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, 2005. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition period from _________________ to ________________ Commission File Number 1-12386 LEXINGTON CORPORATE PROPERTIES TRUST ------------------------------------------------ (Exact name of registrant as specified in its charter) Maryland 13-3717318 ------------------------------ ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Penn Plaza - Suite 4015 New York, NY 10119 ------------------------------ ----------- (Address of principal executive offices) (Zip code) (212) 692-7200 ----------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). Yes x No --- --- Indicate the number of shares outstanding of each of the registrant's classes of common shares, as of the latest practicable date: 51,801,514 common shares, par value $.0001 per share on August 4, 2005.
PART 1. - FINANCIAL INFORMATION ------------------------------- ITEM 1. FINANCIAL STATEMENTS ---------------------------- LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 2005 (Unaudited) and December 31, 2004 (in thousands, except share and per share data) <TABLE> <CAPTION> June 30, December 31, 2005 2004 ------------------- ------------------- <S> <C> <C> Assets: Real estate, at cost $ 1,899,774 $ 1,407,872 Less: accumulated depreciation and amortization 200,371 180,610 ------------------- ------------------- 1,699,403 1,227,262 Properties held for sale - discontinued operations 52,975 13,216 Cash and cash equivalents 42,380 146,957 Investment in non-consolidated entities 159,387 132,738 Deferred expenses, net 13,316 7,860 Notes receivable from affiliate - 45,800 Rent receivable - current 4,392 4,123 Rent receivable - deferred 24,807 23,923 Intangible assets, net 139,119 54,736 Other assets, net 48,470 40,471 ------------------- ------------------- $ 2,184,249 $ 1,697,086 =================== =================== Liabilities and Shareholders' Equity: Mortgages and notes payable $ 1,121,834 $ 765,144 Credit facility 99,000 - Liabilities - discontinued operations 16,753 1,688 Accounts payable and other liabilities 10,940 12,406 Accrued interest payable 5,777 5,808 Deferred revenue 5,814 4,173 Prepaid rent 6,548 3,818 ------------------- ------------------- 1,266,666 793,037 Minority interests 57,413 56,759 ------------------- ------------------- 1,324,079 849,796 ------------------- ------------------- Commitments and contingencies (note 11) Shareholders' equity: Preferred shares, par value $0.0001 per share; authorized 10,000,000 shares, Series B Cumulative Redeemable Preferred, liquidation preference $79,000, 3,160,000 shares issued and outstanding 76,315 76,315 Series C Cumulative Convertible Preferred, liquidation preference $155,000 and $135,000 in 2005 and 2004, respectively, 3,100,000 and 2,700,000 shares issued and outstanding in 2005 and 2004, respectively 150,588 131,126 Common shares, par value $0.0001 per share; authorized 160,000,000 and 80,000,000 shares, in 2005 and 2004, respectively, 49,301,514, and 48,621,273 shares issued and outstanding in 2005 and 2004, respectively 5 5 Additional paid-in-capital 781,017 766,882 Deferred compensation, net (13,351) (8,692) Accumulated distributions in excess of net income (134,404) (118,346) ------------------- ------------------- Total shareholders' equity 860,170 847,290 ------------------- ------------------- $ 2,184,249 $ 1,697,086 =================== =================== </TABLE> 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, 2005 and 2004 (Unaudited and in thousands, except share and per share data) <TABLE> <CAPTION> Three Months ended June 30, Six Months ended June 30, 2005 2004 2005 2004 -------------- ---------------- -------------- -------------- <S> <C> <C> <C> <C> Gross revenues: Rental $ 46,208 $ 34,693 $ 82,967 $ 65,309 Advisory fees 2,556 777 3,191 1,727 Tenant reimbursements 2,106 1,347 2,994 2,794 -------------- ---------------- -------------- -------------- Total gross revenues 50,870 36,817 89,152 69,830 Expense applicable to revenues: Depreciation and amortization (18,111) (8,598) (29,874) (15,731) Property operating (4,919) (2,229) (7,565) (4,451) General and administrative (4,663) (2,537) (9,011) (6,008) Non-operating income 206 640 892 756 Interest and amortization expense (16,426) (12,315) (29,096) (21,643) Debt satisfaction gain, net 4,632 - 4,632 - -------------- ---------------- -------------- -------------- Income before benefit (provision) for income taxes, minority interests, equity in earnings of non- consolidated entities and discontinued operations 11,589 11,778 19,130 22,753 Benefit (provision) for income taxes 29 (595) (67) (1,467) Minority interests (1,497) (1,188) (2,347) (2,394) Equity in earnings of non-consolidated entities 1,334 1,717 2,759 3,521 -------------- ---------------- -------------- -------------- Income from continuing operations 11,455 11,712 19,475 22,413 -------------- ---------------- -------------- -------------- Discontinued operations, net of minority interest: Income from discontinued operations 769 1,056 1,562 2,329 Impairment charges (592) (478) (623) (2,212) Gains on sales of properties 4,317 2,327 5,061 4,065 -------------- ---------------- -------------- -------------- Total discontinued operations 4,494 2,905 6,000 4,182 -------------- ---------------- -------------- -------------- Net income 15,949 14,617 25,475 26,595 Dividends attributable to preferred shares - Series B (1,590) (1,590) (3,180) (3,180) Dividends attributable to preferred shares - Series C (2,519) - (5,038) - -------------- ---------------- -------------- -------------- Net income allocable to common shareholders $ 11,840 $ 13,027 $ 17,257 $ 23,415 ============== ================ ============== ============== Income per common share-basic: Income from continuing operations $ 0.15 $ 0.21 $ 0.23 $ 0.43 Income from discontinued operations $ 0.09 $ 0.06 $ 0.12 $ 0.09 -------------- ---------------- -------------- -------------- Net income $ 0.24 $ 0.27 $ 0.35 $ 0.52 ============== ================ ============== ============== Weighted average common shares outstanding-basic 48,593,332 47,704,823 48,472,665 45,089,816 ============== ================ ============== ============== Income per common share-diluted: Income from continuing operations $ 0.14 $ 0.21 $ 0.22 $ 0.43 Income from discontinued operations $ 0.08 $ 0.06 $ 0.11 $ 0.09 -------------- ---------------- -------------- -------------- Net income $ 0.22 $ 0.27 $ 0.33 $ 0.52 ============== ================ ============== ============== Weighted average common shares outstanding-diluted 53,982,652 47,805,758 53,858,805 45,224,600 ============== ================ ============== ============== </TABLE> The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3
LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six months ended June 30, 2005 and 2004 (Unaudited and in thousands) <TABLE> <CAPTION> 2005 2004 ---------------------- --------------------- <S> <C> <C> Net cash provided by operating activities $ 53,857 $ 46,866 ---------------------- --------------------- Cash flows from investing activities: Investment in convertible mortgage note - (19,800) Investment in real estate properties, including intangibles (665,447) (79,225) Collection of notes receivable from affiliate 45,800 - Net proceeds from sale/transfer of properties 19,623 58,450 Collection of note receivable - non-affiliate 3,488 - Real estate deposits, net - (3,713) Investment in and advances to non-consolidated entities, net (25,408) (30,431) Distribution of loan proceeds from non-consolidated entities - 12,996 Increase in leasing costs (2,080) (189) Increase in escrow deposits (1,934) (5,551) ---------------------- --------------------- Net cash used in investing activities (625,958) (67,463) ---------------------- --------------------- Cash flows from financing activities: Dividends to common and preferred shareholders (41,533) (34,391) Principal payments on debt, excluding normal amortization (16,252) (1,264) Dividend reinvestment plan proceeds 6,848 5,213 Change in credit facility borrowings, net 99,000 (94,000) Principal amortization payments (12,489) (10,009) Debt deposits - (2,162) Proceeds of mortgages and notes payable 418,845 124,940 Contribution from minority partner 1,692 - Increase in deferred costs, net (4,849) (934) Cash distributions to minority partners (3,488) (5,603) Proceeds from the sale of common and preferred shares, net 19,832 144,564 Origination fee amortization payments - (29) Common shares/partnership units repurchased (82) - ---------------------- --------------------- Net cash provided by financing activities 467,524 126,325 ---------------------- --------------------- Change in cash and cash equivalents (104,577) 105,728 Cash and cash equivalents, at beginning of period 146,957 15,923 ---------------------- --------------------- Cash and cash equivalents, at end of period $ 42,380 $ 121,651 ====================== ===================== </TABLE> The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4
LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005 (Unaudited and dollars in thousands, except per share data) (1) The Company ----------- Lexington Corporate Properties Trust (the "Company") is a self-managed and self-administered real estate investment trust ("REIT") that acquires, owns and manages a geographically diversified portfolio of net leased office, industrial and retail properties. As of June 30, 2005, the Company had an ownership interest in 185 properties and managed an additional two properties. The real properties owned by the Company are generally subject to triple net leases to corporate tenants. Of the Company's 185 properties, fourteen provide for operating expense stops, one is a modified gross lease and three are not leased. The Company believes it has qualified as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, the Company will not be subject to federal income tax, provided that distributions to its shareholders equal at least the amount of its REIT taxable income as defined under the Code. The Company is permitted to participate in certain activities which it was previously precluded from in order to maintain its qualification as a REIT, so long as these activities are conducted in entities which elect to be treated as taxable REIT subsidiaries ("TRS") under the Code. As such, the TRS will be subject to federal income taxes on the income from these activities. The unaudited financial statements reflect all adjustments, which are, in the opinion of management, necessary to present a fair statement of the financial condition and results of operations for the interim periods. For a more complete understanding of the Company's operations and financial position, reference is made to the financial statements (including the notes thereto) previously filed with the Securities and Exchange Commission with the Company's Annual Report on Form 10-K for the year ended December 31, 2004. (2) Summary of Significant Accounting Policies ------------------------------------------ Basis of Presentation and Consolidation. The Company's consolidated financial statements are prepared on the accrual basis of accounting. The financial statements reflect the accounts of the Company and its controlled subsidiaries, including Lepercq Corporate Income Fund L.P. ("LCIF"), Lepercq Corporate Income Fund II L.P. ("LCIF II"), Net 3 Acquisition L.P. ("Net 3"), Lexington Realty Advisors, Inc. ("LRA"), Lexington Contributions, Inc. ("LCI") 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"). If not, and the Company controls the entity's voting shares and similar rights, the entity is consolidated. FIN 46R requires the Company to evaluate whether it has a controlling financial interest in an entity through means other than voting rights. Recently Issued Accounting Pronouncements. FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS 150"), was issued in May 2003. SFAS 150 establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS 150 also includes required disclosures for financial instruments within its scope. For the Company, SFAS 150 was effective for instruments entered into or modified after May 31, 2003 and otherwise was effective as of January 1, 2004, except for mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments, SFAS 150 was effective for the Company on January 1, 2005. The effective date has been deferred indefinitely for certain other types of mandatorily redeemable financial instruments. The Company currently does not have any financial instruments that are within the scope of SFAS 150. In December 2004, the FASB issued SFAS No. 123, (revised 2004) Share-Based Payment ("SFAS No. 123R"), which supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. This Statement 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 No. 123R is effective for fiscal years beginning after January 1, 2006, based on new rules issued by the Securities and Exchange Commission. The impact of adopting this statement is not expected to have a material adverse impact on the Company's financial position or results of operations. 5
In December 2004, the FASB issued Statement No. 153 Exchange of Non-monetary Assets - an amendment of APB Opinion No. 29 ("SFAS No. 153"). The guidance in APB Opinion No. 29, Accounting for Non-monetary Transactions, is based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. The guidance in that opinion, however, included certain exceptions to that principle. This Statement 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. SFAS No. 153 is effective for non-monetary asset exchanges, occurring in fiscal periods beginning after June 15, 2005. The impact of adopting this statement is not expected to have a material adverse impact on the Company's financial position or results of operations. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections" ("SFAS 154") which replaces Accounting Principles Board Opinions No. 20 "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements--An Amendment of APB Opinion No. 28." SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The impact of adopting this statement is not expected to have a material adverse impact on the Company's financial position or results of operations. In June 2005, the FASB ratified the Emerging Issues Task Force's ("EITF") consensus on EITF 04-5, "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 04-5 provides a framework for determining whether a general partner controls, and should consolidate, a limited partnership or a similar entity. It is effective after June 29, 2005, for all newly formed limited partnerships and for any pre-existing limited partnerships that modify their partnership agreements after that date. General partners of all other limited partnerships will apply the consensus no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005. The impact of the adoption of EITF 04-5 is not expected to have a material adverse impact on the Company's financial position or results of operations. In 2005, the EITF released Issue No. 05-6, "Determining the Amortization Period for Leasehold Improvements" (EITF 05-6), which clarifies the period over which leasehold improvements should be amortized. EITF 05-6 requires all leasehold improvements to be amortized over the shorter of the useful life of the assets, or The Applicable Lease Term, as defined. The Applicable Lease Term is determined on the date the leasehold improvements are acquired and includes renewal periods for which exercise is reasonably assured. EITF 05-06 is effective for leasehold improvements acquired in reporting periods beginning after June 29, 2005. The impact of the adoption of EITF 05-6 is not expected to have a material adverse impact on the Company's financial position or results of operations. Use of Estimates. Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses to prepare these consolidated financial statements in conformity with generally accepted accounting principles. The most significant estimates made include the recoverability of accounts receivable (primarily related to straight-line rents), allocation of property purchase price to tangible and intangible assets, the determination of impairment of long-lived assets and the useful lives of long-lived assets. Actual results could differ from those estimates. Purchase Accounting for Acquisition of Real Estate. The fair value of the real estate acquired, which includes the impact of mark-to-market adjustments for assumed mortgage debt related to property acquisitions, is allocated to the acquired tangible assets, consisting of land, building and improvements, fixtures and equipment and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and value of tenant relationships, based in each case on their fair values. The fair value of the tangible assets of an acquired property (which includes land, building and improvements and fixtures and equipment) is determined by valuing the property as if it were vacant, and the "as-if-vacant" value is then allocated to land, building and improvements, and fixtures and equipment based on management's determination of relative fair values of these assets. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions. In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the difference between the current in-place lease rent and a management estimate of current market rents. Below-market lease intangibles are recorded as part of deferred revenue and amortized into rental revenue over the non-cancelable periods of the respective leases. Above-market leases are recorded as part of intangible assets and amortized as a direct charge against rental revenue over the non-cancelable portion of the respective leases. The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the excess of (i) the purchase price paid for a property over (ii) the estimated fair value of the property as if vacant, determined as set forth above. This aggregate value is allocated between in-place lease values and tenant relationships based on management's evaluation of the specific characteristics of each tenant's lease. The value of in-place leases and customer relationships are amortized to expense over the remaining non-cancelable periods of the respective leases. Revenue Recognition. The Company recognizes revenue in accordance with Statement of Financial Accounting Standards No. 13 Accounting for Leases, as amended ("SFAS 13"). SFAS 13 requires that revenue be recognized on a straight-line basis over the term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. Rentals provided for during renewal option periods where the rental terms are lower than those in the primary term are excluded from the calculation of straight line rent if they do not meet the criteria of a bargain renewal option. Gains on sales of real estate are recognized pursuant to the provisions of Statement of Financial Accounting Standards No. 66 Accounting for Sales of Real Estate, as amended ("SFAS 66"). The specific timing of the sale is measured against various criteria in SFAS 66 related to the terms of the transactions and any continuing involvement in the form of management or 6
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, 2005 and December 31, 2004, the Company did not record an allowance for doubtful accounts. Impairment of Real Estate. The Company evaluates the carrying value of all real estate held when a triggering event under Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, as amended ("SFAS 144") has occurred to determine if an impairment has occurred which would require the recognition of a loss. The evaluation includes reviewing anticipated cash flows of the property, based on current leases in place, and an estimate of what lease rents will be if the property is vacant coupled with an estimate of proceeds to be realized upon sale. However, estimating market lease rents and future sale proceeds is highly subjective and such estimates could differ materially from actual results. Depreciation is determined by the straight-line method over the remaining estimated economic useful lives of the properties. Tax Status. The Company and certain of its subsidiaries file a consolidated federal income tax return. The Company has made an election to qualify, and believes it is operating so as to qualify, as a REIT for federal income tax purposes. Accordingly, the Company generally will not be subject to federal income tax, provided that distributions to its shareholders equal at least the amount of its REIT taxable income as defined under 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. Properties Held For Sale. The Company accounts for properties held for sale in accordance with SFAS 144. SFAS 144 requires that the assets and liabilities of properties that meet various criteria in SFAS No. 144 be presented separately in the statement of financial position, with assets and liabilities being separately stated. The operating results of these properties are reflected as discontinued operations in the income statement. Properties that do not meet the held for sale criteria of SFAS No. 144 are accounted for as operating properties. 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 potentially convertible securities. Common Share Options. The Company has elected to continue to account for its option plan under the recognition provision of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees." Accordingly, no compensation cost has been recognized with regard to options granted in the condensed consolidated statements of income. Common share options granted generally vest ratably over a four-year term and expire five years from the date of grant. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding share option awards in each period: 7
<TABLE> <CAPTION> Three Months Ended June 30, Six Months Ended June 30, 2005 2004 2005 2004 ---- <S> <C> <C> <C> <C> Net income allocable to common shareholders, as reported $ 11,840 $ 13,027 $ 17,257 $ 23,415 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 64 4 127 --------------- -------------- ------------- -------------- Pro forma net income - basic $ 11,838 $ 12,963 $ 17,253 $ 23,288 =============== ============== ============= ============== Net income per share - basic Basic - as reported $ 0.24 $ 0.27 $ 0.35 $ 0.52 =============== ============== ============= ============== Basic - pro forma $ 0.24 $ 0.27 $ 0.35 $ 0.52 =============== ============== ============= ============== Net income allocable to common shareholders for diluted earnings per share $ 12,009 $ 13,027 $ 18,000 $ 23,415 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 64 4 127 --------------- -------------- ------------- -------------- Pro forma net income - diluted $ 12,007 $ 12,963 $ 17,996 $ 23,288 =============== ============== ============= ============== Net income per share - diluted Diluted - as reported $ 0.22 $ 0.27 $ 0.33 $ 0.52 =============== ============== ============= ============== Diluted - pro forma $ 0.22 $ 0.27 $ 0.33 $ 0.52 =============== ============== ============= ============== </TABLE> Reclassification. Certain amounts included in 2004 financial statements have been reclassified to conform with the 2005 presentation. 8
(3) Earnings per Share ------------------ The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the three and six months ended June 30, 2005 and 2004: <TABLE> <CAPTION> Three Months ended June 30, Six Months ended June 30, --------------------------- ------------------------- 2005 2004 2005 2004 --------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> BASIC Income from continuing operations $ 11,455 $ 11,712 $ 19,475 $ 22,413 Less: preferred dividends (4,109) (1,590) (8,218) (3,180) --------------- ------------- -------------- ------------- Income allocable to common shareholders from continuing operations 7,346 10,122 11,257 19,233 Total income from discontinued operations 4,494 2,905 6,000 4,182 --------------- ------------- -------------- ------------- Net income allocable to common shareholders $ 11,840 $ 13,027 $ 17,257 $ 23,415 =============== ============= ============== ============= Weighted average number of common shares outstanding 48,593,332 47,704,823 48,472,665 45,089,816 =============== ============= ============== ============= Income per common share - basic: Income from continuing operations $ 0.15 $ 0.21 $ 0.23 $ 0.43 Income from discontinued operations 0.09 0.06 0.12 0.09 --------------- ------------- -------------- ------------- Net income $ 0.24 $ 0.27 $ 0.35 $ 0.52 =============== ============= ============== ============= DILUTED Income allocable to common shareholders from continuing operations - basic $ 7,346 $ 10,122 $ 11,257 $ 19,233 Incremental income attributed to assumed conversion of dilutive securities 169 - 743 - --------------- ------------- -------------- ------------- Income allocable to common shareholders from continuing operations - diluted 7,515 10,122 12,000 19,233 Total income from discontinued operations - diluted 4,494 2,905 6,000 4,182 --------------- ------------- -------------- ------------- Net income allocable to common shareholders - diluted $ 12,009 $ 13,027 $ 18,000 $ 23,415 =============== ============= ============== ============= Weighted average number of common shares used in calculation of basic earnings per share 48,593,332 47,704,823 48,472,665 45,089,816 Add incremental shares representing: Shares issuable upon exercise of employee share options 80,928 100,935 77,748 134,784 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 53,982,652 47,805,758 53,858,805 45,224,600 =============== ============= ============== ============= Income per common share - diluted: Income from continuing operations $ 0.14 $ 0.21 $ 0.22 $ 0.43 Income from discontinued operations 0.08 0.06 0.11 0.09 --------------- ------------- -------------- ------------- Net income $ 0.22 $ 0.27 $ 0.33 $ 0.52 =============== ============= ============== ============= </TABLE> The shares issuable upon conversion of dilutive securities relate to the put option a partner in a non-consolidated entity has whereby the partner can elect to put their equity position to the Company. The Company has the option of issuing common shares for the fair market value of the partner's equity position (as defined) or cash for 100% of the fair market value of the partner's equity position. (4) Investments in Real Estate During the three months ended June 30, 2005, the Company made 27 acquisitions, excluding acquisitions made directly by non-consolidated entities and including properties held for sale, for an aggregate capitalized cost of $642,296. The Company allocated $95,791 of the capitalized costs of these properties to intangibles. Two of these properties are economically owned through the holding of industrial revenue bonds. 9
