UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2006.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition period from _________________ to ________________
Commission File Number 1-12386
LEXINGTON CORPORATE PROPERTIES TRUST
------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 13-3717318
------------------------------ ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Penn Plaza - Suite 4015
New York, NY 10119
------------------------------ -----------
(Address of principal executive offices) (Zip code)
(212) 692-7200
-----------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
----- -----
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ x ] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No x
-------- -----
Indicate the number of shares outstanding of each of the registrant's classes of
common shares, as of the latest practicable date: 53,272,972 common shares, par
value $.0001 per share on November 1, 2006.
PART 1. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2006 (Unaudited) and December 31, 2005
(in thousands, except share and per share data)
September 30, December 31,
2006 2005
---- ----
Assets:
Real estate, at cost $ 1,840,739 $ 1,883,115
Less: accumulated depreciation and amortization 255,400 241,188
----------- -----------
1,585,339 1,641,927
Properties held for sale - discontinued operations 16,227 49,397
Intangible assets, net 128,932 128,775
Cash and cash equivalents 62,819 53,515
Investment in non-consolidated entities 181,246 191,146
Deferred expenses, net 15,037 13,582
Notes receivable, including accrued interest 25,311 11,050
Investment in marketable securities 5,782 --
Rent receivable - current 3,264 7,673
Rent receivable - deferred 27,882 24,778
Other assets 45,042 38,389
----------- -----------
$ 2,096,881 $ 2,160,232
=========== ===========
Liabilities and Shareholders' Equity:
Liabilities:
Mortgages and notes payable $ 1,146,371 $ 1,139,971
Liabilities - discontinued operations 8,931 32,145
Dividends payable 23,490 --
Accounts payable and other liabilities 15,973 13,250
Accrued interest payable 3,085 5,859
Deferred revenue 6,075 6,271
Prepaid rent 13,696 10,054
----------- -----------
1,217,621 1,207,550
Minority interests 52,641 61,372
----------- -----------
1,270,262 1,268,922
----------- -----------
Commitments and contingencies (note 10)
Shareholders' equity:
Preferred shares, par value $0.0001 per share; authorized 10,000,000 shares,
Series B Cumulative Redeemable Preferred, liquidation preference $79,000,
3,160,000 shares issued and outstanding 76,315 76,315
Series C Cumulative Convertible Preferred, liquidation preference $155,000,
3,100,000 shares issued and outstanding 150,589 150,589
Common shares, par value $0.0001 per share; authorized 160,000,000 shares,
53,099,996 and 52,155,855 shares issued and outstanding in 2006 and 2005,
respectively 5 5
Additional paid-in-capital 851,010 848,564
Deferred compensation, net -- (11,401)
Accumulated distributions in excess of net income (252,441) (172,762)
Accumulated other comprehensive income 1,141 --
----------- -----------
826,619 891,310
----------- -----------
$ 2,096,881 $ 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 OPERATIONS
Three and nine months ended September 30, 2006 and 2005
(Unaudited and in thousands, except share and per share data)
Three Months ended September 30, Nine Months ended September 30,
2006 2005 2006 2005
-------------- ---------------- -------------- --------------
Gross revenues:
Rental $ 46,205 $ 47,437 $ 137,080 $ 122,521
Advisory fees 1,127 995 3,527 4,186
Tenant reimbursements 4,302 4,205 12,622 7,194
-------- ---------- ---------- ------------
Total gross revenues 51,634 52,637 153,229 133,901
Expense applicable to revenues:
Depreciation and amortization (20,054) (19,522) (59,576) (47,271)
Property operating (8,113) (7,705) (23,126) (15,003)
General and administrative (5,394) (4,154) (15,868) (13,153)
Non-operating income 963 297 7,669 1,187
Interest and amortization expense (17,572) (17,963) (52,825) (45,373)
Debt satisfaction (charges) gains, net (510) -- (216) 4,632
Impairment charges -- -- (1,121) --
---------- --------- ---------- -----------
Income before benefit (provision) for income taxes,
minority interests, equity in earnings of
non-consolidated entities and discontinued operations 954 3,590 8,166 18,920
Benefit (provision) for income taxes (178) 111 (23) 45
Minority interests (168) (484) (1,231) (2,154)
Equity in earnings of non-consolidated entities 1,005 2,328 3,075 5,087
---------- ---------- ---------- ----------
Income from continuing operations 1,613 5,545 9,987 21,898
---------- ---------- ---------- ----------
Discontinued operations, net of minority interest and taxes:
Income from discontinued operations 919 2,007 3,194 6,745
Debt satisfaction (charges) gains, net 15 -- 4,913 (54)
Impairment charges (21,612) (177) (21,612) (800)
Gains on sales of properties 1,470 1,595 17,520 6,656
---------- ---------- ---------- ----------
Total discontinued operations (19,208) 3,425 4,015 12,547
----------- ---------- ---------- ----------
Net income (loss) (17,595) 8,970 14,002 34,445
Dividends attributable to preferred shares - Series B (1,590) (1,590) (4,770) (4,770)
Dividends attributable to preferred shares - Series C (2,519) (2,519) (7,556) (7,556)
----------- ----------- ----------- -----------
Net income (loss) allocable to common shareholders $ (21,704) $ 4,861 $ 1,676 $ 22,119
=========== ========== ========== ==========
Income (loss) per common share-basic:
Income (loss) from continuing operations $ (0.05) $ 0.03 $ (0.05) $ 0.19
Income (loss) from discontinued operations $ (0.37) $ 0.07 $ 0.08 $ 0.26
----------- ----------- ----------- -----------
Net income (loss) $ (0.42) $ 0.10 $ 0.03 $ 0.45
=========== =========== ============ ===========
Weighted average common shares outstanding-basic 52,279,750 50,837,178 52,081,514 49,269,497
============= ============== ============== ==============
Income (loss) per common share-diluted:
Income (loss) from continuing operations $ (0.05) $ 0.02 $ (0.05) $ 0.18
Income (loss) from discontinued operations $ (0.37) $ 0.06 $ 0.08 $ 0.23
------------ ---------- ------------ -----------
Net income (loss) $ (0.42) $ 0.08 $ 0.03 $ 0.41
============ ========== ============ ===========
Weighted average common shares outstanding-diluted 52,279,750 57,764,659 52,081,514 56,197,314
============== ============= ============== ==============
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 (LOSS)
Three and nine months ended September 30, 2006 and 2005
(Unaudited and in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2006 2005 2006 2005
---- ---- ---- ----
Net income (loss) allocable to common shareholders: $ (21,704) $ 4,861 $ 1,676 $ 22,119
Other comprehensive income:
Foreign currency translation adjustment 351 -- 494 --
Unrealized gain on marketable securities 739 -- 647 --
------- ---------- -------- ----------
Comprehensive income (loss) $ (20,614) $ 4,861 $ 2,817 $ 22,119
======== ======== ===== =========
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
Nine months ended September 30, 2006 and 2005
(Unaudited and in thousands)
2006 2005
---------------------- ---------------------
Net cash provided by operating activities $ 85,066 $ 78,643
---------------------- ---------------------
Cash flows from investing activities:
Investment in notes receivable (11,144) -
Investment in properties, including intangibles (60,160) (700,921)
Issuance of notes receivable - affiliate (8,300) -
Collection of notes receivable - affiliate 8,300 45,800
Net proceeds from sale/transfer of properties 58,554 42,130
Distributions from non - consolidated entities
in excess of accumulated earnings 15,831 8,807
Collection of note receivable - non-affiliate - 3,488
Real estate deposits (4,008) 1,449
Investment in and advances to non-consolidated entities (9,710) (38,990)
Investment in marketable securities (5,019) -
Increase in deferred leasing costs (1,358) (2,727)
Increase in escrow deposits (1,433) (1,611)
---------------------- ---------------------
Net cash used in investing activities (18,447) (642,575)
---------------------- ---------------------
Cash flows from financing activities:
Dividends to common and preferred shareholders (70,191) (64,291)
Principal payments on debt, excluding normal amortization (64,412) (16,844)
Dividend reinvestment plan proceeds 9,305 10,509
Principal amortization payments (21,828) (19,012)
Proceeds of mortgages and notes payable 97,185 495,645
Contributions from minority partners 810 1,692
Increase in deferred financing costs (926) (4,830)
Cash distributions to minority partners (5,976) (5,251)
Issuance (repurchase) of common and preferred shares (1,166) 80,554
Partnership units repurchased (116) (82)
---------------------- ---------------------
Net cash (used in ) provided by financing activities (57,315) 478,090
---------------------- ---------------------
Change in cash and cash equivalents 9,304 (85,842)
Cash and cash equivalents, at beginning of period 53,515 146,957
---------------------- ---------------------
Cash and cash equivalents, at end of period $ 62,819 $ 61,115
====================== =====================
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
September 30, 2006 and 2005
(Unaudited and dollars in thousands, except per share data)
(1) The Company
-----------
Lexington Corporate Properties Trust (the "Company") is a self-managed
and self-administered real estate investment trust ("REIT") that
acquires, owns and manages a geographically diversified portfolio of
net leased office, industrial and retail properties. As of September
30, 2006, the Company had an ownership interest in 191 properties and
managed an additional two properties. The real properties owned by the
Company are generally subject to triple net leases to corporate tenants
although certain leases require the Company to pay a portion of
operating expenses.
The Company believes it has qualified as a REIT under the Internal
Revenue Code of 1986, as amended (the "Code"). Accordingly, the Company
will not be subject to federal income tax, provided that distributions
to its shareholders equal at least the amount of its REIT taxable
income as defined under the Code. The Company is permitted to
participate in certain activities which it was previously precluded
from in order to maintain its qualification as a REIT, so long as these
activities are conducted in entities which elect to be treated as
taxable REIT subsidiaries ("TRS") under the Code. As such, the TRS will
be subject to federal income taxes on the income from these activities.
The unaudited condensed consolidated financial statements reflect all
adjustments, which are, in the opinion of management, necessary to
present a fair statement of the financial condition and results of
operations for the interim periods. For a more complete understanding
of the Company's operations and financial position, reference is made
to the financial statements (including the notes thereto) previously
filed with the Securities and Exchange Commission with the Company's
Annual Report on Form 10-K/A for the year ended December 31, 2005 as
updated by the Company's Current Report on Form 8-K filed on October
10, 2006.
(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. The Company determines whether an entity for
which it holds an interest should be consolidated pursuant to Financial
Accounting Standards board ("FASB") Interpretation No. 46,
Consolidation of Variable Interest Entities ("FIN 46R"). FIN 46R
requires the Company to evaluate whether it has a controlling financial
interest in an entity through means other than voting rights. If the
entity is not a variable interest entity, and the Company controls the
entity's voting shares and similar rights, the entity is consolidated.
Recently Issued Accounting Pronouncements. In December 2004, the FASB
issued Statement of Financial Accounting Standards ("SFAS") No. 123,
(revised 2004) Share-Based Payment ("SFAS 123R"), which supersedes
Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and its related implementation guidance.
SFAS 123R establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services.
It also addresses transactions in which an entity incurs liabilities in
exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of
those equity instruments. SFAS 123R focuses primarily on accounting for
transactions in which an entity obtains employee services in
share-based payment transactions. SFAS 123R requires a public entity to
measure the cost of employee services received in exchange for an award
of equity instruments based on the grant date fair value of the award.
The cost will be recognized over the period in which an employee is
required to provide services in exchange for the award. SFAS 123R was
effective for fiscal years beginning after January 1, 2006, based on
rules issued by the Securities and Exchange Commission. The Company
elected the modified prospective approach as provided for in SFAS 123R.
The impact of adopting this statement resulted in the elimination of
$11,401 of deferred compensation and additional paid-in-capital from
the consolidated shareholders' equity as of January 1, 2006 and did not
have a material impact on the Company's results of operations or cash
flows.
In December 2004, the FASB issued SFAS No. 153 Exchange of Non-monetary
Assets - an amendment of APB Opinion No. 29, ("SFAS 153"). The guidance
in APB Opinion No. 29, Accounting for Non-monetary Transactions, is
based on the principle that exchanges of non-monetary assets should be
measured based on the fair value of the assets exchanged. The guidance
in that opinion, however, included certain exceptions to that
principle. SFAS 153 amends APB Opinion No. 29 to eliminate the
exception for non-monetary assets that do not have commercial
substance. A non-monetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as
a result of the exchange. SFAS 153 was effective for non-monetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005.
