Lexington Realty Trust 10-K 2005
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
For the fiscal year ended December 31, 2004
For the transition period from to
Commission File Number 1-12386
LEXINGTON CORPORATE PROPERTIES TRUST
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). Yes þ No o
The aggregate market value of the voting shares held by non-affiliates of the Registrant as of June 30, 2004, which was the last business day of the Registrants most recently completed second fiscal quarter was $926,754,133, based on the closing price of common shares as of that date, which was $19.91 per share.
Number of common shares outstanding as of March 10, 2005 was 48,959,376.
Certain information contained in the Definitive Proxy Statement for Registrants 2005 Annual Meeting of Shareholders to be held on May 24, 2005, or the Proxy Statement, is incorporated herein by reference into Part III.
This annual report on Form 10-K, together with other statements and information publicly disseminated by Lexington Corporate Properties Trust (the Company) contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Companys 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 Companys control and which could materially affect actual results, performances or achievements. In particular, among the factors that could cause actual results to differ materially from current expectations include, but are not limited to, (i) the failure to continue to qualify as a real estate investment trust, (ii) changes in general business and economic conditions, (iii) competition, (iv) increases in real estate construction costs, (v) changes in interest rates, (vi) changes in accessibility of debt and equity capital markets and other risks inherent in the real estate business, including, but not limited to, tenant defaults, potential liability relating to environmental matters, the availability of suitable acquisition opportunities and illiquidity of real estate investments, (vii) changes in governmental laws and regulations, and (viii) increases in operating costs. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect occurrence of unanticipated events. Accordingly, there is no assurance that the Companys expectations will be realized.
The Company is a self-managed and self-administered Maryland statutory real estate investment trust that acquires, owns and manages a geographically diverse portfolio of net leased office, industrial and retail properties and provides investment advisory and asset management services to institutional investors in the net lease area. The Companys predecessor was organized in October 1993 and merged into the Company on December 31, 1997.
The Companys Internet address is www.lxp.com. The Company makes available free of charge through its web site its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after it electronically files such materials with the Securities and Exchange Commission. We also have made available on our web site copies of our current Audit Committee Charter, Compensation Committee Charter, Nominating and Corporate Governance Committee Charter, Code of Business Conduct and Ethics, and Corporate Governance Guidelines. In the event of any changes to these charters or the code or the guidelines, changed copies will also be made available on our web site.
As of December 31, 2004, the Companys real property portfolio consisted of 154 properties or interests therein located in 37 states, including warehousing, distribution and manufacturing facilities, office buildings and retail properties containing an aggregate 32.3 million net rentable square feet of space. In addition, Lexington Realty Advisors, Inc. (LRA), a wholly-owned taxable REIT subsidiary, manages 2 properties for an unaffiliated third party. The Companys properties are generally subject to triple net leases, which are characterized as leases in which the tenant bears all, or substantially all, of the costs and cost increases for real estate taxes, insurance and ordinary maintenance. Of the Companys 154 properties, 7 provide for operating expense stops and one is subject to a modified gross lease. As of December 31, 2004, 98.1% of net rentable square feet were subject to a lease.
The Company manages its real estate and credit risk through geographic, industry, tenant and lease maturity diversification. For the year ended December 31, 2004, the fifteen largest tenants/guarantors, which occupied 42 properties, represented 43.5% of trailing twelve month base rent, including the Companys proportionate share of base rent from non-consolidated entities, properties held for sale and properties sold through date of sale. The fifteen largest tenants/guarantors are as follows:
As of December 31, 2003 and 2002, the fifteen largest tenants/guarantors represented 46.1% and 51.6% of trailing twelve month base rent, respectively, including the Companys proportionate share of base rent from non-consolidated entities, properties held for sale and properties sold through date of sale. In 2004, 2003 and 2002, no tenant/guarantor represented greater than 10% of annual base rent.
The Companys primary objectives are to increase Funds From Operations, cash available for distribution per share to its shareholders, and net asset value per share. In an effort to achieve these objectives, management focuses on:
The Company seeks to enhance its net lease property portfolio through acquisitions of general purpose, efficient, well-located properties in growing markets. Management has diversified the Companys portfolio by geographical location, tenant industry segment, lease term expiration and property type. Management believes that such diversification should help insulate the Company from regional recession, industry specific downturns and price fluctuations by property type. Prior to effecting any acquisitions, management analyzes the (i) propertys design, construction quality, efficiency, functionality and location with respect to the immediate sub-market, city and region; (ii) lease integrity with respect to term, rental rate increases, corporate guarantees and property maintenance provisions; (iii) present and anticipated conditions in the local real estate market; and (iv) prospects for selling or re-leasing the property on favorable terms in the event of a vacancy. Management also evaluates each potential tenants financial strength, growth prospects, competitive position within its respective industry and a propertys strategic location and function within a tenants operations or distribution systems. Management believes that its comprehensive underwriting process is critical to the assessment of long-term profitability of any investment by the Company.
