UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2006.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition period from _________________ to ________________
Commission File Number 1-12386
LEXINGTON CORPORATE PROPERTIES TRUST
------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 13-3717318
------------------------------ ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Penn Plaza - Suite 4015
New York, NY 10119
------------------------------ -----------
(Address of principal executive offices) (Zip code)
(212) 692-7200
-----------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [x] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No x
--- ---
Indicate the number of shares outstanding of each of the registrant's classes of
common shares, as of the latest practicable date: 53,014,379 common shares, par
value $.0001 per share on August 1, 2006.
PART 1. - FINANCIAL INFORMATION
-------------------------------
ITEM 1. FINANCIAL STATEMENTS
----------------------------
LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2006 (Unaudited) and December 31, 2005
(in thousands, except share and per share data)
June 30, December 31,
2006 2005
---- ----
Assets:
Real estate, at cost $ 1,874,730 $ 1,883,115
Less: accumulated depreciation and amortization 255,332 241,188
--------- ---------
1,619,398 1,641,927
Properties held for sale - discontinued operations 7,956 49,397
Intangible assets, net 133,046 128,775
Cash and cash equivalents 54,318 53,515
Investment in non-consolidated entities 186,391 191,146
Deferred expenses, net 14,440 13,582
Notes receivable, including accrued interest 25,407 11,050
Note receivable, including accrued interest - affiliate 8,350 -
Investments in marketable securities 4,221 -
Rent receivable - current 6,052 7,673
Rent receivable - deferred 26,551 24,778
Other assets 54,867 38,389
--------- ---------
$ 2,140,997 $ 2,160,232
========= =========
Liabilities and Shareholders' Equity:
Liabilities:
Mortgages and notes payable $ 1,152,805 $ 1,139,971
Liabilities - discontinued operations 4,180 32,145
Accounts payable and other liabilities 14,858 13,250
Accrued interest payable 5,885 5,859
Deferred revenue 6,141 6,271
Prepaid rent 9,447 10,054
--------- ---------
1,193,316 1,207,550
Minority interests 60,347 61,372
--------- ---------
1,253,663 1,268,922
--------- ---------
Commitments and contingencies (note 10)
Shareholders' equity:
Preferred shares, par value $0.0001 per share; authorized
10,000,000 shares, Series B Cumulative Redeemable Preferred,
liquidation preference $79,000, 3,160,000 shares issued and
outstanding 76,315 76,315
Series C Cumulative Convertible Preferred, liquidation preference
$155,000, 3,100,000 shares issued and outstanding 150,589 150,589
Common shares, par value $0.0001 per share; authorized 160,000,000
shares, 53,015,485 and 52,155,855 shares issued and
outstanding in 2006 and 2005, respectively 5 5
Additional paid-in-capital 848,268 848,564
Deferred compensation, net -- (11,401)
Accumulated distributions in excess of net income (187,894) (172,762)
Accumulated other comprehensive income 51 --
------- ---------
887,334 891,310
------- ---------
$ 2,140,997 $ 2,160,232
========= =========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
2
LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three and six months ended June 30, 2006 and 2005
(Unaudited and in thousands, except share and per share data)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2006 2005 2006 2005
---- ---- ---- ----
Gross revenues:
Rental $ 46,423 $ 44,297 $ 94,936 $ 79,145
Advisory fees 1,338 2,556 2,401 3,191
Tenant reimbursements 3,887 2,106 8,320 2,989
------ ------ ------- ------
Total gross revenues 51,648 48,959 105,657 85,325
Expense applicable to revenues:
Depreciation and amortization (20,351) (17,534) (40,592) (28,745)
Property operating (7,445) (4,916) (15,271) (7,550)
General and administrative (4,865) (4,661) (10,479) (9,006)
Non-operating income 5,911 207 6,706 890
Interest and amortization expense (17,801) (15,764) (35,446) (27,782)
Debt satisfaction gain, net 1,241 4,632 294 4,632
Impairment charges (1,121) - (1,121) -
------- ----- ------- -----
Income before benefit (provision) for income taxes,
minority interests, equity in earnings of
non-consolidated entities and discontinued operations 7,217 10,923 9,748 17,764
Benefit (provision) for income taxes 82 29 155 (67)
Minority interests (1,173) (1,468) (1,710) (2,284)
Equity in earnings of non-consolidated entities 825 1,334 2,070 2,759
----- ------ ------ ------
Income from continuing operations 6,951 10,818 10,263 18,172
----- ------ ------ ------
Discontinued operations, net of minority interest and taxes:
Income (loss) from discontinued operations (137) 1,406 387 2,919
Debt satisfaction (charge) gain, net 4,976 - 4,898 (54)
Impairment charges - (592) - (623)
Gains on sales of properties 13,730 4,317 16,050 5,061
------ ----- ------ -----
Total discontinued operations 18,569 5,131 21,335 7,303
------ ----- ------ -----
Net income 25,520 15,949 31,598 25,475
Dividends attributable to preferred shares - Series B (1,590) (1,590) (3,180) (3,180)
Dividends attributable to preferred shares - Series C (2,519) (2,519) (5,038) (5,038)
------- ------- ------- -------
Net income allocable to common shareholders $ 21,411 $ 11,840 $ 23,380 $ 17,257
====== ====== ====== ======
Income per common share - basic:
Income from continuing operations $ 0.05 $ 0.14 $ 0.04 $ 0.20
Income from discontinued operations 0.36 0.10 0.41 0.15
---- ---- ---- ----
Net income $ 0.41 $ 0.24 $ 0.45 $ 0.35
==== ==== ==== ====
Weighted average common shares outstanding - basic 52,116,003 48,593,332 51,980,753 48,472,665
========== ========== ========== ==========
Income per common share - diluted:
Income from continuing operations $ 0.05 $ 0.13 $ 0.04 $ 0.20
Income from discontinued operations 0.36 0.09 0.41 0.13
---- ---- ---- ----
Net income $ 0.41 $ 0.22 $ 0.45 $ 0.33
==== ==== ==== ====
Weighted average common shares outstanding - diluted 52,136,573 53,982,652 52,006,725 53,858,805
========== ========== ========== ==========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three and six months ended June 30, 2006 and 2005
(Unaudited and in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2006 2005 2006 2005
---- ---- ---- ----
Net income allocable to common shareholders: $ 21,411 $ 11,840 $ 23,380 $17,257
Other comprehensive income (loss):
Foreign currency translation adjustment 293 - 143 -
Unrealized loss on marketable securities (92) - (92) -
------ ------ ------ ------
Comprehensive income $ 21,612 $ 11,840 $ 23,431 $17,257
====== ====== ====== ======
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
4
LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2006 and 2005
(Unaudited and in thousands)
2006 2005
---- ----
Net cash provided by operating activities $ 60,252 $ 53,203
------ ------
Cash flows from investing activities:
Investment in properties, including intangibles (52,283) (665,447)
(Issuance) collection of notes receivable- affiliate (8,300) 45,800
Net proceeds from sale/transfer of properties 55,762 19,623
Collection of note receivable -- 3,488
Investment in notes receivable (11,144) --
Real estate deposits, net (1,726) --
Investment in and advances to non-consolidated
entities, net (10,154) (25,408)
Distribution of loan proceeds from non-consolidated
entities 5,459 --
Investment in marketable securities (4,314) --
Increase in deferred leasing costs (1,038) (2,080)
Increase in escrow deposits (822) (1,280)
------- --------
Net cash used in investing activities (28,560) (625,304)
------- --------
Cash flows from financing activities:
Dividends to common and preferred shareholders (46,730) (41,533)
Principal payments on debt, excluding normal
amortization (51,071) (16,252)
Dividend reinvestment plan proceeds 6,537 6,848
Change in credit facility borrowings, net -- 99,000
Principal amortization payments (13,573) (12,489)
Proceeds of mortgages and notes payable 77,936 418,845
Increase in deferred financing costs, net (939) (4,849)
Contributions from minority partners 810 1,692
Cash distributions to minority partners (3,996) (3,488)
Proceeds from the sale of common and preferred
shares, net 253 19,832
Common shares/partnership units repurchased (116) (82)
------- -------
Net cash (used in) provided by financing
activities (30,889) 467,524
------- -------
Change in cash and cash equivalents 803 (104,577)
Cash and cash equivalents, at beginning of period 53,515 146,957
------ -------
Cash and cash equivalents, at end of period $ 54,318 $ 42,380
====== =======
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
5
LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006 and 2005
(Unaudited and dollars in thousands, except per share data)
(1) The Company
Lexington Corporate Properties Trust (the "Company") is a self-managed
and self-administered real estate investment trust ("REIT") that
acquires, owns and manages a geographically diversified portfolio of net
leased office, industrial and retail properties. As of June 30, 2006,
the Company had an ownership interest in 191 properties and managed an
additional two properties. The real properties owned by the Company are
generally subject to triple net leases to corporate tenants although
certain leases require the Company to pay a portion of operating
expenses.
