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 March 31, 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: 52,872,448 common shares, par
value $.0001 per share on May 2, 2006.
PART 1. - FINANCIAL INFORMATION
-------------------------------
ITEM 1. FINANCIAL STATEMENTS
----------------------------
LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2006 (Unaudited) and December 31, 2005
(in thousands, except share and per share data)
March 31, December 31,
2006 2005
---- ----
Assets:
Real estate, at cost $ 1,879,441 $ 1,883,115
Less: accumulated depreciation and amortization 243,820 241,188
--------- ---------
1,635,621 1,641,927
Properties held for sale - discontinued operations 38,892 49,397
Intangible assets, net 140,074 128,775
Cash and cash equivalents 61,278 53,515
Investment in non-consolidated entities 187,741 191,146
Deferred expenses, net 14,404 13,582
Notes receivable 11,050 11,050
Rent receivable - current 3,226 7,673
Rent receivable - deferred 24,795 24,778
Other assets 44,746 38,389
--------- ---------
$ 2,161,827 $ 2,160,232
========= =========
Liabilities and Shareholders' Equity:
Liabilities:
Mortgages and notes payable $ 1,172,478 $ 1,139,971
Liabilities - discontinued operations 19,730 32,145
Accounts payable and other liabilities 11,029 13,250
Accrued interest payable 2,797 5,859
Deferred revenue 6,206 6,271
Prepaid rent 8,932 10,054
--------- ---------
1,221,172 1,207,550
Minority interests 60,043 61,372
--------- ---------
1,281,215 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, 52,866,743 and 52,155,855 shares issued
and outstanding in 2006 and 2005, respectively 5 5
Additional paid-in-capital 843,860 848,564
Deferred compensation, net -- (11,401)
Accumulated distributions in excess of net income (190,007) (172,762)
Accumulated other comprehensive loss (150) --
---------- ---------
880,612 891,310
--------- ---------
$ 2,161,827 $ 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 months ended March 31, 2006 and 2005
(Unaudited and in thousands, except share and per share data)
Three Months Ended
March 31,
2006 2005
---- ----
Gross revenues:
Rental $ 48,513 $ 35,486
Advisory fees 1,063 634
Tenant reimbursements 4,433 883
--------- ---------
Total gross revenues 54,009 37,003
Expense applicable to revenues:
Depreciation and amortization (20,241) (11,550)
Property operating (7,895) (2,637)
General and administrative (5,616) (4,345)
Non-operating income 795 684
Interest and amortization expense (17,892) (12,220)
Debt satisfaction charge (947) --
---------- ----------
Income before benefit (provision) for income taxes,
minority interests, equity in earnings of non-consolidated
entities and discontinued operations 2,213 6,935
Benefit (provision) for income taxes 73 (96)
Minority interests (493) (828)
Equity in earnings of non-consolidated entities 1,245 1,425
--------- ---------
Income from continuing operations 3,038 7,436
--------- ---------
Discontinued operations, net of minority interest and taxes:
Income from discontinued operations 799 1,376
Debt satisfaction charge (78) --
Impairment charge -- (30)
Gains on sales of properties 2,319 744
--------- ---------
Total discontinued operations 3,040 2,090
--------- ---------
Net income 6,078 9,526
Dividends attributable to preferred shares - Series B (1,590) (1,590)
Dividends attributable to preferred shares - Series C (2,519) (2,519)
---------- ----------
Net income allocable to common shareholders $ 1,969 $ 5,417
========= =========
Income (loss) per common share - basic:
Income (loss) from continuing operations $ (0.02) $ 0.07
Income from discontinued operations 0.06 0.04
--------- ---------
Net income $ 0.04 $ 0.11
========= =========
Weighted average common shares outstanding - basic 51,844,001 48,350,656
========== ==========
Income (loss) per common share - diluted:
Income (loss) from continuing operations $ (0.02) $ 0.07
Income from discontinued operations 0.06 0.04
--------- ---------
Net income $ 0.04 $ 0.11
========= =========
Weighted average common shares outstanding - diluted 51,844,001 48,429,945
========== ==========
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 months ended March 31, 2006 and 2005
(Unaudited and in thousands)
Three Months Ended
March 31,
2006 2005
---- ----
Net income allocable to common shareholders: $ 1,969 $ 5,417
Other comprehensive loss:
Foreign currency translation adjustment (150) --
--------- ---------
Comprehensive income $ 1,819 $ 5,417
========= =========
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
Three months ended March 31, 2006 and 2005
(Unaudited and in thousands)
2006 2005
---- ----
Net cash provided by operating activities $ 25,967 $ 25,462
---------- ----------
Cash flows from investing activities:
Investment in properties, including intangibles (45,421) (21,293)
Collection of notes receivable from affiliate -- 45,800
