. 51,682 $4.33 06/20/17 - 05/31/27: $1.78 2401 Wootton Parkway (Giant Food, Inc.) 06/01/27 - 05/31/37: $1.33 Rockville, MD 590 Ecology Lane Owens Corning 193,891 $8.35 01/01/21 - 12/31/25: $6.41 Chester, SC 01/01/26 - 12/31/30: $7.08
Origination Fees Payable. In connection with certain acquisitions, the Company assumed obligations ($2.2 million in principal plus accrued interest) which bore interest on the outstanding principal balances only at rates ranging from 12.3% to 19.0%. During 2003, the Company satisfied $5.6 million in origination fees payable including accrued interest by issuing 231,763 OP Units which resulted in a gain of $0.9 million. The scheduled annual payments for each of the next five years for the remaining origination fees payable is $0.1 per annum. As of December 31, 2003, $0.8 million is outstanding of which $0.4 million is due to two executive officers of the Company. The following summarizes the Company's principal contractual obligations as of December 31, 2003 ($000's):
2009 and 2004 2005 2006 2007 2008 thereafter Total ----------- ---------- ----------- ----------- ---------- ----------- ------------ Mortgages payable -normal amortization $ 15,429 $ 15,521 $ 16,303 $ 17,238 $ 11,469 $ 34,944 $ 110,904 Mortgages payable -balloon maturities 14,456(2) _ _ _ 70,492 261,533 346,481 Credit facility(3) _ _ 94,000 _ _ _ 94,000 Operating lease obligation (1) 1,395 1,395 1,395 1,395 1,395 7,173 14,148 Deferred installment obligation 37 37 85 110 110 429 808 -------- -------- --------- -------- -------- --------- ----------- $ 31,317 $ 16,953 $ 111,783 $ 18,743 $ 83,466 $ 304,079 $ 566,341 ======== ======== ========= ======== ======== ========= ===========
(1) Amounts include rent for the Company's corporate office which is fixed through 2008 and adjusted to fair market value as determined at January 2009. (2) The Company has the ability to extend the maturity of this mortgage note to 2005 and 2006. Subsequent to year end the Company extended the maturity to 2005. (3) The Company has $4,164 in outstanding letters of credit. Capital Expenditures. Due to the net lease structure the Company does not incur significant expenditures in the ordinary course of business to maintain its properties. However, in the future, as leases expire the Company expects to incur costs in extending the existing tenant lease or re-tenanting the properties. The amounts of these expenditures can vary significantly depending on tenant negotiations, market conditions and rental rates. These expenditures are expected to be funded from operating cash flows or borrowings on the credit facility. Shares Repurchase. The Company's Board of Trustees has authorized the Company to repurchase, from time to time, up to 2.0 million common shares and OP Units depending on market conditions and other factors. As of December 31, 2003, the Company had repurchased approximately 1.4 million common shares and OP Units, at an average price of approximately $10.55 per common share/OP Unit. No common shares or OP Units were repurchased in 2003 and 2002. Comparison of 2003 to 2002 - -------------------------- Changes in the results of operations for the Company are primarily due to the growth of its portfolio and costs associated with such growth. Of the increase in total gross revenues in 2003 of $21.4 million, $19.9 million is attributable to rental revenue which resulted primarily from (i) properties purchased in 2003 and 2002 ($14.3 million), (ii) the consolidation of LRA ($4.4 million) and (iii) the expansion of a single property ($1.4 million). The remaining $1.5 million increase in gross revenues in 2003 was attributable to advisory fees relating to the consolidation 8 of LRA. The increase in interest and amortization expense of $1.7 million is due to the growth of the Company's portfolio and has been partially offset by interest savings resulting from scheduled principal amortization payments, lower interest rates and mortgage satisfactions. The increase in depreciation and amortization of $6.5 million is due primarily to the growth in real estate and intangibles due to property acquisitions. The Company's general and administrative expenses increased by $4.1 million due primarily to greater personnel costs ($1.7 million), occupancy costs ($0.2 million), professional service costs ($0.2 million) and the consolidation of LRA ($1.9 million). The increase in property operating expenses of $1.6 million is due primarily to incurring property level operating expenses for properties in which the Company has operating expense responsibility. Debt satisfaction charges increased $7.1 million in 2003 due to the payoff of certain mortgages. Minority interest expense decreased in 2003 by $1.3 million due to a decrease in earnings at the partnership level. Equity in earnings of non-consolidated entities increased $0.7 million due to an increase in assets owned and net income of non-consolidated entities (see below). Net income increased in 2003 primarily due to the positive impact of items discussed above plus $1.1 million increase in gains on sale offset by a decrease of $0.4 million in income from discontinued operations. Net income allocable to common shareholders increased due to the items discussed above offset by an increase in preferred dividends of $2.7 million on the preferred shares issued in 2003. The Company's non-consolidated entities had aggregate net income of $16.5 million in 2003 compared to $13.6 million in 2002. The increase in net income is primarily attributable to an increase in rental income of $6.8 million in 2003 attributable to acquisition of properties and the formation of a new joint venture. This revenue source was partly offset by an increase in (i) interest expense of $2.1 million in 2003 due to increased acquisition leverage and (ii) depreciation expense of $1.6 million in 2003 due to more depreciable assets owned. The financial information for non-consolidated entities does not include information for LRA. Any increase in net income in future periods will be closely tied to the level of acquisitions made by the Company. Without acquisitions, which in addition to generating rental revenue, generate acquisition, debt placement and asset management fees when such properties are acquired by joint venture or advisory programs, growth in net income is dependent on index adjusted rents (8 leases), percentage rents (3 leases), reduced interest expense on amortizing mortgages and by controlling variable overhead costs. However, there are many factors beyond management's control that could offset these items including, without limitation, increased interest rates of variable debt ($109.7 million as of December 31, 2003 at a weighted average interest rate of 2.85%) and tenant monetary defaults. Comparison of 2002 to 2001 - -------------------------- Changes in the results of operations for the Company are primarily due to the growth of its portfolio and costs associated with such growth. Of the increase in total gross revenues in 2002 of $15.6 million, $14.4 million is attributable to rental revenue which resulted primarily from properties purchased in 2002 and 2001 ($16.1 million), offset by (i) an increase in vacancy ($0.3 million) and (ii) joint venturing of a single property in 2002 ($1.5 million). The remaining $1.2 million increase in gross revenues in 2002 was attributable to an increase in tenant reimbursements. The increase in interest and amortization expense of $4.5 million is due to the growth of the Company's portfolio and has been partially offset by interest savings resulting from scheduled principal amortization payments, lower interest rates and mortgage satisfactions. The increase in depreciation and amortization of $3.4 million is due primarily to the growth in real estate due to property acquisitions. The Company's general and administrative expenses increased by $0.7 million due to the acquisition of the Net Partnerships. The increase in property operating expenses of $1.8 million is due primarily to incurring property level operating expenses for properties in which the Company has operating expense responsibility, an increase in vacancy and an estimate of expenses for the Kmart property. Debt satisfaction charges decreased by $3.6 million due to the payoff of certain mortgages. Non-operating income increased $0.4 million primarily due to greater interest earned. Minority interest expense increased in 2002 by $1.0 million due to the increase in earnings at the partnership level. Equity in earnings of non-consolidated entities increased $1.6 million due to an increase in assets owned and net income of non-consolidated entities (see below). Net income increased in 2002 primarily due to the positive impact of items discussed above plus an increase of $1.6 million in income from discontinued operations and a $1.0 million increase in gains on sales. Net income allocable to common shareholders increased due to the items discussed above plus a net reduction in 9 preferred dividends of $2.0 milion resulting from the conversion of 2 million preferred shares to 2 million common shares in 2002. The Company's non-consolidated entities had aggregate net income of $13.6 million in 2002 compared with $10.4 million in 2001. The increase in net income is primarily attributable to an increase in rental revenue of $5.8 million in 2002 attributable to the acquisition of properties, the expansion of an existing property and the joint venturing of a single property in 2002. These revenue sources was partly offset by an increase in (i) interest expense of $1.5 million in 2002 due to partially funding of acquisitions with the use of non-recourse mortgage debt and the joint venturing of a single property in 2002, and (ii) depreciation expense of $1.1 million in 2002 due to more depreciable assets owned. The financial information for non-consolidated entities does not include information for LRA. Inflation. The Company's long term leases contain provisions to mitigate the adverse impact of inflation on its operating results. Such provisions include clauses entitling the Company to receive (i) scheduled fixed base rent increases and (ii) base rent increases based upon the consumer price index. In addition, the majority of the Company's leases require tenants to pay operating expenses, including maintenance, real estate taxes, insurance and utilities, thereby reducing the Company's exposure to increases in costs and operating expenses resulting from inflation. Environmental Matters. Based upon management's ongoing review of its properties, management is not aware of any environmental condition with respect to any of the Company's properties, which would be reasonably likely to have a material adverse effect on the Company. There can be no assurance, however, that (i) the discovery of environmental conditions, which were previously unknown, (ii) changes in law, (iii) the conduct of tenants or (iv) activities relating to properties in the vicinity of the Company's properties, will not expose the Company to material liability in the future. Changes in laws increasing the potential liability for environmental conditions existing on properties or increasing the restrictions on discharges or other conditions may result in significant unanticipated expenditures or may otherwise adversely affect the operations of the Company's tenants, which would adversely affect the Company's financial condition and results of operations. Funds From Operations - --------------------- The Company believes that Funds From Operations ("FFO") enhances an investor's understanding of the Company's financial condition, results of operations and cash flows. The Company believes that FFO is an appropriate, but limited, measure of the performance of an equity REIT. FFO is defined in the April 2002 "White Paper", issued by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT") as "net income (or loss), computed in accordance with generally accepted accounting principles ("GAAP"), excluding gains (or losses) from sales of property, plus real estate depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures." The Company included in the calculation of FFO the dilutive effect of the deemed conversion of its outstanding exchangeable notes, which were fully satisfied in 2001. FFO should not be considered an alternative to net income as an indicator of operating performance or to cash flows from operating activities as determined in accordance with GAAP, or as a measure of liquidity to other consolidated income or cash flow statement data as determined in accordance with GAAP. 10 The following table reflects the calculation of the Company's FFO and cash flow activities for each of the years in the three year period ended December 31, 2003 ($000):
2003 2002 2001 ---- ---- ---- Net income allocable to common shareholders $ 30,257 $ 29,902 $ 15,353 Depreciation and amortization of real estate 27,634 21,480 18,312 Minority interests' share of net income 4,039 5,510 5,215 Gains on sales of properties (2,191) (1,055) -- Amortization of leasing commissions 812 677 769 Deemed conversion of notes payable -- -- 1,000 Joint venture adjustment-depreciation 3,951 4,611 3,768 Preferred shares - Series A -- 693 2,709 --------- --------- --------- Funds From Operations $ 64,502 $ 61,818 $ 47,126 ========= ========= ========= Cash flows from operating activities $ 71,815 $ 57,732 $ 41,277 Cash flows used in investing activities (298,883) (106,030) (64,321) Cash flows from financing activities 229,316 46,532 32,115