The Company believes it has qualified as a REIT under the Internal
Revenue Code of 1986, as amended (the "Code"). Accordingly, the Company
will not be subject to federal income tax, provided that distributions
to its shareholders equal at least the amount of its REIT taxable income
as defined under the Code. The Company is permitted to participate in
certain activities which it was previously precluded from in order to
maintain its qualification as a REIT, so long as these activities are
conducted in entities which elect to be treated as taxable REIT
subsidiaries ("TRS") under the Code. As such, the TRS will be subject to
federal income taxes on the income from these activities.
The unaudited condensed consolidated financial statements reflect all
adjustments, which are, in the opinion of management, necessary to
present a fair statement of the financial condition and results of
operations for the interim periods. For a more complete understanding of
the Company's operations and financial position, reference is made to
the financial statements (including the notes thereto) previously filed
with the Securities and Exchange Commission with the Company's Annual
Report on Form 10-K/A for the year ended December 31, 2005.
(2) Summary of Significant Accounting Policies
Basis of Presentation and Consolidation. The Company's consolidated
financial statements are prepared on the accrual basis of accounting.
The financial statements reflect the accounts of the Company and its
controlled subsidiaries, including Lepercq Corporate Income Fund L.P.
("LCIF"), Lepercq Corporate Income Fund II L.P. ("LCIF II"), Net 3
Acquisition L.P. ("Net 3"), Lexington Realty Advisors, Inc. ("LRA"),
Lexington Contributions Inc. ("LCI"), and Six Penn Center L.P. LRA and
LCI are wholly owned taxable REIT subsidiaries, and the Company is the
sole unitholder of the general partner and the majority limited partner
of each of LCIF, LCIF II and Net 3. The Company determines whether an
entity for which it holds an interest should be consolidated pursuant to
Financial Accounting Standards Board ("FASB") Interpretation No. 46,
Consolidation of Variable Interest Entities ("FIN 46R"). FIN 46R
requires the Company to evaluate whether it has a controlling financial
interest in an entity through means other than voting rights. If the
entity is not a variable interest entity, and the Company controls the
entity's voting shares and similar rights, the entity is consolidated.
Recently Issued Accounting Pronouncements. In December 2004, the FASB
issued Statement of Financial Accounting Standards ("SFAS") No. 123,
(revised 2004) Share-Based Payment ("SFAS 123R"), which supersedes
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees, and its related implementation guidance. SFAS 123R
establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in exchange
for goods or services that are based on the fair value of the entity's
equity instruments or that may be settled by the issuance of those
equity instruments. SFAS 123R focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based
payment transactions. SFAS 123R requires a public entity to measure the
cost of employee services received in exchange for an award of equity
instruments based on the grant date fair value of the award. The cost
will be recognized over the period in which an employee is required to
provide services in exchange for the award. SFAS 123R was effective for
fiscal years beginning after January 1, 2006, based on rules issued by
the Securities and Exchange Commission. The Company elected the modified
prospective approach as provided for in SFAS 123R. The impact of
adopting this statement resulted in the elimination of $11,401 of
deferred compensation and additional paid-in-capital from the
consolidated shareholders' equity as of January 1, 2006 and did not have
a material impact on the Company's results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 153, Exchange of Non-monetary
Assets - an amendment of APB Opinion No. 29 ("SFAS 153"). The guidance
in APB Opinion No. 29, Accounting for Non-monetary Transactions, is
based on the principle that exchanges of non-monetary assets should be
measured based on the fair value of the assets exchanged. The guidance
in that opinion, however, included certain exceptions to that principle.
SFAS 153 amends APB Opinion No. 29 to eliminate the exception for
non-monetary assets that do not have commercial substance. A
non-monetary exchange has commercial substance if the future cash flows
of the entity are expected to change significantly as a result of the
exchange.
6
SFAS 153 was effective for non-monetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. The adoption of this
statement had no material impact on the Company.
In March 2005, the FASB issued Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations - an Interpretation of SFAS
Statement No. 143 ("FIN 47"). FIN 47 clarifies the timing of liability
recognition for legal obligations associated with the retirement of a
tangible long-lived asset when the timing and/or method of settlement
are conditional on a future event. FIN 47 was effective for fiscal years
ending after December 15, 2005. The application of FIN 47 did not have a
material impact on the Company's consolidated financial position or
results of operations.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections ("SFAS 154") which replaces APB Opinions No. 20, Accounting
Changes, and SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements - An Amendment of APB Opinion No. 28. SFAS 154
provides guidance on the accounting for and reporting of accounting
changes and error corrections. It establishes retrospective application
as the required method for reporting a change in accounting principle
and the reporting of a correction of an error. SFAS 154 was effective
for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The adoption of SFAS 154 had no
material impact on the Company.
In June 2005, the FASB ratified the Emerging Issues Task Force's
("EITF") consensus on EITF 04-05, Determining Whether a General Partner,
or the General Partners as a Group, Controls a Limited Partnership or
Similar Entity When the Limited Partners Have Certain Rights. EITF 04-05
provides a framework for determining whether a general partner controls,
and should consolidate, a limited partnership or a similar entity. It
was effective after June 29, 2005 for all newly formed limited
partnerships and for any pre-existing limited partnerships that modify
their partnership agreements after that date. General partners of all
other limited partnerships applied the consensus no later than the
beginning of the first reporting period in fiscal years beginning after
December 15, 2005. The adoption of EITF 04-05 had no material impact on
the Company's financial position or results of operations.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes ("FIN 48"). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in accordance with SFAS No.
109. FIN 48 prescribes a recognition threshold and measurement attribute
for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The Company does not
expect that the adoption of FIN 48 will have a material impact on the
Company's consolidated financial position or results of operations.
Use of Estimates. Management has made a number of estimates and
assumptions relating to the reporting of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported amounts
of revenues and expenses to prepare these condensed consolidated
financial statements in conformity with generally accepted accounting
principles. The most significant estimates made include the
recoverability of accounts receivable (primarily related to
straight-line rents), allocation of property purchase price to tangible
and intangible assets, the determination of impairment of long-lived
assets and the useful lives of long-lived assets. Actual results could
differ from those estimates.
Purchase Accounting for Acquisition of Real Estate. The fair value of
the real estate acquired, which includes the impact of mark-to-market
adjustments for assumed mortgage debt related to property acquisitions,
is allocated to the acquired tangible assets, consisting of land,
building and improvements, fixtures and equipment and identified
intangible assets and liabilities, consisting of the value of
above-market and below-market leases, other value of in-place leases and
value of tenant relationships, based in each case on their fair values.