One property was acquired through a newly formed limited partnership in which the Company has a 92% interest. This partnership acquired an 87.5% interest in a second partnership which owns the property. The Company has an 80.5% controlling effective ownership in the property. During the second quarter of 2005, the Company sold, at cost which approximates fair market value, a 60% tenancy in common interest in one of the properties acquired during the second quarter of 2005 for $3,961 in cash and the assumption of $8,849 in mortgage debt. During the first quarter of 2005, the Company acquired one property for a capitalized cost of $12,012 and allocated $725 of the purchase price to intangible assets. (5) Discontinued Operations ----------------------- As of June 30, 2005, the Company had six properties held for sale and recorded an impairment charge of $592 for the three months ended June 30, 2005, relating to the difference between the basis for one of the properties and the estimated net proceeds expected to be realized upon sale. During the three months ended June 30, 2005, the Company sold one property for an aggregate sales price of $11,599 resulting in a net gain of $4,317. During the first quarter of 2005, the Company sold two properties for an aggregate sales price of $4,250 resulting in a gain of $744. During the second quarter of 2004, the Company sold two properties for an aggregate net proceeds of $11,056, which resulted in an aggregate gain of $2,327 and recorded an impairment charge of $2,212 relating to the difference between the basis for two properties and the estimated net proceeds expected to be realized upon sale. The following presents the operating results for the properties sold and properties held for sale for the applicable periods: <TABLE> <CAPTION> Three Months ended June 30, Six Months ended June 30, 2005 2004 2005 2004 -------------- ------------------------------ --------------- <S> <C> <C> <C> <C> Rental revenues $ 1,255 $ 2,125 $ 2,375 $ 4,533 Pre-tax income, including gains on sale $ 4,494 $ 2,905 $ 6,000 $ 4,182 </TABLE> (6) Investment in Non-Consolidated Entities --------------------------------------- As of June 30, 2005, the Company has investments in seven non-consolidated entities. The entities are Lexington Acquiport Company, LLC ("LAC") (33 1/3% ownership interest), Lexington Acquiport Company II, LLC ("LAC II") (25% ownership interest), Lexington/Lion Venture LP ("LION") (30% ownership interest), Lexington Columbia LLC ("Columbia") (40% ownership interest), Lexington Durham Limited Partnership ("DLP") (33 1/3% ownership interest), Triple Net Investment Company LLC ("TNI") (30% ownership interest) and Lexington Oklahoma City, LP ("TIC") (which owns a 40% tenancy in common interest in a real property). During the three months ended June 30, 2005, Lion made two acquisitions totaling $55,477 of capitalized costs. These acquisitions were funded through non-recourse mortgages totaling $32,700, which bear interest at a weighted average rate of 5.05%. During the three months ended June 30, 2005, TNI made three acquisitions totaling $126,781 of capitalized costs. These acquisitions were funded through non-recourse mortgages totaling $83,327, which bear interest at a weighted average rate of 5.17%. During the three months ended June 30, 2005, LAC II made one acquisition totaling $121,075 of capitalized costs. The acquisition was funded through non-recourse mortgage of $80,182 which bears interest at 5.33%. During the second quarter of 2005, the Company sold, at cost, a 60% tenancy in common interest in one of the properties acquired during the second quarter of 2005 for $3,961 in cash and the assumption of $8,849 in mortgage debt. During the first quarter of 2005, LAC II obtained two non-recourse mortgages totaling $45,800 and bearing interest at a weighted average rate of 5.05%. Also, during the first quarter of 2005, LAC II repaid $45,800 in advances made by the Company. 10
The following is summary combined balance sheet data as of June 30, 2005 and income statement data for the six months ended June 30, 2005 and 2004 for the Company's non-consolidated entities described in the first paragraph of this note: 2005 ---- Real estate, net $ 1,279,578 Intangibles, net $ 128,500 Mortgages payable $ 912,992 2005 2004 ---- ---- Revenues $ 66,740 $ 35,072 Expenses $ 58,740 $ 25,120 Net income $ 8,000 $ 9,952 The Company earns advisory fees from non-consolidated entities. During the three and six month periods ended June 30, 2005 and 2004 the total advisory fees earned from these entities was $2,537, $3,153, $758 and $1,689, respectively, (7) Mortgages and Notes Payable --------------------------- During the three months ended June 30, 2005 the Company obtained an aggregate of $418,845 in non-recourse notes, with an aggregate weighted average interest rate of 5.18%. The Company satisfied a mortgage note with a principal balance of $20,760 for $15,500 and wrote off $173 in unamortized deferred loan costs. During the second quarter of 2005, the Company's replaced it's original $100,000 credit facility with a new $200,000 unsecured credit facility which bears interest at a rate of LIBOR plus 120-170 basis points depending on the leverage (as defined) of the Company. The credit facility contains customary financial covenants including restrictions on the level of indebtedness, amount of variable rate debt to be borrowed and net worth maintenance provisions. As of June 30, 2005, the Company was in compliance with all covenants, borrowings of $99,000 were outstanding on the facility, $99,770 was available to be borrowed and $1,230 in letters of credit were outstanding. The Company wrote off the unamortized deferred loan costs of $455 associated with the $100,000 credit facility. (8) Concentration of Risk --------------------- The Company seeks to reduce its operating and leasing risks through diversification achieved by the geographic distribution of its properties, tenant industry diversification, avoiding dependency on a single property and the creditworthiness of its tenants. For the three and six months ended June 30, 2005 and 2004, no single tenant represented greater than 10% of rental revenues. Cash and cash equivalent balances may exceed insurable amounts. The Company believes it mitigates risk by investing in or through major financial institutions. (9) Minority Interests ------------------ In conjunction with several of the Company's acquisitions in prior years, sellers were given units in LCIF, LCIF II, or Net 3 as a form of consideration. All of such interests are redeemable at certain times, only at the option of the holders, for common shares on a one-for-one basis at various dates through November 2006 and are not otherwise mandatorily redeemable by the Company. As of June 30, 2005, there were 5,374,499 units outstanding. All units have stated distributions in accordance with their respective partnership agreements. To the extent that the Company's dividend per share is less than the stated distribution per unit per the applicable partnership agreement, the distributions per unit are reduced by the percentage reduction in the Company's dividend. No units have a liquidation preference. (10) Shareholders' Equity -------------------- During the first quarter of 2005, the Company issued 400,000 preferred shares raising net proceeds of $19,463. In addition, the Company issued 322,646 and 282,590 common shares under its dividend reinvestment plan raising net proceeds of $6,848 and $5,213 for the six months ended June 30, 2005 and 2004, respectively. (11) Commitments and Contingencies ----------------------------- The Company is obligated under certain tenant leases, including leases for non-consolidated entities, to fund the expansion of the underlying leased properties. Included in other assets is construction in progress of $25,485 as of June 30, 2005. 11