Recently Issued Accounting Standards - ------------------------------------ In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities ("VIEs"), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued in January 2003. The Company will be required to adopt FIN 46R in the first fiscal period beginning after March 15, 2004. Upon adoption of FIN 46R, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. It is not anticipated that the effect on the Company's Consolidated Financial Statements would be material. FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS 150"), was issued in May 2003. SFAS 150 establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS 150 also includes required disclosures for financial instruments within its scope. For the Company, SFAS 150 was effective for instruments entered into or modified after May 31, 2003 and otherwise will be effective as of January 1, 2004, except for mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments, SFAS 150 will be effective for the Company on January 1, 2005. The effective date has been deferred indefinitely for certain other types of mandatorily redeemable financial instruments. The Company currently does not have any financial instruments that are within the scope of SFAS 150. In April 2002, FASB Statement No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"), was issued. SFAS 145 amends existing guidance on reporting gains and losses on the extinguishment of debt to prohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategy of many companies. SFAS 145 also amends FASB Statement No. 13, Accounting for Leases, to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of SFAS 145 related to the rescission of FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, were applied in fiscal years beginning after May 15, 2002. The provisions of SFAS 145 related to Statement 13 were effective for transactions occurring after May 15, 2002. The adoption of SFAS 145 required the Company to record as debt satisfaction charges, as a component of continuing operations, costs incurred in the early retirement of debt instead of as an extraordinary item. 11 In June 2002, FASB Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS 146"), was issued. SFAS 146 addresses financial accounting and reporting or costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of SFAS 146 were effective for exit or disposal activities initiated after December 31, 2002, with early application encouraged. The adoption of SFAS 146 had no impact on the Company. In November 2002, FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34 ("FIN 45"), was issued. FIN 45 enhances the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. FIN 45 also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of FIN 45 were applicable to guarantees issued or modified after December 31, 2002 and the disclosure requirements were effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 had no impact on the Company. In December 2002, FASB Statement No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123 ("SFAS 148"), was issued. SFAS 148 amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements. Disclosures required by this standard are included in the notes to these consolidated financial statements. Off-Balance Sheet Arrangements - ------------------------------ Non-Consolidated Real Estate Entities. As of December 31, 2003, the Company has investments in various real estate entities with varying structures. These investments include the Company's 33 1/3% non-controlling interest in Lexington Acquiport Company, LLC; its 25% non-controlling interest in Lexington Acquiport Company II, LLC; its 40% non-controlling interest in Lexington Columbia LLC; its 30% non-controlling interest in Lexington/Lion Venture L.P.; and its 33 1/3% non-controlling interest in Lexington Durham Limited Partnership. The properties owned by the entities are financed with individual non-recourse mortgage loans. Non-recourse mortgage debt is generally defined as debt whereby the lenders' sole recourse with respect to borrower defaults is limited to the value of the property collateralized by the mortgage. The lender generally does not have recourse against any other assets owned by the borrower or any of the members of the borrower, except for certain specified exceptions listed in the particular loan documents. These exceptions generally relate to limited circumstances including breaches of material representations. The Company invests in entities with third parties to increase portfolio diversification, reduce the amount of equity invested in any one property and to increase returns on equity due to the realization of advisory fees. See footnote 6 to the consolidated financial statements for summary balance sheet and income statement data relating to these entities. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK - ------------------------------------------------------------------- The Company's exposure to market risk relates to its debt. As of December 31, 2003 and 2002 the Company's variable rate indebtedness represented 19.9% and 15.9%, respectively, of total mortgages and notes payable. During 2003 and 2002, this variable rate indebtedness had a weighted average interest rate of 3.98% and 4.12%, respectively. Had the weighted average interest rate been 100 basis points higher the Company's net income would have been reduced by $0.6 million and $0.8 million in 2003 and 2002, respectively. As of December 31, 2003 and 2002 the Company's fixed rate debt was $441.7 million and $413.2 million, respectively which represented 80.1% and 84.1%, respectively, of total long-term indebtness. The weighted average interest rate as of December 30, 2003 of fixed rate debt was 7.08%, which is approximately 145 12 basis points higher than the fixed rate debt incurred by the Company during 2003. With no fixed rate debt maturing until 2008, the Company believes it has limited market risk exposure to rising interest rates as it relates to its fixed rate debt obligations. However, had the fixed interest rate been higher by 100 basis points, the Company's net income would have been reduced by $4.5 million and $3.9 million, for years ended December 31, 2003 and 2002, respectively. 13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES INDEX Page ---- Independent Auditors' Report 15 Consolidated Balance Sheets as of December 31, 2003 and 2002 16 Consolidated Statements of Income for the years ended December 31, 2003, 2002 and 2001 17 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2003, 2002 and 2001 18 Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001 19 Notes to Consolidated Financial Statements 20 Financial Statement Schedule Schedule III - Real Estate and Accumulated Depreciation 47 14 Report of Independent Registered Public Accounting Firm The Shareholders Lexington Corporate Properties Trust: We have audited the consolidated financial statements of Lexington Corporate Properties Trust and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lexington Corporate Properties Trust and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP New York, New York February 24, 2004, except as to Notes 2, 3, 5, and 19 which are as of November 29, 2004. 15 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheets ($000 except per share amounts) December 31,
Assets 2003 2002 ------------------- ------------------- Real estate, at cost Buildings and building improvements $ 973,475 $ 770,375 Land and land estates 178,077 131,496 Land improvements 2,666 3,154 Fixtures and equipment 8,177 8,345 ------------ ------------ 1,162,395 913,370 Less: accumulated depreciation 160,623 134,220 ------------ ------------ 1,001,772 779,150 Properties held for sale - discontinued operations 36,478 -- Intangible assets, net of accumulated amortization of $299 14,736 -- Investment in and advances to non-consolidated entities 69,225 54,261 Cash and cash equivalents 15,923 12,097 Deferred expenses (net of accumulated amortization of $4,891 in 2003 and $6,269 in 2002) 10,013 8,168 Rent receivable 24,069 23,650 Other assets, net 35,195 25,145 ------------ ------------ $ 1,207,411 $ 902,471 =========== =========== Liabilities and Shareholders' Equity Mortgages and notes payable 455,940 $ 460,517 Credit facility borrowings 94,000 31,000 Mortgage note payable - discontinued operations 1,445 -- Origination fees payable, including accrued interest 808 6,565 Accounts payable and other liabilities 8,283 8,003 Accrued interest payable 1,576 2,755 Prepaid rent 2,482 -- ------------ ------------- 564,534 508,840 Minority interests 59,220 56,846 ------------ ------------ 623,754 565,686 ------------ ------------ Commitments and contingencies (notes 7, 9 and 13) Common shares, par value $0.0001 per share; 287,888 shares issued and outstanding, liquidation preference $3,886 3,809 3,809 ------------ ------------ Shareholders' equity: Preferred shares, par value $0.0001 per share; authorized 10,000,000 shares. Class B Cumulative Redeemable Preferred, liquidation preference $79,000, 3,160,000 shares issued and outstanding in 2003 76,315 -- Common shares, par value $0.0001 per share, authorized 80,000,000 shares, 40,394,113 and 29,742,160 shares issued and outstanding in 2003 and 2002, respectively 4 3 Additional paid-in-capital 601,501 414,989 Deferred compensation, net (6,265) (1,766) Accumulated distributions in excess of net income (91,707) (77,777) ------------ ------------ 579,848 335,449 Less: notes receivable from officers/shareholders -- (2,473) ------------- ------------ Total shareholders' equity 579,848 332,976 ------------ ------------ $ 1,207,411 $ 902,471 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 16 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Income ($000 except per share amounts)
2003 2002 2001 ---- ---- ---- Gross revenues: Rental $ 107,594 $ 87,697 $ 73,295 Advisory fees 1,429 -- -- Tenant reimbursements 4,498 4,450 3,266 -------- -------- -------- Total gross revenues 113,521 92,147 76,561 Expense applicable to revenues: Depreciation and amortization (27,538) (21,001) (17,564) Property operating (8,115) (6,474) (4,700) General and administrative (9,664) (5,588) (4,845) Non-operating income 1,471 1,324 946 Interest and amortization expense (35,873) (34,126) (29,675) Debt satisfaction charges (7,459) (345) (3,993) -------- -------- -------- Income before provision for income taxes, minority interests, equity in earnings of non-consolidated entities and discontinued operations 26,343 25,937 16,730 Provision for income taxes (259) (136) (174) Minority interests (3,644) (4,927) (3,889) Equity in earnings of non-consolidated entities 5,707 4,970 3,328 -------- -------- -------- Income from continuing operations 28,147 25,844 15,995 -------- -------- -------- Discontinued operations, net of minority interest (Note 5): Income from discontinued operations 3,311 3,696 2,067 Gains on sales of properties 2,191 1,055 -- -------- -------- -------- Total discontinued operations 5,502 4,751 2,067 -------- -------- -------- Net income 33,649 30,595 18,062 Dividends attributable to preferred shares - Series A -- (693) (2,709) Dividends attributable to preferred shares - Series B (3,392) -- -- -------- -------- -------- Net income allocable to common shareholders $ 30,257 $ 29,902 $ 15,353 ========= ========= ========= Income per common share-basic: Income from continuing operations $ 0.73 $ 0.93 $ 0.68 Income from discontinued operations 0.16 0.18 0.11 -------- -------- -------- Net income $ 0.89 $ 1.11 $ 0.79 ========= ========= ========= Weighted average common shares outstanding-basic 34,074,935 27,026,789 19,522,323 ========== ========== ========== Income per common share-diluted: Income from continuing operations $ 0.72 $ 0.92 $ 0.67 Income from discontinued operations 0.16 0.17 0.10 -------- -------- -------- Net income $ 0.88 $ 1.09 $ 0.77 ========= ========= ========= Weighted average common shares outstanding-diluted 39,493,872 27,326,891 19,862,880 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 17 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Changes in Shareholders' Equity ($000 except per share amounts) Years ended December 31,