The fair value of the tangible assets of an acquired property (which
includes land, building and improvements and fixtures and equipment) is
determined by valuing the property as if it were vacant, and the
"as-if-vacant" value is then allocated to land, building and
improvements and fixtures and equipment based on management's
determination of relative fair values of these assets. Factors
considered by management in performing these analyses include an
estimate of carrying costs during the expected lease-up periods
considering current market conditions and costs to execute similar
leases. In estimating carrying costs, management includes real estate
taxes, insurance and other operating expenses and estimates of lost
rental revenue during the expected lease-up periods based on current
market demand. Management also estimates costs to execute similar leases
including leasing commissions.
In allocating the fair value of the identified intangible assets and
liabilities of an acquired property, above-market and below-market
in-place lease values are recorded based on the difference between the
current in-place lease rent and a management estimate of current market
rents. Below-market lease intangibles are recorded as part of deferred
revenue and amortized into rental revenue over the non-cancelable
periods of the respective leases and any bargain renewal options, if
applicable. Above-market leases are recorded as part of intangible
assets and amortized as a direct charge against rental revenue over the
non-cancelable portion of the respective leases.
The aggregate value of other acquired intangible assets, consisting of
in-place leases and tenant relationships, is measured by the excess of
(i) the purchase price paid for a property over (ii) the estimated fair
value of the property as if vacant,
7
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
SFAS 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. Renewal options in leases with rental terms
that are lower than those in the primary term are excluded from the
calculation of straight-line rent if they do not meet the criteria of a
bargain renewal option. In instances in which the Company funds tenant
improvements and the improvements are deemed to be owned by the Company,
revenue recognition will commence when the improvements are
substantially completed and possession or control of the space is turned
over to the tenant. When the Company determines that the tenant
allowances are lease incentives, the Company commences revenue
recognition when possession or control of the space is turned over to
the tenant for tenant work to begin. The lease incentive is recorded as
a reduction to revenue on a straight-line basis over the respective
lease term.
Gains on sales of real estate are recognized pursuant to the provisions
of SFAS No. 66, Accounting for Sales of Real Estate, as amended ("SFAS
66"). The specific timing of the sale is measured against various
criteria in SFAS 66 related to the terms of the transactions and any
continuing involvement in the form of management or financial assistance
associated with the properties. If the sales criteria are not met, the
gain is deferred and the finance, installment or cost recovery method,
as appropriate, is applied until the sales criteria are met.
Accounts Receivable. The Company continuously monitors collections from
its tenants and would make a provision for estimated losses based upon
historical experience and any specific tenant collection issues that the
Company has identified. As of June 30, 2006 and December 31, 2005, the
Company did not record an allowance for doubtful accounts.
Impairment of Real Estate. The Company evaluates the carrying value of
all real estate held when a triggering event under SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, as
amended ("SFAS 144") has occurred to determine if an impairment has
occurred which would require the recognition of a loss. The evaluation
includes reviewing anticipated cash flows of the property, based on
current leases in place, and an estimate of market rent after an assumed
lease up period for vacant properties coupled with an estimate of
proceeds to be realized upon sale. However, estimating market lease
rents and future sale proceeds is highly subjective and such estimates
could differ materially from actual results.
Depreciation is determined by the straight-line method over the
remaining estimated economic useful lives of the properties.
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.
Properties Held For Sale. The Company accounts for properties held for
sale in accordance with SFAS 144. SFAS 144 requires that the assets and
liabilities of properties that meet various criteria in SFAS 144 be
presented separately in the balance sheet, with assets and liabilities
being separately stated. The operating results of these properties are
reflected as discontinued operations in the statement of income.
Properties that do not meet the held for sale criteria of SFAS 144 are
accounted for as operating properties.
Marketable Securities. The Company classifies its existing marketable
equity securities as available-for-sale in accordance with the
provisions of SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities. These securities are carried at fair market
value, with unrealized gains and losses reported in shareholders' equity
as a component of accumulated other comprehensive income. Gains or
losses on securities sold, if any, are based on the specific
identification method.
Tax Status. The Company has made an election to qualify, and believes it
is operating so as to qualify, as a REIT for federal income tax
purposes. Accordingly, the Company generally will not be subject to
federal income tax, provided that distributions to its shareholders
equal at least the amount of its REIT taxable income as defined under
Section 856 through 860 of the Internal Revenue Code, as amended (the
"Code").
The Company is now permitted to participate in certain activities from
which it was previously precluded in order to maintain its qualification
as a REIT, so long as these activities are conducted in entities which
elect to be treated as taxable REIT subsidiaries under the Code. LRA and
LCI are taxable REIT subsidiaries. As such, the Company is subject to
federal and state income taxes on the income from these activities.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax basis and operating loss and tax credit
carry-forwards. Deferred tax assets and
8
liabilities are measured using enacted tax rates in effect for the year
in which those temporary differences are expected to be recovered or
settled.
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.
Foreign Currency. Assets and liabilities of the Company's foreign
operations are translated using period-end exchange rates, and revenues
and expenses are translated using exchange rates as determined
throughout the period. Unrealized gains or losses resulting from
translation are included in other comprehensive income as a separate
component of the Company's shareholders' equity.
Earnings Per Share. Basic net income per share is computed by dividing
net income reduced by preferred dividends by the weighted average number
of common shares outstanding during the period. Diluted net income per
share amounts are similarly computed but include the effect, when
dilutive, of in-the-money common share options, operating partnership
units, convertible preferred shares and other dilutive securities.
Common Share Options. All common share options outstanding were fully
vested as of December 31, 2005 and accordingly no compensation costs as
calculated under SFAS 123R were recorded. 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 historically to all outstanding share option awards in each
period:
Three Months Six Months
Ended Ended
June 30, June 30,
2005 2005
----------- ----------
Net income allocable to common shareholders,
as reported - basic $ 11,840 $ 17,257
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 2 4
------ ------
Pro forma net income - basic $ 11,838 $ 17,253
====== ======
Net income per share - basic
Basic - as reported $ 0.24 $ 0.35
Basic - pro forma $ 0.24 $ 0.35
Net income allocable to common shareholders,
as reported - diluted $ 12,009 $ 18,000
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 2 4
------ ------
Pro forma net income - diluted $ 12,007 $ 17,996
====== ======
Net income per share - diluted
Diluted - as reported $ 0.22 $ 0.33
Diluted - pro forma $ 0.22 $ 0.33
Share-based Compensation. The Company issues non-vested common shares to
its employees that have various vesting terms. The non-vested shares
issued vest either (i) ratably over 5 years, (ii) cliff vest after 5
years, (iii) cliff vest after 5 years if market conditions (targeted
total shareholder return) are achieved and/or (iv) vest upon the
achievement of performance criteria (increase in cash available for
distributions). The Company has elected to charge to compensation cost
ratably over 5 years non-vested shares which cliff vest after 5 years.
The Company charges to compensation cost ratably over 5 years (the
implicit service period), the non-vested shares that vest based upon the
achievement of performance criteria. The Company charges to compensation
cost ratably over 5 years (the explicit service period), the non-vested
shares that vest upon achievement of market and service conditions. The
Company values all share-based payment arrangements using the fair value
method,
9
which is the value of the Company's common shares on date of grant and
assumes no forfeitures. The Company expects to issue all common shares
from reserves for options exercised and non-vested shares granted.
As of June 30, 2006, there are 827,377 awards available to be issued to
employees under the Company's equity award plans. In addition, the
Company has $17,499 in unrecognized compensation cost that will be
charged to compensation cost over an average of approximately 3.9 years.