The Company at times is involved in various legal actions occurring in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. Certain leases contain options whereby the tenant can terminate a lease if the property becomes obsolete, as defined. As of June 30, 2005, the Company 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 $28,768. (12) Supplemental Disclosure of Statement of Cash Flow Information ------------------------------------------------------------- During 2005 and 2004, the Company paid $28,639 and $18,257, respectively, for interest and $1,450 and $1,759, respectively, for income taxes. During the second quarter of 2005, the Company sold, at cost which approximates fair market value, a 60% tenancy in common interest in one of the properties acquired during the second quarter of 2005 for $3,961 in cash and the assumption of $8,849 in mortgage debt and retained an interest of $2,641. During 2005 and 2004, the Company issued 276,608 and 201,029 non-vested common shares, respectively, to certain employees resulting in $6,253 and $4,057 of deferred compensation, respectively. These common shares generally vest over 5 years. During 2005 and 2004, holders of an aggregate of 30,528 and 100,053 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 $354 and $1,299 in 2005 and 2004, respectively. (13) Subsequent Events ----------------- In July 2005, the Company sold 2.5 million common shares, raising net proceeds of $60,900. In August 2005 the Company acquired a property for $14,300 located in Lavonia, Georgia. In August 2005 the Company obtained a $14,000 non-recourse mortgage with an interest rate of 5.38% which matures in 2025. The Company entered into a contract to acquire a property for $36,800. In July 2005, the Company sold a property located in Wilsonville, OR for $14,500. In conjunction with this sale the Company issued a $11,050 note, secured by the property. The note bears interest at a rate of 5.46% and matures in 2015. 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ----------------------------------- Forward-Looking Statements - -------------------------- The following is a discussion and analysis of the Company's consolidated financial condition and results of operations for the three and six month periods ended June 30, 2005 and 2004, and significant factors that could affect the Company's prospective financial condition and results of operations. This discussion should be read together with the accompanying unaudited condensed consolidated financial statements and notes and with the Company's consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004. Historical results may not be indicative of future performance. This quarterly report on Form 10-Q, together with other statements and information publicly disseminated by the Company contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Company's future plans, strategies and expectations, are generally identifiable by use of the words "believes," "expects," "intends," "anticipates," "estimates," "projects" or similar expressions. Readers should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond the Company's control and which could materially affect actual results, performances or achievements. In particular, among the factors that could cause actual results to differ materially from current expectations include, but are not limited to, (i) the failure to continue to qualify as a real estate investment trust, (ii) changes in general business and economic conditions, (iii) competition, (iv) increases in real estate construction costs, (v) changes in interest rates, (vi) changes in accessibility of debt and equity capital markets and other risks inherent in the real estate business, including, but not limited to, tenant defaults, potential liability relating to environmental matters, the availability of suitable acquisition opportunities and illiquidity of real estate investments, (vii) changes in governmental laws and regulations, and (viii) increases in operating costs. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Accordingly, there is no assurance that the Company's expectations will be realized. General - ------- The Company, which has elected to qualify as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended, acquires, owns and manages net-leased commercial properties. The Company believes that it has operated as a REIT since October 1993. As of June 30, 2005, the Company owned, or had interests in, 185 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 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 13
estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions. In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the difference between the current in-place lease rent and a management estimate of current market rents. Below-market lease intangibles are recorded as part of deferred revenue and amortized into rental revenue over the non-cancelable periods of the respective leases. Above-market leases are recorded as part of intangible assets and amortized as a direct charge against rental revenue over the non-cancelable portion of the respective leases. The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the excess of (i) the purchase price paid for a property over (ii) the estimated fair value of the property as if vacant, determined as set forth above. This aggregate value is allocated between in-place lease values and tenant relationships based on management's evaluation of the specific characteristics of each tenant's lease. The value of in-place leases and customer relationships are amortized to expense over the remaining non-cancelable periods of the respective leases. Revenue Recognition. The Company recognizes revenue in accordance with Statement of Financial Accounting Standards No. 13 Accounting for Leases, as amended ("SFAS 13"). SFAS 13 requires that revenue be recognized on a straight-line basis over the term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. Rentals provided during renewal option periods where with rental terms that are lower than those in the primary term are excluded from the calculation of straight line rent if they do not meet the criteria of a bargain renewal option. Gains on sales of real estate are recognized pursuant to the provisions of Statement of Financial Accounting Standards No. 66 Accounting for Sales of Real Estate, as amended ("SFAS 66"). The specific timing of the sale is measured against various criteria in SFAS 66 related to the terms of the transactions and any continuing involvement in the form of management or financial assistance associated with the properties. If the sales criteria are not met, the gain is deferred and the finance, installment or cost recovery method, as appropriate, is applied until the sales criteria are met. Accounts Receivable. The Company continuously monitors collections from its tenants and would make a provision for estimated losses based upon historical experience and any specific tenant collection issues that the Company has identified. As of June 30, 2005 and December 31, 2004, the Company did not record an allowance for doubtful accounts. Impairment of Real Estate. The Company evaluates the carrying value of all real estate held when a triggering event under Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, as amended ("SFAS 144") has occurred to determine if an impairment has occurred which would require the recognition of a loss. The evaluation includes reviewing anticipated cash flows of the property, based on current leases in place, and an estimate of what lease rents will be if the property is vacant coupled with an estimate of proceeds to be realized upon sale. However, estimating market lease rents and future sale proceeds is highly subjective and such estimates could differ materially from actual results. Depreciation is determined by the straight-line method over the remaining estimated economic useful lives of the properties. Tax Status. The Company and its certain subsidiaries file a consolidated federal income tax return. The Company has made an election to qualify, and believes it is operating so as to qualify, as a REIT for Federal income tax purposes. Accordingly, the Company generally will not be subject to federal income tax, provided that distributions to its shareholders equal at least the amount of its REIT taxable income as defined under 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 No. 144). SFAS 144 requires that the assets and liabilities of properties that meet various criteria in SFAS No. 144 be presented separately in the statement of financial position, with assets and liabilities being separately stated. The operating results of these properties are reflected as discontinued operations in the income statement. Properties that do not meet the held for sale criteria of SFAS No. 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"). If not, and the Company controls the entity's 14