The adoption of this statement had no material impact on the Company.
6
In March 2005, the FASB issued Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations - an Interpretation of SFAS
Statement No. 143 ("FIN 47"). FIN 47 clarifies the timing of liability
recognition for legal obligations associated with the retirement of a
tangible long-lived asset when the timing and/or method of settlement
are conditional on a future event. FIN 47 was effective for fiscal
years ending after December 15, 2005. The application of FIN 47 did not
have a material impact on the Company's consolidated financial position
or results of operations.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections ("SFAS 154") which replaces APB Opinions No. 20, Accounting
Changes, and SFAS No. 3, Reporting Accounting Changes, in Interim
Financial Statements - An Amendment of APB Opinion No. 28. SFAS 154
provides guidance on the accounting for and reporting of accounting
changes and error corrections. It establishes retrospective application
as the required method for reporting a change in accounting principle
and the reporting of a correction of an error. SFAS 154 was effective
for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The adoption of SFAS 154 had no
material impact on the Company.
In June 2005, the FASB ratified the Emerging Issues Task Force's
("EITF") consensus on EITF 04-05, Determining Whether a General
Partner, or the General Partners as a Group, Controls a Limited
Partnership or Similar Entity When the Limited Partners Have Certain
Rights. EITF 04-05 provides a framework for determining whether a
general partner controls, and should consolidate, a limited partnership
or a similar entity. It was effective after June 29, 2005 for all newly
formed limited partnerships and for any pre-existing limited
partnerships that modify their partnership agreements after that date.
General partners of all other limited partnerships applied the
consensus no later than the beginning of the first reporting period in
fiscal years beginning after December 15, 2005. The adoption of EITF
04-05 had no material impact on the Company's financial position or
results of operations.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes ("FIN 48"). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in accordance
with SFAS No. 109. FIN 48 prescribes a recognition threshold and
measurement attribute for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. FIN 48 is effective for fiscal years beginning after December
15, 2006. The Company does not expect that the adoption of FIN 48 will
have a material impact on the Company's consolidated financial position
or results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements ("SFAS 157"). SFAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting
principles and expands disclosures about fair value measurements. SFAS
157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those
fiscal years. The adoption of this statement is not expected to have a
material impact on the Company's consolidated financial position or
results of operations.
In September 2006, the Securities and Exchange Commission released
Staff Accounting Bulletin No. 108 ("SAB 108"). SAB 108 provides
guidance on how the effects of the carryover or reversal of prior year
financial statement misstatements should be considered in quantifying a
current period misstatement. In addition, upon adoption, SAB 108
permits the Company to adjust the cumulative effect of immaterial
errors relating to prior years in the carrying amount of assets and
liabilities as of the beginning of the current fiscal year, with an
offsetting adjustment to the opening balance of retained earnings. SAB
108 also requires the adjustment of any prior quarterly financial
statement within the fiscal year of adoption for the effects of such
errors on the quarters when the information is next presented. The
Company will adopt SAB 108 in the first quarter of 2007, and does not
anticipate that it will have a material impact on its results of
operations and financial condition.
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
7
during the expected lease-up periods based on current market demand.
Management also estimates costs to execute similar leases including
leasing commissions.
In allocating the fair value of the identified intangible assets and
liabilities of an acquired property, above-market and below-market
in-place lease values are recorded based on the difference between the
current in-place lease rent and a management estimate of current market
rents. Below-market lease intangibles are recorded as part of deferred
revenue and amortized into rental revenue over the non-cancelable
periods of the respective leases and any bargain renewal options, if
applicable. Above-market leases are recorded as part of intangible
assets and amortized as a direct charge against rental revenue over the
non-cancelable portion of the respective leases.
The aggregate value of other acquired intangible assets, consisting of
in-place leases and tenant relationships, is measured by the excess of
(i) the purchase price paid for a property over (ii) the estimated fair
value of the property as if vacant, determined as set forth above. This
aggregate value is allocated between in-place lease values and tenant
relationships based on management's evaluation of the specific
characteristics of each tenant's lease. The value of in-place leases
and customer relationships are amortized to expense over the remaining
non-cancelable periods of the respective leases.
Revenue Recognition. The Company recognizes revenue in accordance with
SFAS No. 13, Accounting for Leases, as amended ("SFAS 13"). SFAS 13
requires that revenue be recognized on a straight-line basis over the
term of the lease unless another systematic and rational basis is more
representative of the time pattern in which the use benefit is derived
from the leased property. Renewal options in leases with rental terms
that are lower than those in the primary term are excluded from the
calculation of straight-line rent if they do not meet the criteria of a
bargain renewal option. In those instances in which the Company funds
tenant improvements and the improvements are deemed to be owned by the
Company, revenue recognition will commence when the improvements are
substantially completed and possession or control of the space is
turned over to the tenant. When the Company determines that the tenant
allowances are lease incentives, the Company commences revenue
recognition when possession or control of the space is turned over to
the tenant for tenant work to begin. The lease incentive is recorded as
a deferred expense and amortized as a reduction to revenue on a
straight-line basis over the respective lease term.
Gains on sales of real estate are recognized pursuant to the provisions
of SFAS No. 66, Accounting for Sales of Real Estate, as amended ("SFAS
66"). The specific timing of the sale is measured against various
criteria in SFAS 66 related to the terms of the transactions and any
continuing involvement in the form of management or financial
assistance associated with the properties. If the sales criteria are
not met, the gain is deferred and the finance, installment or cost
recovery method, as appropriate, is applied until the sales criteria
are met.
Accounts Receivable. The Company continuously monitors collections from
its tenants and would make a provision for estimated losses based upon
historical experience and any specific tenant collection issues that
the Company has identified. As of September 30, 2006 and December 31,
2005, the Company did not record an allowance for doubtful accounts.
Impairment of Real Estate. The Company evaluates the carrying value of
all real estate held when a triggering event under SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, as
amended ("SFAS 144") has occurred to determine if an impairment has
occurred which would require the recognition of a loss. The evaluation
includes reviewing anticipated cash flows of the property, based on
current leases in place, and an estimate of market rent after an
assumed lease up period for vacant properties coupled with an estimate
of proceeds to be realized upon sale. However, estimating market lease
rents and future sale proceeds is highly subjective and such estimates
could differ materially from actual results.
Depreciation is determined by the straight-line method over the
remaining estimated economic useful lives of the properties.
Only costs incurred to third parties in acquiring properties are
capitalized. No internal costs (rents, salaries, overhead) are
capitalized. Expenditures for maintenance and repairs are charged to
operations as incurred. Significant renovations which extend the useful
life of the properties are capitalized.
Properties Held For Sale. The Company accounts for properties held for
sale in accordance with SFAS 144. SFAS 144 requires that the assets and
liabilities of properties that meet various criteria in SFAS 144 be
presented separately in the balance sheet, with assets and liabilities
being separately stated. The operating results of these properties are
reflected as discontinued operations in the statement of operations.
Properties that do not meet the held for sale criteria of SFAS 144 are
accounted for as operating properties.
Marketable Securities. The Company classifies its existing marketable
equity securities as available-for-sale in accordance with the
provisions of SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities. These securities are carried at fair market
value, with unrealized gains and losses reported in shareholders'
equity as a component of accumulated other comprehensive income. Gains
or losses on securities sold, if any, are based on the specific
identification method.
Tax Status. The Company has made an election to qualify, and believes
it is operating so as to qualify, as a REIT for Federal income tax
purposes. Accordingly, the Company generally will not be subject to
Federal income tax, provided that
8
distributions to its shareholders equal at least the amount of its REIT
taxable income as defined under Section 856 through 860 of the Internal
Revenue Code, as amended (the "Code").
The Company is now permitted to participate in certain activities from
which it was previously precluded in order to maintain its
qualification as a REIT, so long as these activities are conducted in
entities which elect to be treated as taxable REIT subsidiaries under
the Code. The Company has two wholly-owned subsidiaries and an
investment in a non-consolidated entity that have made an election to
be taxed as taxable REIT subsidiaries (see note 12). 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, as a separate
component of the Company's shareholders' equity.
Earnings Per Share. Basic net income per share is computed by dividing
net income reduced by preferred dividends by the weighted average
number of common shares outstanding during the period. Diluted net
income per share amounts are similarly computed but include the effect,
when dilutive, of in-the-money common share options, operating
partnership units, convertible preferred shares and other dilutive
securities.
Common Share Options. All common share options outstanding were fully
vested as of December 31, 2005. 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 Nine Months Ended
September 30, September 30,
2005 2005
------------- --------
Net income allocable to common shareholders,
as reported - basic $ 4,861 $ 22,119
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 1 5
--------- ---------
Pro forma net income - basic $ 4,860 $ 22,114
====== =======
Net income per share - basic
Basic - as reported $ 0.10 $ 0.45
Basic - pro forma $ 0.10 $ 0.45
Net income allocable to common shareholders,
as reported - diluted $ 4,813 $ 22,814
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 1 5
-------- ----------
Pro forma net income - diluted $ 4,812 $ 22,809
====== =======
Net income per share - diluted
Diluted - as reported $ 0.08 $ 0.41
Diluted - pro forma $ 0.08 $ 0.41
9
Share-based Compensation. The Company issues non-vested common shares
to its employees that have various vesting terms. The non-vested shares
issued vest either (i) ratably over 5 years, (ii) cliff vest after 5
years, (iii) cliff vest after 5 years if market conditions (targeted
total shareholder return) are achieved and/or (iv) vest upon the
achievement of performance criteria (increase in cash available for
distributions). The Company has elected to charge to compensation cost
ratably over 5 years non-vested shares which cliff vest after 5 years.
The Company charges to compensation cost, ratably over 5 years (the
implicit service period), the non-vested shares that vest based upon
the achievement of performance criteria. The Company charges to
compensation cost, ratably over 5 years (the explicit service period),
the non-vested shares that vest upon achievement of market and service
conditions. The Company values all share-based payment arrangements
using the fair value method, 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 September 30, 2006, there are 827,377 awards available to be
issued to employees under the Company's equity award plans. In
addition, the Company has $16,249 in unrecognized compensation cost
that will be charged to compensation cost over an average of
approximately 3.7 years.
Common share option activity for the nine months ended September 30,
2006 is as follows:
Number of Weighted-Average Weighted-Average
Shares Exercise Price Per Share Life (years)
------ ------------------------ ------------
Balance at December 31, 2005 40,500 $ 14.71 .8
Granted -- -- --
Exercised (20,500) 14.15 .5
Forfeited -- -- --
Expired (1,500) 11.82 --
--------- ---------- -----
Balance at September 30, 2006 18,500 $ 15.55 .4
========= ========= =====
Non-vested share activity for the nine months ended September 30, 2006
is as follows:
Number of Weighted-Average
Shares Value Per Share
------ ---------------
Balance at December 31, 2005 547,555 $20.82
Granted 405,528 22.04
Forfeited (469) 21.30
Vested (56,933) 20.49
--------- -----
Balance at September 30, 2006 895,681 $21.43
========= =====
Reclassification. Certain amounts included in 2005 financial statements have
been reclassified to conform with the 2006 presentation.