Common share option activity for the six months ended June 30, 2006 is
as follows:
Number of Weighted-Average Weighted-Average
Shares Exercise Price Per Share Life (years)
------ ------------------------ ------------
Balance at December 31, 2005 40,500 $ 14.71 .8
Granted -- -- --
Exercised (20,500) 14.15 .5
Forfeited -- -- --
Expired (1,500) 11.82 --
--------- ------- ----
Balance at June 30, 2006 18,500 $ 15.55 .6
========= ======= ====
Non-vested share activity for the six months ended June 30, 2006 is as
follows:
Number of Weighted-Average
Shares Value Per Share
------ ---------------
Balance at December 31, 2005 547,555 $20.82
Granted 405,528 22.04
Forfeited (469) 21.30
Vested (56,933) 20.49
-------- -----
Balance at June 30, 2006 895,681 $21.43
======= =====
Reclassification. Certain amounts included in 2005 financial statements
have been reclassified to conform with the 2006 presentation.
10
(3) Earnings per Share
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations for the three and
six months ended June 30, 2006 and 2005:
Three months ended Six months ended
June 30, June 30,
2006 2005 2006 2005
--------- --------- --------- ---------
BASIC
Income from continuing operations $ 6,951 $ 10,818 $ 10,263 $ 18,172
Less preferred dividends (4,109) (4,109) (8,218) (8,218)
------ ----- ----- ------
Income allocable to common shareholders from
continuing operations 2,842 6,709 2,045 9,954
Total income from discontinued operations 18,569 5,131 21,335 7,303
------ ----- ------ -----
Net income allocable to common shareholders $ 21,411 $ 11,840 $ 23,380 $ 17,257
====== ====== ====== ======
Weighted average number of common shares
outstanding 52,116,003 48,593,332 51,980,753 48,472,665
========== ========== ========== ==========
Income per common share - basic:
Income from continuing operations $ 0.05 $ 0.14 $ 0.04 $ 0.20
Income from discontinued operations 0.36 0.10 0.41 0.15
---- ---- ---- ----
Net income $ 0.41 $ 0.24 $ 0.45 $ 0.35
==== ==== ==== ====
DILUTED
Income allocable to common shareholders from
continuing operations - basic $ 2,842 $ 6,709 $ 2,045 $ 9,954
Incremental income attributed to assumed
conversion of dilutive securities - 169 - 743
----- ----- ------ -----
Income allocable to common shareholders
from continuing operations 2,842 6,878 2,045 10,697
Total income from discontinued operations 18,569 5,131 21,335 7,303
------ ------ ------ ------
Net income allocable to common shareholders $ 21,411 $ 12,009 $ 23,380 $ 18,000
====== ====== ====== ======
Weighted average number of common shares
used in calculation of basic earnings per
share 52,116,003 48,593,332 51,980,753 48,472,665
Add incremental shares representing:
Shares issuable upon exercise of employee
share options 20,570 80,928 25,972 77,748
Shares issuable upon conversion of dilutive
securities - 5,308,392 - 5,308,392
---------- ---------- ---------- ----------
Weighted average number of shares used in
calculation of diluted earnings per common
share 52,136,573 53,982,652 52,006,725 53,858,805
========== ========== ========== ==========
Income per common share - diluted:
Income from continuing operations $ 0.05 $ 0.13 $ 0.04 $ 0.20
Income from discontinued operations 0.36 0.09 0.41 0.13
---- ---- ---- ----
Net income $ 0.41 $ 0.22 $ 0.45 $ 0.33
==== ==== ==== ====
11
(4) Investments in Real Estate and Mortgage Notes Receivable
During the six months ended June 30, 2006, the Company acquired one
property in the Netherlands for an initial capitalized cost of $40,061
and allocated $15,716 of the purchase price to intangible assets.
The Company purchased a $13,027 face amount mortgage note receivable for
$11,144, for an effective yield at 7.50%. The note matures in 2015 and
requires interest payments at 4.55% per annum, on the face amount, and
principal payments.
(5) Discontinued Operations
During the first quarter of 2006, the Company sold two properties for an
aggregate net sales price of $28,239 resulting in a gain of $2,320.
During the second quarter of 2006, the Company sold four properties for
an aggregate net sales price of $44,893 resulting in a net gain of
$13,730. The Company provided a $3,200, 6.00% interest only mortgage due
in 2017 relating to a sale of one property. In addition, the Company had
two properties held for sale as of June 30, 2006.
The following presents the operating results for the properties sold and
properties held for sale for the applicable periods:
Three Months Ended June 30, Six Months Ended June 30,
2006 2005 2006 2005
----------- ----------- ----------- --------
Rental revenues $ 345 $ 3,166 $ 1,941 $ 6,197
Pre-tax income, including gains on sale 18,593 5,131 21,410 7,303
(6) Investment in Non-Consolidated Entities
As of June 30, 2006, the Company has investments in eight
non-consolidated entities. During the six months ended June 30, 2006,
these entities purchased six properties for an aggregate capitalized
cost of $73,262, including estimated expansion cost for one property.
During the six months ended June 30, 2006, the non-consolidated entities
obtained four separate mortgages encumbering four properties aggregating
$43,363 with an average stated interest rate of 5.97% and maturity dates
ranging from April 2016 to November 2019.
During the second quarter of 2006, the Company advanced $8,300 to one
entity in connection with an acquisition of a property from a third
party. The mortgage note bears interest at 7.00% and matures in October
2006. During the first quarter of 2005, one entity repaid $45,800 in
advances made by the Company.
The following is summary combined balance sheet data as of June 30, 2006
and income statement data for the six months ended June 30, 2006 and
2005 for the Company's non-consolidated entities:
2006
----
Real estate, net 1,410,090
Intangibles, net 146,633
Mortgages payable 1,041,071
2006 2005
---- ----
Gross revenues $80,026 $66,221
Expenses, net $76,635 $58,221
------ ------
Net income $ 3,391 $ 8,000
====== ======
The Company earned advisory fees of $1,141 and $2,044 for the three and
six months ended June 30, 2006, respectively, and $2,440 and $2,831 for
the three and six months ended June 30, 2005, respectively, relating to
these entities.
(7) Mortgages and Notes Payable
During the first quarter of 2006, the Company refinanced its property in
Dillon, South Carolina. The Company repaid the existing debt on the
property of $11,420 and incurred debt satisfaction charges of
approximately $904.
12
During the second quarter of 2006, the Company sold two properties
encumbered by mortgage debt, which resulted in debt satisfaction charges
of approximately $446.
During the second quarter of 2006, the Company refinanced its property
in Boca Raton, Florida. The Company repaid the existing debt on the
property of $15,275 and incurred debt satisfaction charges of
approximately $218.
During the second quarter of 2006, the Company transferred its Milpitas,
California property which was encumbered by a $11,869 mortgage to the
lender in a foreclosure, which resulted in a $6,289 debt satisfaction
gain.
During the second quarter of 2006, the Company repaid the $10,525
mortgage on its Southfield, Michigan property for $9,022, which resulted
in a debt satisfaction gain of $1,460.
During 2006, the Company obtained the following mortgages:
Property Amount Rate Maturity
-------- ------ ---- --------
Dillon, South Carolina $ 23,750 5.97% 2022
Renswoude, the Netherlands 33,785 5.31% 2011
Boca Raton, Florida 20,400 6.47% 2020
In addition, the purchaser of a property assumed a $14,170 mortgage note
in connection with the sale by the Company.
(8) Concentration of Risk
The Company seeks to reduce its operating and leasing risks through
diversification achieved by the geographic distribution of its
properties, tenant industry diversification, avoiding dependency on a
single property and the creditworthiness of its tenants. For the three
and six months ended June 30, 2006 and 2005, no single tenant
represented greater than 10% of rental revenues.