Number of Number of Additional Preferred Common Paid-in Shares Amount Shares Amount Capital ------ ------ ------ ------ ------- Balance at December 31, 2000 -- -- 16,863,394 $ 2 $ 240,112 Net income -- -- -- -- -- Dividends paid to common share- holders ($1.27 per share) -- -- -- -- -- Dividends paid to preferred share- holders ($1.3335 per share) -- -- -- -- -- Common shares issued, net 7,368,015 -- 102,206 Amortization of deferred compensation -- -- -- -- -- Common shares repurchased and retired -- -- (12,000) -- (157) Repayments on notes -- -- -- -- -- --------- ----------- ---------- ------ ---------- Balance at December 31, 2001 -- -- 24,219,409 2 342,161 Net income -- -- -- -- -- Dividends paid to common share- holders ($1.32 per share) -- -- -- -- -- Dividends paid to preferred share- holders ($0.3465 per share) -- -- -- -- -- Conversion of preferred shares -- -- 2,000,000 -- 24,369 Common shares issued, net -- -- 3,522,751 1 48,459 Amortization of deferred compensation -- -- -- -- -- --------- ----------- ---------- ------ ---------- Balance at December 31, 2002 -- -- 29,742,160 3 414,989 Net income -- -- -- -- -- Dividends paid to common share- holders ($1.34 per share) -- -- -- -- -- Dividends paid to preferred share- holders ($0.5702 per share) -- -- -- -- -- Common shares issued, net -- -- 10,810,177 1 188,985 Issuance of preferred shares, net 3,160,000 76,315 -- -- -- Amortization of deferred compensation -- -- -- -- -- Repayments on notes -- -- (158,224) -- (2,473) --------- ----------- ---------- ------ ---------- Balance at December 31, 2003 3,160,000 $ 76,315 40,394,113 $ 4 $ 601,501 ========= =========== ========== ====== ========== Accumulated Notes Deferred Distributions Receivable Total Compensation, In Excess of Officers / Shareholders' net Net Income Shareholders Equity --- ---------- ------------ ------ Balance at December 31, 2000 $ (1,019) $ (62,227) $ (1,983) $ 174,885 Net income -- 18,062 -- 18,062 Dividends paid to common share- holders ($1.27 per share) -- (25,004) -- (25,004) Dividends paid to preferred share- holders ($1.3335 per share) -- (2,667) -- (2,667) Common shares issued, net (1,181) -- -- 101,025 Amortization of deferred compensation 559 -- -- 559 Common shares repurchased and retired -- -- -- (157) Repayments on notes -- -- 10 10 ---------- ---------- ---------- ---------- Balance at December 31, 2001 (1,641) (71,836) (1,973) 266,713 Net income -- 30,595 -- 30,595 Dividends paid to common share- holders ($1.32 per share) -- (35,843) -- (35,843) Dividends paid to preferred share- holders ($0.3465 per share) -- (693) -- (693) Conversion of preferred shares -- -- -- 24,369 Common shares issued, net (860) -- (500) 47,100 Amortization of deferred compensation 735 -- -- 735 ---------- ---------- ---------- ---------- Balance at December 31, 2002 (1,766) (77,777) (2,473) 332,976 Net income -- 33,649 -- 33,649 Dividends paid to common share- holders ($1.34 per share) -- (45,777) -- (45,777) Dividends paid to preferred share- holders ($0.5702 per share) -- (1,802) -- (1,802) Common shares issued, net (5,887) -- -- 183,099 Issuance of preferred shares, net -- -- -- 76,315 Amortization of deferred compensation 1,388 -- -- 1,388 Repayments on notes -- -- 2,473 -- ---------- ---------- ---------- ---------- Balance at December 31, 2003 $ (6,265) $ (91,707) $ -- $ 579,848 ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 18 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows ($000) Years ended December 31,
2003 2002 2001 ------------------------------------------------- Cash flows from operating activities: Net income $ 33,649 $ 30,595 $ 18,062 Adjustments to reconcile net income to net cash provided by operating activities, net of effects from acquisitions: Depreciation and amortization 29,572 23,375 19,952 Minority interests 4,276 5,707 4,534 Gains on sales of properties (2,191) (1,055) -- Straight-line rents (3,790) (2,426) (2,755) Other non-cash charges 2,026 1,016 1,508 Equity in earnings of non-consolidated entities (5,734) (5,079) (3,328) Distributions from non-consolidated entities 8,495 5,704 4,593 Increase (decrease) in accounts payable and other liabilities 1,708 539 (2,140) Other adjustments, net 3,804 (644) 851 -- --------- ------------ ----------- Net cash provided by operating activities 71,815 57,732 41,277 ----------- ------------ ----------- Cash flows from investing activities: Net proceeds from sale/transfer of properties 34,943 20,756 4,107 Acquisition of the Net Partnerships, net of debt assumed and $3,777 in cash -- -- (27,835) Investments in properties (327,435) (114,272) (19,363) Investments in non-consolidated entities (6,824) (5,539) (5,620) Advances to non-consolidated entities (2,331) (2,158) (4,195) Investment in and advances to the Net Partnerships -- -- (10,979) Real estate deposits (23,101) (4,817) (436) Distribution of loan proceeds from non-consolidated entities 26,899 -- -- Increase in deferred leasing costs (1,034) -- -- ------------ ------------ ----------- Net cash used in investing activities (298,883) (106,030) (64,321) ------------ ------------ ----------- Cash flows from financing activities: Proceeds of mortgages and notes payable 90,882 49,165 100,194 Change in credit facility borrowing, net 63,000 21,000 (31,821) Dividends to common and preferred shareholders (47,579) (36,536) (27,671) Dividend reinvestment plan proceeds 7,095 4,870 2,507 Principal payments on debt, excluding normal amortization (107,942) (10,049) (48,611) Principal amortization payments (16,121) (14,091) (12,354) Origination fee amortization payments (406) (372) (372) Common shares issued, net of offering costs 174,152 41,595 61,021 Preferred shares issued, net of offering costs 76,315 -- -- Cash distributions to minority interests (6,618) (6,304) (6,236) Change in escrow deposits and restricted cash 451 (1,396) (1,002) Increase in deferred expenses (3,913) (1,350) (3,203) Common shares/partnership units repurchased -- -- (348) Other -- -- 11 ------------ ------------ ----------- Net cash provided by financing activities 229,316 46,532 32,115 ------------ ------------ ----------- Cash attributable to newly consolidated entity 1,578 -- -- ------------ ------------ ----------- Change in cash and cash equivalents 3,826 (1,766) 9,071 Cash and cash equivalents, beginning of year 12,097 13,863 4,792 ----------- ----------- ----------- Cash and cash equivalents, end of year $ 15,923 $ 12,097 $ 13,863 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 19 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) (1) The Company Lexington Corporate Properties Trust (the "Company") is a self-managed and self-administered Maryland statutory real estate investment trust ("REIT") that acquires, owns, and manages a geographically diversified portfolio of net leased office, industrial and retail properties and provides investment advisory and asset management services to institutional investors in the net lease area. As of December 31, 2003 the Company owned or had interests in 118 properties in 35 states. The real properties owned by the Company are generally subject to triple net leases to corporate tenants, however six provide for operating expense stops, two are subject to modified gross leases and one required the Company to be responsible for real estate taxes in 2003 and for the tenant to be responsible thereafter. The Company's Board of Trustees authorized the Company to repurchase, from time to time, up to 2.0 million common shares and/or operating partnership units ("OP Units") in it's three controlled operating partnership subsidiaries, depending on market conditions and other factors. As of December 31, 2003, the Company repurchased approximately 1.4 million common shares/OP Units at an average price of approximately $10.55 per common share/ OP Unit. No shares or OP Units were repurchased in 2003 or 2002. (2) Summary of Significant Accounting Policies Basis of Presentation and Consolidation. The Company's consolidated financial statements are prepared on the accrual basis of accounting. The financial statements reflect the accounts of the Company and its controlled subsidiaries, including Lepercq Corporate Income Fund L.P. ("LCIF"), Lepercq Corporate Income Fund II L.P. ("LCIF II"), Net 3 Acquisition L.P. ("Net 3"), Lexington Realty Advisors, Inc. ("LRA") and Lexington Contributions, Inc. ("LCI"), a wholly owned subsidiary. The Company is the sole equity owner of each of the general partner and majority limited partner of LCIF, LCIF II and Net 3. Effective January 1, 2003, the Company converted its non-voting interest in LRA to a 100% voting interest and accordingly has consolidated LRA in 2003 while it was accounted for under the equity method in 2002 and 2001. Earnings Per Share. Basic net income per share is computed by dividing net income reduced by preferred dividends, if applicable, by the weighted average number of common shares outstanding during the period. Diluted net income per share amounts are similarly computed but include the effect, when dilutive, of in-the-money common share options and OP Units. Recently Issued Accounting Standards. In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities ("VIEs"), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidated the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued in January 2003. The Company will be required to adopt FIN 46R in the first fiscal period beginning after March 15, 2004. Upon adoption of FIN 46R, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. It is not anticipated that the effect on the Company's Consolidated Financial Statements would be material. 20 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS 150"), was issued in May 2003. SFAS 150 establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS 150 also includes required disclosures for financial instruments within its scope. For the Company, SFAS 150 was effective for instruments entered into or modified after May 31, 2003 and otherwise will be effective as of January 1, 2004, except for mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments, SFAS 150 will be effective for the Company on January 1, 2005. The effective date has been deferred indefinitely for certain other types of mandatorily redeemable financial instruments. The Company currently does not have any financial instruments that are within the scope of SFAS 150. In April 2002, FASB Statement No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"), was issued. SFAS 145 amends existing guidance on reporting gains and losses on the extinguishment of debt to prohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategy of many companies. SFAS 145 also amends FASB Statement No. 13, Accounting for Leases, to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of Statement 145 related to the rescission of FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, were applied in fiscal years beginning after May 15, 2002. The provisions of SFAS 145 related to SFAS 13 were effective for transactions occurring after May 15, 2002. The adoption of SFAS 145 required the Company to record as debt satisfaction charges, as a component of continuing operations, costs incurred in the early retirement of debt instead of as an extraordinary item. In June 2002, FASB Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS 146"), was issued. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of SFAS 146 were effective for exit or disposal activities initiated after December 31, 2002, with early application encouraged. The adoption of SFAS 146 had no impact on the Company. In November 2002, FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34 ("FIN 45"), was issued. FIN 45 enhances the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. FIN 45 also clarifies that a guarantor is required to recognized, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the FIN 45 were applicable to guarantees issued or modified after December 31, 2002 and the disclosure requirements were effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 had no impact on the Company. 21 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) In December 2002, FASB Statement No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123 ("SFAS 148"), was issued. SFAS 148 amends FASB SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements. Disclosures required by this standard are included in the notes to these consolidated financial statements. Use of Estimates. Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses to prepare these consolidated financial statements in conformity with generally accepted accounting principles. The most significant estimates made include the recoverability of accounts receivable (primarily related to straight-line rents) and the useful lives of assets. Actual results could differ from those estimates. Purchase Accounting for Acquisition of Real Estate. The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and value of tenant relationships, based in each case on their fair values. The fair value of the tangible assets of an acquired property (which includes land, building and improvements) is determined by valuing the property as if it were vacant, and the "as-if-vacant" value is then allocated to land, building and improvements based on management's determination of relative fair values of these assets. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions. In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the difference between the current in-place lease rent and a management estimate of current market rents. 