10
(3) Earnings per Share
------------------
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations for the three and
nine months ended September 30, 2006 and 2005:
Three months ended Nine months ended
September 30, September 30,
2006 2005 2006 2005
----------- ----------- ----------- -----------
BASIC
Income from continuing operations $ 1,613 $ 5,545 $ 9,987 $ 21,898
Less preferred dividends (4,109) (4,109) (12,326) (12,326)
----- ----- -------- --------
Income (loss) allocable to common
shareholders from continuing
operations (2,496) 1,436 (2,339) 9,572
Total income (loss) from discontinued operations (19,208) 3,425 4,015 12,547
-------- ----- ----- ------
Net income (loss) allocable to common shareholders $ (21,704) $ 4,861 $ 1,676 $ 22,119
======== ===== ===== =====
Weighted average number of common shares outstanding 52,279,750 50,837,178 52,081,514 49,269,497
========== ========== ========== ==========
Income (loss) per common share - basic:
Income (loss) from continuing operations $ (0.05) $ 0.03 $ (0.05) $ 0.19
Income (loss) from discontinued operations (0.37) 0.07 0.08 0.26
------ ---- ---- ----
Net income (loss) $ (0.42) $ 0.10 $ 0.03 $ 0.45
====== ==== ==== ====
DILUTED
Income (loss) allocable to common shareholders from
continuing operations - basic $ (2,496) $ 1,436 $ (2,339) $ 9,572
Incremental income attributed to assumed conversion of
dilutive securities - (48) - 695
--------- --------- --------- ----------
Income (loss) allocable to common shareholders from
continuing operations (2,496) 1,388 (2,339) 10,267
Total income (loss) from discontinued operations (19,208) 3,425 4,015 12,547
-------- ----- ----- ------
Net income (loss) allocable to common shareholders $ (21,704) $ 4,813 $ 1,676 $ 22,814
======== ===== ===== ======
Weighted average number of common shares used in
calculation of basic earnings per share 52,279,750 50,837,178 52,081,514 49,269,497
Add incremental shares representing:
Shares issuable upon exercise of employee share options - 78,046 - 78,382
Shares issuable upon conversion of dilutive securities - 6,849,435 - 6,849,435
---------- --------- --------- ---------
Weighted average number of shares used in calculation
of diluted earnings per common share 52,279,750 57,764,659 52,081,514 56,197,314
========== ========== ========== ==========
Income (loss) per common share - diluted:
Income (loss) from continuing operations $ (0.05) $ 0.02 $ (0.05) $ 0.18
Income (loss) from discontinued operations (0.37) 0.06 0.08 0.23
------ ---- ---- ----
Net income (loss) $ (0.42) $ 0.08 $ 0.03 $ 0.41
====== ==== ==== ====
(4) Investments in Real Estate and Mortgage Notes Receivable
-------------------------------------------------------
During the nine months ended September 30, 2006, the Company acquired
one property in the Netherlands for an initial capitalized cost of
$40,061 and allocated $15,716 of the purchase price to intangible
assets.
During the nine months ended September 30, 2006, the Company purchased
a $13,027 face amount mortgage note receivable for $11,144, for an
effective yield at 7.50%. The note matures in 2015 and requires
interest payments at 4.55% per annum on the face amount and principal
payments.
11
(5) Discontinued Operations
-----------------------
During the first quarter of 2006, the Company sold two properties for
an aggregate net sales price of $28,239 resulting in a gain of $2,320.
During the second quarter of 2006, the Company sold three properties
and a parcel of a fourth property for an aggregate net sales price of
$44,893 resulting in a net gain of $13,730. The Company provided a
$3,200, 6.00% interest only mortgage due in 2017 relating to a sale of
one property.
During the third quarter of 2006, the Company sold the remaining parcel
of one property for an aggregate net sales price of $2,792 resulting in
a net gain of $1,470.
In addition, the Company had one property (Warren, Ohio) held for sale
as of September 30, 2006. In September 2006, the tenant in the Warren,
Ohio property exercised its option to purchase the property at fair
market value, as defined in the purchase agreement. Appraisals received
estimate the maximum fair market value, as defined, will not exceed
approximately $15,800. As a result of the exercise of the purchase
option, the Company has recorded an impairment charge of $28,209
(including $6,597 applicable to minority interest) in the third quarter
of 2006.
The following presents the operating results for the properties sold
and properties held for sale for the applicable periods:
Three Months Ended September 30, Nine Months Ended September 30,
2006 2005 2006 2005
------------- ------------- ------------- ---------
Rental revenues $ 2,233 $ 4,849 $ 8,235 $ 15,106
Pre-tax income (loss), including gains on sale (19,210) 3,425 4,087 12,547
(6) Investment in Non-Consolidated Entities
---------------------------------------
As of September 30, 2006, the Company has direct investments in eight
non-consolidated entities. During the nine months ended September 30,
2006, these entities purchased seven properties for an aggregate
capitalized cost of $88,185.
During the nine months ended September 30, 2006, the non-consolidated
entities obtained six separate mortgages encumbering six properties
aggregating $59,538 with a weighted average stated interest rate of
6.00% and maturity dates ranging from April 2016 to November 2019.
During the second quarter of 2006, in connection with an acquisition of
a property from a third party, the Company advanced an $8,300 mortgage
note to one entity, which was scheduled to mature in October 2006. The
mortgage note was repaid in September 2006. During the first quarter of
2005, another entity repaid $45,800 in advances made by the Company.
During the third quarter of 2006, one non-consolidated entity issued a
$1,750 mortgage note to a tenant which bears interest at LIBOR plus
3.0% and matures in 2011.
The following is a summary combined balance sheet data as of September
30, 2006 and income statement data for the nine months ended September
30, 2006 and 2005 for the Company's non-consolidated entities:
\
2006
----
Real estate, net $ 1,420,700
Intangibles, net 147,693
Mortgages payable 1,044,414
2006 2005
---- ----
Gross revenues $ 123,737 $ 103,798
Expenses, net (118,884) (92,899)
Debt satisfaction -- (1,953)
Gain on sale -- 5,219
--------- -------
Net income $ 4,853 $ 14,165
========== ========
The Company earned advisory fees of $950 and $2,994 for the three and
nine months ended September 30, 2006, respectively, and $849 and $3,680
for the three and nine months ended September 30, 2005, respectively,
relating to these entities.
12
(7) Mortgages and Notes Payable
---------------------------
During the first quarter of 2006, the Company refinanced its property
in Dillon, South Carolina. The Company repaid the existing debt on the
property of $11,420 and incurred debt satisfaction charges of
approximately $904.
During the second quarter of 2006, the Company sold two properties
encumbered by mortgage debt, which resulted in debt satisfaction
charges of approximately $446.
During the second quarter of 2006, the Company refinanced its property
in Boca Raton, Florida. The Company repaid the existing debt on the
property of $15,275 and incurred debt satisfaction charges of
approximately $218.
During the second quarter of 2006, the Company transferred its
Milpitas, California property which was encumbered by a $11,869
mortgage to the lender in a foreclosure, which resulted in a $6,289
debt satisfaction gain.
During the second quarter of 2006, the Company repaid the $10,525
mortgage on its Southfield, Michigan property for $9,022, which
resulted in a debt satisfaction gain of $1,460.
During the third quarter of 2006, the Company refinanced its property
in Phoenix, Arizona. The Company repaid the existing debt on the
property of $13,341 and incurred debt satisfaction charges of
approximately $510.
During 2006, the Company obtained the following mortgages:
Property Amount Rate Maturity
-------- ------ ---- --------
Dillon, South Carolina $ 23,750 5.97% 2022
Renswoude, The Netherlands 33,785 5.31% 2011
Boca Raton, Florida 20,400 6.47% 2020
Phoenix, Arizona 19,250 6.27% 2013
In addition, the purchaser of a property assumed a $14,170 mortgage
note in connection with the sale by the Company.
(8) Concentration of Risk
---------------------
The Company seeks to reduce its operating and leasing risks through
diversification achieved by the geographic distribution of its
properties, tenant industry diversification, avoiding dependency on a
single property and the creditworthiness of its tenants. For the three
and nine months ended September 30, 2006 and 2005, no single tenant
represented greater than 10% of rental revenues.
In March 2006, Dana Corporation ("Dana"), a tenant in 11 properties,
including non-consolidated entities, filed for Chapter 11 bankruptcy.
Dana succeeded on motions to reject leases on 2 properties owned by the
Company and a non-consolidated entity and has affirmed the other 9
leases. During the second quarter of 2006, the Company recorded an
impairment charge of $1,121 and accelerated amortization of an
above-market lease of $2,349, relating to the write off of lease
intangibles and the above-market lease for the disaffirmed lease of a
consolidated property. In addition, the Company's proportionate share
from a non-consolidated entity of the impairment charge and accelerated
amortization of an above-market lease for a disaffirmed lease was $551
and $1,412, respectively. In addition, the Company, including its
interest through a non-consolidated entity, sold its bankruptcy claims
related to the 2 rejected leases for approximately $7,100 which
resulted in a gain of approximately $6,900.
Cash and cash equivalent balances may exceed insurable amounts. The
Company believes it mitigates this risk by investing in or through
major financial institutions.
13
(9) Minority Interests
------------------
In conjunction with several of the Company's acquisitions in prior
years, sellers were given units in the Company's operating partnerships
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 and are not
otherwise mandatorily redeemable by the Company.
As of September 30, 2006, there were 5,619,358 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 $543 and $9,273 as of September 30, 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 September 30, 2006, the Company, including its non-consolidated
entities, has entered into binding letters of intent to purchase three
properties for an aggregate estimated obligation of $65,126.
On July 23, 2006, the Company entered into a definitive merger
agreement with Newkirk Realty Trust, Inc. ("Newkirk"). Under the merger
agreement each share of Newkirk common stock will be exchanged for 0.80
common shares of the Company. Following the merger, Newkirk
stockholders and unit holders will own approximately 46.8% and the
Company's shareholders and unit holders will own approximately 53.2% of
the fully diluted common shares of the combined company assuming no
conversion of the Company's Series C Cumulative Convertible Preferred
Stock. The transaction is expected to close in the fourth quarter of
2006, subject to the approval of the voting shareholders of both
companies and other customary conditions.
The merger agreement contains certain termination rights for both the
Company and Newkirk and provides that in certain specified
circumstances, a terminating party must pay the other party's expenses
up to $5 million in connection with the proposed transaction. In
addition, the agreement provides that in certain specified
circumstances (generally in the event a terminating party enters into
an alternative transaction within six months of termination), a
terminating party must also pay the other party a break-up fee of up to
$25 million (less expenses, if any, previously paid by the terminating
party to the non-terminating party).
(11) Supplemental Disclosure of Statement of Cash Flow Information
-------------------------------------------------------------
During the nine months ended September 30, 2006 and 2005, the Company
paid $54,630 and $49,882, respectively, for interest and $232 and
$1,659, respectively, for income taxes.
During the nine months ended September 30, 2006 and 2005, holders of an
aggregate of 95,205 and 33,864 operating partnership units,
respectively, redeemed such units for common shares of the Company.
These redemptions resulted in an increase in shareholders' equity and
corresponding decrease in minority interest of $1,085 and $398,
respectively.
During the nine months ended September 30, 2006 and 2005, the Company
recognized $4,859 and $2,724, respectively in compensation relating to
share grants to trustees and employees.
During the nine months ended September 30, 2006, the Company sold a
property in which the purchaser assumed a mortgage note encumbering the
property in the amount of $14,170. In addition, the Company provided a
$3,200, 6.00% interest only mortgage due in 2017 relating to the sale
of another property.
During the nine months ended September 30, 2005, the Company provided
$11,050 in secured financing relating to a sale of a property and
assumed $3,056 in obligations relating to acquisitions of properties.
14
(12) Subsequent Events
-----------------
Subsequent to September 30, 2006, the Company completed the following
transactions:
o acquired three properties for an aggregate purchase price of
$22,095;
o obtained a $9,425 non-recourse mortgage which bears interest at
6.06% and matures November 2016;
o entered into a one - year lease extension with its tenant at its
Oberlin, Ohio property for an annual rent of $748;
o purchased for $27,723 a 28.7% interest in Lexington Strategic Asset
Corp. ("LSAC"), a taxable REIT subsidiary, increasing its ownership
in LSAC to approximately 61% (commencing in the fourth quarter of
2006, LSAC will be consolidated with the Company);
o borrowed $20,500 on its line of credit; and
o repurchased 190,000 common shares at an average cost of $20.72 per
common share.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
--------------------------
The following is a discussion and analysis of Lexington Corporate Properties
Trust's (the "Company's") consolidated financial condition and results of
operations for the three and nine months periods ended September 30, 2006 and
2005, and the significant factors that could affect the Company's prospective
financial condition and results of operations. This discussion should be read
together with the accompanying unaudited condensed consolidated financial
statements and notes and with the Company's consolidated financial statements
and notes included in the Company's Annual Report on Form 10-K/A for the year
ended December 31, 2005. Historical results may not be indicative of future
performance.