In March 2006, Dana Corporation ("Dana"), a tenant in 11 properties,
including non-consolidated entities, filed for Chapter 11 bankruptcy. As
of June 30, 2006, Dana succeeded on motions to reject leases on 2
properties owned by the Company and a non-consolidated entity and has
not indicated its intention as it relates to the other 9 leases. During
the second quarter of 2006, the Company recorded an impairment charge of
$1,121 and accelerated amortization of an above-market lease of $2,349,
relating to the write off of lease intangibles and the above-market
lease for the disaffirmed lease of a consolidated property. In addition,
the Company's proportionate share from a non-consolidated entity of the
impairment charge and accelerated amortization of an above-market lease
for a disaffirmed lease was $551 and $1,412, respectively. In addition,
the Company, including a non-consolidated entity, sold its bankruptcy
claims related to the 2 disaffirmed leases for approximately $7,100
which resulted in a gain of approximately $6,900.
Cash and cash equivalent balances may exceed insurable amounts. The
Company believes it mitigates this risk by investing in or through major
financial institutions.
(9) Minority Interests
In conjunction with several of the Company's acquisitions in prior
years, sellers were given units in LCIF, LCIF II, or Net 3 as a form of
consideration. All of such interests are redeemable at certain times,
only at the option of the holders, for the Company's common shares on a
one-for-one basis at various dates through November 2006 and are not
otherwise mandatorily redeemable by the Company.
As of June 30, 2006, there were 5,622,694 units outstanding. All units
have stated distributions in accordance with their respective
partnership agreements. To the extent that the Company's dividend per
share is less than the stated distribution per unit per the applicable
partnership agreement, the distributions per unit are reduced by the
percentage reduction in the Company's dividend. No units have a
liquidation preference.
(10) Commitments and Contingencies
The Company is obligated under certain tenant leases, including leases
for non-consolidated entities, to fund the expansion of the underlying
leased properties. Included in other assets is construction in progress
of $15,352 and $9,273 as of June 30, 2006 and December 31, 2005,
respectively.
13
The Company at times is involved in various legal actions occurring in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position, results of
operations or liquidity.
As of June 30, 2006, the Company, including its non-consolidated
entities, has entered into binding letters of intent to purchase, upon
completion of construction and commencement of rent from the tenants,
two properties for an aggregate estimated obligation of $58,799.
(11) Supplemental Disclosure of Statement of Cash Flow Information
During the six months ended June 30, 2006 and 2005, the Company paid
$35,148 and $28,639, respectively, for interest and $169 and $1,450,
respectively, for income taxes.
During the six months ended June 30, 2006 and 2005, holders of an
aggregate of 91,869 and 30,528 operating partnership units,
respectively, redeemed such units for common shares of the Company.
These redemptions resulted in an increase in shareholders' equity and
corresponding decrease in minority interest of $1,041 and $354,
respectively.
During the six months ended June 30, 2006 and 2005, the Company
recognized $3,321 and $1,901, respectively in compensation relating to
share grants to trustees and employees.
During the six months ended June 30, 2006, the Company sold a property
in which the purchaser assumed a mortgage note encumbering the property
in the amount of $14,170. In addition, the Company provided a $3,200,
6.00% interest only mortgage due in 2017 relating to the sale of another
property.
(12) Subsequent Events
On July 23, 2006, the Company entered into a definitive merger agreement
with Newkirk Realty Trust, Inc. ("Newkirk"). Under the merger agreement
each share of Newkirk common stock will be exchanged for 0.80 common
shares of the Company. Following the merger, Newkirk stockholders and
unit holders will own approximately 46.8% and the Company's shareholders
and unit holders will own approximately 53.2% of the fully diluted
common shares of the combined company assuming no conversion of the
Company's Series C Cumulative Convertible Preferred Stock. The
transaction is expected to close in the fourth quarter of 2006, subject
to the approval of the voting shareholders of both companies and other
customary conditions.
The merger agreement contains certain termination rights for both the
Company and Newkirk and provides that in certain specified
circumstances, a terminating party must pay the other party's expenses
up to $5 million in connection with the proposed transaction. In
addition, the agreement provides that in certain specified circumstances
(generally in the event a terminating party enters into an alternative
transaction within six months of termination), a terminating party must
also pay the other party a break-up fee of up to $25 million (less
expenses, if any, previously paid by the terminating party to the
non-terminating party).
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
--------------------------
The following is a discussion and analysis of Lexington Corporate Properties
Trust's (the "Company's") consolidated financial condition and results of
operations for the three and six months periods ended June 30, 2006 and 2005,
and the significant factors that could affect the Company's prospective
financial condition and results of operations. This discussion should be read
together with the accompanying unaudited condensed consolidated financial
statements and notes and with the Company's consolidated financial statements
and notes included in the Company's Annual Report on Form 10-K/A for the year
ended December 31, 2005. Historical results may not be indicative of future
performance.
This quarterly report on Form 10-Q, together with other statements and
information publicly disseminated by the Company contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The Company intends such forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995 and includes this statement for
purposes of complying with these safe harbor provisions. Forward-looking
statements, which are based on certain assumptions and describe the Company's
future plans, strategies and expectations, are generally identifiable by use of
the words "believes," "expects," "intends," "anticipates," "estimates,"
"projects" or similar expressions. Readers should not rely on forward-looking
statements since they involve known and unknown risks, uncertainties and other
factors which are, in some cases, beyond the Company's control and which could
materially affect actual results, performances or achievements. In particular,
among the factors that could cause actual results to differ materially from
current expectations include, but are not limited to, (i) the failure to
continue to qualify as a real estate investment trust, (ii) changes in general
business and economic conditions, (iii) competition, (iv) increases in real
estate construction costs, (v) changes in interest rates, (vi) changes in
accessibility of debt and equity capital markets and other risks inherent in the
real estate business, including, but not limited to, tenant defaults, potential
liability relating to environmental matters, the availability of suitable
acquisition opportunities and illiquidity of real estate investments, (vii)
changes in governmental laws and regulations, and (viii) increases in operating
costs. The Company undertakes no obligation to publicly release the results of
any revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Accordingly, there is no assurance that the Company's
expectations will be realized.
General
-------
The Company, which has elected to qualify as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"),
acquires, owns and manages net-leased commercial properties. The Company
believes that it has operated as a REIT since October 1993.
As of June 30, 2006, the Company owned, or had interests in, 191 real estate
properties and managed 2 additional properties.
Critical Accounting Policies
----------------------------
The Company's accompanying unaudited condensed consolidated financial statements
have been prepared in conformity with accounting principles generally accepted
in the United States of America, which require management to make estimates that
affect the amounts of revenues, expenses, assets and liabilities reported. The
following are critical accounting policies which are very important to the
portrayal of the Company's financial condition and results of operations and
which require some of management's most difficult, subjective and complex
judgments. The accounting for these matters involves the making of estimates
based on current facts, circumstances and assumptions which could change in a
manner that might materially affect management's future estimate with respect to
such matters. Accordingly, future reported financial conditions and results
could differ materially from financial conditions and results reported based on
management's current estimates.
Purchase Accounting for Acquisition of Real Estate. The fair value of the real
estate acquired, which includes the impact of mark-to-market adjustments for
assumed mortgage debt related to property acquisitions, is allocated to the
acquired tangible assets, consisting of land, building and improvements,
fixtures and equipment and identified intangible assets and liabilities,
consisting of the value of above-market and below-market leases, other value of
in-place leases and value of tenant relationships, based in each case on their
fair values.