Acquisitions of Portfolio and Individual Net Lease Properties. The Company seeks to acquire portfolio and individual properties that are leased to creditworthy tenants under long-term net leases. Management believes there is significantly less competition for the acquisition of property portfolios containing a number of net leased properties located in more than one geographic region. Management also believes that the Companys geographical diversification, acquisition experience and access to capital will allow it to compete effectively for the acquisition of such net leased properties.
Co-Investment Programs. In 1999, the Company entered into a joint venture agreement with The Comptroller of the State of New York as Trustee of the Common Retirement Fund (CRF). The joint venture entity, Lexington Acquiport Company, LLC (LAC), was created to acquire high quality office and industrial real estate properties net leased to investment and non-investment grade single tenant users. The Company and CRF committed to make equity contributions to LAC of up to $50 million and $100 million, respectively. LAC has completed its acquisition program and no more investments will be made by this entity. In addition, LAC financed a portion of acquisition costs through the use of non-recourse mortgages. As of December 31, 2004, LAC owned 11 properties.
LAC also has an investment in an $11.0 million participating note which was used to partially fund the purchase of a 327,325 square foot office property in Houston, Texas for $34.8 million. As of December 31, 2004, LAC had made investments totaling $380.3 million.
In 2003, the Company and CRF purchased a property for $22.7 million directly as partners and therefore, it is not owned by LAC. The purchase price was partially funded through a $19.2 million non-recourse mortgage maturing in 2021.
LRA has a management agreement with LAC and the separate partnership whereby LRA will perform certain services for a fee relating to the acquisition and management of the investments.
In December 2001, the Company and CRF announced the formation of Lexington Acquiport Company II, LLC (LAC II). The Company and CRF have committed to make equity contributions to LAC II of up to $50 million and $150 million, respectively, to purchase up to $560 million in single tenant office and industrial properties net leased to investment and non-investment grade tenants. As of December 31, 2004, $76.5 million has been funded. LRA, in addition to earning acquisition and asset management fees, earns a fee for all mortgage debt directly placed. During 2004, LAC II acquired nine properties (four from the Company) for an aggregate capitalized cost of $239.7 million ($131.6 million for properties transferred from the Company at cost). These acquisitions were partially funded by the use of $118.7 non-recourse mortgages, which bear interest at fixed rates ranging from 5.3% to 6.3% and mature at various dates ranging from 2014 to 2019. In addition, the Company advanced $45.8 million in loans to LAC II to purchase three of the properties. Subsequent to year end all advances were repaid.
The Company is required to first offer to LAC II all of the Companys opportunities to acquire office and industrial properties generally requiring a minimum investment of $15 million, which are net leased primarily
to investment grade tenants for a minimum term of ten years, are available for immediate delivery and satisfy other specified investment criteria. Only if CRF elects not to approve LAC IIs pursuit of an acquisition opportunity may the Company pursue the opportunity directly.
In October 2003, the Company entered into a joint venture agreement with CLPF-LXP/ Lion Venture GP, LLC (Clarion). The joint venture entity Lexington/ Lion Venture L.P. (LION), was created to acquire high quality office, industrial and retail properties net leased to investment and non-investment grade single tenant users. The Company and Clarion initially committed to make equity contributions to LION of up to $30 million and $70 million, respectively. In 2004, the Company and Clarion increased their equity commitment by $25.7 million and $60.0 million, respectively. As of December 31, 2004, $149.6 million of the commitments has been funded. In addition, LION finances a portion of the acquisitions through the use of non-recourse mortgages. During 2004, LION made ten acquisitions (one was transferred from the Company) for an aggregate capitalized cost of $291.3 million, ($20.7 million for the property transferred from the Company at cost) of which $173.3 million was funded through non-recourse mortgages, which bear interest at fixed rates (including imputed rates), ranging from 4.8% to 6.8% and mature at various dates ranging from 2009 to 2019.
LRA has a management agreement with LION whereby LRA will perform certain services for a fee relating to acquisition, financing and management of the LION investments.
The Company is required to first offer to LION all of the Companys opportunities (other than the opportunities it is required to offer LAC II) to acquire office, industrial and retail properties requiring a minimum investment $15.0 million to $40.0 million which are net leased primarily to non-investment grade tenants for a minimum term of at least five years, are available for immediate delivery and satisfy other specified investment criteria. Only if Clarion elects not to approve the joint ventures pursuit of an acquisition opportunity may the Company pursue the opportunity directly.