Net proceeds from sale/transfer of properties 14,091 4,075
Collection of note receivable - non affiliate -- 3,488
Real estate deposits, net (1,717) (42,925)
Investment in and advances to non-consolidated
entities, net 206 2,302
Increase in deferred leasing costs (453) (1,208)
Decrease (increase) in escrow deposits 205 (696)
---------- ----------
Net cash used in investing activities (33,089) (10,457)
---------- ----------
Cash flows from financing activities:
Dividends to common and preferred shareholders (23,323) (19,731)
Principal payments on debt, excluding
normal amortization (11,420) (752)
Dividend reinvestment plan proceeds 3,607 3,695
Principal amortization payments (9,821) (6,670)
Debt deposits -- (5,966)
Proceeds of mortgages and notes payable 57,535 --
Increase in deferred financing costs, net (820) --
Contributions from minority partners 810 --
Cash distributions to minority partners (1,936) (1,737)
Proceeds from the sale of common and preferred
shares, net 253 19,832
Common shares/partnership units repurchased -- (82)
---------- ----------
Net cash provided by (used in) financing
activities 14,885 (11,411)
---------- ----------
Change in cash and cash equivalents 7,763 3,594
Cash and cash equivalents, at beginning of period 53,515 146,957
---------- ----------
Cash and cash equivalents, at end of period $ 61,278 $ 150,551
========== ==========
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
March 31, 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 March 31, 2006,
the Company had an ownership interest in 190 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
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 SFAS No. 123, (revised 2004) Share-Based Payment ("SFAS 123R"),
which supersedes 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 Statement 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 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 No. 153 is 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 is 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 is 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 will apply 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.
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. Above-market leases are recorded as
part of intangible assets and amortized as a direct charge against
rental revenue over the non-cancelable portion of the respective leases.
The aggregate value of other acquired intangible assets, consisting of
in-place leases and tenant relationships, is measured by the excess of
(i) the purchase price paid for a property over (ii) the estimated fair
value of the property as if vacant, determined as set forth above. This
aggregate value is allocated between in-place lease values and tenant
relationships based on management's evaluation of the specific
characteristics of each tenant's lease. The value of in-place leases and
customer relationships are amortized to expense over the remaining
non-cancelable periods of the respective leases.
Revenue Recognition. The Company recognizes revenue in accordance with
Statement of Financial Accounting Standards No. 13 Accounting for
Leases, as amended ("SFAS 13"). SFAS 13 requires that revenue be
recognized on a straight-line basis over the term of the lease unless
another systematic and rational basis is more representative of the time
pattern in which
7
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.
Gains on sales of real estate are recognized pursuant to the provisions
of Statement of Financial Accounting Standards No. 66 Accounting for
Sales of Real Estate, as amended ("SFAS 66"). The specific timing of the
sale is measured against various criteria in SFAS 66 related to the
terms of the transactions and any continuing involvement in the form of
management or financial assistance associated with the properties. If
the sales criteria are not met, the gain is deferred and the finance,
installment or cost recovery method, as appropriate, is applied until
the sales criteria are met.
Accounts Receivable. The Company continuously monitors collections from
its tenants and would make a provision for estimated losses based upon
historical experience and any specific tenant collection issues that the
Company has identified. As of March 31, 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 Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, as amended ("SFAS 144") has occurred to
determine if an impairment has occurred which would require the
recognition of a loss. The evaluation includes reviewing anticipated
cash flows of the property, based on current leases in place, and an
estimate of what lease rents will be if the property is vacant coupled
with an estimate of proceeds to be realized upon sale. However,
estimating market lease rents and future sale proceeds is highly
subjective and such estimates could differ materially from actual
results.