The fair value of the tangible assets of an acquired property (which includes
land, building and improvements and fixtures and equipment) is determined by
valuing the property as if it were vacant, and the "as-if-vacant" value is then
allocated to land, building and improvements and fixtures and equipment based on
management's determination of relative fair values of these assets. Factors
considered by management in performing these analyses include an estimate of
carrying costs during the expected lease-up periods
15
considering current market conditions and costs to execute similar leases. In
estimating carrying costs, management includes real estate taxes, insurance and
other operating expenses and estimates of lost rental revenue during the
expected lease-up periods based on current market demand. Management also
estimates costs to execute similar leases including leasing commissions.
In allocating the fair value of the identified intangible assets and liabilities
of an acquired property, above-market and below-market in-place lease values are
recorded based on the difference between the current in-place lease rent and a
management estimate of current market rents. Below-market lease intangibles are
recorded as part of deferred revenue and amortized into rental revenue over the
non-cancelable periods of the respective leases and any bargain renewal options,
if applicable. Above-market leases are recorded as part of intangible assets and
amortized as a direct charge against rental revenue over the non-cancelable
portion of the respective leases.
The aggregate value of other acquired intangible assets, consisting of in-place
leases and tenant relationships, is measured by the excess of (i) the purchase
price paid for a property over (ii) the estimated fair value of the property as
if vacant, determined as set forth above. This aggregate value is allocated
between in-place lease values and tenant relationships based on management's
evaluation of the specific characteristics of each tenant's lease. The value of
in-place leases and customer relationships are amortized to expense over the
remaining non-cancelable periods of the respective leases.
Revenue Recognition. The Company recognizes revenue in accordance with Statement
of Financial Accounting Standards ("SFAS") 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. Renewal options in leases with
rental terms that are lower than those in the primary term are excluded from the
calculation of straight- line rent if they do not meet the criteria of a bargain
renewal option. In those instances in which the Company funds tenant
improvements and the improvements are deemed to be owned by the Company, revenue
recognition will commence when the improvements are substantially completed and
possession or control of the space is turned over to the tenant. When the
Company determines that the tenant allowances are lease incentives, the Company
commences revenue recognition when possession or control of the space is turned
over to the tenant for tenant work to begin. The lease incentive is recorded as
a reduction to revenue on a straight-line basis over the respective lease term.
Gains on sales of real estate are recognized pursuant to the provisions of SFAS
No. 66, Accounting for Sales of Real Estate, as amended ("SFAS 66"). The
specific timing of the sale is measured against various criteria in SFAS 66
related to the terms of the transactions and any continuing involvement in the
form of management or financial assistance associated with the properties. If
the sales criteria are not met, the gain is deferred and the finance,
installment or cost recovery method, as appropriate, is applied until the sales
criteria are met.
Accounts Receivable. The Company continuously monitors collections from its
tenants and would make a provision for estimated losses based upon historical
experience and any specific tenant collection issues that the Company has
identified. As of June 30, 2006 and December 31, 2005, the Company did not
record an allowance for doubtful accounts.
Impairment of Real Estate. The Company evaluates the carrying value of all real
estate held when a triggering event under SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, as amended ("SFAS 144") has
occurred to determine if an impairment has occurred which would require the
recognition of a loss. The evaluation includes reviewing anticipated cash flows
of the property, based on current leases in place, and an estimate of market
rent after an assumed lease up period for vacant properties coupled with an
estimate of proceeds to be realized upon sale. However, estimating market lease
rents and future sale proceeds is highly subjective and such estimates could
differ materially from actual results.
Tax Status. The Company has made an election to qualify, and believes it is
operating so as to qualify, as a REIT for federal income tax purposes.
Accordingly, the Company generally will not be subject to federal income tax,
provided that distributions to its shareholders equal at least the amount of its
REIT taxable income as defined under Section 856 through 860 of the Code.
The Company is now permitted to participate in certain activities which it was
previously precluded from in order to maintain its qualification as a REIT, so
long as these activities are conducted in entities which elect to be treated as
taxable subsidiaries under the Code. Lexington Realty Advisors, Inc. and
Lexington Contributions Inc. are taxable REIT subsidiaries. As such, the Company
is subject to federal and state income taxes on the income from these
activities.
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis and operating loss and tax credit carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or settled.
Properties Held For Sale. The Company accounts for properties held for sale in
accordance with SFAS 144. SFAS 144 requires that the assets and liabilities of
properties that meet various criteria in SFAS 144 be presented separately in the
balance sheet, with assets and liabilities being separately stated. The
operating results of these properties are reflected as discontinued operations
in the statement of income. Properties that do not meet the held for sale
criteria of SFAS 144 are accounted for as operating properties.
16
Basis of Consolidation. The Company determines whether an entity for which it
holds an interest should be consolidated pursuant to Financial Accounting
Standards Board Interpretation No. 46, Consolidation of Variable Interest
Entities ("FIN 46R"). FIN 46R requires the Company to evaluate whether it has a
controlling financial interest in an entity through means other than voting
rights. If the entity is not a variable interest entity, and the Company
controls the entity's voting shares and similar rights, the entity is
consolidated.
Liquidity and Capital Resources
-------------------------------
Real Estate Assets. As of June 30, 2006, the Company's real estate assets were
located in 39 states and the Netherlands and contained an aggregate of
approximately 40.2 million square feet of net rentable space. Substantially all
of the properties are subject to triple net leases, which are generally
characterized as leases in which the tenant pays all or substantially all of the
cost and cost increases for real estate taxes, capital expenditures, insurance,
utilities and ordinary maintenance of the property. Approximately 97.8% of the
total square feet is subject to a lease.
During the six months ended June 30, 2006, the Company, including
non-consolidated entities, purchased 7 properties for an aggregate capitalized
cost of $113.3 million, including an estimated expansion obligation, and sold 6
properties to third parties resulting in an aggregate net gain of $16.1 million.
The Company's principal sources of liquidity are revenues generated from its
properties, interest on cash balances, amounts available under its unsecured
credit facility and amounts that may be raised through the sale of securities in
private or public offerings. For the six months ended June 30, 2006, the leases
on the consolidated properties generated $94.9 million in gross rental revenue
compared to $79.1 million during the same period in 2005.
In March 2006, Dana Corporation ("Dana"), a tenant in 11 properties, including
those owned by non-consolidated entities, filed for Chapter 11 bankruptcy. As of
June 30, 2006, Dana succeeded on motions to reject leases on 2 properties, 1
owned by the Company and the other owned by a non-consolidated entity. Dana has
not indicated its intention as it relates to the other 9 leases. During the
second quarter of 2006, the Company recorded an impairment charge and
accelerated amortization of above-market leases of $5.4 million (including the
Company's proportionate share from a non-consolidated entity), relating to the
write off of above-market leases and lease intangibles of the 2 rejected leases.
Dividends. The Company has made quarterly distributions since October 1986
without interruption. The Company declared a common dividend of $0.365 per share
to common shareholders of record as of July 31, 2006, payable on August 15,
2006. The Company's annualized common dividend rate is currently $1.46 per
share. The Company also declared a dividend on its Series C preferred shares of
$0.8125 per share to preferred shareholders of record as of July 31, 2006,
payable on August 15, 2006. The annual preferred dividend rate on the Series C
shares is $3.25 per share. The Company also declared a dividend on its Series B
preferred shares of $0.503125 per share to preferred shareholders of record as
of July 31, 2006, payable on August 15, 2006. The annual preferred dividend rate
on the Series B shares is $2.0125 per share.
In connection with its intention to continue to qualify as a REIT for Federal
income tax purposes, the Company expects to continue paying regular common and
preferred dividends to its shareholders. These dividends are expected to be paid
from operating cash flows which are expected to increase over time due to
property acquisitions and growth in rental revenues in the existing portfolio
and from other sources. Since cash used to pay dividends reduces amounts
available for capital investments, the Company generally intends to maintain a
conservative dividend payout ratio, reserving such amounts as it considers
necessary for the expansion of properties in its portfolio, debt reduction, the
acquisition of interests in new properties as suitable opportunities arise, and
such other factors as the Company's board of trustees considers appropriate.