voting shares and similar rights, the entity is consolidated. FIN 46R requires the Company to evaluate whether it has a controlling financial interest in an entity through means other than voting rights. Liquidity and Capital Resources - ------------------------------- Real Estate Assets. As of June 30, 2005, the Company's real estate assets were located in 37 states and contained an aggregate of approximately 39.2 million square feet of net rentable space. The properties are generally subject to triple net leases, which are generally characterized as leases in which the tenant pays all or substantially all of the cost and cost increases for real estate taxes, capital expenditures, insurance, utilities and ordinary maintenance of the property. Of the Company's 185 properties, fourteen provide for operating expense stops, one is subject to a modified gross lease and three are not leased. Approximately 97.7% of square feet is subject to a lease. During the six months ended June 30, 2005, the Company purchased 34 properties (including through non-consolidated entities) for a capitalized cost of $957.6 million (including $324.9 million for non-consolidated entities) and sold three properties to third parties resulting in a net gain of $5.1 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 six months ended June 30, 2005, the leases on the consolidated properties generated $83.0 million in gross rental revenue compared to $65.3 million during the same period in 2004. On November 1, 2004, the tenant in the Company's Dallas, Texas property, filed for Chapter 11 bankruptcy and rejected the lease. Accordingly, in addition to losing base rental revenue, the Company is responsible for operating expenses until a replacement tenant can be found. Dividends. The Company has made quarterly distributions since October 1986 without interruption. The Company declared a common dividend of $0.36 per share to common shareholders of record as of July 29, 2005, payable on August 15, 2005. The Company's annualized common dividend rate is currently $1.44 per share. The Company also declared a preferred dividend on its Series C preferred of $0.8125 per share to preferred shareholders of record as of July 29, 2005, payable on August 15, 2005. The annual preferred dividend rate on the Series C shares is $3.25 per share. The Company also declared a preferred dividend on its Series B preferred of $0.503125 per share to preferred shareholders of record as of July 29, 2005, payable on August 15, 2005. The annual preferred dividend rate on the Series B shares is $2.0125 per share. In connection with its intention to continue to qualify as a REIT for Federal income tax purposes, the Company expects to continue paying regular common and preferred dividends to its shareholders. These dividends are expected to be paid from operating cash flows which are expected to increase over time due to property acquisitions and growth in rental revenues in the existing portfolio and from other sources. Since cash used to pay dividends reduces amounts available for capital investments, the Company generally intends to maintain a conservative dividend payout ratio, reserving such amounts as it considers necessary for the expansion of properties in its portfolio, debt reduction, the acquisition of interests in new properties as suitable opportunities arise, and such other factors as the Company's board of trustees considers appropriate. Cash dividends paid to common shareholders increased to $35.3 million in 2005 compared to $31.2 million in 2004. Although the Company receives the majority of its rental payments on a monthly basis, it intends to continue paying dividends quarterly. Amounts accumulated in advance of each quarterly distribution are invested by the Company in short-term money market or other suitable instruments. The Company anticipates that cash flows from operations will continue to provide adequate capital to fund its operating and administrative expenses, regular debt service obligations and all dividend payments in accordance with REIT requirements in both the short-term and long-term. In addition, the Company anticipates that cash on hand, borrowings under its unsecured credit facility, 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 $53.9 million and $46.9 million for the six months ended June 30, 2005 and 2004, respectively. Net cash used in investing activities totaled $626.0 million and $67.5 million for the six months ended June 30, 2005 and 2004, 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 financing activities totaled $467.5 million and $126.3 million for the six months ended June 30, 2005 and 2004, respectively. Cash used in financing activities was primarily attributable to repayments under the Company's credit facility, dividends (net of proceeds reinvested under the Company's dividend reinvestment plan), distributions to limited partners, debt service payments and deferred financing costs. Cash provided by financing activities relates primarily to proceeds from equity offerings and debt financings. 15
UPREIT Structure. The Company's UPREIT structure permits the Company to effect acquisitions by issuing to a seller, as a form of consideration, interests in operating partnerships controlled by the Company. All of such interests are redeemable, at the option of the holder, at certain times for common shares on a one-for-one basis and all of such interests require the Company to pay certain distributions to the holders of such interests in accordance with the respective operating partnership agreements. The Company accounts for these interests in a manner similar to a minority interest holder. The number of common shares that will be outstanding in the future should be expected to increase, and minority interest expense should be expected to decrease, from time to time, as such operating partnership interests are redeemed for common shares. The table set forth below provides certain information with respect to such operating partnership interests as of June 30, 2005, based on the current $1.44 annual dividend. <TABLE> <CAPTION> Current Total Current Annualized Per Annualized Total Number Affiliate Unit Distribution Redemption Date of Units Units Distribution ($000) --------------- -------- ----- ------------ ------ <S> <C> <C> <C> <C> At any time 3,482,908 1,404,015 $ 1.44 $ 5,015 At any time 1,199,652 65,874 1.08 1,296 At any time 108,724 52,144 1.12 122 January 2006 171,168 416 - - January 2006 231,763 120,662 1.44 334 February 2006 28,230 1,743 - - May 2006 9,368 - 0.29 3 May 2006 97,828 27,212 1.44 141 November 2006 44,858 44,858 1.44 65 ---------------- ------------- ---------------- ----------------- 5,374,499 1,716,924 $ 1.30 $ 6,976 ================ ============= ================ ================= </TABLE> Affiliate units are held by two executive officers of the Company and are included in the total number of units. Share Repurchase Program - ------------------------ The Company's board of trustees has authorized the repurchase of up to 2.0 million common shares/operating partnership units. As of June 30, 2005, 1.4 million common shares/operating partnership units have been repurchased. Financing - --------- Revolving Credit Facility. The Company's $200 million unsecured credit facility bears interest at a rate of LIBOR plus 120-170 basis points depending on the leverage (as defined) of the Company. The credit facility contains customary financial covenants including restrictions on the level of indebtedness, amount of variable rate debt to be borrowed and net worth maintenance provisions. As of June 30, 2005, the Company was in compliance with all covenants, borrowings of $99 million were outstanding on the facility, which matures in June 2009, $99.8 million was available to be borrowed and $1.2 million in letters of credit were outstanding. The new credit facility replaced an existing credit facility of $100 million. During the second quarter of 2005, the Company wrote off the unamortized deferred loan costs of $0.5 million associated with the $100 million credit facility. Debt Service Requirements. The Company's principal liquidity needs are for the payment of interest and principal on outstanding mortgage debt. As of June 30, 2005, a total of 95 of the Company's 131 consolidated properties were subject to outstanding mortgages, which had an aggregate principal amount of $1.1 billion. The weighted average interest rate on the Company's total consolidated debt on such date was approximately 6.05%. The estimated scheduled principal amortization payments for the remainder of 2005 and for 2006, 2007, 2008 and 2009 are $12.0 million, $27.4 million, $34.9 million, $29.6 million and $30.6 million, respectively. As of June 30, 2005, the estimated scheduled balloon payments, including amounts outstanding of the line of credit, for the remainder of 2005 and for 2006, 2007, 2008 and 2009 are $0, $11.8 million, $0, $164.6 million and $47.7 million, respectively. Lease Obligations. Since the Company's tenants generally bear all or substantially all of the cost of property operations, maintenance and repairs, the Company does not anticipate significant needs for cash for these costs. For 15 properties, the Company does have a level of property operating expense responsibility. The Company generally funds property expansions with available cash and additional secured borrowings, the repayment of which is funded out of rental increases under the leases covering the expanded properties. To the extent there is a vacancy in a property, the Company would be obligated for all operating expenses, including real estate taxes and insurance. As of June 30, 2005, the Company had three properties that were not leased. The Company's tenants pay the rental obligation on ground leases either directly to the fee holder or to the Company as increased rent. The annual ground lease rental payment obligation for each of the next five years is $1.3 million. Capital Expenditures. Due to the triple net lease structure, the Company does not incur significant expenditures in the ordinary course of business to maintain its properties. However, in the future, as leases expire, the Company expects to incur costs in extending the existing tenant lease or re-tenanting the properties. The amounts of these expenditures can vary significantly depending on tenant 16