In June 2004, the Company entered into a joint venture agreement with the Utah State Retirement Investment Fund (Utah). The joint venture entity, Triple Net Investment Company LLC (TNI), was created to acquire high quality office and industrial properties net leased to non-investment grade single tenant users. The Company and Utah initially committed to fund equity contributions to TNI of $15 million and $35 million, respectively. In December 2004, the Company and Utah increased their equity commitment by $21.4 million and $50.0 million, respectively. As of December 31, 2004, $39.9 million of the commitments has been funded. In addition, TNI finances a portion of acquisition costs through the use of non-recourse mortgages. During 2004, TNI made eleven acquisitions (three of which were transferred from the Company) for an aggregate $114.5 million, ($46.0 million for properties transferred from the Company at cost) of which $73.9 million was funded through non-recourse mortgages, which bear interest at fixed rates (including imputed rates) ranging from 4.9% to 7.9% and mature at various dates ranging from 2010 to 2018.
LRA has a management agreement with TNI whereby LRA will perform certain services for a fee relating to acquisition, financing and management of the TNI investment.
The Company is required to first offer to Utah all of the Companys opportunities (other than the opportunities it is required to offer LAC II and LION) to acquire office and industrial properties requiring a minimum investment of $8 million to $30 million, which are net leased to non-investment grade tenants for a minimum term of at least seven years, are generally available for immediate delivery and satisfy other specified investment criteria. Only if Utah elects not to approve the joint ventures pursuit of an acquisition opportunity may the Company pursue the opportunity directly.
In 1999, the Company also formed a joint venture to own a property net leased to Blue Cross Blue Shield of South Carolina, Inc. The Company has a 40% interest in the joint venture and LRA entered into a management agreement with the joint venture with similar terms as the management agreement with the above mentioned joint venture programs.
In January 2002, the Company sold a 77.3% interest in its Florence, South Carolina property net leased to Washington Mutual Home Loans, Inc., along with the proportionate share of mortgage debt for $4.6 million in
proceeds. During 2004, the Company repurchased the entire 77.3% interest it did not own in this property for $6.1 million.
Operating Partnership Structure. The operating partnership structure enables the Company to acquire properties by issuing to a property owner, as a form of consideration in exchange for the property, interests in the Companys operating partnerships (OP Units). Management believes that this structure facilitates the Companys ability to raise capital and to acquire portfolio and individual properties by enabling the Company to structure transactions which may defer tax gains for a contributor of property.
Advisory Contracts. In addition to the contracts discussed above, LRA has an advisory and asset management agreement to invest and manage $50 million of equity on behalf of a private investment fund. The investment program could, depending on leverage utilized, acquire up to $140 million in single tenant, net leased office, industrial and retail properties in the United States. LRA earns acquisition fees (90 basis points of total acquisition costs), annual asset management fees (30 basis points of gross asset value) and a promoted interest of 16% of the return in excess of an internal rate of return of 10% earned by the private investment fund. The investment fund made no purchases in 2004 or 2003.
Sale/ Leaseback Transactions. The Company seeks to acquire portfolio and individual net lease properties in sale/leaseback transactions. The Company selectively pursues sale/leaseback transactions with creditworthy sellers/tenants with respect to properties that are integral to the sellers/tenants ongoing operations.
Build-to-Suit Properties. The Company seeks to acquire, generally after construction has been completed, build-to-suit properties that are entirely pre-leased to their intended corporate users before construction. As a result, the Company generally does not assume the risk associated with the construction phase of a project.
Competition. Through our predecessor entities the Company has been in the net lease business for over 30 years and has established close relationships with a large number of major corporate tenants and maintains a broad network of contacts including developers, brokers and lenders. In addition, management is associated with and/or participates in many industry organizations. Notwithstanding these relationships, there are numerous commercial developers, real estate companies, financial institutions and other investors with greater financial resources that compete with the Company in seeking properties for acquisition and tenants who will lease space in these properties. Due to the Companys focus on net lease properties located throughout the United States, the Company does not generally encounter the same competitors in each region of the United States since most competitors are locally and/or regionally focused. The Companys competitors include other REITs, pension funds, private companies and individuals.
Environmental Matters. Under various federal, state and local environmental laws, statutes, ordinances, rules and regulations, an owner of real property may be liable for the costs of removal or redemption of certain hazardous or toxic substances at, on, in or under such property as well as certain other potential costs relating to hazardous or toxic substances. These liabilities may include government fines and penalties and damages for injuries to persons and adjacent property. Such laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence or disposal of such substances. Although generally the Companys tenants are primarily responsible for any environmental damage and claims related to the leased premises, in the event of the bankruptcy or inability of the tenant of such premises to satisfy any obligations with respect to such environmental liability, the Company may be required to satisfy such obligations. In addition, the Company as the owner of such properties may be held directly liable for any such damages or claims irrespective of the provisions of any lease.