Depreciation is determined by the straight-line method over the
remaining estimated economic useful lives of the properties.
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.
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 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 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 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 (loss), 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
8
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 Ended March 31,
2006 2005
----------- -----------
Net income allocable to common shareholders,
as reported - basic $ 1,969 $ 5,417
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
--------- ---------
Pro forma net income - basic $ 1,969 $ 5,415
========= =========
Net income per share - basic
Basic - as reported $ 0.04 $ 0.11
========= =========
Basic - pro forma $ 0.04 $ 0.11
========= =========
Net income allocable to common shareholders,
as reported - diluted $ 1,969 $ 5,417
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
--------- ---------
Pro forma net income - diluted $ 1,969 $ 5,415
========= =========
Net income per share - diluted
Diluted - as reported $ 0.04 $ 0.11
========= =========
Diluted - pro forma $ 0.04 $ 0.11
========= =========
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) 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) 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, 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 March 31, 2006, there are 826,408 awards available to be issued to
employees under the Company's equity award plans. In addition, the
Company has $18,886 in unrecognized compensation cost that will be
charged to compensation cost over an average of approximately 4.1 years.
9
Common share option activity for the three months ended March 31, 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 March 31, 2006 18,500 $ 15.55 .9
========= ======== ====
Non-vested share activity for the three months ended March 31, 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
Vested (55,933) 20.43
---------- --------
Balance at March 31, 2006 897,150 $ 21.05
========= ========
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
months ended March 31, 2006 and 2005:
Three months ended
March 31,
2006 2005
--------- ---------
BASIC
Income from continuing operations $ 3,038 $ 7,436
Less preferred dividends (4,109) (4,109)
---------- ----------
Income (loss) allocable to common
shareholders from continuing operations (1,071) 3,327
Total income from discontinued operations 3,040 2,090
--------- ---------
Net income allocable to common shareholders $ 1,969 $ 5,417
========== ==========
Weighted average number of common shares
outstanding 51,844,001 48,350,656
========== ==========
Income (loss) per common share - basic:
Income (loss) from continuing operations $ (0.02) $ 0.07
Income from discontinued operations 0.06 0.04
--------- ---------
Net income $ 0.04 $ 0.11
========== ==========
DILUTED
Income (loss) allocable to common
shareholders from continuing operations - basic $ (1,071) $ 3,327
Incremental income attributed to assumed
conversion of dilutive securities -- --
--------- ---------
Income (loss) allocable to common
shareholders from continuing operations (1,071) 3,327
Total income from discontinued operations 3,040 2,090
--------- ---------
Net income allocable to common shareholders $ 1,969 $ 5,417
========== ==========
Weighted average number of common shares
used in calculation of basic earnings per
share 51,844,001 48,350,656
Add incremental shares representing:
Shares issuable upon exercise of
employee share options -- 79,289
Shares issuable upon conversion of
dilutive securities -- --
---------- ----------
Weighted average number of shares used in
calculation of diluted earnings per common
share 51,844,001 48,429,945
========== ==========
Income (loss) per common share - diluted:
Income (loss) from continuing operations $ (0.02) $ 0.07
Income from discontinued operations 0.06 0.04
--------- ---------
Net income $ 0.04 $ 0.11
========== ==========
11
(4) Investments in Real Estate
During the three months ended March 31, 2006, the Company acquired one
property in the Netherlands for a capitalized cost of $40,061 and
allocated $15,716 of the purchase price to intangible assets.
(5) Discontinued Operations
During the three months ended March 31, 2006, the Company sold two
properties for an aggregate sales price of $28,900 resulting in a gain
of $2,319. As of March 31, 2006, the Company had five properties held
for sale.