This quarterly report on Form 10-Q, together with other statements and
information publicly disseminated by the Company contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The Company intends such forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995 and includes this statement for
purposes of complying with these safe harbor provisions. Forward-looking
statements, which are based on certain assumptions and describe the Company's
future plans, strategies and expectations, are generally identifiable by use of
the words "believes," "expects," "intends," "anticipates," "estimates,"
"projects" or similar expressions. Readers should not rely on forward-looking
statements since they involve known and unknown risks, uncertainties and other
factors which are, in some cases, beyond the Company's control and which could
materially affect actual results, performances or achievements. In particular,
among the factors that could cause actual results to differ materially from
current expectations include, but are not limited to, (i) the failure to
continue to qualify as a real estate investment trust, (ii) changes in general
business and economic conditions, (iii) competition, (iv) increases in real
estate construction costs, (v) changes in interest rates, (vi) changes in
accessibility of debt and equity capital markets and other risks inherent in the
real estate business, including, but not limited to, tenant defaults, potential
liability relating to environmental matters, the availability of suitable
acquisition opportunities and illiquidity of real estate investments, (vii)
changes in governmental laws and regulations, (viii) increases in operating
costs and (ix) the risk factors noted in Part II, Item 1A. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Accordingly, there is no assurance that the Company's
expectations will be realized.
General
-------
The Company, which has elected to qualify as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended, (the "Code")
acquires, owns and manages net-leased commercial properties. The Company
believes that it has operated as a REIT since October 1993.
As of September 30, 2006, the Company owned, or had interests in, 191 real
estate properties and managed 2 additional properties.
On July 23, 2006, the Company entered into a definitive merger agreement with
Newkirk Realty Trust, Inc. ("Newkirk"). Under the merger agreement each share of
Newkirk common stock will be exchanged for 0.80 common shares of the Company.
Following the merger, Newkirk stockholders and unit holders will own
approximately 46.8% and the Company's shareholders and unit holders will own
approximately 53.2% of the fully diluted common shares of the combined company
assuming no conversion of the Company's Series C Cumulative Convertible
Preferred Stock. The transaction is expected to close in the fourth quarter of
2006, subject to the approval of the voting shareholders of both companies and
other customary conditions.
The merger agreement contains certain termination rights for both the Company
and Newkirk and provides that in certain specified circumstances, a terminating
party must pay the other party's expenses up to $5 million in connection with
the proposed transaction. In addition, the agreement provides that in certain
specified circumstances (generally in the event a terminating party enters into
an alternative transaction within six months of termination), a terminating
party must also pay the other party a break-up fee of up to $25 million (less
expenses, if any, previously paid by the terminating party to the
non-terminating party).
Critical Accounting Policies
----------------------------
The Company's accompanying unaudited condensed consolidated financial statements
have been prepared in conformity with accounting principles generally accepted
in the United States of America, which require management to make estimates that
affect the amounts of revenues, expenses, assets and liabilities reported. The
following are critical accounting policies which are very important to the
portrayal of the Company's financial condition and results of operations and
which require some of management's most difficult, subjective and complex
judgments. The accounting for these matters involves the making of estimates
based on current facts,
16
circumstances and assumptions which could change in a manner that might
materially affect management's future estimate with respect to such matters.
Accordingly, future reported financial conditions and results could differ
materially from financial conditions and results reported based on management's
current estimates.
Purchase Accounting for Acquisition of Real Estate. The fair value of the real
estate acquired, which includes the impact of mark-to-market adjustments for
assumed mortgage debt related to property acquisitions, is allocated to the
acquired tangible assets, consisting of land, building and improvements,
fixtures and equipment and identified intangible assets and liabilities,
consisting of the value of above-market and below-market leases, other value of
in-place leases and value of tenant relationships, based in each case on their
fair values.
The fair value of the tangible assets of an acquired property (which includes
land, building and improvements and fixtures and equipment) is determined by
valuing the property as if it were vacant, and the "as-if-vacant" value is then
allocated to land, building and improvements and fixtures and equipment based on
management's determination of relative fair values of these assets. Factors
considered by management in performing these analyses include an estimate of
carrying costs during the expected lease-up periods considering current market
conditions and costs to execute similar leases. In estimating carrying costs,
management includes real estate taxes, insurance and other operating expenses
and estimates of lost rental revenue during the expected lease-up periods based
on current market demand. Management also estimates costs to execute similar
leases including leasing commissions.
In allocating the fair value of the identified intangible assets and liabilities
of an acquired property, above-market and below-market in-place lease values are
recorded based on the difference between the current in-place lease rent and a
management estimate of current market rents. Below-market lease intangibles are
recorded as part of deferred revenue and amortized into rental revenue over the
non-cancelable periods of the respective leases and any bargain renewal options,
if applicable. Above-market leases are recorded as part of intangible assets and
amortized as a direct charge against rental revenue over the non-cancelable
portion of the respective leases.
The aggregate value of other acquired intangible assets, consisting of in-place
leases and tenant relationships, is measured by the excess of (i) the purchase
price paid for a property over (ii) the estimated fair value of the property as
if vacant, determined as set forth above. This aggregate value is allocated
between in-place lease values and tenant relationships based on management's
evaluation of the specific characteristics of each tenant's lease. The value of
in-place leases and customer relationships are amortized to expense over the
remaining non-cancelable periods of the respective leases.
Revenue Recognition. The Company recognizes revenue in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 13, Accounting for Leases, as
amended ("SFAS 13"). SFAS 13, requires that revenue be recognized on a
straight-line basis over the term of the lease unless another systematic and
rational basis is more representative of the time pattern in which the use
benefit is derived from the leased property. Renewal options in leases with
rental terms that are lower than those in the primary term are excluded from the
calculation of straight-line rent if they do not meet the criteria of a bargain
renewal option. In those instances in which the Company funds tenant
improvements and the improvements are deemed to be owned by the Company, revenue
recognition will commence when the improvements are substantially completed and
possession or control of the space is turned over to the tenant. When the
Company determines that the tenant allowances are lease incentives, the Company
commences revenue recognition when possession or control of the space is turned
over to the tenant for tenant work to begin. The lease incentive is recorded as
a deferred expense and amortized as a reduction to revenue on a straight-line
basis over the respective lease term.
Gains on sales of real estate are recognized pursuant to the provisions of SFAS
No. 66, Accounting for Sales of Real Estate, as amended ("SFAS 66"). The
specific timing of the sale is measured against various criteria in SFAS 66
related to the terms of the transactions and any continuing involvement in the
form of management or financial assistance associated with the properties. If
the sales criteria are not met, the gain is deferred and the finance,
installment or cost recovery method, as appropriate, is applied until the sales
criteria are met.
Accounts Receivable. The Company continuously monitors collections from its
tenants and would make a provision for estimated losses based upon historical
experience and any specific tenant collection issues that the Company has
identified. As of September 30, 2006 and December 31, 2005, the Company did not
record an allowance for doubtful accounts.
Impairment of Real Estate. The Company evaluates the carrying value of all real
estate held when a triggering event under SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, as amended ("SFAS 144") has
occurred to determine if an impairment has occurred which would require the
recognition of a loss. The evaluation includes reviewing anticipated cash flows
of the property, based on current leases in place, and an estimate of market
rent after assumed lease up period for vacant properties coupled with an
estimate of proceeds to be realized upon sale. However, estimating market lease
rents and future sale proceeds is highly subjective and such estimates could
differ materially from actual results.
Tax Status. The Company has made an election to qualify, and believes it is
operating so as to qualify, as a REIT for Federal income tax purposes.
Accordingly, the Company generally will not be subject to Federal income tax,
provided that distributions to its shareholders equal at least the amount of its
REIT taxable income as defined under Section 856 through 860 of the Code.
The Company is now permitted to participate in certain activities from which it
was previously precluded in order to maintain its qualification as a REIT,
so long as these activities are conducted in entities which elect to be treated
as taxable subsidiaries under the
17
Code. Lexington Realty Advisors, Inc., Lexington Contributions Inc. and
Lexington Strategic Asset Corp. have elected to be treated as taxable REIT
subsidiaries. As such, the Company is subject to Federal and state income taxes
on the income from these activities.
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis and operating loss and tax credit carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or settled.
Properties Held For Sale. The Company accounts for properties held for sale in
accordance with SFAS 144. SFAS 144 requires that the assets and liabilities of
properties that meet various criteria in SFAS 144 be presented separately in the
balance sheet, with assets and liabilities being separately stated. The
operating results of these properties are reflected as discontinued operations
in the statement of income. Properties that do not meet the held for sale
criteria of SFAS 144 are accounted for as operating properties.
Basis of Consolidation. The Company determines whether an entity for which it
holds an interest should be consolidated pursuant to Financial Accounting
Standards Board Interpretation No. 46, Consolidation of Variable Interest
Entities ("FIN 46R"). FIN 46R requires the Company to evaluate whether it has a
controlling financial interest in an entity through means other than voting
rights. If the entity is not a variable interest entity, and the Company
controls the entity's voting shares and similar rights, the entity is
consolidated.
Liquidity and Capital Resources
-------------------------------
Real Estate Assets. As of September 30, 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. Substantially all
of the properties are subject to triple net leases, which are generally
characterized as leases in which the tenant pays all or substantially all of the
cost and cost increases for real estate taxes, capital expenditures, insurance,
utilities and ordinary maintenance of the property. Approximately 97.8% of the
total square feet is subject to a lease.
During the nine months ended September 30, 2006, the Company, including
non-consolidated entities, purchased eight properties for an aggregate
capitalized cost of $128.2 million and sold six properties to third parties
resulting in an aggregate net gain of $17.5 million.
The Company's principal sources of liquidity are revenues generated from its
properties, interest on cash balances, amounts available under its unsecured
credit facility and amounts that may be raised through the sale of securities in
private or public offerings. For the nine months ended September 30, 2006, the
leases on the consolidated properties generated $137.1 million in gross rental
revenue compared to $122.5 million during the same period in 2005.
In March 2006, Dana Corporation ("Dana"), a tenant in 11 properties, including
those owned by non-consolidated entities, filed for Chapter 11 bankruptcy. Dana
succeeded on motions to reject leases on two properties, one owned by the
Company and the other owned by a non-consolidated entity and has affirmed the
other nine leases. During the second quarter of 2006, the Company recorded an
impairment charge and accelerated amortization of above-market leases of $5.4
million (including the Company's proportionate share from a non-consolidated
entity), relating to the write off of above-market leases and lease intangibles
of the two rejected leases.
Dividends. The Company has made quarterly distributions since October 1986
without interruption. The Company declared a common dividend of $0.365 per share
to common shareholders of record as of October 2, 2006, payable on October 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 October 31, 2006,
payable on November 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 October 31, 2006, payable on November 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 nine months
ended September 30, 2006 and 2005 were $70.2 million and $64.3 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.
18
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 $85.1 million and $78.6 million for the nine months ended
September 30, 2006 and 2005, respectively. The underlying drivers that impact
working capital and therefore cash flows from operations are the timing of
collection of rents, including reimbursements from tenants, the collection of
advisory fees, payment of interest on mortgage debt and payment of operating and
general and administrative costs. The Company believes the net lease structure
of the majority of its tenants leases enhances cash flows from operations since
the payment and timing of operating costs related to the properties are
generally borne directly by the tenant. Collection and timing of tenant rents is
closely monitored by management as part of its cash management program.
Net cash used in investing activities totaled $18.4 million and $642.6 million
for the nine months ended September 30, 2006 and 2005, respectively. Cash used
in investing activities was primarily attributable to the acquisition of and
deposits made for real estate, the investment in non-consolidated entities,
investment in notes receivable and investment in marketable securities. Cash
provided by investing activities relates primarily to the sale of properties,
the collection of notes receivable and distributions from non-consolidated
entities.
Net cash (used in) provided by financing activities totaled $(57.3) million and
$478.1 million for the nine months ended September 30, 2006 and 2005,
respectively. Cash used in financing activities was primarily attributable to
dividends (net of proceeds reinvested under the Company's dividend reinvestment
plan), distributions to limited partners and debt service payments. Cash
provided by financing activities relates primarily to proceeds from equity
offerings and mortgage financings.