From time to time, in connection with the conduct of the Companys business, and prior to the acquisition of any property from a third party or as required by the Companys financing sources, the Company authorizes the preparation of Phase I environmental reports with respect to its properties. Based upon such environmental reports and managements ongoing review of its properties, as of the date of this Annual Report, management is not aware of any environmental condition with respect to any of the Companys properties which management believes 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, the existence or severity of which were previously unknown, (ii) changes in law, (iii) the conduct of tenants or (iv) activities relating to properties in the vicinity of the Companys 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 Companys tenants, which would adversely affect the Companys financial condition and results of operations, including funds from operations.
Tenant Relations and Lease Compliance. The Company maintains close contact with its tenants in order to understand their future real estate needs. The Company monitors the financial, property maintenance and other lease obligations of its tenants through a variety of means, including periodic reviews of financial statements and physical inspections of the properties. The Company performs annual inspections of those properties where it has an ongoing obligation with respect to the maintenance of the property and for all properties during each of the last three years immediately prior to a scheduled lease expiration. Biannual physical inspections are undertaken for all other properties.
Extending Lease Maturities. The Company seeks to extend its leases in advance of their expiration in order to maintain a balanced lease rollover schedule and high occupancy levels. During 2004, the Company entered into 10 lease extensions for leases scheduled to expire at various dates ranging from 2005 to 2021, for an average 6.4 years.
Revenue Enhancing Property Expansions. The Company undertakes expansions of its properties based on tenant requirements or marketing opportunities. The Company believes that selective property expansions can provide it with attractive rates of return and actively seeks such opportunities.
Property Sales. The Company sells properties when management believes that the return realized from selling a property will exceed the expected return from continuing to hold such property.
During 2004 and 2003, the Company completed common share offerings of 6.9 million and 9.8 million shares, respectively, raising aggregate net proceeds of $144.0 million and $174.0 million, respectively. During 2004, the Company issued 2.7 million convertible preferred shares (currently convertible into approximately 5.0 million common shares) at $50 per share and a dividend rate of 6.50%, raising net proceeds of $131.1 million. In 2003, the Company issued 3.16 million redeemable preferred shares at $25 per share and a dividend rate of 8.05%, raising net proceeds of $76.3 million.
During 2003, the Company, including its non-consolidated entities, repaid $131.9 million in mortgages, which resulted in aggregate debt satisfaction charges of $8.5 million.
During 2004, the Company, including its non-consolidated entities, obtained and/or assumed $699.1 million in non-recourse mortgage financings on properties at a fixed weighted average interest rate (including imputed interest rates) of 5.8%. The proceeds of the financings were used to partially fund acquisitions.
As a result of the Companys financing activities, the weighted average fixed interest rate on the Companys outstanding indebtedness has been reduced from approximately 7.1% as of December 31, 2003, to
approximately 6.6% as of December 31, 2004. Scheduled balloon payments over the next five years are as follows ($000s):
The Companys variable rate unsecured credit facility bears interest at 150-250 basis points over the Companys option of 1, 3 or 6 month LIBOR rates, depending on the amount of properties the Company owns free and clear of mortgage debt, and is scheduled to mature in August 2006. The Company can extend the maturity date to August 2007, if no default exists for a fee of 25 basis points. As of December 31, 2004, no borrowings were outstanding under this facility. The Company has issued letters of credit aggregating $3.9 million in accordance with provisions in certain non-recourse mortgages, which expire at various dates ranging from 2010 to 2012.
In 1999, the Company issued 287,888 common shares in which it had the obligation to repurchase for $13.50 per share through December 2004. As of December 31, 2004 the obligation expired and the Company has included such shares in shareholders equity.
Common Share Repurchase. The Companys Board of Trustees authorized the repurchase of up to 2.0 million common shares and/or OP Units. As of December 31, 2004, the Company has repurchased approximately 1.4 million common shares/ OP Units at an average price of $10.59 per share/ OP Unit.
Employees. As of December 31, 2004, the Company had forty employees.
Industry Segments. The Company operates in one industry segment, investment in single tenant, net leased real properties.
Recent Developments. On February 25, 2005, the Company entered into a Purchase and Sale Agreement (the Purchase and Sale Agreement) to purchase a portfolio of 27 properties from unaffiliated sellers. The total purchase price is approximately $786.0 million.
Under the Purchase and Sale Agreement, the closing of the transaction will occur no earlier than March 25, 2005. Each of the Company and Sellers has the right to extend the closing date until no later than April 29, 2005, by giving written notice to the other party on or before March 22, 2005. The agreement is subject to a number of closing conditions, all of which must be satisfied for the closing to occur.
To finance the acquisition, the Company received a loan commitment from JP Morgan Chase Bank, N.A., for $558.3 million of non-recourse first mortgage loans secured by individual first mortgages on each of the properties and on five other properties which the Company presently owns free and clear. The loans bear interest at a weighted average fixed rate of 5.20%. The loans will mature in six to ten years with a weighted average maturity of approximately eight years. The loans are subject to final documentation and standard closing conditions.