Cash dividends paid to common and preferred shareholders for the six months
ended June 30, 2006 and 2005 were $46.7 million and $41.5 million, respectively.
Although the Company receives the majority of its rental payments on a monthly
basis, it intends to continue paying dividends quarterly. Amounts accumulated in
advance of each quarterly distribution are invested by the Company in short-term
money market or other suitable instruments.
The Company anticipates that cash flows from operations will continue to provide
adequate capital to fund its operating and administrative expenses, regular debt
service obligations and all dividend payments in accordance with REIT
requirements in both the short-term and long-term. In addition, the Company
anticipates that cash on hand, borrowings under its unsecured credit facility,
issuance of equity and debt, and other capital raising alternatives will be
available to fund the necessary capital required by the Company. Cash flows from
operations were $60.3 million and $53.2 million for the six months ended June
30, 2006 and 2005, respectively. The underlying drivers that impact working
capital and therefore cash flows from operations are the timing of collection of
rents, including reimbursements from tenants, the collection of advisory fees,
payment of interest on mortgage debt and payment of operating and general and
administrative costs. The Company believes the net lease structure of the
majority of its tenants leases enhances cash flows from operations since the
payment and timing of operating costs related to the properties are generally
borne directly by the tenant. Collection and timing of tenant rents is closely
monitored by management as part of its cash management program.
17
Net cash used in investing activities totaled $28.6 million and $625.3 million
for the six months ended June 30, 2006 and 2005, respectively. Cash used in
investing activities was primarily attributable to the acquisition of and
deposits made for real estate, the investment in non-consolidated entities and
the issuance of notes receivable. Cash provided by investing activities relates
primarily to the sale of properties and the collection of notes receivable.
Therefore, the fluctuation in investing activities relates primarily to the
timing of investments and dispositions.
Net cash (used in) provided by financing activities totaled $(30.9) million and
$467.5 million for the six months ended June 30, 2006 and 2005, respectively.
Cash used in financing activities was primarily attributable to dividends (net
of proceeds reinvested under the Company's dividend reinvestment plan),
distributions to limited partners and debt service payments. Cash provided by
financing activities relates primarily to proceeds from equity offerings and
mortgage financings.
UPREIT Structure. The Company's UPREIT structure permits the Company to effect
acquisitions by issuing to a seller, as a form of consideration, interests in
operating partnerships controlled by the Company. All of such interests are
redeemable, at the option of the holder, at certain times for common shares on a
one-for-one basis and all of such interests require the Company to pay certain
distributions to the holders of such interests in accordance with the respective
operating partnership agreements. The Company accounts for these interests in a
manner similar to a minority interest holder. The number of common shares that
will be outstanding in the future should be expected to increase, and minority
interest expense should be expected to decrease, from time to time, as such
operating partnership interests are redeemed for common shares. As of June 30,
2006, there were 5,622,694 operating partnership units, of which 1,666,720
partnership units are held by E. Robert Roskind, Chairman and Richard J. Rouse,
Vice Chairman and Chief Investment Officer. The current average annual
distribution is $1.37 per unit.
Share Repurchase Program
------------------------
The Company's board of trustees has authorized the repurchase of up to 2.0
million common shares/operating partnership units. No repurchases were made
during the six months ended June 30, 2006.
Financing
---------
Revolving Credit Facility. The Company's $200.0 million unsecured revolving
credit facility, which expires in June 2008, bears interest at a rate of LIBOR
plus 120-170 basis points depending on the Company's leverage level. The
unsecured revolving credit facility contains customary financial covenants
including restrictions on the level of indebtedness, amount of variable rate
debt to be borrowed and net worth maintenance provisions. As of June 30, 2006,
the Company was in compliance with all covenants, there were no borrowings
outstanding, $167.3 million was available to be borrowed and $32.7 million in
letters of credit were outstanding.
Debt Service Requirements. The Company's principal liquidity needs are for the
payment of interest and principal on outstanding mortgage debt. As of June 30,
2006, total outstanding mortgages were $1.2 billion. The weighted average
interest rate on the Company's total consolidated debt on such date was
approximately 6.0%. The estimated scheduled principal amortization payments for
the remainder of 2006 and for 2007, 2008, 2009 and 2010 are $14.0 million, $35.2
million, $30.0 million, $31.6 million and $30.4 million, respectively. As of
June 30, 2006, the estimated scheduled balloon payments for the remainder of
2006 and for 2007, 2008, 2009 and 2010 are $0 million, $0 million, $43.7
million, $37.0 million and $56.6 million, respectively.
Other
-----
Lease Obligations. Since the Company's tenants generally bear all or
substantially all of the cost of property operations, maintenance and repairs,
the Company does not anticipate significant needs for cash for these costs.
However, the Company is responsible for operating expenses in vacant properties
and for certain leases which contain expense stops. The Company generally funds
property expansions with available cash and additional secured borrowings, the
repayment of which is funded out of rental increases under the leases covering
the expanded properties.
The Company's tenants pay the rental obligation on ground leases either directly
to the fee holder or to the Company as increased rent. The annual ground lease
rental payment obligations for 2007, 2008, 2009, 2010 and 2011 are approximately
$1.2 million, $1.2 million, $1.2 million, $1.0 million and $0.9 million,
respectively.
Capital Expenditures. Due to the triple net lease structure, the Company does
not incur significant expenditures in the ordinary course of business to
maintain its properties. However, in the future, as leases expire, the Company
expects to incur costs in extending the existing tenant lease or re-tenanting
the properties. The amounts of these expenditures can vary significantly
depending on tenant negotiations, market conditions and rental rates. These
expenditures are expected to be funded from operating cash flows or borrowings
on the unsecured revolving credit facility. As of June 30, 2006, the Company,
including through non-consolidated entities, has entered into letters of intent
to purchase upon completion of construction and commencement of rent from the
tenants, two properties for an aggregate estimated obligation of $58.8 million.
18
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.
Results of Operations
Three months ended June 30, 2006 compared with June 30, 2005
Changes in the results of operations for the Company are primarily due to the
growth of its portfolio, costs associated with such growth, the timing of
acquisitions and other items discussed below. Of the increase in total gross
revenues in 2006 of $2.7 million, $2.1 million is attributable to rental
revenue. The remaining $0.6 million increase in gross revenues in 2006 was
primarily attributable to an increase in tenant reimbursements of $1.8 million
offset by a decrease in advisory fees of $1.2 million. The increase in interest
and amortization expense of $2.0 million is due to the growth of the Company's
portfolio and has been offset by interest savings resulting from scheduled
principal amortization payments and mortgage satisfactions. The increase in
property operating expense of $2.5 million is primarily due to an increase in
properties for which the Company has operating expense responsibility. The
increase in depreciation and amortization expense of $2.8 million is due
primarily to the growth in real estate and intangibles due to property
acquisitions. Intangible assets are amortized over a shorter period of time
(generally the lease term) than real estate assets. The increase in general and
administrative expenses of $0.2 million is due primarily to an increase in
personnel costs offset by a reduction in professional fees and dead deal costs.
Non-operating income increased $5.7 million primarily due to the sale of a Dana
Corporation bankruptcy claim in 2006. Debt satisfaction gains, net decreased
$3.4 million due to timing of debt satisfactions. Impairment charges increased
due to the write off of intangible assets relating to a tenant bankruptcy.