22 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the excess of (i) the purchase price paid for a property over (ii) the estimated fair value of the property as if vacant, determined as set forth above. This aggregate value is allocated between in-place lease values and tenant relationships based on management's evaluation of the specific characteristics of each tenant's lease. The value of in-place leases and customer relationships are amortized to expense over the remaining non-cancelable periods of the respective leases. Revenue Recognition. The Company recognizes revenue in accordance with Statement of Financial Accounting Standards No. 13 Accounting for Leases, as amended ("SFAS 13"). SFAS 13 requires that revenue be recognized on a straight line basis over the term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. Gains on sales of real estate are recognized pursuant to the provisions of Statement of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate ("SFAS 66"). The specific timing of the sale is measured against various criteria in SFAS 66 related to the terms of the transactions and any continuing involvement in the form of management or financial assistance associated with the properties. If the sales criteria are not met, the gain is deferred and the finance, installment or cost recovery method, as appropriate, is applied until the sales criteria are met. Accounts Receivable. The Company continuously monitors collections from its tenants and would make a provision for estimated losses based upon historical experience and any specific tenant collection issues that the Company has identified. Real Estate. The Company evaluates the carrying value of all real estate held to determine if an impairment has occurred which would require the recognition of a loss. The evaluation includes reviewing anticipated cash flows of the property, based on current leases in place, coupled with an estimate of proceeds to be realized upon sale. However, estimating future sale proceeds is highly subjective and such estimates could differ materially from actual results. Depreciation is determined by the straight-line method over the remaining estimated economic useful lives of the properties. The Company generally depreciates buildings and building improvements over periods not exceeding 40 years, land improvements over a 20-year period, and fixtures and equipment over a 12-year period. Only costs incurred to third parties in acquiring properties are capitalized. No internal costs (rents, salaries, overhead) are capitalized. Expenditures for maintenance and repairs are charged to operations as incurred. Significant renovations which extend the useful life of the properties are capitalized. Investments in non-consolidated entities. The Company accounts for its investments in less than 50% owned entities under the equity method unless pursuant to FIN 46R consolidation is required. Deferred Expenses. Deferred expenses consist primarily of debt placement costs, and are amortized using the straight-line method, which approximates the interest method, over the terms of the debt instruments and leasing costs which are amortized over the life of the lease. Deferred Compensation. Deferred compensation consists of the value of non-vested common shares issued by the Company to employees and trustees. The deferred compensation is amortized ratably over the vesting period which generally is five years. 23 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) Tax Status. The Company has made an election to qualify, and believes it is operating so as to qualify, as a REIT under the Internal Revenue Code. A REIT is generally not subject to Federal income tax on that portion of its REIT taxable income which is distributed to its shareholders, provided that at least 90% of taxable income is distributed. As distributions have equaled or exceeded taxable income, no provision for Federal income taxes has been made. State and local income taxes, which are not significant, have been provided for those states and localities in which the Company operates and is subject to an income tax. LRA and LCI have elected to be treated as taxable REIT subsidiaries. A summary of the average taxable nature of the Company's common dividends for each of the years in the three year period ended December 31, 2003 is as follows: 2003 2002 2001 ---------------------------------------------- Total common dividends per share $ 1.34 $ 1.32 $ 1.27 ======= ======= ======= Ordinary income 68.94% 77.89% 95.46% Short-term capital gain -- 2.27 -- 15% rate gain 3.10 -- -- 20% rate gain -- 4.12 -- 25% rate gain 0.70 5.65 -- Return of capital 27.26 10.07 4.54 ------- ------- ------ 100.00% 100.00% 100.00% ======= ======= ====== Cash and Cash Equivalents. The Company considers all highly liquid instruments with maturities of three months or less from the date of purchase to be cash equivalents. Common Share Options. The Company has elected to continue to account for its option plan under the recognition provisions of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees." Accordingly, no compensation cost has been recognized with regard to options granted in the Consolidated Statements of Income. 24 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) Common share options granted generally vest ratably over a four-year term and expire five years from the date of grant. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding common share option awards in each period:
2003 2002 2001 -------------- --------------- --------------- Net income allocable to common shareholders, as reported - basic $ 30,257 $ 29,902 $ 15,353 Add: Stock based employee compensation expense included in reported net income -- -- -- Deduct: Total stock based employee compensation expense determined under fair value based method for all awards 509 975 1,409 --------- --------- --------- Pro forma net income - basic $ 29,748 $ 28,927 $ 13,944 ========= ========= ========= Net income per share - basic Basic - as reported $ 0.89 $ 1.11 $ 0.79 ========= ========= ========= Basic - pro forma $ 0.87 $ 1.07 $ 0.71 ========= ========= ========= Net income allocable to common shareholders, as reported - diluted $ 34,740 $ 29,902 $ 15,353 Add: Stock based employee compensation expense included in reported net income -- -- -- Deduct: Total stock based employee compensation expense determined under fair value based method for all awards 509 975 1,409 --------- --------- --------- Pro forma net income - diluted $ 34,231 $ 28,927 $ 13,944 ========= ========= ========= Net income per share - diluted Diluted - as reported $ 0.88 $ 1.09 $ 0.77 ========= ========= ========= Diluted - pro forma $ 0.87 $ 1.06 $ 0.70 ========= ========= =========
The per share weighted average fair value of options granted during 2002 and 2001 were estimated to be $2.42 and $2.00, respectively, using a Black-Scholes option pricing formula. The more significant assumptions underlying the determination of such fair values include: (i) a risk free interest rate of 3.32% in 2002 and 3.35% in 2001; (ii) an expected life of five years; (iii) volatility factors of 15.11% and 15.79% for 2002 and 2001, respectively; and (iv) actual dividends paid. The value of common share options issued in 2003 were estimated to be $2.42. Reclassifications. Certain amounts included in prior years' financial statements have been reclassified to conform with the current year presentation, including conforming the Consolidated Statements of Income to rule 5-03 of Regulation S-X. In addition, the Company has reclassified certain income statement captions as a result of properties held for sale as of September 30, 2004 and properties sold during 2004, which are presented as discontinued operations. 25 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) (3) Earnings Per Share The following is a reconciliation of numerators and denominators of the basic and diluted earnings per share computations for each of the years in the three year period ended December 31, 2003:
2003 2002 2001 ------------ ------------- ----------------- BASIC Income from continuing operations $ 28,147 $ 25,844 $ 15,995 Less - dividends attributable to preferred shares (3,392) (693) (2,709) ----------- ----------- ---------- Income attributed to common shareholders from continuing operations 24,755 25,151 13,286 Total income from discontinued operations 5,502 4,751 2,067 ---------- ---------- ---------- Net income attributed to common shareholders $ 30,257 $ 29,902 $ 15,353 ========== ========== ========== Weighted average number of common shares outstanding 34,074,935 27,026,789 19,522,323 ========== ========== ========== Income per common share - basic: Income from continuing operations $ 0.73 $ 0.93 $ 0.68 Income from discontinued operations 0.16 0.18 0.11 ---------- ---------- ---------- Net income $ 0.89 $ 1.11 $ 0.79 ========== ========== ========== DILUTED Income attributed to common shareholders from continuing operations - basic $ 24,755 $ 25,151 $ 13,286 Add - incremental income attributed to assumed conversion of dilutive securities 3,644 -- -- ---------- ----------- --------- Income attributed to common shareholders from continuing operations 28,399 25,151 13,286 Income from discontinued operations 6,341 4,751 2,067 ---------- ---------- ---------- Net income attributed to common shareholders $ 34,740 $ 29,902 $ 15,353 ========== ========== ========== Weighted average number of shares used in caculation of basic earnings per share 34,074,935 27,026,789 19,522,323 Add - incremental shares representing: Shares issuable upon exercise of employee share options 202,504 300,102 340,557 Shares issuable upon conversion of dilutive securities 5,216,433 -- -- ---------- ----------- --------- Weighted average number of shares used in calculation of diluted earnings per common share 39,493,872 27,326,891 19,862,880 ============ ============ ============ Income per common share - diluted: Income from continuing operations $ 0.72 $ 0.92 $ 0.67 Income from discontinued operations 0.16 0.17 0.10 ---------- ---------- ---------- Net income $ 0.88 $ 1.09 $ 0.77 ========== ========== ==========
26 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) (4) Investments in Real Estate During 2003 and 2002, the Company made the following acquisitions, excluding acquisitions made by non-consolidated entities:
Net Rentable Date of Acquisition Lease Square Acquisition Tenant Location Cost Expires Feet ------------ ------------------------------- ----------------- ------------ ------- ---------- 2003 ---- February Oce Printing Systems USA, Inc. Boca Raton, FL $ 23,551 2020 143,290 June Owens Corning Minneapolis, MN 4,610 2015 18,620 July The McGraw-Hill Companies, Inc. Dubuque, IA 11,424 2017 330,988 August Verizon Wireless Greenville, SC 21,745 2012 192,884 September Tower Automotive Products Company Plymouth, MI 20,710 2012 290,133 October Nextel Communications of Texas, Inc. Temple, TX 15,301 2016 108,800 October Nextel West Corporation Bremerton, WA 11,301 2016 60,200 December Employees Reinsurance Corporation Overland Park, KS 53,779 2018 320,198 December Employees Reinsurance Corporation Kansas City, MO 25,676 2019 166,641 December Bell South Mobility, Inc. Baton Rouge, LA 10,742 2012 70,100 December Minnesota Mining and Manufacturing Wallingford, CT 5,525 2010 44,400 December Siemens Dematic Postal Automation L.P. Arlington, TX 30,286 2014 233,783 December James Hardie Building Products, Inc. Waxahachie, TX 32,568 2020 425,816 -------- ------- $ 267,218 2,405,853 ======== ========= 2002 ---- March Apria Healthcare Group, Inc. Lake Forest, CA $ 16,970 2012 100,012 August Quest Diagnostics, Inc. Valley Forge, PA 19,500 2011 109,281 August AdvancePCS, Inc. Knoxville, TN 8,100 2013 59,748 September Anda Pharmaceuticals, Inc Groveport, OH 11,800 2012 354,676 December North American Van Lines Westmont, IL 24,825 2015 269,715 December Wells Fargo Home Mortgage Fort Mill, SC 17,933 2013 169,083 -------- ------- $ 99,128 1,062,515 ======== =========
The 2003 acquisitions do not include the purchases of a property in Novato, California and Malvern, Pennsylvania which were acquired by the Company and subsequently transferred to a joint venture during 2003. The Company received $23,849 in cash resulting from these transfers. The Company sold four properties, to unrelated parties, in 2003, four properties and one building in the Palm Beach Gardens, Florida property in 2002 and one property in 2001 for aggregate net proceeds of $11,094, $16,342 and $4,107, respectively, which resulted in gains in 2003, 2002 and 2001 of $2,191, $1,055 and $0, respectively. In addition, the Company sold in 2002 a 77.3% interest in a property (along with the related non-recourse mortgage) in Florence, South Carolina for net proceeds of $4,414 and deferred a $671 gain on sale since the purchasers can put their interests in the property to the Company for a six month period commencing January 2004 for $4,581. During 2002, the Company expanded its property in Lancaster, California net leased to Michaels Stores, Inc. The expansion, which cost $15,200, is leased to the tenant through September 2019 for an annual rent of $1,808. In connection with the expansion, the initial lease term was also extended to September 2019. 27 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) (5) Discontinued Operations and Assets Held For Sale In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 established criteria beyond that previously specified in Statement of Financial Accounting Standard No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of ("SFAS 121"), to determine when a long-lived asset is classified as held for sale, and it provides a single accounting model for the disposal of long-lived assets. SFAS 144 was effective beginning January 1, 2002. In accordance with SFAS 144, the Company now reports as discontinued operations assets held for sale (as defined by SFAS 144) as of the end of the current period and assets sold subsequent to January 1, 2002. All results of these discontinued operations are included in a separate component of income on the Consolidated Statements of Income under discontinued operations. At December 31, 2003, the Company has three properties held for sale with an aggregate carrying value of $36,478, two of which were sold in 2004. One of these properties is encumbered by a non-recourse mortgage payable of $1,445. In addition, the Company has also classified properties held for sale at September 30, 2004 and properties sold in 2004 as discontinued operations. The following presents the operating results for the properties sold and held for sale during the nine months ended September 30, 2004 and the years ended December 31, 2003 and 2002 for the applicable periods: Year ended December 31, 2003 2002 2001 ---- ---- ---- Rental revenues $ 5,477 $ 6,186 $ 5,107 Pre-tax income, including gains on sales $ 5,663 $ 4,751 $ 2,067 (6) Investment in Non-Consolidated Entities The Company has investments in various real estate joint ventures. The business of each joint venture is to acquire, finance, hold for investment or sell single tenant net leased real estate. 