UPREIT Structure. The Company's UPREIT structure permits the Company to effect
acquisitions by issuing to a seller, as a form of consideration, interests in
operating partnerships controlled by the Company. All of such interests are
redeemable, at the option of the holder, at certain times for common shares on a
one-for-one basis and all of such interests require the Company to pay certain
distributions to the holders of such interests in accordance with the respective
operating partnership agreements. The Company accounts for these interests in a
manner similar to a minority interest holder. The number of common shares that
will be outstanding in the future should be expected to increase, and minority
interest expense should be expected to decrease, from time to time, as such
operating partnership interests are redeemed for common shares. As of September
30, 2006, there were 5,619,358 operating partnership units, of which 1,666,720
partnership units are held by E. Robert Roskind, Chairman and Richard J. Rouse,
Vice Chairman and Chief Investment Officer. The current average annual
distribution is $1.37 per unit.
Share Repurchase Program
------------------------
The Company's board of trustees has authorized the repurchase of up to 2.0
million common shares/operating partnership units. The Company repurchased
73,912 common shares/units at an average cost of $19.86 per common share/unit
during the nine months ended September 30, 2006.
Financing
---------
Revolving Credit Facility. The Company's $200.0 million unsecured revolving
credit facility, which expires in June 2008, bears interest at a rate of LIBOR
plus 120-170 basis points depending on the Company's leverage level. The
unsecured revolving credit facility contains customary financial covenants
including restrictions on the level of indebtedness, amount of variable rate
debt to be borrowed and net worth maintenance provisions. As of September 30,
2006, the Company was in compliance with all covenants, there were no borrowings
outstanding, $167.3 million was available to be borrowed and $32.7 million in
letters of credit were outstanding.
Debt Service Requirements. The Company's principal liquidity needs are for the
payment of interest and principal on outstanding mortgage debt. As of September
30, 2006, total outstanding mortgages were approximately $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 $6.3
million, $35.0 million, $30.1 million, $32.0 million and $30.8 million,
respectively. As of September 30, 2006, the estimated scheduled balloon payments
for the remainder of 2006 and for 2007, 2008, 2009 and 2010 are $0, $0, $31.1
million, $37.0 million and $56.6 million, respectively.
Other
-----
Lease Obligations. Since the Company's tenants generally bear all or
substantially all of the cost of property operations, maintenance and repairs,
the Company does not anticipate significant needs for cash for these costs.
However, the Company is responsible for operating expenses in vacant properties
and for certain leases which contain expense stops. The Company generally funds
property expansions with available cash and additional secured borrowings, the
repayment of which is funded out of rental increases under the leases covering
the expanded properties.
19
The Company's tenants pay the rental obligation on ground leases either directly
to the fee holder or to the Company as increased rent. The annual ground lease
rental payment obligations for 2007, 2008, 2009, 2010 and 2011 are approximately
$1.2 million, $1.2 million, $1.2 million, $1.0 million and $0.9 million,
respectively.
Capital Expenditures. Due to the triple net lease structure, the Company does
not incur significant expenditures in the ordinary course of business to
maintain its properties. However, in the future, as leases expire, the Company
expects to incur costs in extending the existing tenant lease or re-tenanting
the properties. The amounts of these expenditures can vary significantly
depending on tenant negotiations, market conditions and rental rates. These
expenditures are expected to be funded from operating cash flows or borrowings
on the unsecured revolving credit facility. As of September 30, 2006, the
Company, including through non-consolidated entities, has entered into binding
letters of intent to purchase 3 properties for an aggregate estimated obligation
of $65.1 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.
Results of Operations
Three months ended September 30, 2006 compared with September 30, 2005
----------------------------------------------------------------------
Changes in the results of operations for the Company are primarily due to the
growth of its portfolio, costs associated with such growth, the timing of
acquisitions and other items discussed below. Of the decrease in total gross
revenues in 2006 of $1.0 million, $1.2 million is attributable to rental revenue
due to increased vacancy. The offsetting $0.2 million increase in gross revenues
in 2006 was primarily attributable to an increase in tenant reimbursements of
$0.1 million and an increase in advisory fees of $0.1 million. The decrease in
interest and amortization expense of $0.4 million is due to interest savings
resulting from scheduled principal amortization payments and mortgage
satisfactions. The increase in property operating expense of $0.4 million is
primarily due to an increase in properties for which the Company has operating
expense responsibility, including vacancies. The increase in depreciation and
amortization expense of $0.5 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 $1.2
million is due primarily to an increase in personnel costs, trustee fees and
professional service fees. Non-operating income increased $0.7 million primarily
due to interest earned and dividends received on investments made in 2006. Debt
satisfaction charges, net increased $0.5 million due to timing of debt
satisfactions. Minority interest expense decreased $0.3 million due to a
decrease in earnings at the partnership level. Equity in earnings of
non-consolidated entities decreased by $1.3 million primarily due to the impact
of a gain on the sale of a property and debt satisfaction charge in 2005. Net
income decreased in 2006 (to a net loss) by $26.6 million primarily due to the
net impact of items discussed above coupled with a decrease (to a net loss) of
$22.6 million in income from discontinued operations. The total discontinued
operations decrease of $22.6 million is primarily comprised of an increase in
impairment charges of $21.4 million (primarily relating to the Warren, Ohio
property) plus a decrease of $1.1 million in income from discontinued
operations. Income from discontinued operations decreased due to less properties
in discontinued operations in 2006 compared with 2005. Net income applicable to
common shareholders decreased by $26.6 million due to the items discussed above.
Nine months ended September 30, 2006 compared with September 30, 2005
---------------------------------------------------------------------
Changes in the results of operations for the Company are primarily due to the
growth of its portfolio, costs associated with such growth, the timing of
acquisitions and other items discussed below. Of the increase in total gross
revenues in 2006 of $19.3 million, $14.6 million is attributable to rental
revenue due to acquisitions in 2005 and 2006. The remaining $4.7 million
increase in gross revenues in 2006 was primarily attributable to an increase in
tenant reimbursements of $5.4 million offset by a decrease in advisory fees of
$0.7 million. The increase in interest and amortization expense of $7.5 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 $8.1 million is
primarily due to an increase in properties for which the Company has operating
expense responsibility, including vacancies. The increase in depreciation and
amortization expense of $12.3 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 $2.7
million is due primarily to an increase in personnel costs and trustee fees
offset by a reduction in dead deal costs. Non-operating income increased $6.5
million primarily due to the sale of a Dana Corporation bankruptcy claim in
2006. Debt satisfaction gains, net decreased $4.8 million due to the timing of
debt satisfactions. Impairment charges increased due to the write off of
intangible assets relating to a tenant bankruptcy. Minority interest expense
decreased $0.9 million due to a decrease in earnings at the partnership level.
Equity in earnings of non-consolidated entities decreased by $2.0 million
primarily due to the impact of the write off of lease intangibles and the
acceleration of above-market lease
20
amortization offset by a gain on the sale of a Dana Corporation bankruptcy claim
in 2006 compared with a gain on sale of a property and debt satisfaction charge
in 2005. Net income decreased in 2006 by $20.4 million primarily due to the net
impact of items discussed above coupled with a decrease of $8.5 million in
income from discontinued operations. The total discontinued operations decrease
of $8.5 million is comprised of an increase in gains on sales of properties of
$10.9 million and an increase in debt satisfaction gains of $5.0 million offset
by a $20.8 million increase in impairment charges (primarily relating to the
Warren, Ohio property) and a decrease of $3.6 million in income from
discontinued operations. Income from discontinued operations decreased due to
less properties in discontinued operations in 2006 compared with 2005. Net
income applicable to common shareholders decreased by $20.4 million due to the
items discussed above.
The increase in net income in future periods will be closely tied to the level
of acquisitions and dispositions made by the Company. Without acquisitions,
which in addition to generating rental revenue, generate acquisition, debt
placement and asset management fees from non-consolidated entities, the sources
of growth in net income are limited to index adjusted rents (such as the
consumer price index), percentage rents, reduced interest expense on amortizing
mortgages and by controlling other variable overhead costs. However, there are
many factors beyond management's control that could offset these items
including, without limitation, increased interest rates and tenant monetary
defaults. As discussed in note 10 to the unaudited condensed consolidated
financial statements, the Company has entered into a definitive merger agreement
with Newkirk Realty Trust, Inc.
Off-Balance Sheet Arrangements
------------------------------
Non-Consolidated Real Estate Entities. As of September 30, 2006, the Company has
investments in various non-consolidated real estate entities with varying
structures. The properties owned by the non-consolidated entities are financed
with individual non-recourse mortgage loans. Non-recourse mortgage debt is
generally defined as debt whereby the lenders' sole recourse with respect to
borrower defaults is limited to the value of the property collateralized by the
mortgage. The lender generally does not have recourse against any other assets
owned by the borrower or any of the members of the borrower, except for certain
specified exceptions listed in the particular loan documents. These exceptions
generally relate to limited circumstances including breaches of material
representations and fraud.
The Company invests in non-consolidated entities with third parties to increase
portfolio diversification, reduce the amount of equity invested in any one
property and to increase returns on equity due to the realization of advisory
fees. See note 6 to the unaudited condensed consolidated financial statements
for combined summary balance sheet and income statement data relating to these
entities.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK ($000's)
--------------------------------------
The Company's exposure to market risk relates primarily to its variable rate and
fixed rate debt. As of September 30, 2006 and 2005, the Company's variable rate
indebtedness was $0 and $12,305, respectively, which represented 0% and 1.0% of
total long-term indebtedness, respectively. During the three months ended
September 30, 2006 and 2005, this variable-rate indebtedness had a weighted
average interest rate of 0% and 5.8%, respectively. During the nine months ended
September 30, 2006 and 2005, this variable rate indebtedness had a
weighted-average interest rate of 8.1% and 5.9%, respectively. Had the weighted
average interest rate been 100 basis points higher, the Company's net income
would have been reduced by approximately $0 and $66 for the three and nine
months ended September 30, 2006, respectively, and $65 and $137 for the three
months and nine months ended September 30, 2005, respectively. As of September
30, 2006 and 2005, the Company's fixed rate debt was $1,155,000 and $1,199,557,
respectively, which represented 100.0% and 99.0%, respectively, of total
long-term indebtness. The weighted average interest rate as of September 30,
2006 of fixed rate debt was 6.0%, which is approximately 18 basis points lower
than the fixed rate debt incurred by the Company during the three months ended
September 30, 2006. With no fixed rate debt maturing until 2008, the Company
believes it has limited market risk exposure to rising interest rates as it
relates to its fixed rate debt obligations. However, had the fixed interest rate
been higher by 100 basis points, the Company's net income would have been
reduced by $2,890 and $8,736 for the three and nine months ended September 30,
2006, respectively, and by $2,881 and $7,351 for the three and nine months ended
September 30, 2005, respectively.
21
ITEM 4. CONTROLS AND PROCEDURES
-------------------------------
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
(a) Disclosure Controls and Procedures. The Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective.
Internal Control Over Financial Reporting
-----------------------------------------
(b) Internal Control Over Financial Reporting. There have not been any changes
in the Company's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
22
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
The Company and its subsidiaries, from time to time, have been involved in
various items of litigation incidental to and in the ordinary course of our
business. The Company is not presently involved in any litigation, nor to its
knowledge is any litigation threatened against the Company or its subsidiaries,
that in management's opinion, would result in any material adverse effect on the
Company's ownership, management or operation of its properties, or which is not
covered by the Company's liability insurance.
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, except as
described below.
The risks described below relate primarily to the merger of Newkirk with and
into us and the combined company resulting from the merger.
Risks Relating to the Merger
The operations of Lexington and Newkirk may not be integrated successfully, and
the intended benefits of the merger may not be realized.
The merger will present challenges to management, including the integration of
the operations and properties of Lexington and Newkirk. The merger will also
pose other risks commonly associated with similar transactions, including
unanticipated liabilities, unexpected costs and the diversion of management's
attention to the integration of the operations of Lexington and Newkirk. Any
difficulties that the combined company encounters in the transition and
integration processes, and any level of integration that is not successfully
achieved, could have an adverse effect on the revenue, level of expenses and
operating results of the combined company. The combined company may also
experience operational interruptions or the loss of key employees, tenants and
customers. As a result, notwithstanding our expectations, the combined company
may not realize any of the anticipated benefits or cost savings of the merger.
The market value of the Lexington common shares that Newkirk common stockholders
will receive depends on what the market price of Lexington common shares will be
at the effective time of the merger and will decrease if the market value of
Lexington common shares decreases.