The following presents the operating results for the properties sold and
properties held for sale for the applicable periods:
Three Months Ended March 31,
2006 2005
----------- ------------
Rental revenues $ 1,596 $ 2,394
Pre-tax income, including gains on sale $ 3,090 $ 2,090
(6) Investment in Non-Consolidated Entities
As of March 31, 2006, the Company has investments in eight
non-consolidated entities.
During the three months ended March 31, 2006, one of these entities
purchased a property for $4,776.
During the three months ended March 31, 2006, one of the
non-consolidated entities obtained two separate mortgages encumbering
two properties aggregating $17,500 with a stated interest rate of 5.61%
and a maturity date of April 2016.
During the three months ended March 31, 2005, one entity repaid $45,800
in advances made by the Company.
The following is summary combined balance sheet data as of March 31,
2006 and income statement data for the three months ended March 31, 2006
and 2005 for the Company's non-consolidated entities:
2006
----
Real estate, net $ 1,376,366
Intangibles, net $ 152,853
Mortgages payable $ 1,008,927
2006 2005
---- ----
Gross revenues $ 41,972 $ 30,128
Expenses, net 39,563 25,303
--------- ---------
Net income $ 2,409 $ 4,825
========= =========
The Company earned advisory fees of $1,044 and $615 relating to these
entities for the three months ended March 31, 2006 and 2005,
respectively.
(7) Mortgages and Notes Payable
During 2006, the Company refinanced its Dillon, South Carolina property.
The Company repaid the existing debt on the property of $11,420 and
incurred debt satisfaction charges of approximately $904.
During 2006, the Company obtained the following mortgages:
Property Amount Rate Maturity
-------- ------ ---- --------
Dillon, South Carolina $ 23,750 5.97% 2022
Renswoude, Netherlands 33,785 5.31% 2011
In addition, the purchaser of a property assumed a $14,170 mortgage note
in connection with the sale by the Company.
12
(8) Concentration of Risk
The Company seeks to reduce its operating and leasing risks through
diversification achieved by the geographic distribution of its
properties, tenant industry diversification, avoiding dependency on a
single property and the creditworthiness of its tenants. For the three
months ended March 31, 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 March 31, 2006, Dana disaffirmed a lease on a property owned by a
non-consolidated entity and has not indicated their intention as it
relates to the other 10 leases (See Note 12). For the three months ended
March 31, 2006, the properties leased to Dana generated $3,198 in rental
revenues, including the Company's proportionate share of
non-consolidated entities. The Company has not recorded any allowance
for doubtful accounts or impairment charges on its real estate as it
relates to Dana.
Cash and cash equivalent balances may exceed insurable amounts. The
Company believes it mitigates risk by investing in or through major
financial institutions.
(9) Minority Interests
In conjunction with several of the Company's acquisitions in prior
years, sellers were given units in LCIF, LCIF II, or Net 3 as a form of
consideration. All of such interests are redeemable at certain times,
only at the option of the holders, for 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 March 31, 2006, there were 5,629,916 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 $11,186 and $9,273 as of March 31, 2006 and December 31, 2005,
respectively.
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 March 31, 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 $36,811.
(11) Supplemental Disclosure of Statement of Cash Flow Information
During the three months ended March 31, 2006 and 2005, the Company paid
$21,057 and $14,732, respectively, for interest and $328 and $1,061,
respectively, for income taxes.
During the three months ended March 31, 2006 and 2005, holders of an
aggregate of 90,155 and 30,528, repectively, operating partnership units
redeemed such units for common shares of the Company. These redemptions
resulted in an increase in shareholders' equity and corresponding
decrease in minority interest of $1,020 and $354, respectively.
During the three months ended March 31, 2006 and 2005, the Company
recognized $1,816 and $1,015, respectively in compensation relating to
share grants to trustees and employees.
During the three months ended March 31, 2006, the Company sold a
property in which the seller assumed a mortgage note encumbering the
property in the amount of $14,170.
13
(12) Subsequent Events
In April 2006, the Company sold a property in Ocala, Florida, which was
classified as held for sale as of March 31, 2006, for a gross sales
price of $29,000 and satisfied the associated mortgage of $12,083.