negotiations, market conditions and rental rates. These expenditures are expected to be funded from operating cash flows or borrowings on the credit facility. As of June 30, 2005, the Company 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 $28.8 million. Results of Operations Three months ended June 30, 2005 compared with June 30, 2004 - ------------------------------------------------------------ Changes in the results of operations for the Company are primarily due to the growth of its portfolio and costs associated with such growth. Of the increase in total gross revenues for the three months ended June 30, 2005 of $14.1 million, $11.5 million is attributable to rental revenue, which resulted primarily from (i) properties purchased in 2004 and owned during 2005 ($5.6 million), (ii) properties purchased in 2005 ($9.6 million), offset by (iii) an increase in vacancy ($1.0 million) and (iv) an increase in properties transferred to non-consolidated entities ($2.5 million). Advisory fees (comprised of acquisition, debt placement and asset management fees) increased $1.8 million due to an increase in assets purchased by non-consolidated entities, and related debt placement completed during the three months ended June 30, 2005. Tenant reimbursements increased $0.8 million due to an increase in properties in which the Company has operating expense responsibilities offset by an increase in vacancy. The increase in interest and amortization expense of $4.1 million is due to the growth of the Company's portfolio and has been offset by interest savings resulting from scheduled principal amortization payments and mortgage satisfactions. The increase in depreciation and amortization of $9.5 million is due primarily to the increase in real estate and intangibles due to property acquisitions. The increase in property operating expenses of $2.7 million is due primarily to the Company acquiring properties in which it has property level operating expense responsibility and an increase in vacancy. The increase in general and administrative expenses of $2.1 million is due primarily to increases in personnel costs ($0.7 million), professional fees ($1.0 million), technology costs ($0.2 million) and occupancy costs ($0.1 million). Non-operating income decreased by $0.4 million primarily due to reduced interest earned. Debt satisfaction gains, net of $4.6 million related to the satisfaction of a mortgage note that resulted in a gain offset by the write-off of unamortized deferred financing costs. Minority interest expense increased $0.3 million due to increased earnings at the partnership level. Equity in earnings of non-consolidated entities decreased $0.4 million due to a decrease in net income of non-consolidated entities (see below). Net income increased in 2005 primarily due to the net impact of items discussed above plus an increase of $1.6 million in income from discontinued operations comprised of an increase in gains on sales of $2.0 million offset by a decrease of income from discontinued operations of $0.3 million and an increase in impairment charges of $0.1 million. Equity in earning of non-consolidated entities decreased by $0.4 million as described as follows. The Company's non-consolidated entities had aggregate net income of $3.2 million for the three months ended June 30, 2005 compared to $4.8 million in the comparable period in 2004. The decrease in net income is primarily attributable to an (i) increase in depreciation expense of $10.1 million in 2005 due to more depreciable assets owned, (ii) an increase in interest expense of $7.3 million in 2005 due to partially funding of acquisitions with the use of non-recourse mortgage debt (iii) an increase in property operating expenses of $2.3 million due to an increase in the number of properties owned and (iv) an increase in general and administrative expenses of $0.1 million. These expenses were partially offset by an increase in rental revenue and tenant reimbursements of $18.2 million in 2005 attributable to the acquisition of properties in 2004 and 2005. The increase in net income in future periods will be closely tied to the level of acquisitions made by the Company. Without acquisitions, which in addition to generating rental revenue, generate acquisition, debt placement and asset management fees from non-consolidated entities, the sources of growth in net income are limited to index adjusted rents (such as the consumer price index), percentage rents, reduced interest expense on amortizing mortgages and by controlling other variable overhead costs. However, there are many factors beyond management's control that could offset these items including, without limitation, increased interest rates on variable debt ($111.8 million as of June 30, 2005 at an interest rate of 5.9%) and tenant monetary defaults. Six months ended June 30, 2005 compared with June 30, 2004 - ---------------------------------------------------------- Changes in the results of operations for the Company are primarily due to the growth of its portfolio and costs associated with such growth. Of the increase in total gross revenues in 2005 of $19.3 million, $17.7 million is attributable to rental revenue which resulted primarily from (i) properties purchased in 2004 and owned during 2005 ($14.6 million), (ii) properties purchased in 2005 ($9.7 million), offset by (iii) an increase in vacancy ($2.1 million) and (iv) properties transferred to non-consolidated entities ($4.6 million). Advisory fees (comprised of acquisition, debt placement and asset management fees) increased $1.5 million due to an increase in assets purchased by non-consolidated entities and related debt placement completed during the six months ended June 30, 2005. The increase in interest and amortization expense of $7.5 million is due to the growth of the Company's portfolio and has been partially offset by interest savings resulting from scheduled principal amortization payments and mortgage satisfactions. The increase in depreciation and amortization of $14.1 million is due primarily to the increase in real estate and intangibles due to property acquisitions. The Company's general and administrative expenses increased by $3.0 million due primarily to increased personnel costs ($1.2 million), professional fees ($1.2 million) and technology costs of ($0.2 million). The increase in property operating expenses of $3.1 million is due primarily to incurring property level operating expenses for properties in which the Company has operating expense responsibility and an increase in vacancy. Debt satisfaction gains, net of $4.6 million relate to the satisfaction of a mortgage note that resulted in a gain offset by the write-off of unamortized deferred financing costs. Equity in earnings of non-consolidated entities 17