The market value of the Lexington common shares that Newkirk common stockholders
will receive as part of the merger consideration depends on what the trading
price of Lexington common shares will be at the effective time of the merger.
The 0.80 exchange ratio that determines the number of Lexington common shares
that Newkirk common stockholders are entitled to receive in the merger is fixed.
This means that there is no "price protection" mechanism in the merger agreement
that would adjust the number of Lexington common shares that Newkirk common
stockholders may receive in the merger as a result of increases or decreases in
the trading price of Lexington common shares. If Lexington's common share price
decreases, then the market value of the merger consideration payable to Newkirk
common stockholders will also decrease.
Lexington and Newkirk expect to incur significant costs and expenses in
connection with the merger, which could result in the combined company not
realizing some or all of the anticipated benefits of the merger.
Lexington and Newkirk are expected to incur one-time, pre-tax closing costs of
approximately $35.5 million in connection with the merger. These costs include a
$12.5 million termination payment to NKT Advisors, LLC, which we refer to as NKT
Advisors, the external advisor of Newkirk, investment banking expenses, legal
and accounting fees, debt assumption fees, printing expenses and other related
charges incurred and expected to be incurred by Lexington and Newkirk.
Completion of the merger could trigger a mandatory prepayment (including a
penalty in some cases) of Lexington and Newkirk debt unless appropriate lender
consents or waivers are received. If those consents and waivers cannot be
obtained prior to completion of the merger, the existing Lexington and Newkirk
debt might need to be prepaid and/or refinanced. Lexington also expects to incur
one-time cash and non-cash costs related to the integration of Lexington and
Newkirk, which cannot be estimated at this time. There can be no assurance that
the costs incurred by Lexington and Newkirk in connection with the merger will
not be higher than expected or that the combined company will not incur
additional unanticipated costs and expenses in connection with the merger.
23
Directors and officers of Newkirk and certain security holders have interests in
the merger that may be different from, or in addition to, the interests of
Newkirk common stockholders generally.
Directors and officers of Newkirk and certain security holders have interests in
the merger that may be different from, or in addition to, the interests of
Newkirk common stockholders generally. Newkirk's board of directors was aware of
these interests and considered them, among other matters, in approving the
merger agreement, the merger and the related transactions and making their
recommendations. These interests include:
o the appointment of Michael L. Ashner, the current Chairman and Chief
Executive Officer of Newkirk, as Executive Chairman and Director of
Strategic Transactions of Lexington upon completion of the merger
pursuant to an employment agreement;
o the receipt of a termination payment of $12.5 million by NKT Advisors,
of which Mr. Ashner is Chairman and Chief Executive Officer. Vornado
Realty Trust, Inc., which we refer to as Vornado, an affiliate of
Newkirk board member and Lexington board designee Clifford Broser, as
well as a significant security holder of Newkirk, owns a 20% interest
in NKT Advisors and will be entitled to receive up to $2.5 million of
the termination fee being paid to NKT Advisors. Winthrop Realty Trust,
which we refer to as Winthrop, will also receive $4.4 million of the
$12.5 million payment for termination of Newkirk's advisory agreement
with NKT Advisors. Mr. Ashner is Chairman and Chief Executive Officer
of NKT Advisors and Chief Executive Officer of Winthrop and he and
other executive officers own a 28% minority interest in NKT Advisors
and a 7.3% interest in Winthrop;
o Winthrop owns 4,375,000 shares of Newkirk common stock which are
currently subject to a lock up agreement that is scheduled to expire on
November 7, 2008. As of September 1, 2006, 468,750 of the foregoing
shares were subject to forfeiture during a period expiring on November
7, 2008. Upon closing of the merger, the lock up and the forfeiture
provisions will terminate. If the merger does not occur, these shares
will be released from the forfeiture restrictions at the rate of 17,361
shares per month;
o For a period of one year following the merger, all existing management
agreements between Newkirk and Winthrop Management L.P., an affiliate
of Mr. Ashner, will not be terminated except in accordance with their
terms and Winthrop Management L.P. or its affiliate will be retained as
the property manager for all of the properties of the Newkirk Master
Limited Partnership, which we refer to as MLP, and all properties
acquired by Lexington during that time, in all cases where a property
manager is retained. After one year all such agreements may be
terminated by Lexington without cause;
o Lexington has agreed to grant exemption from its 9.8% ownership
limitation to two significant security holders in Newkirk, Apollo Real
Estate Investment Fund III, L.P., which we refer to as Apollo, and its
affiliates and Vornado Realty L.P., an affiliate of Vornado. Apollo and
Vornado were each previously granted ownership waivers by Newkirk in
connection with Newkirk's initial public offering;
o the early termination of lock up agreements with certain officers and
directors of Newkirk with respect to approximately 747,502 post-reverse
split MLP units; a lock up agreement restricting the sale of common
shares by Mr. Ashner will continue in full effect;
o the continued indemnification of current directors and officers of
Newkirk and NKT Advisors under the merger agreement and the provision
of directors' and officers' liability insurance to these individuals
and this entity; and
o the entry into the voting agreements with Michael L. Ashner and his
affiliates, and with Winthrop and with affiliates of Apollo.
For the above reasons, the directors and officers of Newkirk are more likely to
vote to approve the merger agreement, the merger and the related transactions
than if they did not have these interests. Newkirk common stockholders should
consider whether these interests may have influenced these directors and
officers to support or recommend approval of the merger agreement, the merger
and the related transactions.
Failure to complete the merger could negatively impact the price of Lexington
common shares and/or Newkirk common stock and future business and operations.
24
It is possible that the merger may not be completed. The parties' obligations to
complete the merger are subject to the satisfaction or waiver of specified
conditions, some of which are beyond the control of Lexington and Newkirk. For
example, the merger is conditioned on the receipt of the required approvals of
Lexington shareholders and Newkirk stockholders. If these approvals are not
received, the merger cannot be completed even if all of the other conditions to
the merger are satisfied or waived. If the merger is not completed for any
reason, Lexington and/or Newkirk may be subject to a number of material risks,
including the following:
o either company may be required under certain circumstances to reimburse
the other party for up to $5 million of expenses and, depending upon
the circumstances, may be required to pay a termination fee of $25
million (inclusive of any prior expense reimbursement paid by such
party);
o the price of Lexington common shares and/or Newkirk common stock may
decline to the extent that the current market prices of Lexington
common shares and Newkirk common stock reflects a market assumption
that the merger will be completed; and
o each company will have incurred substantial costs related to the
merger, such as legal, accounting and financial advisor fees, which
must be paid even if the merger is not completed.
Further, if the merger is terminated and either Lexington's board of trustees or
Newkirk's board of directors determines to seek another merger or business
combination, there can be no assurance that it will be able to find a party
willing to pay an equivalent or more attractive price than the price to be paid
in the merger. In addition, while the merger agreement is in effect and subject
to specified exceptions, each of Lexington and Newkirk is prohibited from
soliciting, initiating or encouraging or entering into any alternative
acquisition transactions, such as a merger, sale of assets or other business
combination, with any party other than Lexington or Newkirk, as the case may be.
Lexington or Newkirk may incur substantial expenses and payments if the merger
does not occur, which could discourage other potential parties to business
combinations with Lexington or Newkirk which might otherwise be desirable to the
shareholders of Lexington or the stockholders of Newkirk.
Lexington and Newkirk already have incurred substantial expenses in connection
with the merger. We cannot assure you that the merger will be consummated. The
merger agreement provides for Lexington or Newkirk to pay expenses of the other
party of up to $5 million to the other party if the merger agreement is
terminated by Lexington or Newkirk under specified circumstances. The merger
agreement also provides for Newkirk or Lexington to pay a termination fee of $25
million to the other party if the merger agreement is terminated by Newkirk or
Lexington under specified circumstances in which either party enters into an
alternative business combination with a third party within six months of
termination of the merger agreement. The termination fee will be reduced by any
prior expense payments by the paying party.
These termination payments may discourage some third party proposals to enter
into business combinations that Lexington shareholders or Newkirk stockholders
may otherwise find desirable to the extent that a potential acquiror would not
be willing to assume the $25 million termination fee.
After the merger is completed, Newkirk common stockholders will become
shareholders of Lexington and will have different rights that may be less
advantageous than their current rights.
After the closing of the merger, Newkirk common stockholders will become
Lexington common shareholders. Lexington is a Maryland real estate investment
trust and Newkirk is a Maryland corporation.
Differences in Lexington's Declaration of Trust and By-laws and Newkirk's
Charter and By-laws will result in changes to the rights of Newkirk common
stockholders when they become Lexington common shareholders. A Newkirk common
stockholder may conclude that its current rights under Newkirk's Charter and
By-laws are more advantageous than the rights they may have under Lexington's
Declaration of Trust and By-laws.
The merger will result in a reduction in per share distributions for Newkirk
common stockholders after the merger.
Assuming Lexington makes quarterly cash dividends at the rate of $0.375 per
common share after the merger, this dividend, from a Newkirk common
stockholder's perspective, would be equivalent to a quarterly distribution
payment of $0.30 per share of Newkirk common stock based on the exchange ratio
of 0.80, which is 25% less than Newkirk's current quarterly dividend of $0.40
per share of Newkirk common stock.
The parties have agreed to delay the closing until on or about December 29,
2006. However, neither party will have the right to terminate the merger
agreement after the satisfaction date due to the occurrence of a material
adverse effect with respect to the other party, or the material breach by the
other party of its representations or warranties or under the merger agreement.
25
The parties expect that all conditions to closing the merger will be satisfied
when and if shareholders and stockholders approve the merger at the November 20,
2006 special meetings. The parties have agreed to delay the closing until on or
about December 29, 2006. However, after the satisfaction date, neither party
will have the right to terminate the merger agreement due to the occurrence of a
material adverse effect with respect to the other party or the material breach
by the other party of its representations or warranties under the merger
agreement.
Risks Related to the Combined Company
Primary term rents on many Newkirk properties are substantially higher than
contractual renewal rates.
As of August 1, 2006, leases on approximately 8,640,728 square feet of Newkirk's
properties representing approximately $172,580,489 of annual rental income were
scheduled to expire by the end of 2009. Upon expiration of their initial term,
substantially all leases can be renewed at the option of the tenants for one or
more renewal terms. As of August 1, 2006, for Newkirk leases scheduled to expire
through 2009, the weighted average current rent per square foot was $19.97 while
the contractual renewal rent per square foot for those properties was $8.84.
These numbers do not include 566,836 square feet of vacant space and 707,000
square feet of space sold in September 2006.
Uncertainties relating to lease renewals and re-letting of space; as of August
1, 2006, 72% of Newkirk's leases were scheduled to expire over the next three
years which could unfavorably affect the combined company's financial
performance.
Upon the expiration of current leases for space located in the combined
company's properties, it may not be able to re-let all or a portion of that
space, or the terms of re-letting (including the cost of concessions to tenants)
may be less favorable to the combined company than current lease terms. If the
combined company is unable to re-let promptly all or a substantial portion of
the space located in its properties or if the rental rates it receives upon
re-letting are significantly lower than current rates, the combined company's
net income and ability to make expected distributions to its shareholders will
be adversely affected due to the resulting reduction in rent receipts and
increase in its property operating costs. There can be no assurance that the
combined company will be able to retain tenants in any of its properties upon
the expiration of their leases.
This risk is increased in the case of Newkirk's properties because the current
term of many of the leases for its properties will expire over the next three
years and the renewal rates are substantially lower than the current rates, as
noted above. As of August 1, 2006, based upon the then current annualized rent,
the weighted average remaining lease term for Newkirk's properties was
approximately 3.6 years and 72% of its current leases were scheduled to expire
by the end of 2009. These amounts are based on Newkirk's consolidated rental
income which includes rent attributable to properties partially owned by
unaffiliated third parties. If the combined company is unable to promptly relet
or renew leases for all or a substantial portion of the space subject to
expiring leases or if its reserves for these purposes prove inadequate, the
combined company's revenue, net income, available cash and ability to make
expected distributions to shareholders could be adversely affected. In addition,
if it becomes necessary for the combined company to make capital expenditures
for tenant improvements, leasing commissions and tenant inducements in order to
re-lease space, the combined company's revenue, net income and cash available
for future investment could be adversely affected.
Investment grade tenants will represent a smaller portion of annualized base
rent of the combined company than of the annualized base rent of Newkirk.