In April 2006, a non-consolidated entity in which the Company has a 30%
interest, purchased and leased back a property in Dallas, Texas to
Hagger Clothing Corporation for $28,250. The lease expires in 2016.
In April 2006, the Company sold a property in Voorhees, New Jersey,
which was classified as held for sale as of March 31, 2006, for a gross
sales price of $6,400. The Company provided the purchaser an 11 year,
$3,200 mortgage note which bears interest at 6.00% and matures in 2017.
The carrying value of the property was $3,260 at March 31, 2006.
In May 2006, Dana filed a motion in the bankruptcy court to disaffirm
its lease on the Company's property in Farmington Hills, Michigan.
During the three months ended March 31, 2006 the Company's proportionate
share of rental revenue for this property and one previously disaffirmed
by Dana was $706. As of March 31, 2006, the Company had a deferred rent
receivable of $101 and a current rent receivable of $255 (including the
Company's proportionate share from a non-consolidated entity) from Dana
for the two disaffirmed leases.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Forward-Looking Statements
--------------------------
The following is a discussion and analysis of the Company's consolidated
financial condition and results of operations for the three month periods ended
March 31, 2006 and 2005, and 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 include this statement for
purposes of complying with these safe harbor provisions. Forward-looking
statements, which are based on certain assumptions and describe the Company's
future plans, strategies and expectations, are generally identifiable by use of
the words "believes," "expects," "intends," "anticipates," "estimates,"
"projects" or similar expressions. Readers should not rely on forward-looking
statements since they involve known and unknown risks, uncertainties and other
factors which are, in some cases, beyond the Company's control and which could
materially affect actual results, performances or achievements. In particular,
among the factors that could cause actual results to differ materially from
current expectations include, but are not limited to, (i) the failure to
continue to qualify as a real estate investment trust, (ii) changes in general
business and economic conditions, (iii) competition, (iv) increases in real
estate construction costs, (v) changes in interest rates, (vi) changes in
accessibility of debt and equity capital markets and other risks inherent in the
real estate business, including, but not limited to, tenant defaults, potential
liability relating to environmental matters, the availability of suitable
acquisition opportunities and illiquidity of real estate investments, (vii)
changes in governmental laws and regulations, and (viii) increases in operating
costs. The Company undertakes no obligation to publicly release the results of
any revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Accordingly, there is no assurance that the Company's
expectations will be realized.
General
-------
The Company, which has elected to qualify as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended, acquires, owns and
manages net-leased commercial properties. The Company believes that it has
operated as a REIT since October 1993.
As of March 31, 2006, the Company owned, or had interests in, 190 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 both very important to the
portrayal of the Company's financial condition and results of operations and
which require some of management's most difficult, subjective and complex
judgments. The accounting for these matters involves the making of estimates
based on current facts, circumstances and assumptions which could change in a
manner that would materially affect management's future estimate with respect to
such matters. Accordingly, future reported financial conditions and results
could differ materially from financial conditions and results reported based on
management's current estimates.
Purchase Accounting for Acquisition of Real Estate. The Company allocates the
purchase price of real estate acquired in accordance with SFAS 141. The fair
value of the real estate acquired, which includes the impact of mark-to-market
adjustments for assumed mortgage debt related to property acquisitions, is
allocated to the acquired tangible assets, consisting of land, building and
improvements, fixtures and equipment and identified intangible assets and
liabilities, consisting of the value of above-market and below-market leases,
other value of in-place leases and value of tenant relationships, based in each
case on their fair values.
The fair value of the tangible assets of an acquired property (which includes
land, building and improvements and fixtures and equipment) is determined by
valuing the property as if it were vacant, and the "as-if-vacant" value is then
allocated to land, building and improvements and fixtures and equipment based on
management's determination of relative fair values of these assets. Factors
considered by management in performing these analyses include an estimate of
carrying costs during the expected lease-up periods considering current market
conditions and costs to execute similar leases. In estimating carrying costs,
management includes real
15
estate taxes, insurance and other operating expenses and estimates of lost
rental revenue during the expected lease-up periods based on current market
demand. Management also estimates costs to execute similar leases including
leasing commissions.