As of December 31, 2004, the Company owned or had interests in approximately 32.3 million square feet of rentable space in 154 office, industrial and retail properties. As of December 31, 2004, the Companys
properties were 98.1% leased based upon net rentable square feet. As of December 31, 2004, the number, percentage of trailing 12 month base rent (including base rent from properties sold through date of sale, properties held for sale and the Companys proportionate share of non-consolidated entities) and square footage mix of the Companys portfolio is as follows:
The Companys properties are generally subject to net leases; however, in certain leases the Company is responsible for roof and structural repairs. In such situations the Company performs annual inspections of the properties. Eight of the Companys properties (including non-consolidated entities) are subject to leases in which the landlord is responsible for a portion of the real estate taxes, utilities and general maintenance. The Company is responsible for all operating expenses of any vacant properties. As of December 31, 2004, the Company had three vacant properties (Phoenix, Arizona, Hebron, Kentucky and Dallas, Texas). The Phoenix, Arizona property is classified as held for sale at December 31, 2004.
The Companys tenants represent a variety of industries including general retailing, finance and insurance, energy, transportation and logistics, technology, telecommunications and defense. For the year ended December 31, 2004, base rent, including base rent earned by non-consolidated entities, from properties held for sale, and for properties sold through date of sale, were earned from 108 tenants in 20 different industries.
Tenant Leases. A substantial portion of the Companys income consists of base rent under long-term leases. As of December 31, 2004, of the 154 properties, three are vacant and the remaining are subject to 155 leases.
Ground Leases. The Company has 10 properties (including a property owned by a non-consolidated entity) that are subject to long term ground leases where a third party owns and has leased the underlying land to the Company. In each of these situations the rental payments made to the landowner are passed on to the Companys tenant. At the end of these long-term ground leases, unless extended, the land together with all improvements thereon reverts to the landowner. In addition, the Company has one property in which a portion of the land, on which a portion of the parking lot is located, is subject to a ground lease. At expiration of the ground lease only that portion of the parking lot reverts to the land owner. These ground leases, including renewal options, expire at various dates from 2026 through 2072.
Leverage. The Company generally uses fixed rate, non-recourse mortgages to partially fund the acquisition of real estate. As of December 31, 2004, the Company had outstanding mortgages of $765.1 million with a weighted average interest rate of 6.6%.
Table Regarding Real Estate Holdings
The table on the following pages sets forth certain information relating to the Companys real property portfolio, including non-consolidated properties, as of December 31, 2004. All the properties listed have been fully leased by tenants for the last five years, or since the date of purchase by the Company or its non-consolidated entities if less than five years, with the exception of the Dallas, Texas, Columbia, Maryland, Hebron, Kentucky, Memphis, Tennessee and Phoenix, Arizona properties and 2,100 square feet of the Chicago, Illinois property purchased in 2004. During the last five years, the Dallas, Texas property was vacant since December 31, 2004, the Phoenix, Arizona property has been vacant since December 2003, the Hebron, Kentucky property has been vacant since April 2004, the Columbia, Maryland property was vacant from September 2001 to April 2003 when a lease for 17,100 square feet was executed and in September 2003 the remaining 46,724 square feet were leased. The Companys property in Memphis, Tennessee has 141,000 square feet of rentable space, of which 35,000 has been leased since October 1999.
LEXINGTON CORPORATE PROPERTIES TRUST
JOINT VENTURE PROPERTY CHART
From time to time, the Company and/or its subsidiaries are involved in legal proceedings arising in the ordinary course of its business. In managements opinion, after consultation with legal counsel, the outcome of such matters, including in respect of the matter referred to below, is not expected to have a material adverse effect on the Companys ownership, financial condition, management or operation of its properties.
VarTec Telecom, Inc. Bankruptcy. On November 1, 2004, VarTec Telecom, Inc. (VarTec), previously one of our largest tenants based upon base rent, filed for Chapter 11 bankruptcy protection with the U.S. Bankruptcy Court in the Northern District of Texas (the Bankruptcy Court). VarTec leased a 249,452 square foot office property in Dallas, Texas. The VarTec lease was to expire in September, 2015.
On December 17, 2004, the Bankruptcy Court approved VarTecs motion to reject the lease. As a result of the rejection of the lease, the Company incurred a fourth quarter non-cash charge of approximately $2.9 million due to the write-off of deferred rent receivable and unamortized lease costs. In addition, as a result of the rejection of the lease, the Company has an unsecured claim for any damages resulting from the breach of the lease, including rent for the period from the rejection date through the remainder of the lease term, subject to a cap under applicable bankruptcy law. The Company may not be able to collect all or any portion of these unsecured claims.