Following the merger and based on June 30, 2006 annualized rents, investment
grade tenants, in the aggregate, will represent approximately 56% of annualized
base rent of the combined company, as compared with 74% of Newkirk's annualized
base rents and 40% of Lexington's base rents prior to the merger.
26
Inability to carry out our growth strategy.
The combined company's growth strategy will be based on the acquisition and
development of additional properties and related assets, including acquisitions
of large portfolios and real estate companies and acquisitions through
co-investment programs such as joint ventures. In the context of the combined
company's business plan, "development" generally means an expansion or
renovation of an existing property or the acquisition of a newly constructed
property. The combined company may provide a developer with a commitment to
acquire a property upon completion of construction of a property and
commencement of rent from the tenant. The combined company's plan to grow
through the acquisition and development of new properties could be adversely
affected by trends in the real estate and financing businesses. The consummation
of any future acquisitions will be subject to satisfactory completion of an
extensive valuation analysis and due diligence review and to the negotiation of
definitive documentation. The combined company's ability to implement its
strategy may be impeded because it may have difficulty finding new properties
and investments at attractive prices that meet its investment criteria,
negotiating with new or existing tenants or securing acceptable financing. If
the combined company is unable to carry out its strategy, its financial
condition and results of operations could be adversely affected.
Acquisitions of additional properties entail the risk that investments will fail
to perform in accordance with expectations, including operating and leasing
expectations. Redevelopment and new project development are subject to numerous
risks, including risks of construction delays, cost overruns or force majeure
events that may increase project costs, new project commencement risks such as
the receipt of zoning, occupancy and other required governmental approvals and
permits, and the incurrence of development costs in connection with projects
that are not pursued to completion.
Some of the combined company's acquisitions and developments may be financed
using the proceeds of periodic equity or debt offerings, lines of credit or
other forms of secured or unsecured financing that may result in a risk that
permanent financing for newly acquired projects might not be available or would
be available only on disadvantageous terms. If permanent debt or equity
financing is not available on acceptable terms to refinance acquisitions
undertaken without permanent financing, further acquisitions may be curtailed or
cash available for distribution to shareholders may be adversely affected.
Concentration of ownership by certain investors, including joint venture
partners; voting rights of MLP unitholders.
After the consummation of the merger, (i) Mr. Ashner, and Winthrop will
collectively own 3,583,000 Lexington common shares and (ii) Mr. Ashner, other
executives and employees of NKT Advisors, Vornado and Apollo will collectively
own 28,431,920 voting MLP units which are redeemable for, at the election of
Lexington, cash or Lexington common shares. Accordingly, on a fully-diluted
basis, Mr. Ashner, other executive officers and employees of NKT Advisors,
Apollo, Vornado and Winthrop will collectively hold a 29.1% ownership interest
in Lexington. As holders of voting MLP units, Mr. Ashner, other executives and
employees of NKT Advisors, Vornado and Apollo, as well as other holders of
voting MLP units, will have the right to direct the voting of Lexington's
special voting preferred stock. Holders of Lexington's operating partnership
interests do not have voting rights.
27
After the consummation of the merger, Robert Roskind, our chairman, will own
834,911 Lexington common shares and 1,565,282 units of limited partnership
interest which are redeemable for, at the election of Lexington, cash or
Lexington common shares. On a fully diluted basis, Mr. Roskind will hold a 2.2%
ownership interest in Lexington.
The joint ventures described below each have a provision in their respective
joint venture agreements permitting the joint venture partner to sell its equity
position to Lexington. In the event that any of the joint venture partners
exercises its right to sell its equity position to Lexington, and Lexington
elects to fund the acquisition of such equity position with Lexington common
shares, such venture partner could acquire a large concentration of Lexington
common shares.
In 1999, Lexington entered into a joint venture agreement with The Comptroller
of the State of New York as trustee of The Common Retirement Fund, which we
refer to as CRF, to acquire properties. This joint venture and a separate
partnership established by the partners has made investments in 13 (one of which
was sold in 2005) properties for an aggregated capitalized cost of $409.1
million and no additional investments will be made unless they are made pursuant
to a tax-free exchange. Lexington has a 331/3% equity interest in this joint
venture. In December 2001, Lexington formed a second joint venture with CRF to
acquire additional properties in an aggregate amount of up to approximately
$560.0 million. Lexington has a 25% equity interest in this joint venture. As of
June 30, 2006, this second joint venture has invested in 13 properties for an
aggregate capitalized cost of $421.6 million.
Under these joint venture agreements, CRF has the right to sell its equity
position in the joint ventures to Lexington and, after the closing of the
merger, to the combined company. In the event CRF exercises its right to sell
its equity interest in either joint venture to Lexington, Lexington may, at its
option, either issue common shares to CRF for the fair market value of CRF's
equity position, based upon a formula contained in the respective joint venture
agreement, or pay cash to CRF equal to 110% of the fair market value of CRF's
equity position. Lexington has the right not to accept any property in the joint
ventures (thereby reducing the fair market value of CRF's equity position) that
does not meet certain underwriting criteria. In addition, the joint venture
agreements contain a mutual buy-sell provision in which either CRF or Lexington
can force the sale of any property.
28
In October 2003, Lexington entered into a joint venture agreement with
CLPF-LXP/Lion Venture GP, LLC, which we refer to as Clarion, which has made
investments in 17 properties for an aggregate capitalized cost of $486.9
million. No additional investments will be made unless they are made pursuant to
a tax-free exchange or upon the mutual agreement of Clarion and Lexington.
Lexington has a 30% equity interest in this joint venture. Under the joint
venture agreement, Clarion has the right to sell its equity position in the
joint venture to Lexington and, after the closing of the merger, the combined
company. In the event Clarion exercises its right to sell its equity interest in
the joint venture to Lexington, Lexington may, at its option, either issue
common shares to Clarion for the fair market value of Clarion's equity position,
based upon a formula contained in the partnership agreement, or pay cash to
Clarion equal to 100% of the fair market value of Clarion's equity position.
Lexington has the right not to accept any property in the joint venture (thereby
reducing the fair market value of Clarion's equity position) that does not meet
certain underwriting criteria. In addition, the joint venture agreement contains
a mutual buy-sell provision in which either Clarion or Lexington can force the
sale of any property.
In June 2004, Lexington entered in a joint venture agreement with the Utah State
Retirement Investment Fund, which we refer to as Utah, which was expanded in
December 2004, to acquire properties in an aggregate amount of up to
approximately $345.0 million. As of June 30, 2006, this joint venture has made
investments in 15 properties for an aggregate capitalized cost of $241.7
million. Lexington has a 30% equity interest in this joint venture. Under the
joint venture agreement, Utah has the right to sell its equity position in the
joint venture to Lexington. This right becomes effective upon the occurrence of
certain conditions. In the event Utah exercises its right to sell its equity
interest in the joint venture to Lexington, Lexington may, at its option, either
issue common shares to Utah for the fair market value of Utah's equity position,
based upon a formula contained in the joint venture agreement, or pay cash to
Utah equal to 100% of the fair market value of Utah's equity position. Lexington
has the right not to accept any property in the joint venture (thereby reducing
the fair market value of Utah's equity position) that does not meet certain
underwriting criteria. In addition, the joint venture agreement contains a
mutual buy-sell provision in which either Utah or Lexington can force the sale
of any property.
Dilution of common shares.
The combined company's future growth will depend in part on its ability to raise
additional capital. If the combined company raises additional capital through
the issuance of equity securities, the interests of holders of the combined
company's common shares could be diluted. Likewise, the combined company's board
of trustees will be authorized to cause the combined company to issue preferred
shares in one or more series, the holders of which would be entitled to
dividends and voting and other rights as the combined company's board of
trustees determines, and which could be senior to or convertible into the
combined company's common shares. Accordingly, an issuance by the combined
company of preferred shares could be dilutive to or otherwise adversely affect
the interests of holders of the combined company's common shares.
The combined company's Series C Preferred Shares will be capable of being
converted by the holder, at its option, into the combined company's common
shares at an initial conversion rate of 1.87966 common shares per $50.00
liquidation preference (after the assumed payment of the special dividend and
assuming no other dividend is paid), which is equivalent to an initial
conversion price of approximately $26.60 per common share (subject to adjustment
in certain events). Depending upon the number of Series C Preferred Shares being
converted at one time, a conversion of Series C Preferred Shares could be
dilutive to or otherwise adversely affect the interests of holders of the
combined company's common shares.
29
Under Lexington's joint venture agreements, Lexington's joint venture partners
have the right to sell their equity position in the applicable joint venture to
Lexington. In the event one of Lexington's joint venture partners exercises its
right to sell its equity interest in the applicable joint venture to Lexington,
Lexington may, at its option, either issue Lexington common shares to the
exercising joint venture partner for the fair market value of the exercising
joint venture partner's equity position, based upon a formula contained in the
applicable joint venture agreement, or pay cash to the exercising joint venture
partner equal to either: (i) 110% of the fair market value of the exercising
joint venture partner's equity position with respect to Lexington's joint
ventures with CRF, or (ii) 100% of the fair market value of the exercising joint
venture partner's equity position with respect to Lion and Utah. An exercise by
one or more of Lexington's joint venture partners and, after the merger, the
combined company's election to satisfy an exercise with its common shares could
be dilutive to or otherwise adversely affect the interests of holders of the
combined company's common shares.
Following the closing of the merger, an aggregate of approximately 41,673,386
common shares will be issuable upon: (i) the exchange of all outstanding units
of limited partnership interests in Lexington's operating partnership
subsidiaries (5,622,694 common shares); (ii) the redemption of all outstanding
units of limited partnership interests in the MLP (36,032,192 common shares);
and (iii) the exercise of outstanding options under Lexington's equity-based
award plans (18,500 common shares). Depending upon the number of such securities
exchanged or exercised at one time, an exchange or exercise of such securities
could be dilutive to or otherwise adversely affect the interests of holders of
the combined company's common shares.
Securities eligible for future sale may have adverse effects on our share price.
As described in the preceding risk factor, following the closing of the merger,
an aggregate of up to approximately 36,032,192 common shares will be issuable on
the redemption for common shares of outstanding MLP units. Lexington and Newkirk
have agreed to file a registration statement that would allow up to 36,000,000
of these Lexington common shares to be sold. Lexington has also agreed to file a
registration statement that would allow the sale of 3,500,000 Lexington common
shares that will be owned by Winthrop following the merger, which shares were
previously subject to a lock up agreement that will terminate on closing of the
merger. The sale of these shares could result in a decrease in the market price
of Lexington common shares.
Limited control over joint venture investments.
Lexington's joint venture investments will constitute a significant portion of
the combined company's assets and will constitute a significant component of
Lexington's growth strategy. Lexington's joint venture investments may involve
risks not otherwise present for investments made solely by Lexington, including
the possibility that Lexington's joint venture partner might, at any time,
become bankrupt, have different interests or goals than the combined company
does, or take action contrary to the combined company's instructions, requests,
policies or objectives, including the combined company's policy with respect to
maintaining its qualification as a REIT. Other risks of joint venture
investments include impasse on decisions, such as a sale, because neither the
combined company nor a joint venture partner have full control over the joint
venture. Also, there will be no limitation under the combined company's
organizational documents as to the amount of funds that may be invested in joint
ventures.
30
One of the joint ventures, 111 Debt Holdings LLC, is owned equally by the MLP
and WRT Realty L.P., a subsidiary of Winthrop. This joint venture is managed by
an investment committee which consists of five members, two members appointed by
each of the MLP and Winthrop and the fifth member appointed by FUR Holdings LLC,
the primary owner of the current external advisors of both Newkirk and Winthrop.
Each investment in excess of $20.0 million to be made by this joint venture, as
well as additional material matters, requires the consent of three members of
the investment committee appointed by the MLP and Winthrop. Accordingly, the
joint venture may not take certain actions or invest in certain assets even if
the MLP believes it to be in its best interest.
Joint venture investments may conflict with our ability to make attractive
investments.
Under the terms of Lexington's active joint venture with CRF, the combined
company will be required to first offer to the joint venture 50% of the combined
company's opportunities to acquire office and industrial properties requiring a
minimum investment of $15.0 million which are net leased primarily to investment
grade tenants for a minimum term of 10 years, are available for immediate
delivery and satisfy other specified investment criteria.