In allocating the fair value of the identified intangible assets and liabilities
of an acquired property, above-market and below-market in-place lease values are
recorded based on the difference between the current in-place lease rent and a
management estimate of current market rents. Below-market lease intangibles are
recorded as part of deferred revenue and amortized into rental revenue over the
non-cancelable periods of the respective leases. Above-market leases are
recorded as part of intangible assets and amortized as a direct charge against
rental revenue over the non-cancelable portion of the respective leases.
The aggregate value of other acquired intangible assets, consisting of in-place
leases and tenant relationships, is measured by the excess of (i) the purchase
price paid for a property over (ii) the estimated fair value of the property as
if vacant, determined as set forth above. This aggregate value is allocated
between in-place lease values and tenant relationships based on management's
evaluation of the specific characteristics of each tenant's lease. The value of
in-place leases and customer relationships are amortized to expense over the
remaining non-cancelable periods of the respective leases.
Revenue Recognition. The Company recognizes revenue in accordance with Statement
of Financial Accounting Standards No. 13 Accounting for Leases, as amended
("SFAS 13"). SFAS 13 requires that revenue be recognized on a straight-line
basis over the term of the lease unless another systematic and rational basis is
more representative of the time pattern in which the use benefit is derived from
the leased property. 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.
Gains on sales of real estate are recognized pursuant to the provisions of
Statement of Financial Accounting Standards No. 66 Accounting for Sales of Real
Estate, as amended ("SFAS 66"). The specific timing of the sale is measured
against various criteria in SFAS 66 related to the terms of the transactions and
any continuing involvement in the form of management or financial assistance
associated with the properties. If the sales criteria are not met, the gain is
deferred and the finance, installment or cost recovery method, as appropriate,
is applied until the sales criteria are met.
Accounts Receivable. The Company continuously monitors collections from its
tenants and would make a provision for estimated losses based upon historical
experience and any specific tenant collection issues that the Company has
identified. As of March 31, 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 Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, as amended ("SFAS 144") has occurred to determine if an impairment has
occurred which would require the recognition of a loss. The evaluation includes
reviewing anticipated cash flows of the property, based on current leases in
place, and an estimate of what lease rents will be if the property is vacant
coupled with an estimate of proceeds to be realized upon sale. However,
estimating market lease rents and future sale proceeds is highly subjective and
such estimates could differ materially from actual results.
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 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. 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
liabilities are measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or settled.
Properties Held For Sale. The Company accounts for properties held for sale in
accordance with Statement of Financial Accounting Standards No. 144, as amended,
Accounting for the Impairment or Disposal of Long-Lived Assets ("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.
Basis of Consolidation. The Company determines whether an entity for which it
holds an interest should be consolidated pursuant to FASB Interpretation No. 46
Consolidation of Variable Interest Entities ("FIN 46R"). FIN 46R requires the
Company to evaluate
16
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 March 31, 2006, the Company's real estate assets were
located in 39 states and the Netherlands and contained an aggregate of
approximately 40.3 million square feet of net rentable space. The properties are
generally subject to triple net leases, which are generally characterized as
leases in which the tenant pays all or substantially all of the cost and cost
increases for real estate taxes, capital expenditures, insurance, utilities and
ordinary maintenance of the property. Approximately 97.6% of square feet is
subject to a lease.
During the three months ended March 31, 2006, the Company purchased one property
for $40.1 million and sold two properties to third parties resulting in a net
gain of $2.3 million.
The Company's principal sources of liquidity are revenues generated from the
properties, interest on cash balances, amounts available under its unsecured
credit facility and amounts that may be raised through the sale of securities in
private or public offerings. For the three months ended March 31, 2006, the
leases on the consolidated properties generated $48.5 million in gross rental
revenue compared to $35.5 million during the same period in 2005.
In March 2006, Dana Corporation ("Dana"), a tenant in 11 properties, including
non-consolidated entities, filed for Chapter 11 bankruptcy. As of March 31,
2006, Dana disaffirmed a lease on a property owned by a non-consolidated entity.