28 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) Lexington Acquiport Company, LLC - -------------------------------- Lexington Acquiport Company, LLC ("LAC"), is a joint venture with the Comptroller of the State of New York as Trustee for the Common Retirement Fund ("CRF"). The joint venture agreement expires in December 2011. The Company and CRF originally committed to contribute up to $50,000 and $100,000, respectively, to invest in high quality office and industrial net leased real estate. Through December 31, 2003 total contributions to LAC were $144,332. In 2003, the Company and CRF purchased a property outside the LAC joint venture which required an aggregate capital contribution of $3,751. The partners agreed that the aggregate of these contributions would close the funding obligations to LAC. LRA earns annual management fees of 2% of rent collected and acquisition fees equaling 75 basis points of purchase price of each property investment. All allocations of profit, loss and cash flows are made one-third to the Company and two-thirds to CRF. During 2001, the Company and CRF announced the formation of Lexington Acquiport Company II, LLC ("LAC II"). The Company and CRF have committed $50,000 and $150,000, respectively. In addition to the fees LRA currently earns on acquisitions and asset management in LAC, LRA will also earn 50 basis points on all mortgage debt directly placed in LAC II. All allocations of profit, loss and cash flows from all properties acquired by this joint venture will be allocated 25% to the Company and 75% to CRF. As of December 31, 2003, LAC II has not made any investments. CRF can presently elect to put their equity position in LAC to the Company. The Company has the option of issuing common shares for the fair market value of CRF's equity position (as defined) or cash for 110% of the fair market value of CRF's equity position. The per common share value of shares issued for CRF's equity position will be the greater of (i) the price of the Company's common shares on the closing date (ii) the Company's funds from operations per share (as defined) multiplied by 8.5 or (iii) $13.40 for LAC properties (all properties that are currently owned) and $15.20 for LAC II properties purchased. The Company has the right not to accept any property (thereby reducing the fair market value of CRF's equity position) that does not meet certain underwriting criteria (e.g. lease term and tenant credit). In addition, the operating agreement contains a mutual buy-sell provision in which either partner can force the sale of any property. During 2003 and 2002, LAC made the following investments:
Net Rentable Date of Acquisition Lease Square Acquisition Tenant Location Cost Expires Feet -------------- ---------------------------- --------------- ----------- ------- ------------ 2003 March Motorola, Inc. Farmington $ 32,650 2016 119,829 Hills, MI December Honeywell, International, Colorado Inc. Springs, CO 16,800 2013 166,575 ------ --------- $ 49,450 286,404 ====== ========= 2002 August TNT Logistics North Laurens, SC $ 27,100 2012 1,164,000 America, Inc. August TNT Logistics North Temperance, MI America, Inc. 18,186 2012 752,000 ------ --------- $ 45,286 1,916,000 ====== =========
29 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) Summarized balance sheet data as of December 31, 2003 and 2002 and income statement data for the years ended December 31, 2003, 2002 and 2001 is as follows:
2003 2002 --------- --------- Real estate, net $ 328,525 $ 286,311 Note receivable 11,009 11,009 Cash and cash equivalents 2,309 3,989 Other assets 11,712 6,580 --------- --------- $ 353,555 $ 307,889 ========= ========= Mortgages payable $ 211,071 $ 180,223 Other liabilities 6,617 1,934 Equity 135,867 125,732 --------- --------- $ 353,555 $ 307,889 ========= ========= 2003 2002 2001 --------- --------- --------- Revenues $ 36,696 $ 31,228 $ 28,661 Interest expense (14,453) (12,628) (11,910) Depreciation of real estate (6,786) (5,408) (4,932) Other (3,147) (2,925) (3,147) ---------- ---------- --------- Net income $ 12,310 $ 10,267 $ 8,672 ========= ========= =========
As of December 31, 2003, the LAC properties are 100% leased and have scheduled lease expiration dates ranging from 2009 to 2016. Minimum future rental receipts under the non-cancelable portion of the tenant leases, assuming no new or negotiated leases, for the next five years and thereafter are as follows: Year ending December 31, ------------ 2004 $ 36,259 2005 38,262 2006 38,842 2007 39,468 2008 39,912 Thereafter 67,275 ----------- $ 260,018 =========== 30 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) The mortgages payable bear interest at rates ranging from 5.42% to 8.19% and mature at various dates ranging from 2010 to 2012. Scheduled principal amortization and balloon payments for the mortgages for the next five years and thereafter are as follows:
Year ending Scheduled Balloon December 31, Amortization Payments Total ------------ ------------ -------- ----- 2004 $ 2,881 $ -- $ 2,881 2005 3,160 -- 3,160 2006 3,410 -- 3,410 2007 3,705 -- 3,705 2008 3,969 -- 3,969 Thereafter 11,738 182,208 193,946 -------- ---------- -------- $ 28,863 $ 182,208 $ 211,071 ======== ========== ========
In 2003, the Company and CRF have purchased a property outside the LAC partnership for $22,700. The property is subject to a lease through 2021, but can be canceled by the tenant in September 2011 with a payment of $23,433. If cancelled after September 2011 the termination payment is determined based upon a scheduled amount. In all situations the termination payment exceeds the estimated balance outstanding on the non-recourse mortgage encumbering the property. The property acquisition was partially funded through the assumption of a $19,182 non-recourse mortgage that bears interest at 6.73% and matures in 2021. There are no principal amortization payments required under this note from 2004 through 2008. During 2003, LRA earned an acquisition fee of $114. All allocations of profit, loss and cash flows are made one-third to the Company and two-thirds to CRF. In addition, LRA earns fees under the same structure as the LAC agreement. Minimum future rental receipts under the non-cancelable portion of the tenant lease, assuming no new or negotiated lease, for the next five years and thereafter are as follows: Year ending December 31, ------------ 2004 $ 1,833 2005 1,833 2006 1,665 2007 1,665 2008 1,315 Thereafter 3,884 ----------- $ 12,195 =========== 31 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) Lexington Columbia LLC Lexington Columbia LLC ("Columbia") is a joint venture established December 30, 1999 with a private investor. Its sole purpose is to own a property in Columbia, South Carolina net leased to Blue Cross Blue Shield of South Carolina, Inc. through September 2009. The purchase price of the property was approximately $42,500 and was partially funded through a 10 year, $25,300 non-recourse mortgage note bearing interest at 7.85%. In accordance with the operating agreement, net cash flows, as defined, will be allocated 40% to the Company and 60% to the partner until both parties have received a 12.5% return on capital. Thereafter cash flows will be distributed 60% to the Company and 40% to the partner. During 2001, Columbia expanded the property by 107,894 square feet bringing the total square feet of the property to 456,304. The $10,900 expansion was funded 40% by the Company and 60% by the partner. The tenant has leased the expansion through September 2009 for an average annual rent of $2,000. Cash flows from the expansion will be distributed 40% to the Company and 60% to the partner. LRA earns annual asset management fees of 2% of rents collected. Summarized financial information for the underlying property investment as of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001 is as follows:
2003 2002 ---------- ---------- Real estate, net $ 46,465 $ 48,454 Other assets 2,727 2,438 ---------- ---------- $ 49,192 $ 50,892 ========== ========== Mortgage payable $ 24,410 $ 24,653 Accrued interest 165 167 Equity 24,617 26,072 ---------- ---------- $ 49,192 $ 50,892 ========== ========== 2003 2002 2001 --------- --------- --------- Rental income $ 6,930 $ 6,930 $ 5,412 Interest expense (1,952) (1,970) (1,851) Depreciation (1,988) (1,988) (1,664) Other (184) (196) (133) ---------- ---------- ---------- Net income $ 2,806 $ 2,776 $ 1,764 ========= ========= =========
Minimum future rental receipts under the non-cancelable operating lease, assuming no new or renegotiated lease, for the next five years and thereafter is as follows: Year ending December 31, 2004 $ 6,655 2005 7,377 2006 7,377 2007 7,377 2008 7,377 Thereafter 5,531 ----------- $ 41,694 =========== 32 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) Scheduled principal amortization and balloon payment for the mortgage payable for the next five years and thereafter is as follows:
Year ending Scheduled Balloon December 31, Amortization Payment Total ------------ ------------ ------- ----- 2004 $ 257 $ -- $ 257 2005 284 -- 284 2006 307 -- 307 2007 332 -- 332 2008 355 -- 355 Thereafter 289 22,586 22,875 -------- --------- -------- $ 1,824 $ 22,586 $ 24,410 ======== ========= ========
Lexington/Lion Venture L.P. Lexington/Lion Venture LP ("LION") was formed on October 1, 2003 by the Company and CLPF-LXP/Lion Venture GP, LLC ("Clarion"), to invest in high quality single tenant net leased retail, office and industrial real estate. The limited partnership agreement provides for a ten-year term unless terminated sooner pursuant to the terms of the partnership agreement. The limited partnership agreement provides for the Company and Clarion to invest up to $30,000 and $70,000, respectively, and to leverage these investments up to a maximum of 60%. LRA earns acquisition and asset management fees as defined in the operating agreement. All allocation of profit, loss and cash flows are made 30% to the Company and 70% to Clarion until each partner receives a 12% internal rate of return. The Company is eligible to receive a promoted interest of 15% of the internal rate of return in excess of 12%. No promoted interest was earned in 2003. Clarion can elect to put their equity position in LION to the Company commencing when $100,000 in capital is contributed to the venture or January 2, 2006, whichever occurs first. The Company has the option of issuing common shares for the fair market value of Clarion's equity position (as defined) or cash for 100% of the fair market value of Clarion's equity position. The per common share value of shares issued for Clarion's equity position will be the greater of (i) the price of the Company's common shares on the closing date (ii) the Company's funds from operations per share (as defined) multiplied by 9.5 or (iii) $19.00. The Company has the right not to accept any property (thereby reducing the fair market value of Clarion's equity position) that does not meet certain underwriting criteria (e.g. lease term and tenant credit). In addition, the operating agreement contains a mutual buy-sell provision in which either partner can force the sale of any property. 33 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) Summarized balance sheet data as of December 31, 2003 and income statement data for the period October 1, 2003 (date of inception) to December 31, 2003 is as follows: Real estate, net $ 70,648 Cash 1,006 Other assets 4,331 --------- $ 75,985 ========= Mortgages payable $ 36,206 Other liabilities 791 Equity 38,988 --------- $ 75,985 ========= Rental income $ 1,334 --------- Interest expense (268) Operating expenses (321) Depreciation and amortization expenses (313) ---------- (902) --------- Net income $ 432 ========= As of December 31, 2003, LION owns the following properties:
Net Rentable Date of Acquisition Lease Square Acquisition Tenant Location Cost Expires Feet -------------- ---------------------------- --------------- ----------- ------- ---------- October Greenpoint Mortgage Novato, CA Funding, Inc. $ 39,574 2011 124,600 October Linens `n Things, Inc. Logan Township, NJ 12,586 2009 262,644 December Ikon Office Solutions, Inc. Malvern, PA 22,399 2013 106,855 ------ ------- $ 74,559 494,099 ====== =======
The Novato, California and Malvern, Pennsylvania properties were contributed by the Company and the Logan Township, New Jersey property was contributed by Clarion. In addition, Clarion paid the Company $23,849 for its net equity position in the properties. 34 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) Minimum future rental receipts under non-cancelable tenant operating leases, assuming no new or negotiated leases, for the next five years and thereafter are as follows: Year ending December 31, ------------ 2004 $ 7,481 2005 7,646 2006 7,831 2007 8,052 2008 8,237 Thereafter 23,609 ----------- $ 62,856 =========== Scheduled principal amortization and balloon payments for the mortgages payable for the next five years and thereafter are as follows:
Year ending Scheduled Balloon December 31, Amortization Payments Total ---------------- ---------------- ------------ ------------ 2004 $ 441 $ -- $ 441 2005 473 -- 473 2006 501 -- 501 2007 531 -- 531 2008 557 -- 557 Thereafter 2,160 31,543 33,703 ------- --------- -------- $ 4,663 $ 31,543 $ 36,206 ======= ========= ========
Lexington Florence LLC - ---------------------- Lexington Florence LLC ("Florence") is a joint venture established in January 2002 with unaffiliated investors. Its sole purpose is to own a property in Florence, South Carolina net leased to Washington Mutual Home Loans, Inc. through June 2008. The property is encumbered by a non- recourse mortgage bearing interest at 7.50% per annum which matures February 2009. The Company sold a 77.3% interest in Florence to the unaffiliated investors for $4,581. The investors have the right to put their interests in Florence to the Company for OP Units in LCIF (valued at $4,581). The number of OP Units issued will have a minimum price of $13.92 and a maximum price of $15.82. The put is effective beginning in January 2004 and expires in June 2004. LRA earns annual asset management fees of 3.5% of rents collected. 35 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) Summarized financial information for the underlying property investment as of December 31, 2003 and 2002 and for the year ended December 31, 2003 and for the period January 25, 2002 (date of inception) to December 31, 2002 is as follows:
2003 2002 ---- ---- Real estate, net $ 15,227 $ 15,544 Other assets 876 656 ---------- ---------- $ 16,103 $ 16,200 ========== ========== Mortgage payable $ 9,395 $ 9,544 Other liabilities 164 163 Equity 6,544 6,493 ---------- ---------- $ 16,103 $ 16,200 ========== ========== Rental income $ 1,699 $ 1,576 Interest expense (720) (676) Depreciation (317) (304) Other (56) (46) ---------- ---------- Net income $ 606 $ 550 ========== ==========
Minimum future rental receipts under the non-cancelable operating lease, assuming no new or renegotiated lease, for the next five years and thereafter is as follows: Year ending December 31, ------------ 2004 $ 1,750 2005 1,750 2006 1,750 2007 1,750 2008 875 ------- $ 7,875 Scheduled principal amortization and balloon payment for the mortgage payable for the next five years and thereafter is as follows:
Year ending Scheduled Balloon December 31, Amortization Payment Total ---------------- ---------------- ------------ ------------ 2004 $ 158 $ -- $ 158 2005 173 -- 173 2006 186 -- 186 2007 201 -- 201 2008 216 -- 216 Thereafter 18 8,443 8,461 -------- -------- -------- $ 952 $ 8,443 $ 9,395 ======== ======== ========
36 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) (7) Mortgages and Notes Payable The following table sets forth certain information regarding the Company's mortgage and notes payable as of December 31, 2003 and 2002:
2004 Estimated Annual Debt Property Level Debt - Fixed Interest Service Balloon Rate 2003 2002 Rate Maturity (g) Payment - ------------------------------- ------------ ----------- ----------- ----------- ---------- ---------- Gainesville, GA (first) $ 18 $ 219 13.000% 01-01-04 $ 18 $ -- Oxon Hill, MD 94 457 6.250% 03-01-04 95 -- Bethesda, MD -- 1,955 9.250% 05-01-06 -- -- Warren, OH 21,172 25,615 7.000% 10-01-07 6,160 -- Bristol, PA 9,729 9,833 7.400% 02-01-08 831 9,262 Boca Raton, FL (f) 15,275 -- 5.250% 03-01-08 802 15,275 Decatur, GA 6,695 6,830 6.720% 06-01-08 579 6,049 Phoenix, AZ 14,231 14,553 7.890% 06-05-08 1,434 12,591 Palm Beach Gardens, FL 11,341 11,509 7.010% 06-15-08 970 10,418 Dubuque, IA 7,351 -- 4.890% 08-01-08 513 6,588 Canton, OH 3,325 3,395 7.150% 08-11-08 313 2,936 Spartanburg, SC 2,762 2,819 7.150% 08-11-08 260 2,438 Hebron, KY 5,340 5,414 7.000% 10-23-08 451 4,935 Gainesville, GA (e) (second) 902 837 7.500% 01-01-09 200 -- Ocala, FL 13,059 13,429 7.250% 02-01-09 1,332 10,700 Canton, OH 1,578 1,823 9.490% 02-28-09 388 -- Baton Rouge, LA 1,898 1,969 7.375% 03-01-09 208 1,478 Bristol, PA 6,053 6,190 7.250% 04-01-09 571 5,228 Livonia, MI (2 properties) 11,026 11,133 7.800% 04-01-09 992 10,236 Henderson, NC 4,414 4,497 7.390% 05-01-09 417 3,854 Westland, MI 2,938 3,320 10.500% 09-01-09 683 -- Salt Lake City, UT 13,409 15,204 7.610% 10-01-09 2,901 -- Richmond, VA 16,472 16,633 8.100% 02-01-10 1,511 15,257 Hampton, VA 4,473 4,512 8.260% 04-01-10 415 4,144 Hampton, VA 7,294 7,357 8.270% 04-01-10 677 6,758 Tampa, FL (Queen Palm Dr.) 6,034 6,096 6.880% 08-01-10 485 5,495 Tampa, FL (North 30th) 8,342 8,427 6.930% 08-01-10 674 7,603 Herndon, VA 18,807 18,964 8.180% 12-05-10 1,723 17,301 San Diego, CA 4,252 4,347 7.500% 01-01-11 411 3,420 Tuscon, AZ 2,444 2,483 7.500% 01-01-11 226 2,076 Columbia, SC 3,419 3,472 7.540% 01-01-11 317 2,905 Valley Forge, PA 13,080 13,306 7.120% 02-10-11 1,166 10,927 Glendale, AZ 14,777 14,930 7.400% 04-01-11 1,258 13,365 Auburn Hills, MI 7,198 7,325 7.010% 06-01-11 637 5,918 Plymouth, MI 4,787 4,866 7.960% 07-01-11 463 3,949 Greenville, SC 13,886 -- 4.415% 01-01-12 841 11,806 New Kingston, PA 7,265 7,364 7.790% 01-01-12 678 6,101 Mechanicsburg, PA 5,363 5,437 7.780% 01-01-12 500 4,503 New Kingston, PA 3,462 3,509 7.780% 01-01-12 323 2,906 Lake Forest, CA 10,832 10,939 7.260% 02-01-12 901 9,708 Groveport, OH (c) 7,800 7,800 6.030% 10-01-12 535 6,860 Plymouth, MI 12,776 -- 6.220% 12-10-12 1,026 10,026 Dallas, TX 21,348 21,785 7.490% 12-31-12 2,020 16,030 Fort Mill, SC 11,523 11,657 6.000% 01-01-13 839 9,904 Lancaster, CA (first) 10,611 10,761 7.020% 09-01-13 900 8,637 Lancaster, CA (second) 8,903 -- 5.920% 09-01-13 642 7,518 Knoxville, TN (d) 5,295 5,330 5.950% 09-01-13 381 4,496 Eau Claire, WI 2,220 2,360 8.000% 07-01-14 313 -- Franklin, NC 1,965 2,053 8.500% 04-01-15 263 -- Southborough, MA 2,132 2,251 7.500% 09-01-15 275 --
37 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data)
2004 Estimated Annual Property Level Debt - Fixed Interest Debt Balloon Rate 2003 2002 Rate Maturity Service(g) Payment - ------------------------------- ------------ ----------- ----------- ----------- ---------- ---------- Danville, IL 6,623 -- 9.000% 01-01-16 692 4,578 Temple, TX 9,200 -- 6.090% 01-01-16 668 7,446 Bremerton, WA 6,800 -- 6.090% 04-01-16 494 5,465 Dillon, SC 12,111 -- 7.900% 12-01-16 1,263 5,273 Westmont, IL 16,170 -- 6.210% 03-01-18 1,292 9,662 REMIC Financing (i) -- 63,054 -- -- -- -- Salt Lake City, UT (i) -- 5,145 -- -- -- -- ------- ------ -------- ------- ------- 440,274 413,164 7.073% 44,927 332,025 ------- ------- -------- ------- ------- Property Level Debt - Variable Rate - ------------------------------- Milpitas, CA (a) (b) 15,666 17,100 4.140% 07-01-04 2,253 14,456 Marlborough, MA (i) -- 8,102 -- -- -- -- Hebron, OH (i) -- 9,651 -- -- -- -- ------- ------ --------- ------ ------- 15,666 34,853 4.140% 2,253 14,456 ------ ------ -------- ------ ------- Corporate Level Debt - -------------------- Credit Facility (h) 94,000 31,000 2.640% 08-01-06 2,516 94,000 Warren, OH (i) -- 12,500 -- -- -- -- ------ ------ -------- ------ ------- 94,000 43,500 2.640% 2,516 94,000 ------ ------ -------- ------ ------- Total $ 549,940 $ 491,517 6.232% $ 49,696 $ 440,481 ======= ======= ======== ====== ========
(a) Floating rate debt, 30 day LIBOR plus 297 basis points. The Company has the ability to extend maturity date to July 1, 2005 (spread increases to 350 basis points) and to July 1, 2006 (spread increases to 400 basis points). (b) All property cash flows net of interest expense are used for principal amortization. (c) Interest only through April 2004, and $563 in annual debt service thereafter. (d) Interest only through May 2003, and $381 in annual debt service thereafter. (e) Mortgage is accrual only through 01/31/04. Commencing 02/01/04 annual debt service of $218 is due. (f) Interest only through maturity. (g) For mortgages with less than twelve months to maturity, amounts represent remaining payments. 38 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) (h) In 2003, the Company obtained a $100,000 unsecured revolving credit facility, which expires August 2006, bears interest at 150-250 basis points over LIBOR depending on the amount of properties the Company owns free and clear of mortgage debt and has an interest rate period of one, three or six months, at the option of the Company, which rate at December 31, 2003 was 2.64%. The credit facility is provided by Fleet National Bank, as Administrative Agent and Wachovia Bank, National Association, as Syndication Agent. The credit facility contains various leverage, debt service coverage, net worth maintenance and other customary covenants with which the Company is in compliance as of December 31, 2003. Approximately $1,836 was available to the Company at December 31, 2003. The Company has six outstanding letters of credit aggregating $4,164 which mature between 2004 and 2010. The Company pays an unused facility fee equal to 25 basis points if 50% or less of the facility is utilized and 15 basis points if greater than 50% of the facility is utilized. This facility replaced a $60,000 facility which bore interest at the same spread to LIBOR. (i) The Company satisfied these mortgages in 2003, along with a mortgage on a previously non-consolidated property, which resulted in debt satisfaction charges of $8,462. Scheduled principal amortization and balloon payments for mortgages and notes payable, including mortgages payable related to discontinued operations and the credit facility for the next five years and thereafter are as follows:
Years ending Scheduled Balloon December 31, Amortization Payments Total ------------ ------------ -------------- -------- 2004 $ 15,429 $ 14,456 $ 29,885 2005 15,521 -- 15,521 2006 16,303 94,000 110,303 2007 17,238 -- 17,238 2008 11,469 70,492 81,961 Thereafter 34,944 261,533 296,477 ---------- ----------- ------------ $ 110,904 $ 440,481 $ 551,385 ========== =========== ============
(8) Origination Fees Payable In connection with certain acquisitions the Company assumed obligations which currently bear interest, on the outstanding principal balances only of 12.5%. During 2003, the Company satisfied $5,641 of these obligations by issuing 231,763 OP Units. The difference between the carrying value of the obligations and the fair value of the OP Units on the date of issuance resulted in a gain of $896 that is netted in debt satisfaction charges on the Consolidated Statements of Income. As of December 31, 2003, $414 in origination fees payable are owed to two executive officers of the Company. The scheduled payments of this obligation for the next five years and thereafter is as follows: Years ending December 31, ------------ 2004 $ 37 2005 37 2006 85 2007 110 2008 110 Thereafter 429 ---------- $ 808 ========== 39 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) (9) Leases Minimum future rental receipts under noncancellable tenant operating leases, assuming no new or negotiated leases, for the next five years and thereafter are as follows: Year ending December 31, ------------ 2004 $ 128,545 2005 126,408 2006 114,579 2007 102,665 2008 87,595 Thereafter 456,700 ----------- $ 1,016,492 =========== The Company holds various leasehold interests in properties. The ground rent on these properties are either directly paid by the tenants or reimbursed to the Company as additional rent. Minimum future rental payments under all noncancellable leasehold interests for the next five years and thereafter are as follows: Year ending December 31, ------------ 2004 $ 898 2005 898 2006 898 2007 898 2008 898 Thereafter 7,173 ----------- $ 11,663 =========== During 2003 the Company entered into a new lease for its corporate office. The lease expires December 2015, with rent fixed at $497 per annum through December 2008 and will be adjusted to fair market value, as defined, thereafter. The Company is also responsible for its proportionate share of operating expense and real estate taxes. As an incentive to enter the lease the Company received a payment of $845 which it is amortizing as a reduction of rent expense through December 2008. Rent expense for 2003, 2002 and 2001 was $546, $243 and $237 , respectively. (10) Minority Interests In conjunction with several of the Company's acquisitions, property owners were issued OP Units as a form of consideration in exchange for the property. All of such interests are redeemable at certain times for common shares on a one-for-one basis. As of December 31, 2003, there were 5,430,454 OP Units outstanding of which 4,814,994 were currently redeemable for common shares. Of the total OP Units outstanding, 1,744,212 are held by two executive officers of the Company. As of December 31, 2003 these OP Units, subject to certain adjustments through the date of conversion, had annual distributions per OP Unit in varying amounts from $0 to $1.40 per unit with a weighted average distribution of $1.24 per OP Unit. 40 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) (11) Preferred and Common Shares During 2003 and 2002, the Company issued 9,800,000 and 2,690,000 common shares raising $174,023 and $40,508 in proceeds, respectively, which was used to retire mortgage debt and fund acquisitions. During 2003, the Company issued 3,160,000 Series B Cumulative Redeemable Preferred Shares raising net proceeds of $76,315. These shares have a fixed dividend of $2.0125 per share per annum, have a liquidation preference of $79,000, have no voting rights, and are redeemable by the Company at $25.00 per share ($79,000) commencing June 2008. During 2003 and 2002, holders of an aggregate of 71,567 and 50,997 OP Units redeemed such OP Units for common shares of the Company. These redemptions resulted in an increase in shareholders' equity and corresponding decrease in minority interest of $915 and $619, respectively. During 2003, three officers repaid recourse notes to the Company including accrued interest thereon, of $2,522 by delivering to the Company 158,724 common shares. During 2003 and 2002, the Company issued 336,992 and 64,249 common shares, respectively, to certain employees and trustees resulting in $5,887 and $996 of deferred compensation, respectively. These common shares generally vest ratably, primarily over a 5 year period, however in certain situations the vesting is cliff based after 5 years and in other cases vesting only occurs if certain performance criteria are met. During 2002, the Company issued 34,483 common shares in respect of a 15 year, 8% interest only recourse note to an officer for $500. This note was satisfied in 2003. During 2002, the holders of the Company's outstanding 2,000,000 Series A preferred shares converted these shares into 2,000,000 common shares. 41 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) (12) Benefit Plans The Company maintains a common share option plan pursuant to which qualified and non-qualified options may be issued. Options granted under the plan generally vest over a period of one to four years and expire five years from date of grant. No compensation cost is reflected in net income as all options granted under the plan had an exercise price equal to the market value of the underlying common shares on the date of grant. Share option activity during the years indicated is as follows:
Weighted-Average Number of Shares Exercise Price Per Share Balance at December 31, 2000 1,978,023 $ 11.63 Granted 568,000 11.99 Exercised (603,142) 11.02 Forfeited (9,308) 12.17 Expired (5,000) 11.25 ------------ --------- Balance at December 31, 2001 1,928,573 11.93 Granted 411,500 15.50 Exercised (1,050,866) 11.59 Forfeited (53,650) 11.98 Expired (2,500) 14.25 ------------- --------- Balance at December 31, 2002 1,233,057 13.39 Granted 30,000 16.15 Exercised (687,527) 12.94 Forfeited (10,500) 15.97 Expired (43,500) 15.25 ------------- --------- Balance at December 31, 2003 521,530 $ 13.94 ============ =========
The following is additional disclosures for common share options outstanding at December 31, 2003:
Options Outstanding Exercisable Options --------------------------------------- ------------------------ Weighted Weighted Range of Average Remaining Average Exercise Exercise Life Exercise Prices Number Price (Years) Number Price -------------- ------------- --------- --------- -------- ------- $9.00-$10.875 12,857 $ 9.55 0.8 12,857 $ 9.55 $11.8125-$12.5625 191,475 11.89 1.6 156,967 11.91 $13.1875-$15.50 317,198 15.36 3.0 176,677 15.22 ------------ ------- ---- -------- ------ 521,530 $ 13.94 2.4 346,501 $ 13.51 ============ ======= ==== ======== ======
42 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) There are 1,449,252 options available for grant at December 31, 2003. The Company has a 401(k) retirement savings plan covering all eligible employees. The Company will match 25% of the first 4% of employee contributions. In addition, based on its profitability, the Company may make a discretionary contribution at each fiscal year end to all eligible employees. The matching and discretionary contributions are subject to vesting under a schedule providing for 25% annual vesting starting with the first year of employment and 100% vesting after four years of employment. Approximately $127, $124 and $112 were contributed in 2003, 2002 and 2001, respectively. The Company has established a trust for certain officers in which nonvested common shares, which vest ratably over five years, granted for the benefit of the officers are deposited. The officers exert no control over the common shares in the trust and the common shares are available to the general creditors of the Company. As of December 31, 2003 and 2002, there were 405,110 and 265,385 common shares, respectively, in the trust. In addition, certain officers can delay, to a specified date, the receipt of common shares that would be received upon exercise of common share options. These common shares are deposited in the trust. As of December 31, 2003 and 2002 there were 295,076 and 222,615 common shares, respectively deposited in the trust. (13) Commitments and Contingencies The Company is involved in various legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. The Company, including its non-consolidated entities, are obligated under certain tenant leases to fund the expansion of the underlying leased properties. The Company has entered into a binding letter of intent to purchase, upon completion and rent commencement from the tenant, an office facility in Meridian, Idaho for an estimated obligation of $14,722. The facility was completed in 2004 and acquired by LAC II. (14) Related Party Transactions During 2003, the Company issued 231,763 OP Units to satisfy outstanding obligations that resulted in a gain of $896. Of the OP Units issued, the Chairman and the Vice Chairman of the Board of Trustees of the Company received 120,662 units. During 2003, three executive officers repaid recourse notes to the Company including accrued interest thereon, of $2,522 by delivering to the Company 158,724 common shares. As of December 31, 2003 the Company is obligated for $808 resulting from the acquisition of certain properties in 1996. Of the $808, the Chairman and the Vice Chairman of the Board of Trustees are owed $414. In 2002, the Company issued 34,483 common shares in respect of a 15-year, 8% interest only recourse note to the Chief Financial Officer of the Company for $500. This note was satisfied in 2003. On November 28, 2001, the Company acquired Net 1 L.P. and Net 2 L.P. (collectively, the "Net Partnerships"), in a merger transaction valued at approximately $136,300, which owned twenty-three properties in fourteen states. The Company issued 2,143,840 common shares (valued at $31,622), 44,858 OP Units (valued at $661), $31,612 in cash and assumed approximately $61,389 of third party mortgage debt (excluding $11,114 in Net Partnership obligations to the Company). The Company's Chairman was the controlling shareholder of the general partners of the Net Partnerships. The general partners received 44,858 OP Units valued on the same basis as 43 the limited partners for their 1% ownership interest in the Net Partnerships. The OP Units, which receive distributions equal to the dividends on common shares, are convertible into the Company's common shares on a one-for-one basis beginning November 2006. During 2001, the Company issued 24,620 common shares to acquire a company controlled by the Chairman of the Company, whose sole asset was a mortgage note receivable from a 64% owned partnership of the Company. During 2001, the Company renegotiated $1,973 in notes receivable from the current Chief Executive Officer and the Vice-Chairman of the Board of Trustees of the Company. The notes were issued in connection with the officers' purchases of 131,000 common shares at $15.25 per common share. The new notes had a 15-year maturity, were 8% interest only, recourse to the officers and provide for forgiveness of the principal balances if certain operating results are achieved. These notes were satisfied in 2003. All related party acquisitions, sales and loans were approved by the independent members of the Board of Trustees. In addition, the Company earns fees from it's joint venture investments (See note 6). (15) Fair Market Value of Financial Instruments Cash Equivalents, Restricted Cash, Accounts Receivable and Accounts Payable - ---------------------------------------------------------------------------- The Company estimates that the fair value approximates carrying value due to the relatively short maturity of the instruments. Mortgages and Notes Payable - --------------------------- The Company determines the fair value of these instruments based on a discounted cash flow analysis using a discount rate that approximates the current borrowing rates for instruments of similar maturities. Based on this, the Company has determined that the fair value of these instruments approximates carrying values. (16) Concentration of Risk The Company seeks to reduce its operating and leasing risks through diversification achieved by the geographic distribution of its properties, avoiding dependency on a single property and the creditworthiness of its tenants. For the years ended December 31, 2003 and 2002, no tenant represented 10% or more of rental revenue. For the year ended December 31, 2001 the following tenants represented 10% or greater of rental revenue: Northwest Pipeline Corporation 11% Kmart Corporation 11% Both of these tenants are publicly registered companies subject to the Securities Exchange Act of 1934, as amended and accordingly file financial information with the Securities and Exchange Commission. 44 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) (17) Supplemental Disclosure of Statement of Cash Flow Information During 2003, the Company issued 231,763 OP Units to satisfy $5,641 in outstanding obligations which resulted in a gain of $896. During 2003, 2002 and 2001, the Company paid $36,467, $32,255 and $30,624, respectively, for interest and $282, $262 and $204, respectively, for taxes. During 2003, three executive officers repaid recourse notes to the Company including accrued interest thereon, of $2,522 by delivering to the Company 158,724 common shares. During 2003, 2002 and 2001, holders of an aggregate of 71,567, 50,997, and 418,411 OP Units, respectively, redeemed such units for common shares of the Company. These redemptions resulted in increases in shareholders' equity and corresponding decreases in minority interests of $915, $619 and $5,713, respectively. During 2003, 2002 and 2001, the Company issued 336,992, 64,249 and 100,000 common shares to certain employees and trustees resulting in $5,887, $996 and $1,181 of deferred compensation. During 2002, the holder of the Company's 2,000,000 Series A preferred shares converted them into 2,000,000 common shares. In 2003, 2002 and 2001, the Company contributed properties (along with non-recourse mortgage notes) to joint venture entities for capital contributions of $11,649, $643 and $1,168, respectively. During 2001, the Company purchased the Net Partnerships by issuing, in addition to $31,612 in cash, 2,143,840 common shares (valued at $31,622), 44,858 OP Units (valued at $661), assumed $61,389 in third party debt and $11,114 in Net Partnership debt obligations to the Company. During 2003, LRA became a consolidated subsidiary of the Company. The assets and liabilities of LRA as of January 1, 2003 were as follows: Real estate, net $ 41,613 Cash 1,579 Other assets 1,221 Mortgage payable 30,028 Other liabilities 1,468 45 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) (18) Unaudited Quarterly Financial Data
2003 ----------------------------------------------------------------------- 3/31/03 6/30/03 9/30/03 12/31/03 ----------- ----------- ----------- ------------ Gross revenues (1) $ 27,064 $ 27,317 $ 28,677 $ 30,463 Net income $ 8,763 $ 2,483 $ 9,962 $ 12,441 Net income allocable to common $ 8,763 $ 2,271 $ 8,372 $ 10,851 shareholders Net income allocable to common shareholders -per share: Basic $ 0.29 $ 0.07 $ 0.24 $ 0.28 Diluted $ 0.29 $ 0.06 $ 0.24 $ 0.28 2002 -------------------------------------------------------------------- 3/31/02 6/30/02 9/30/02 12/31/02 ----------- ----------- ----------- ------------ Gross revenues (1) $ 22,391 $ 22,497 $ 22,977 $ 24,282 Net income $ 7,961 $ 7,879 $ 7,646 $ 7,109 Net income allocable to common $ 7,268 $ 7,879 $ 7,646 $ 7,109 shareholders Net income allocable to common shareholders -per share: Basic $ 0.30 $ 0.30 $ 0.28 $ 0.24 Diluted $ 0.29 $ 0.29 $ 0.28 $ 0.24