The VarTec property is subject to a non-recourse mortgage with an outstanding balance of $20.9 million as of December 31, 2004. The note has a fixed interest rate of 7.49%, requires annual debt service of $2.0 million and is scheduled to mature in December, 2012, when a balloon payment of $16.0 million is due. The lender holds a $2.5 million letter of credit issued by the Company as collateral against the mortgage.
Item 4. Submission of Matters to a Vote of Security Holders
Item 4A. Executive Officers and Trustees of the Registrant
The following sets forth certain information relating to the executive officers and trustees of the Company:
Market Information. The common shares of the Company are listed for trading on the New York Stock Exchange (NYSE) under the symbol LXP. The following table sets forth the closing high and low sales prices as reported by the NYSE for the common shares of the Company for each of the periods indicated below:
The closing price of the common shares of the Company was $22.82 on March 10, 2005.
Holders. As of March 10, 2005, the Company had approximately 2,854 common shareholders of record.
Dividends. The Company has made quarterly distributions since October 1986 without interruption.
The common share dividends paid in each quarter for the last five years are as follows:
The Companys current quarterly common share dividend rate is $0.36 per share, or $1.44 per common share on an annualized basis.
Following is a summary of the average taxable nature of the Companys common share dividends for the three years ended December 31,:
The Companys per share dividend on its Series B Cumulative Redeemable Preferred Shares is $2.0125 per annum.
Following is a summary of the average taxable nature of the Companys dividend on its Series B Cumulative Redeemable Preferred Shares for the years ended December 31,:
The Companys per share dividend on its Series C Cumulative Convertible Preferred Shares is $3.25 per annum.
While the Company intends to continue paying regular quarterly dividends to holders of its common shares, future dividend declarations will be at the discretion of the Board of Trustees and will depend on the actual cash flow of the Company, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Trustees deems relevant. The actual cash flow available to pay dividends will be affected by a number of factors, including the revenues received from rental properties, the operating expenses of the Company, the interest and principal payments required under various borrowing agreements, the ability of lessees to meet their obligations to the Company and any unanticipated capital expenditures.
The various instruments governing the Companys unsecured bank debt impose certain restrictions on the Company with regard to dividends and incurring additional debt obligations. See Managements Discussion and Analysis of Financial Condition and Results of Operations and Note 7 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
The Company does not believe that the financial covenants contained in its unsecured revolving credit agreement and secured indebtedness will have any adverse impact on the Companys ability to pay dividends in the normal course of business to its common and preferred shareholders or to distribute amounts necessary to maintain its qualifications as a REIT.
The Company maintains a dividend reinvestment program pursuant to which common shareholders and operating partnership limited partners may elect to automatically reinvest their dividends and distributions to purchase common shares of the Company at a 5% discount to the market price and free of commissions and other charges. The Company may, from time to time, either repurchase common shares in the open market, or issue new common shares, for the purpose of fulfilling its obligations under the dividend reinvestment program. Under this program none of the common shares issued were purchased on the open market.
Equity Compensation Plan Information. The following table sets forth certain information, as of December 31, 2004, with respect to compensation plans (including individual compensation arrangements) under which equity securities of the Company are authorized for issuance.
Recent Sales of Unregistered Securities. On October 28, 2004, Lepercq Corporate Income Fund L.P. (LCIF), one of the Companys operating partnerships, issued 97,828 OP Units in exchange for certain minority limited partnership interest in Barnhech Montgomery Associates Limited Partnership, a Maryland limited partnership and subsidiary of LCIF. The issuance of the 97,828 OP Units was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a transaction not involving a public offering of securities.
The following sets forth selected consolidated financial data for the Company as of and for each of the years in the five-year period ended December 31, 2004. The selected consolidated financial data for the Company should be read in conjunction with the Consolidated Financial Statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. ($000s, except per share data)
The Company, which has elected to qualify as a real estate investment trust under the Internal Revenue Code of 1986, acquires and manages net leased commercial properties throughout the United States. The Company believes it has operated as a REIT since October 1993. As of December 31, 2004, the Company owned or had interests in 154 real estate properties encompassing 32.3 million rentable square feet. During 2004, the Company purchased 44 properties, including non-consolidated investments, for a capitalized cost of $935.1 million.
During 2004, the Company sold eight properties to unrelated third parties for net sales price of $36.7 million. In addition, the Company contributed eight properties to its various joint venture programs for $197.0 million which approximated carrying costs. In addition, the Company was reimbursed for certain holding costs by the partners in the joint ventures.
As of December 31, 2004, the Company leased properties to 108 tenants in 20 different industries.