In May 2006, Dana filed a motion to disaffirm a lease on a consolidated
property. Dana has not indicated their intention as it relates to the other 9
leases. For the three months ended March 31, 2006 the properties leased to Dana
generated $3.2 million in rental revenues, including the Company's proportionate
share of non-consolidated entities. The Company's proportionate share of rental
revenues for the two leases disaffirmed by Dana was $0.7 million for the three
months ended March 31, 2006. For the two leases disaffirmed by Dana the Company
was owed $0.4 million in current and deferred rent (including the Company's
proportionate share of non-consolidated entities) as of March 31, 2006. As of
March 31, 2006, the Company has not recorded any allowance for doubtful accounts
or impairment charges on its real estate (due to the nature and location of the
properties) as it relates to Dana.
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 April 28, 2006, payable on May 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 April 28, 2006, payable on May
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 April 28, 2006,
payable on May 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 three months
ended March 2006 and 2005, was $23.3 million and $19.7 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 $26.0 million and $25.5 million for the three months ended March
31, 2006 and 2005, respectively.
Net cash used in investing activities totaled $33.1 million and $10.5 million
for the three months ended March 31, 2006 and 2005, respectively. Cash used in
investing activities was primarily attributable to the acquisition of and
deposits made for real estate and the investment in non-consolidated entities.
Cash provided by investing activities relates primarily to the sale of
properties and the collection of notes receivable. Therefore, the fluctuation in
investing activities relates primarily to the timing of investments and
dispositions.
Net cash provided by (used in) financing activities totaled $14.9 million and
$(11.4) million for the three months ended March 31, 2006 and 2005,
respectively. Cash used in financing activities was primarily attributable to
dividends (net of proceeds reinvested
17
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 March 31,
2006, there were 5,629,916 operating partnership units, of which 1,666,720
partnership units are held by two executive officers of the Company. 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.
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 March 31, 2006,
the Company was in compliance with all covenants, there were no borrowings
outstanding, $198.5 million was available to be borrowed and $1.5 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 March 31,
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 $18.4 million, $36.4
million, $31.2 million, $32.4 million and $31.2 million, respectively. As of
March 31, 2006, the estimated scheduled balloon payments for the remainder of
2006 and for 2007, 2008, 2009 and 2010 are $11.9 million, $0 million, $59.0
million, $47.7 million and $56.6 million, respectively. The Company has informed
the lender on the mortgage note due in 2006 that it will no longer make debt
service payments, including the balloon amount of $11.9 million, and will convey
the property collaterizing the mortgage to the lender. As of March 31, 2006, the
net carrying value of the encumbered property and escrowed deposits was $6.1
million.
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. 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 obligation for each of the next five years is approximately $1.2
million.
Capital Expenditures. Due to the triple net lease structure, the Company does
not incur significant expenditures in the ordinary course of business to
maintain its properties. However, in the future, as leases expire, the Company
expects to incur costs in extending the existing tenant lease or re-tenanting
the properties. The amounts of these expenditures can vary significantly
depending on tenant negotiations, market conditions and rental rates. These
expenditures are expected to be funded from operating cash flows or borrowings
on the unsecured revolving credit facility. As of March 31, 2006, the Company,
including its 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 $36.8 million.
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.
18
Results of Operations
Three months ended March 31, 2006 compared with March 31, 2005
--------------------------------------------------------------
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 2006 of $17.0 million, $13.0 million is attributable
to rental revenue. The remaining $4.0 million increase in gross revenues in 2006
was primarily attributable to an increase in advisory fees of $0.4 million and a
$3.6 million increase in tenant reimbursements. The increase in interest and
amortization expense of $5.7 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 $5.3 million is primarily due to an increase in
properties for which the Company has operating expense responsibility and an
increase in vacancy. The increase in depreciation and amortization of $8.7
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 $1.3 million is due primarily to an increase in
the recognition of share based compensation and personnel costs ($1.2 million).