Minority interest expense decreased $0.3 million due to a decrease in earnings
at the partnership level. Equity in earnings of non-consolidated entities
decreased by $0.5 million primarily due to the impact of the write off of lease
intangibles and the acceleration of above-market lease amortization offset by a
gain on the sale of a Dana Corporation bankruptcy claim in 2006. Net income
increased in 2006 by $9.6 million primarily due to the net impact of items
discussed above coupled with an increase of $13.4 million in income from
discontinued operations. The total discontinued operations increase of $13.4
million is comprised of an increase in gains on sales of properties of $9.4
million, an increase in debt satisfaction gains, net of $5.0 million and a
reduction in impairment charges of $0.6 million offset by a decrease of $1.5
million in income from discontinued operations. Net income applicable to common
shareholders increased by $9.6 million due to the items discussed above.
Six months ended June 30, 2006 compared with June 30, 2005
Changes in the results of operations for the Company are primarily due to the
growth of its portfolio, costs associated with such growth, the timing of
acquisitions and other items discussed below. Of the increase in total gross
revenues in 2006 of $20.3 million, $15.8 million is attributable to rental
revenue. The remaining $4.5 million increase in gross revenues in 2006 was
primarily attributable to an increase in tenant reimbursements of $5.3 million
offset by a decrease in advisory fees of $0.8 million. The increase in interest
and amortization expense of $7.7 million is due to the growth of the Company's
portfolio and has been offset by interest savings resulting from scheduled
principal amortization payments and mortgage satisfactions. The increase in
property operating expense of $7.7 million is primarily due to an increase in
properties for which the Company has operating expense responsibility. The
increase in depreciation and amortization expense of $11.8 million is due
primarily to the growth in real estate and intangibles due to property
acquisitions. Intangible assets are amortized over a shorter period of time
(generally the lease term) than real estate assets. The increase in general and
administrative expenses of $1.5 million is due primarily to an increase in
personnel costs offset by a reduction in professional fees and dead deal costs.
Non-operating income increased $5.8 million primarily due to the sale of a Dana
Corporation bankruptcy claim in 2006. Debt satisfaction gains, net decreased
$4.3 million due to the timing of debt satisfactions. Impairment charges
increased due to the write off of intangible assets relating to a tenant
bankruptcy. Minority interest expense decreased $0.6 million due to a decrease
in earnings at the partnership level. Equity in earnings of non-consolidated
entities decreased by $0.7 million primarily due to the impact of the write off
of lease intangibles and the acceleration of above-market lease amortization
offset by a gain on the sale of a Dana Corporation bankruptcy claim in 2006. Net
income increased in 2006 by $6.1 million primarily due to the net impact of
items discussed above coupled with an increase of $14.0 million in income from
discontinued operations. The total discontinued operations increase of $14.0
million is comprised of an increase in gains on sales of properties of $11.0
million, an increase in debt satisfaction gains of $5.0 million and a $0.6
million reduction in impairment charges offset by a decrease of $2.5 million in
income from discontinued operations. Net income applicable to common
shareholders increased by $6.1 million due to the items discussed above.
The increase in net income in future periods will be closely tied to the level
of acquisitions and dispositions made by the Company. Without acquisitions,
which in addition to generating rental revenue, generate acquisition, debt
placement and asset management fees from non-consolidated entities, the sources
of growth in net income are limited to index adjusted rents (such as the
consumer price index), percentage rents, reduced interest expense on amortizing
mortgages and by controlling other variable overhead costs. However, there are
many factors beyond management's control that could offset these items
including, without limitation, increased
19
interest rates and tenant monetary defaults. As discussed in note 12 to the
unaudited condensed consolidated financial statements the Company has entered
into a definitive merger agreement with Newkirk Realty Trust, Inc.
Off-Balance Sheet Arrangements
------------------------------
Non-Consolidated Real Estate Entities. As of June 30, 2006, the Company has
investments in various non-consolidated real estate entities with varying
structures. The properties owned by the non-consolidated 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 and fraud.
The Company invests in non-consolidated 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 note 6 to the unaudited condensed consolidated financial statements
for combined summary balance sheet and income statement data relating to these
entities.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK ($000's)
--------------------------------------
The Company's exposure to market risk relates primarily to its variable-rate and
fixed rate debt. As of June 30, 2006 and 2005, the Company's variable-rate
indebtedness was $0 and $111,748, respectively, which represented 0% and 9.0% of
total long-term indebtedness, respectively. During the three months ended June
30, 2006 and 2005 this variable-rate indebtedness had a weighted average
interest rate of 8.0% and 6.1%, respectively. During the six months ended June
30, 2006 and 2005 this variable-rate indebtedness had a weighted-average
interest rate of 8.1% and 6.1%, respectively. Had the weighted average interest
rate been 100 basis points higher, the Company's net income would have been
reduced by approximately $36 and $66 for the three and six months ended June 30,
2006 and $39 and $72 for the three and six months ended June 30, 2005. As of
June 30, 2006 and 2005, the Company's fixed rate debt was $1,156,975 and
$1,123,256, respectively, which represented 100% and 91.0%, respectively, of
total long-term indebtness. The weighted average interest rate as of June 30,
2006 of fixed rate debt was 6.0%, which is approximately 33 basis points lower
than the fixed rate debt incurred by the Company during the three months ended
June 30, 2006. 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
$2,919 and $5,846 for the three and six months ended June 30, 2006 and by $2,598
and $4,470 for the three and six months ended June 30, 2005.
ITEM 4. CONTROLS AND PROCEDURES
-------------------------------
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
(a) Disclosure Controls and Procedures. The Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective.
Internal Control Over Financial Reporting
-----------------------------------------
(b) Internal Control Over Financial Reporting. There have not been any changes
in the Company's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
20
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings - not applicable.
ITEM 1A. Risk Factors.
There have been no material changes in our risk factors from
those disclosed in our Annual Report on Form 10-K/A for the year
ended December 31, 2005.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds - not
applicable.
ITEM 3. Defaults Upon Senior Securities - not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders.
At the Company's Annual Meeting of Shareholders held on May 23,
2006, the following action was taken:
The shareholders elected nine individuals nominated to serve as
the trustees of the Company until the 2007 Annual Meeting, as set
forth in Proposal No. 1 in the Company's Notice of Annual Meeting
of Shareholders and Proxy Statement for the Annual Meeting. The
nine individuals elected, and the number of votes cast for, or
withheld, with respect to each of them follows:
Nominee for Trustee For Withhold
------------------- --- --------
E. Robert Roskind 45,944,291 1,487,065
Richard J. Rouse 45,955,610 1,475,746
T. Wilson Eglin 46,992,118 439,238
Geoffrey Dohrmann 46,101,866 1,329,490
Carl D. Glickman 46,857,291 574,065
James Grosfeld 46,840,562 590,794
Kevin W. Lynch 47,141,163 290,193
Stanley R. Perla 47,137,265 294,091
Seth M. Zachary 44,154,359 3,276,997
The shareholders ratified the appointment of KPMG LLP as the
independent registered public accounting firm for the Company for
the fiscal year ending December 31, 2006, as set forth in
Proposal No. 2 in the Company's Notice of Annual Meeting of
Shareholders and Proxy Statement for the Annual Meeting. The
number of votes cast for, against, or abstained, with respect to
Proposal No. 2 follows:
For Against Abstain
--- ------- -------
46,967,612 350,019 113,725
ITEM 5. Other Information - not applicable.
ITEM 6. Exhibits
31.1 Certification of Chief Executive Officer pursuant to rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of Chief Financial Officer pursuant to rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
21
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Lexington Corporate Properties Trust
Date: August 9, 2006 By: /s/ T. Wilson Eglin
---------------------------------------
T. Wilson Eglin
Chief Executive Officer, President and
Chief Operating Officer
Date: August 9, 2006 By: /s/ Patrick Carroll
---------------------------------------
Patrick Carroll
Chief Financial Officer, Executive
Vice President and Treasurer
22