The Companys revenues and cash flows are generated predominantly from property rent receipts. Growth in revenue and cash flows is directly correlated to the Companys ability to (i) acquire income producing properties and (ii) to release properties that are vacant, or may become vacant at favorable rental rates. The challenge the Company faces in purchasing properties is finding investments that will provide an attractive return without compromising the Companys real estate underwriting criteria. The Company believes it has access to acquisition opportunities due to its relationship with developers, brokers, corporate users and sellers.
In the past three years, the Company has experienced minimal lease turnover, and accordingly minimal capital expenditures. There can be no assurance that this will continue. Through 2009, the Company, including its non-consolidated entities, has 42 leases expiring which generate approximately $58.4 million in base rent, including the Companys proportion share of base rent from non-consolidated entities. Releasing these properties at favorable effective rates is the primary focus of the Company.
The primary risks associated with re-tenanting properties are (i) the period of time required to find a new tenant (ii) whether rental rates will be lower than previously received (iii) the significant leasing costs such as commissions and tenant improvement allowances and (iv) the payment of operating costs such as real estate taxes and insurance while there is no offsetting revenue. The Company addresses these risks by contacting tenants well in advance of lease maturity to get an understanding of their occupancy needs, contacting local brokers to determine the depth of the rental market and, if required, retaining local expertise to assist in the re-tenanting of a property. As part of the acquisition underwriting process, the Company focuses on buying general purpose real estate which can be leased to other tenants without significant modification to the properties. No assurance can be given that once a property becomes vacant it will subsequently be re-let.
During 2003, the Company sold four properties for $11.1 million to unrelated parties, which resulted in an aggregate gain of approximately $2.2 million. During 2002, the Company sold five properties for $20.8 million to unrelated parties, which resulted in an aggregate gain of approximately $1.1 million. During 2003, the Company contributed 2 properties to LION for $23.8 million, which approximated carrying costs.
The Companys accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates that affect the amounts of revenues, expenses, assets and liabilities reported. The following are
critical accounting policies which are important to the portrayal of the Companys financial condition and results of operations and which require some of managements most difficult, subjective and complex judgments. The accounting for these matters involves the making of estimates based on current facts, circumstances and assumptions which could change in a manner that would materially affect managements 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 managements current estimates.
Revenue Recognition. The Company recognizes revenue in accordance with Statement of Financial Accounting Standards No. 13 Accounting for Leases, as amended (SFAS No. 13). SFAS No. 13 requires that revenue be recognized on a straight-line basis over the term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. Leases that include renewal options with rental terms that are lower than those in the primary term are excluded from the calculation of straight line rent if they do not meet the criteria of a bargain renewal option.
Gains on sales of real estate are recognized pursuant to the provisions of SFAS No. 66 Accounting for Sales of Real Estate, as amended. The specific timing of the sale is measured against various criteria in SFAS No. 66 related to the terms of the transactions and any continuing involvement in the form of management or financial assistance associated with the properties. If the sales criteria are not met, the gain is deferred and the finance, installment or cost recovery method, as appropriate, is applied until the sales criteria are met.
Accounts Receivable. The Company continuously monitors collections from its tenants and would make a provision for estimated losses based upon historical experience and any specific tenant collection issues that the Company has identified. As of December 31, 2004 and 2003, the Company did not record an allowance for doubtful accounts.
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 relating to property acquisitions, is allocated to the acquired tangible assets, consisting of land, building and improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and value of tenant relationships, based in each case on their fair values.
The fair value of the tangible assets, which includes land, building and improvements, and fixtures and equipment, of an acquired property is determined to valuing the property as if it were vacant, and the as-if-vacant value is then allocated to the tangible assets based on managements determination of relative fair values of these assets. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions.
In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the difference between the current in-place lease rent and a management estimate of current market rents. Below-market lease intangibles are recorded as part of deferred revenue and amortized into rental revenue over the non-cancelable periods of the respective leases. Above-market leases are recorded as part of intangible assets and amortized as a direct charge against rental revenue over the non-cancelable portion of the respective leases.
The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the excess of (i) the purchase price paid for a property over (ii) the estimated fair value of the property as if vacant, determined as set forth above. This aggregate value is allocated between in-place lease values and tenant relationships based on managements evaluation of the specific characteristics of each tenants lease. The value of in-place leases and customer relationships are amortized to expense over the remaining non-cancelable periods of the respective leases.
Impairment of Real Estate. Annually, and if events and circumstances require, the Company evaluates the carrying value of its real estate held to determine if an impairment has occurred which would require the recognition of a loss. The evaluation includes reviewing anticipated cash flows of the property, based on current leases in place, coupled with an estimate of proceeds to be realized upon sale. However, estimating future sale proceeds is highly subjective and such estimates could differ materially from actual results.