Debt satisfaction charge of $1.0 million relates primarily to the costs incurred
in the refinancing of a property. Minority interest expense decreased $0.3
million due to a decrease in earnings at the partnership level. Net income
decreased in 2006 by $3.4 million primarily due to the net impact of items
discussed above offset by an increase of $1.0 million in income from
discontinued operations. The total discontinued operations increase of $1.0
million is comprised of an increase in gains on sales of properties of $1.6
million offset by a decrease of $0.6 million in income from discontinued
operations. Net income applicable to common shareholders decreased by $3.4
million due to the items discussed above.
The increase in net income in future periods will be closely tied to the level
of acquisitions made by the Company. Without acquisitions, which in addition to
generating rental revenue, generate acquisition, debt placement and asset
management fees from non-consolidated entities, the sources of growth in net
income are limited to index adjusted rents (such as the consumer price index),
percentage rents, reduced interest expense on amortizing mortgages and by
controlling other variable overhead costs. However, there are many factors
beyond management's control that could offset these items including, without
limitation, increased interest rates and tenant monetary defaults.
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 (loss) (computed in accordance with
generally accepted accounting principles), excluding gains (or losses) from
sales of property, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. Adjustments for unconsolidated
partnerships and joint ventures will be calculated to reflect funds from
operations on the same basis." FFO should not be considered an alternative to
net income as an indicator of operating performance or to cash flows from
operating activities as determined in accordance with generally accepted
accounting principles, or as a measure of liquidity to other consolidated income
or cash flow statement data as determined in accordance with generally accepted
accounting principles.
The following table reconciles net income allocable to common shareholders to
the Company's FFO for the three months ended March 31, 2006 and 2005 ($000's):
2006 2005
-------- --------
Net income allocable to common
shareholders $ 1,969 $ 5,417
Adjustments:
Depreciation and amortization 20,127 11,789
Minority interests' share of net
income 687 857
Amortization of leasing commissions 139 124
Gains on sale of properties (2,319) (744)
Taxes incurred on sale of property 49 --
Joint venture adjustment -
depreciation 5,482 3,148
Preferred share dividend - Series C 2,519 2,519
--------- ---------
Funds From Operations $ 28,653 $ 23,110
======== ========
Cash flows from operating activities 25,967 25,462
Cash flows from investing activities (33,089) (10,457)
Cash flows from financing activities 14,885 (11,411)
19
Off-Balance Sheet Arrangements
------------------------------
Non-Consolidated Real Estate Entities. As of March 31, 2006, the Company has
investments in various real estate entities with varying structures. 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 unaudited condensed consolidated financial statements for combined
summary balance sheet and income statement data relating to these entities.
20
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 March 31, 2006 and 2005, the Company's variable rate
indebtedness was $11,870 and $13,200, respectively, which represented 1.0% and
1.7% of total long-term indebtedness, respectively. During the three months
ended March 31, 2006 and 2005, this variable rate indebtedness had a weighted
average interest rate of 8.3% and 6.1%, respectively. Had the weighted average
interest rate been 100 basis points higher, the Company's net income for the
three months ended March 31, 2006 and 2005 would have been reduced by
approximately $30 and $33, respectively. As of March 31, 2006 and 2005, the
Company's fixed rate debt was $1,180,164 and $745,287, respectively, which
represented 99.0% and 98.3%, respectively, of total long-term indebtness. The
weighted average interest rate as of March 31, 2006 of fixed rate debt was 6.0%,
which is approximately 39 basis points higher than the fixed rate debt incurred
by the Company during the three months ended March 31, 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 $2,927 for the three
months ended March 31, 2006 and by $1,872 for the three months ended March 31,
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.
21
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 - not
applicable.
ITEM 5. Other Information - not applicable.
ITEM 6. Exhibits
31.1 Certification of Chief Executive Officer pursuant to rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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.
22
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Lexington Corporate Properties Trust
Date: May 5, 2006 By: /s/ T. Wilson Eglin
------------------------------------------
T. Wilson Eglin
Chief Executive Officer, President and Chief
Operating Officer
Date: May 5, 2006 By: /s/ Patrick Carroll
------------------------------------------
Patrick Carroll
Chief Financial Officer, Executive Vice President
and Treasurer
23