decreased $0.8 million due to the expensing of a fee paid by the Company and a decrease of net income of non-consolidated entities (see below). Net income decreased in 2005 primarily due to the net impact of items discussed offset by an increase of $1.8 million in income from discontinued operations comprised of an increase of $1.0 million in gains on sale and a decrease in impairment charges of $1.6 million offset by a decrease of income from discontinued operations of $0.8 million. Equity in earnings of non-consolidated entities decreased by $0.8 million as described as follows. The Company's non-consolidated entities had aggregate net income of $8.0 million for the six months ended June 30, 2005 compared to $10.0 million in the comparable period in 2004. The decrease in net income is primarily attributable to (i) an increase in depreciation expense of $16.6 million in 2005 due to more depreciable assets owned, (ii) an increase in interest expense of $12.4 million in 2005 due to partially funding of acquisitions with the use of non-recourse mortgage debt, (iii) an increase in property operating expenses of $3.8 million due to an increase in the number of properties owned, and (iv) an increase in non-reimbursable operating expenses of $0.3 million. These expenses were partially offset by an increase in rental revenue and tenant reimbursements of $31.2 million in 2005 attributable to the acquisition of properties in 2004 and 2005. Funds From Operations - --------------------- The Company believes that Funds From Operations ("FFO") enhances an investor's understanding of the Company's financial condition, results of operations and cash flows. The Company believes that FFO is an appropriate, but limited, measure of the performance of an equity REIT. FFO is defined in the April 2002 "White Paper", issued by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT") as "net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis." Impairment charges recorded are not added back to net income in arriving at FFO. FFO should not be considered an alternative to net income as an indicator of operating performance or to cash flows from operating activities as determined in accordance with generally accepted accounting principles, or as a measure of liquidity to other consolidated income or cash flow statement data as determined in accordance with generally accepted accounting principles. The following table reconciles net income allocable to common shareholders to the Company's FFO for the six months ended June 30, 2005 and 2004 ($000's): <TABLE> <CAPTION> 2005 2004 ----------------- --------------- <S> <C> <C> Net income allocable to common shareholders $ 17,257 $ 23,415 Adjustments: Depreciation and amortization 29,784 16,860 Minority interest's share of net income 2,251 2,109 Amortization of leasing commissions 253 365 Gains on sale of properties (5,061) (4,065) Joint venture adjustment - depreciation 7,619 2,873 Preferred share dividend - Series C 5,038 - ----------------- --------------- Funds From Operations $ 57,141 $ 41,557 ================= =============== Cash flows from operating activities $ 53,857 $ 46,866 Cash flows from investing activities $ (625,958) $ (67,463) Cash flows from financing activities $ 467,524 $ 126,325 </TABLE> Off-Balance Sheet Arrangements - ------------------------------ Non-Consolidated Real Estate Entities. As of June 30, 2005, the Company has investments in various real estate entities with varying structures. These investments include the Company's 33 1/3% non-controlling interest in Lexington Acquiport Company, LLC; its 25% non-controlling interest in Lexington Acquiport Company II, LLC; its 40% non-controlling interest in Lexington Columbia LLC; its 30% non-controlling interest in Lexington/Lion Venture L.P.; its 30% non-controlling interest in Triple Net Investment Company LLC; its 33 1/3% non-controlling interest in Lexington Durham Limited Partnership and, through Lexington Oklahoma City, LP, its 40% non-controlling tenancy in common interest in a real property. The properties owned by the entities are financed with individual non-recourse mortgage loans. Non-recourse mortgage debt is generally defined as debt whereby the lenders' sole recourse with respect to borrower defaults is limited to the value of the property collateralized by the mortgage. The lender generally does not have recourse against any other assets owned by the borrower or any of the members of the borrower, except for certain specified expectations listed in the particular loan documents. These exceptions generally relate to limited circumstances including breaches of material representations. 18
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. 19
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, 2005 and 2004, the Company's variable rate indebtedness was $111,748 and $14,631, respectively, which represented 9.0% and 2.0% of total long-term indebtedness, respectively. During the three and six months ended June 30, 2005 and 2004, this variable rate indebtedness had a weighted average interest rate of 6.1% and 6.1% and 4.2% and 3.3%, respectively. Had the weighted average interest rate been 100 basis points higher, the Company's net income would have been reduced by approximately $39 and $72 for the three and six months ended June 30, 2005 and $38 and $218 for the three and six months ended June 30, 2004. As of June 30, 2005 and 2004 the Company's fixed rate debt was $1,123,256 and $711,361, respectively, which represented 91.0% and 98.0%, respectively, of total long-term indebtness. The weighted average interest rate as of June 30, 2005 of fixed rate debt was 6.1%, which is approximately 100 basis points higher than the fixed rate debt incurred by the Company during the last twelve months. 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 $2,598 and $4,470 for the three and six months ended June 30, 2005 and by $1,349 and $2,515 for the three and six months ended June 30, 2004. 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 From time to time, the Company and/or its subsidiaries are involved in legal proceedings arising in the ordinary course of its business. In management's opinion, after consultation with legal counsel, the outcome of such matters, including in respect of the matter referred to below, is not expected to have a material adverse effect on the Company's ownership, financial condition, management or operation of its properties. The following updates the discussion set forth under "Item 3. Legal Proceedings" in the Company's Annual Report on Form 10-K for the year ended December 31, 2004. VarTec Telecom, Inc. Bankruptcy. On November 1, 2004, VarTec Telecom, Inc. ("VarTec"), previously one of our largest tenants based upon base rent, filed for Chapter 11 bankruptcy protection with the U.S. Bankruptcy Court in the Northern District of Texas (the "Bankruptcy Court"). VarTec leased a 249,452 square foot office property in Dallas, Texas. The VarTec lease was to expire in September 2015. On December 17, 2004, the Bankruptcy Court approved VarTec's motion to reject the lease. As a result of the rejection of the lease, the Company incurred a fourth quarter non-cash charge of approximately $2.9 million due to the write-off of deferred rent receivable and unamortized lease costs. In addition, as a result of the rejection of the lease, the Company incurred an unsecured claim for any damages resulting from the breach of the lease, including rent for the period from the rejection date through the remainder of the lease term, subject to a cap under applicable bankruptcy law. On May 5, 2005, the Company entered into a discounted payoff agreement with the lender under the non-recourse mortgage secured by the Dallas, Texas property. Pursuant to the discounted payoff agreement, we assigned our unsecured claims against VarTec to the lender. 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 24, 2005, the following action was taken: The shareholders elected nine individuals nominated to serve as trustees of the Company until the 2005 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: <TABLE> <CAPTION> Nominee for Trustee For Withhold ------------------- --- -------- <S> <C> <C> <C> E. Robert Roskind 44,278,625 465,912 Richard J. Rouse 44,280,647 463,890 T. Wilson Eglin 44,275,940 468,597 Geoffrey Dohrmann 44,401,576 342,961 Carl D. Glickman 44,452,743 291,794 James Grosfeld 27,716,099 17,028,438 Kevin W. Lynch 44,390,575 353,962 Stanley R. Perla 42,719,333 2,025,204 Seth M. Zachary 42,513,827 2,230,710 </TABLE> The shareholders approved an amendment to the Company's Declaration of Trust which increased the number of authorized common shares and excess shares which the Company has authority to issue from 80,000,000 Common Shares and 40,000,000 excess shares to 160,000,000 Common Shares and 170,000,000 excess shares, 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: 21
<TABLE> <CAPTION> For Against Abstain --- ------- ------- <S> <C> <C> <C> 34,224,160 10,335,410 184,967 </TABLE> ITEM 5. Other Information - not applicable. ITEM 6. Exhibits 3.1 Articles of Amendment of Declaration of Trust of the Company (filed herewith). 31.1 Certification of Chief Executive Officer pursuant to rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 31.2 Certification of Chief Financial Officer pursuant to rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). 22
SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Lexington Corporate Properties Trust Date: August 9, 2005 By: /s/ T. Wilson Eglin ---------------------------------------------- T. Wilson Eglin Chief Executive Officer, President and Chief Operating Officer Date: August 9, 2005 By: /s/ Patrick Carroll ---------------------------------------------- Patrick Carroll Chief Financial Officer, Executive Vice President and Treasurer 23