Similarly, under the terms of Lexington's joint venture with Utah, unless 75% of
Utah's capital commitment is funded, the combined company will be required to
first offer to the joint venture all of the combined company's opportunities to
acquire certain office, bulk warehouse and distribution properties requiring an
investment of $8.0 million to $30.0 million which are net leased primarily to
non-investment grade tenants for a minimum term of at least nine years and
satisfy other specified investment criteria, subject also to the combined
company's obligation to first offer such opportunities to Lexington's joint
venture with CRF.
Lexington's board of trustees adopted a conflicts policy with respect to
Lexington and LSAC, a real estate investment company externally advised by
Lexington. Under the conflicts policy the combined company will be required to
first offer to LSAC, subject to the first offer rights of CRF and Utah, all of
the combined company's opportunities to acquire: (i) general purpose real estate
net leased to unrated or below investment grade credit tenants; (ii) net leased
special purpose real estate located in the United States, such as medical
buildings, theaters, hotels and auto dealerships; (iii) net leased properties
located in the Americas outside of the United States with rent payments
denominated in United States dollars with such properties typically leased to
U.S. companies; (iv) specialized facilities in the United States supported by
net leases or other contracts where a significant portion of the facility's
value is in equipment or other improvements, such as power generation assets and
cell phone towers; and (v) net leased equipment and major capital assets that
are integral to the operations of LSAC's tenants and LSAC's real estate
investments. To the extent that a specific investment opportunity, which is not
otherwise subject to a first offer obligation to Lexington's joint ventures with
CRF or Utah, is determined to be suitable to the combined company and LSAC, the
investment opportunity will be allocated to LSAC. If full allocation to LSAC is
not reasonably practicable (for example, if LSAC does not have sufficient
capital), the combined company may allocate a portion of the investment to
itself after determining in good faith that such allocation is fair and
reasonable. The combined company will apply the foregoing allocation procedures
between LSAC and any investment funds or programs, companies or vehicles or
other entities that the combined company controls which have overlapping
investment objectives with LSAC.
Only if a joint venture partner elects not to approve the applicable joint
venture's pursuit of an acquisition opportunity or the applicable exclusivity
conditions have expired may the combined company pursue the opportunity
directly. As a result of the foregoing rights of first offer, the combined
company may not be able to make attractive acquisitions directly and may only
receive a minority interest in such acquisitions through the combined company's
minority interest in these joint ventures.
31
Conflicts of interest with respect to sales and refinancings.
E. Robert Roskind and Richard J. Rouse, the combined company's Co-Vice Chairman,
and Co-Vice Chairman and Chief Investment Officer, respectively, will continue
to own limited partnership interests in certain operating partnerships of the
combined company after the merger, and as a result, may face different and more
adverse tax consequences than the combined company's other shareholders will if
the combined company sells certain properties or reduces mortgage indebtedness
on certain properties. Those individuals may, therefore, have different
objectives than the combined company's other shareholders regarding the
appropriate pricing and timing of any sale of such properties or reduction of
mortgage debt.
Accordingly, there may be instances in which the combined company may not sell a
property or pay down the debt on a property even though doing so would be
advantageous to the combined company's other shareholders. In the event of an
appearance of a conflict of interest, the conflicted trustee or officer must
recuse himself or herself from any decision making or seek a waiver of our Code
of Business Conduct and Ethics.
The combined company will be dependent upon its key personnel and the terms of
Mr. Ashner's employment agreement affect Lexington's ability to make certain
investments.
The combined company will be dependent upon key personnel whose continued
service is not guaranteed. The combined company will be dependent on its
executive officers for strategic business direction and real estate experience.
Lexington previously entered into employment agreements with E. Robert Roskind,
Lexington's Chairman, Richard J. Rouse, Lexington Vice Chairman and Chief
Investment Officer, T. Wilson Eglin, Lexington's Chief Executive Officer,
President and Chief Operating Officer, Patrick Carroll, Lexington's Executive
Vice President, Chief Financial Officer and Treasurer, and John B. Vander Zwaag,
Lexington's Executive Vice President. Upon the closing of the merger, the
combined company will enter into an employment agreement with Michael L. Ashner,
Newkirk's Chairman and Chief Executive Officer. Pursuant to Mr. Ashner's
employment agreement, Mr. Ashner may voluntarily terminate his employment with
the combined company and become entitled to receive a substantial severance
payment if the combined company acquires or makes an investment in a non-net
lease business opportunity during the term of Mr. Ashner's employment. This
provision in Mr. Ashner's agreement may cause the combined company not to avail
itself of those other business opportunities due to the potential consequences
of acquiring such non-net lease business opportunities. Upon consummation of the
merger, the following executive officers have agreed to assume the following
positions at the combined company:
Name Title
------------------------------------ ---------------------------------------------------------------
Michael L. Ashner Executive Chairman and Director of Strategic Acquisitions
E. Robert Roskind Co-Vice Chairman
Richard J. Rouse Co-Vice Chairman and Chief Investment Officer
T. Wilson Eglin Chief Executive Officer, President and Chief Operating Officer
Patrick Carroll Executive Vice President, Chief Financial Officer and Treasurer
John B. Vander Zwaag Executive Vice President
Lara Johnson Executive Vice President
32
The combined company's inability to retain the services of any of these
executives or the combined company's loss of any of their services after the
merger could adversely impact the operations of the combined company. The
combined company will not have key man life insurance coverage on its executive
officers upon completion of the merger.
Certain limitations will exist with respect to a third party's ability to
acquire the combined company or effectuate a change in control.
Limitations imposed to protect the combined company's REIT status. In order to
protect the combined company against the loss of its REIT status, its
Declaration of Trust (attached as Annex B) will limit any shareholder from
owning more than 9.8% in value of the combined company's outstanding shares,
subject to certain exceptions. The ownership limit may have the effect of
precluding acquisition of control of the combined company.
Severance Payments under Employment Agreements. Substantial termination payments
may be required to be paid under the provisions of employment agreements with
certain executives of the combined company upon a change of control.
Accordingly, these payments may discourage a third party from acquiring the
combined company.
Limitation due to the combined company's ability to issue preferred shares. The
combined company's Declaration of Trust will authorize the board of trustees to
issue preferred shares, without limitation as to amount. The board of trustees
will be able to establish the preferences and rights of any preferred shares
issued which could have the effect of delaying or preventing someone from taking
control of the combined company, even if a change in control were in its
shareholders' best interests.
Limitation imposed by the Maryland Business Combination Act. The Maryland
General Corporation Law, as applicable to Maryland REITs, establishes special
restrictions against "business combinations" between a Maryland REIT and
"interested shareholders" or their affiliates unless an exemption is applicable.
An interested shareholder includes a person who beneficially owns, and an
affiliate or associate of the trust who, at any time within the two-year period
prior to the date in question, was the beneficial owner of, 10% or more of the
voting power of Lexington's then-outstanding voting shares, but a person is not
an interested shareholder if the board of trustees approved in advance the
transaction by which he otherwise would have been an interested shareholder.
Among other things, Maryland law prohibits (for a period of five years) a merger
and certain other transactions between a Maryland REIT and an interested
shareholder. The five-year period runs from the most recent date on which the
interested shareholder became an interested shareholder. Thereafter, any such
business combination must be recommended by the board of trustees and approved
by two super-majority shareholder votes unless, among other conditions, the
common shareholders receive a minimum price for their shares and the
consideration is received in cash or in the same form as previously paid by the
interested shareholder for its shares. The statute permits various exemptions
from its provisions, including business combinations that are exempted by the
board of trustees prior to the time that the interested shareholder becomes an
interested shareholder. The business combination statute could have the effect
of discouraging offers to acquire the combined company and of increasing the
difficulty of consummating any such offers, even if the combined company's
acquisition would be in its shareholders' best interests. In connection with the
merger, certain holders of Newkirk voting stock have been granted a limited
exemption from the definition of "interested shareholder."
33
Maryland Control Share Acquisition Act. Maryland law provides that "control
shares" of a REIT acquired in a "control share acquisition" shall have no voting
rights except to the extent approved by a vote of two-thirds of the vote
eligible to be cast on the matter under the Maryland Control Share Acquisition
Act. "Control Shares" means shares that, if aggregated with all other shares
previously acquired by the acquirer or in respect of which the acquirer is able
to exercise or direct the exercise of voting power (except solely by virtue of a
revocable proxy), would entitle the acquirer to exercise voting power in
electing trustees within one of the following ranges of voting power: one-tenth
or more but less than one-third, one-third or more but less than a majority or a
majority or more of all voting power. Control shares do not include shares the
acquiring person is then entitled to vote as a result of having previously
obtained shareholder approval. A "control share acquisition" means the
acquisition of control shares, subject to certain exceptions. If voting rights
of control shares acquired in a control share acquisition are not approved at a
shareholders' meeting, then subject to certain conditions and limitations the
issuer may redeem any or all of the control shares for fair value. If voting
rights of such control shares are approved at a shareholders' meeting and the
acquirer becomes entitled to vote a majority of the shares entitled to vote, all
other shareholders may exercise appraisal rights. Any control shares acquired in
a control share acquisition which are not exempt under the combined company's
By-laws will be subject to the Maryland Control Share Acquisition Act.
Lexington's By-laws contain a provision exempting from the Maryland Control
Share Acquisition Act any and all acquisitions by any person of its shares.
Lexington cannot assure you that this provision will not be amended or
eliminated at any time in the future.
Many factors can have an adverse effect on the market value of the combined
company's securities.
A number of factors might adversely affect the price of the combined company's
securities, many of which are beyond its control. These factors include:
o increases in market interest rates, relative to the dividend yield on
the combined company's shares. If market interest rates go up,
prospective purchasers of the combined company's securities may require
a higher yield. Higher market interest rates would not, however, result
in more funds for the combined company to distribute and, to the
contrary, would likely increase its borrowing costs and potentially
decrease funds available for distribution. Thus, higher market interest
rates could cause the market price of the combined company's common
shares to go down;
o anticipated benefit of an investment in the combined company's
securities as compared to investment in securities of companies in
other industries (including benefits associated with tax treatment of
dividends and distributions);
o perception by market professionals of REITs generally and REITs
comparable to the combined company in particular;
o level of institutional investor interest in the combined company's
securities;
o relatively low trading volumes in securities of REITs;
o the combined company's results of operations and financial condition;
and
o investor confidence in the stock market generally.
The market value of Lexington's common shares is based primarily upon the
market's perception of the combined company's growth potential and its current
and potential future earnings and cash distributions. Consequently, the combined
company's common shares may trade at prices that are higher or lower than its
net asset value per common share. If the combined company's future earnings or
cash distributions are less than expected, it is likely that the market price of
the combined company's common shares will diminish.
34
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The Company's board of trustees has authorized the repurchase
of up to 2.0 million common shares/operating partnership
units. The Company repurchased 73,912 common shares/units at
an average cost of $19.86 per common share/unit during the
nine months ended September 30, 2006.
The following table summarizes repurchases of our common
shares during the third quarter of 2006:
Total Number of
Shares/Units Maximum Number of
Total Number Purchased as Part Shares/Units That May
of Average Price of Publicly Yet Be Purchased
Shares/Units Paid Per Announced Plans or Under the Plans
Period (2) Purchased Share/Unit Programs (1) or Programs
--------------------- -------------- -------------- -------------------- ------------------
July 1-31, 2006 -- $ -- -- --
August 1-31, 2006 68,404 $ 19.77 68,404 1,926,088
September 1-30, 2006 -- $ -- -- --
-------------- -------------- ------------------- -------------------
Third Quarter 2006 68,404 $ 19.77 68,404 1,926,088
=============== ============== =================== ===================
(1) The Company has one repurchase plan which was publicly
announced on January 5, 2006.
(2) In April 2006, the Company repurchased 5,508 operating
partnership units at an average price of $20.98 per unit.
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.
35
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Lexington Corporate Properties Trust
Date: November 9, 2006 By: /s/ T. Wilson Eglin
----------------------------------------------
T. Wilson Eglin
Chief Executive Officer, President and Chief
Operating Officer
Date: November 9, 2006 By: /s/ Patrick Carroll
----------------------------------------------
Patrick Carroll
Chief Financial Officer, Executive Vice
President and Treasurer
36