(1) All periods have been adjusted to reflect the impact of properties sold during nine months ended September 30, 2004 and the years ended December 31, 2003 and 2002, and properties classified as held for sale as of September 30, 2004, which are reflected in discontinued operations in the Consolidated Statements of Income. The sum of the quarterly income per common share amounts may not equal the full year amounts primarily because the computations of the weighted average number of common shares outstanding for each quarter and the full year are made independently. (19) Subsequent Events Subsequent to December 31, 2003, the following events occurred: The Company: o Purchased 17 properties, for a capitalized cost of $373,322, with tenant leases which expire at various dates between 2012 to 2021. o Obtained $358,577 in non-recourse fixed rate mortgages, including assumed mortgages relating to certain acquisitions. The mortgages have fixed interest rates ranging from 4.55% to 6.25% and mature at various dates between 2009 to 2021. o Recorded impairment charges of $2,775 relating to properties sold and held for sale. o Sold seven properties to third parties for an aggregate net sale price of $32,451, which resulted in a gain of $4,065. o Sold seven properties, at cost to non-consolidated entities for $176,567, which were subject to $97,641 in non-recourse mortgages. o Invested $19,800 in a convertible mortgage note which currently bears interest at 8.20% per annum. 46 o Was informed that the tenant in its Dallas, Texas property, VarTec Telecom, Inc., filed for Chapter 11 bankruptcy. The lease, which expires September 2015, provides for $3,486 in annual rental revenue. As of September 30, 2004 the Company had capitalized real estate, deferred rent receivable and deferred expenses of $28,910, $1,570 and $1,456, respectively. The property is encumbered by a $21,025 non-recourse mortgage which bears interest at 7.49%, provides for annual debt service of $2,020 and matures in December 2012 when a balloon payment of $16,030 is due. The Company has issued a $2,500 letter of credit to the lender as additional collateral. On November 24, 2004, the tenant filed a motion to reject the lease and the Company will write off deferred rent receivable and unamortized lease costs of approximately $2,800 in the fourth quarter of 2004. o Sold 6,900,000 Common Shares raising net proceeds of $144,206. o Made cash and property contributions to non-consolidated entities of $62,774. o Paid common and preferred dividends of $65,085 and $6,360, respectively. o Repaid $94,000 on its line of credit. o As of November 29, 2004 the Company has entered into letters of intent to purchase 10 properties in which the due diligence period has expired thereby obligating the Company to purchase the properties upon the completion of certain seller obligations. The aggregate obligation for the properties is $47,520 plus the assumption of $57,141 in non-recourse mortgages. Non-consolidated entities: o Purchased 13 properties for a capitalized cost of $350,835, with tenant leases which expire at various dates between 2010 to 2024. o Obtained $221,743 in non-recourse fixed rate mortgages, including assumed mortgages relating to certain acquisitions. The mortgages have fixed interest rates ranging from 4.75% to 7.94% and mature at various dates between 2009 to 2019. o Expanded the LION venture by obtaining additional capital commitments of $25,714 and $60,000 from the Company and its partner, respectively. o Formed a new venture to acquire single tenant net lease real estate in which the Company and its partner have committed to fund $15,000 and $35,000, respectively. 47 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Real Estate and Accumulated Depreciation and Amortization Schedule III ($000) Initial cost to Company and Gross Amount at which carried at End of Year (A)
- ---------------------------------------------------------------------------------------------------------------------------------- Accu- mulated Useful life Depre- computing Land ciation depreciation in and Buildings and Date latest income Land and Amorti- Date Con- statements Description Location Encumbrances Estates Improvements Total zation Acquired structed (years) - ------------------------------------------------------------------------------------------------------------------------------------ Office Southington, CT $ - $ 3,240 $ 20,440 $ 23,680 $ 9,809 Oct. 1986 1983 40 & 12 Research & Development Glendale, AZ 14,777 4,996 24,392 29,388 12,473 Nov. 1986 1985 40 & 12 Retail/Health Club Countryside, IL - 628 3,722 4,350 1,880 Jul. 1987 1987 40 & 12 Retail/Health Club Voorhees NJ - 577 4,820 5,397 2,342 Jul. 1987 1987 40 & 12 Retail/Health Club DeWitt, NY - 445 3,043 3,488 1,479 Aug. 1987 1977 & 1987 40 & 12 Warehouse & Distribution Mansfield, OH - 120 5,965 6,085 2,289 Jul. 1987 1970 40, 20 & 12 Industrial Marshall, MI - 33 3,378 3,411 1,601 Aug. 1987 1968 & 1972 40, 20 & 12 Industrial Marshall, MI - 14 926 940 440 Aug. 1987 1979 40, 20 & 12 Retail Newport, OR - 1,400 7,270 8,670 3,489 Sept. 1987 1986 40, 20 & 12 Office & Warehouse Memphis, TN - 1,053 11,174 12,227 5,912 Feb. 1988 1987 40 Warehouse & Distribution Mechanicsburg, PA - 1,439 13,987 15,426 4,309 Oct. 1990 1985 & 1991 40 Office & Warehouse Tampa, FL 6,034 1,389 7,763 9,152 3,348 Nov. 1987 1986 40 & 20 Retail Klamath Falls, OR - 727 9,160 9,887 3,616 Mar. 1988 1986 40 Office Tampa, FL 8,342 1,900 9,854 11,754 3,767 Jul. 1988 1986 40 Warehouse & Industrial Jacksonville, FL - 240 3,637 3,877 1,237 Jul. 1988 1958 & 1969 40 & 20 Retail Sacramento, CA - 885 2,705 3,590 1,309 Oct. 1988 1988 40, 20 & 12 Office Phoenix, AZ - 2,804 13,921 16,725 7,035 Nov. 1988 1960 & 1979 40 & 3 Retail Reno, NV - 1,200 1,904 3,104 897 Dec. 1988 1988 40, 20 & 12 Retail Rockville, MD - - 1,784 1,784 744 Aug. 1995 1977 22.375, 16.583 & 15.583 Retail Oxon Hill, MD 94 403 2,765 3,168 1,098 Aug. 1995 1976 21.292 Retail Laguna Hills, CA - 255 5,035 5,290 2,021 Aug. 1995 1974 20 & 20.5 Retail Riverdale, GA - 333 2,233 2,566 446 Dec. 1995 1985 40 Retail/Health Club Canton, OH 1,578 602 3,820 4,422 764 Dec. 1995 1987 40 Office Salt Lake City, UT 13,409 - 55,404 55,404 16,284 May 1996 1982 25.958 Manufacturing Franklin, NC 1,965 386 3,062 3,448 536 Dec. 1996 1996 40 Industrial Oberlin, OH - 276 4,515 4,791 790 Dec. 1996 1996 40 Retail Tulsa, OK - 447 2,432 2,879 947 Dec. 1996 1981 23.583 & 13.583 Retail Clackamas, OR - 523 2,847 3,370 1,109 Dec. 1996 1981 23.583 & 13.583 Retail Lynwood, WA - 488 2,658 3,146 1,035 Dec. 1996 1981 23.583 & 13.583 Retail Honolulu, HI - - 11,147 11,147 3,218 Dec. 1996 1980 24.33 Warehouse New Kingston, PA (Silver Springs) 3,462 674 5,360 6,034 910 Mar. 1997 1981 40 Warehouse New Kingston, PA (Cumberland) 7,265 1,380 10,963 12,343 1,861 Mar. 1997 1989 40 Warehouse Mechanicsburg, PA (Hampden IV) 5,363 1,012 8,039 9,051 1,365 Mar. 1997 1985 40 Office/ Research & Development Marlborough, MA - 2,013 13,834 15,847 2,233 Jul. 1997 1960 & 1988 40 Office Dallas, TX 21,348 3,582 30,598 34,180 4,692 Sept. 1997 1986 40 Warehouse Waterloo, IA - 1,025 8,296 9,321 1,288 Oct. 1997 1996 & 1997 40 Office/ Research & Development Milpitas, CA 15,666 3,542 18,603 22,145 2,790 Dec. 1997 1985 40 Industrial Gordonsville, TN - 52 3,325 3,377 574 Dec. 1997 1983 & 1985 34.75 Office Decatur, GA 6,695 975 13,677 14,652 2,052 Dec. 1997 1983 40 Office Richmond, VA 16,472 - 27,282 27,282 5,076 Dec. 1997 1990 32.25 Office/Warehouse Bristol, PA 9,729 2,508 10,031 12,539 1,442 Mar. 1998 1982 40 Office Hebron, KY 5,340 1,615 6,462 8,077 929 Mar. 1998 1987 40 Office Livonia, MI 5,430 1,554 6,859 8,413 895 Mar. 1998 1987 & 1988 40 Office Valley Forge, PA 13,080 3,960 15,880 19,840 546 Aug. 2002 1985 & 2001 40 Research & Development Livonia, MI 5,596 1,733 6,936 8,669 997 Mar. 1998 1987 & 1988 40 Office Palm Beach Gardens, FL 11,341 3,578 14,249 17,827 2,004 May 1998 1996 40 Warehouse/ Distribution Lancaster, CA 19,514 2,028 28,183 30,211 2,296 Jun. 1998 1998 40 Industrial Auburn Hills, MI 7,198 2,788 11,151 13,939 1,515 Jul. 1998 1989 & 1998 40
48
- ------------------------------------------------------------------------------------------------------------------------------------ Accu- mulated Useful life Depre- computing Land ciation depreciation in and Buildings and Date latest income Land and Amorti- Date Con- statements Description Location Encumbrances Estates Improvements Total zation Acquired structed (years) - ------------------------------------------------------------------------------------------------------------------------------------ Warehouse/ Distribution Warren, OH 21,172 10,231 51,110 61,341 11,445 Aug. 1998 1982 10 &40 Warehouse/ Distribution Baton Rouge, LA 1,898 685 2,742 3,427 356 Oct. 1998 1998 40 Retail Columbia, MD - 1,002 4,872 5,874 567 Dec. 1998 1983 40 Office Bristol, PA 6,053 1,073 7,709 8,782 779 Dec. 1999 1998 40 Office Southborough, MA 2,132 456 4,291 4,747 434 Dec. 1999 1984 40 Office Herndon, VA 18,807 5,127 20,553 25,680 2,061 Dec. 1999 1987 40 Office Hampton, VA 4,473 1,353 5,441 6,794 516 Mar. 2000 2000 40 Office Phoenix, AZ 14,231 4,666 18,664 23,330 1,691 May 2000 1997 40 Industrial Hebron, OH - 1,063 4,271 5,334 218 Dec. 2001 2000 40 Industrial Hebron, OH - 1,681 6,754 8,435 345 Dec. 2001 1999 40 Retail Phoenix, AZ - 1,126 4,501 5,627 239 Nov. 2001 1988 40 Retail Stockton, CA - 259 1,037 1,296 55 Nov. 2001 1968 40 Retail Lynchburg, VA - 159 638 797 34 Nov. 2001 1986 40 Office San Diego, CA 4,252 1,740 6,960 8,700 370 Nov. 2001 1989 40 Office Phoenix, AZ - 2,287 9,149 11,436 486 Nov. 2001 1985 & 1994 40 Industrial Henderson, NC 4,414 1,488 5,954 7,442 316 Nov. 2001 1998 40 Industrial Columbus, OH - 319 1,275 1,594 68 Nov. 2001 1990 40 Office Tuscon, AZ 2,444 657 2,627 3,284 140 Nov. 2001 1988 40 Retail Eau Claire, WI 2,220 860 3,442 4,302 183 Nov. 2001 1994 40 Office Milford, CT - 567 2,265 2,832 120 Nov. 2001 1994 40 Retail Westland, MI 2,938 1,444 5,777 7,221 307 Nov. 2001 1987 & 1997 40 Retail Canton, OH 3,325 883 3,534 4,417 188 Nov. 2001 1995 40 Retail Spartanburg, SC 2,762 833 3,334 4,167 177 Nov. 2001 1996 40 Office Wilsonville, OR - 2,666 10,662 13,328 566 Nov. 2001 1980 & 1998 40 Industrial Ocala, FL 13,059 3,803 15,210 19,013 808 Nov. 2001 1976 40 Industrial Columbia, SC 3,419 928 3,710 4,638 197 Nov. 2001 1968 & 1998 40 Office Hampton, VA 7,294 2,333 9,351 11,684 496 Nov. 2001 1999 40 Industrial Plymouth, MI 4,787 1,533 6,130 7,663 326 Nov. 2001 1996 40 Retail Gainesville, GA 920 526 2,105 2,631 112 Nov. 2001 1984 40 Office Lake Forest, CA 10,832 3,442 13,769 17,211 617 Mar. 2002 2001 40 Office Knoxville, TN 5,295 1,624 6,496 8,120 223 Aug. 2002 2002 40 Industrial Groveport, OH 7,800 2,386 9,546 11,932 308 Sep. 2002 2002 40 Office Westmont, IL 16,170 4,978 19,894 24,872 519 Dec. 2002 1989 40 Office Fort Mill, SC 11,523 3,601 14,404 18,005 375 Dec. 2002 2002 40 Industrial Chester, SC - 535 14,875 15,410 3,095 Jan. 2001 2001 40 Industrial Dubuque, IA 7,351 2,052 8,207 10,259 94 Jul. 2003 2002 40 Office Boca Raton, FL 15,275 4,290 17,161 21,451 375 Feb. 2003 1983 & 2002 40 Office Greenville, SC 13,886 4,059 16,236 20,295 186 Jul. 2003 2000 & 2001 40 Office Temple, TX 9,200 2,890 11,561 14,451 60 Oct. 2003 2001 40 Office Bremerton, WA 6,800 2,144 8,577 10,721 45 Oct. 2003 2001 40 Industrial Dillon, SC 12,111 3,223 12,900 16,123 658 Dec. 2001 2001 40 Industrial Plymouth, MI 12,776 3,932 15,728 19,660 115 Sep. 2003 1996 & 1998 40 Industrial Danville, IL 6,623 1,796 7,182 8,978 548 Dec. 2000 2000 40 Industrial Minneapolis, MN - 922 3,688 4,610 42 Jul. 2003 2003 40 Office Wallingford, CT - 1,049 4,198 5,247 4 Dec. 2003 1978 & 1985 40 Office Baton Rouge, LA - 2,023 8,094 10,117 8 Dec. 2003 1997 40 Office Overland Park, KS - 10,008 40,031 50,039 42 Dec. 2003 1980 & 2003 40 Office Kansas City, MO - 4,758 19,031 23,789 20 Dec. 2003 1963 & 2003 40 Office Arlington, TX - 5,795 23,181 28,976 - Dec. 2003 2003 40 ------------------------------------------------------- Total $455,940 $178,077 $984,318 $1,162,395 $160,623 ======================================================
49 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Real Estate and Accumulated Depreciation and Amortization Schedule III ($000) - (continued) (A) The initial cost includes the purchase price paid by the Company and acquisition fees and expenses. The total cost basis of the Company's properties at December 31, 2003 for Federal income tax purposes was approximately $895 million. Reconciliation of real estate owned:
2003 2002 2001 ---------------------------------------------- Balance at the beginning of year $ 913,370 $ 830,788 $ 682,627 Additions during year 312,209 116,264 166,668 Properties sold during year (9,978) (18,621) (4,107) Property contributed to joint venture during year (58,837) (15,061) (14,400) Properties consolidated effective 1/1/2003 43,499 - - Reclassify held for sale properties (37,868) - - ----------------------------------------------- Balance at end of year $ 1,162,395 $ 913,370 $ 830,788 =============================================== Balance of beginning of year $ 134,220 $ 116,741 $ 98,429 Depreciation and amortization expense 27,335 21,480 18,312 Accumulated depreciation and amortization of properties sold during year (1,428) (2,934) - Accumulated depreciation of property contributed to joint venture - (1,067) - Accumulated depreciation of properties consolidated effective 1/1/2003 1,886 - - Accumulated depreciation reclassify as held for sale (1,390) - - ----------------------------------------------- Balance at end of year $ 160,623 $ 134,220 $ 116,741 ===============================================
50 Item 15(a) 3 Exhibits Exhibit 12 Lexington Corporate Properties Trust Ratio of earnings to combined fixed charges and preferred dividends
For the year ended December 31, ($000's) Earnings 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- Income from continuing operations $ 28,147 $ 25,844 $ 15,995 $ 19,945 $ 19,348 Interest expense 41,840 33,308 32,312 28,579 28,033 Amortization expense - debt cost 1,493 1,163 1,356 1,037 941 Equity in earnings from joint ventures (5,735) (4,561) (3,502) (1,428) (61) Cash received from joint ventures 7,823 5,660 4,110 810 -- ---------- --------- --------- --------- -------- Total $ 73,568 $ 61,414 $ 50,271 $ 48,943 $ 48,261 ========== ========= ========= ========= ========= Fixed Charges Interest expense $ 41,840 $ 33,308 $ 32,312 $ 28,579 $ 28,033 Capitalized interest expense 142 24 168 241 -- Preferred stock dividend 3,392 693 2,709 2,562 2,520 Amortization expense - debt cost 1,493 1,163 1,356 1,037 941 ---------- --------- --------- --------- --------- Total $ 46,867 $ 35,188 $ 36,545 $ 32,419 $ 31,494 ========== ========== ========== ========== ========= Ratio 1.57 1.75 1.38 1.51 1.53 ========== ========== ========== ========== =========
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