Properties Held For Sale. The Company accounts for properties held for sale in accordance with Statement of Financial Accounting Standards No. 144, as amended Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS 144 requires that the assets and liabilities of properties that meet various criteria in SFAS No. 144 be presented separately in the statement of financial position, with assets and liability being separately stated. The operating results of these properties are reflected as discontinued operations in the income statement. Properties that do not meet the held for sale criteria of SFAS No. 144 are accounted for as operating properties.
Basis of Consolidation. The Company determines whether an entity for which it holds an interest should be consolidated pursuant to FASB Interpretation No. 46 Consolidation of Variable Interest Entities (FIN 46R). If not, and the Company controls the entities voting shares and similar rights, the entity is consolidated. FIN 46R requires the Company to evaluate whether it has a controlling financial interest in an entity through means other than voting rights.
Since becoming a public company, the Companys principal sources of capital for growth has been the public and private equity markets, selective secured indebtedness, its unsecured credit facility, issuance of OP Units and undistributed funds from operations. The Company expects to continue to have access to and use these sources in the future; however, there are factors that may have a material adverse effect on the Companys access to capital sources. The Companys ability to incur additional debt to fund acquisitions is dependent upon its existing leverage, the value of the assets the Company is attempting to leverage and general economic conditions which may be outside of managements influence.
The Companys current $100.0 million variable rate unsecured revolving credit facility, which is scheduled to expire in August 2006, has made available funds to finance acquisitions and meet any short-term working capital requirements. As of December 31, 2004, no borrowings were outstanding. The Company did have $3.9 million in outstanding letters of credit under the facility. The Company pays an unused facility fee equal to 25 basis points if 50% or less of the facility is utilized and 15 basis points if greater than 50% of the facility is utilized. The Company has the option to extend the maturity to August 2007, if no defaults exist, upon a payment of $0.3 million.
During 2004, the Company completed a 6.9 million common share offering, raising $144.0 million of net proceeds. The Company also completed a 2.7 million convertible preferred share offering with a cumulative preferred dividend rate of 6.50% raising net proceeds of $131.1 million. As of December 31, 2004, these preferred shares are convertible into approximately 5.0 million common shares.
During 2003, the Company completed a 4.5 million common share offering and a 5.3 million common share offering raising an aggregate of $174.0 million of net proceeds. The Company completed a 3.16 million redeemable preferred share offering with a cumulative preferred dividend rate of 8.05% raising net proceeds of $76.3 million. The proceeds of these offerings were used to repay debt and fund acquisitions.
The Company has made equity commitments of $192.1 million to its various joint venture programs, of which $66.1 million is unfunded as of December 31, 2004. This amount will be funded as investments are made. In addition, the joint venture agreements provide the partners, under certain circumstances, the ability to put their interests to the Company for cash or commons shares. This put could require the Company to use its resources to purchase these assets instead of more favorable investment opportunities. The aggregate contingent commitment as of December 31, 2004 is approximately $222.3 million.
Dividends. In connection with its intention to continue to qualify as a REIT for Federal income tax purposes, the Company expects to continue paying regular dividends to its shareholders. These dividends are
expected to be paid from operating cash flows and/or from other sources. Since cash used to pay dividends reduces amounts available for capital investments, the Company generally intends to maintain a conservative dividend payout ratio as a percentage of FFO, reserving such amounts as it considers necessary for the maintenance or expansion of properties in its portfolio, debt reduction, the acquisition of interests in new properties as suitable opportunities arise, and such other factors as the Board of Trustees considers appropriate.
Dividends paid to common shareholders increased to $65.1 million in 2004, compared to $45.8 million in 2003 and $35.8 million in 2002. Preferred dividends paid were $6.4 million, $1.8 million and $0.7 million in 2004, 2003 and 2002, respectively.
Although the Company receives the majority of its base rent 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. On November 1, 2004, the tenant in the Companys Dallas, Texas property, VarTec Telcom, Inc., filed for Chapter 11 bankruptcy and subsequently rejected its lease with the Company. The lease, provided for $3.5 million in annual base rent and $3.4 million in annual cash rent. In addition, under the terms of the lease the tenant was responsible for all operating expenses of the property. As the tenant has rejected the lease, in addition to the loss of base rent, the Company will be responsible for operating expenses until a replacement tenant can be found. The Company has assessed the recoverability of this asset, which it is holding for investment, and believes it is not impaired as of December 31, 2004. The Company has written off $2.9 million in other assets relating to this bankruptcy.
The Company believes that cash flows from operations will continue to provide adequate capital to fund its operating and administrative expenses, regular debt service obligations and all dividend payments in accordance with REIT requirements in both the short-term and long-term. In addition, the Company anticipates that cash on hand, borrowings under its unsecured credit facility, issuance of equity and debt, as well as other alternatives, will provide the necessary capital required by the Company. Cash flows from operations as reported in the Consolidated Statements of Cash flows increased to $90.9 million for 2004 from $71.8 million for 2003 and $57.7 million for 2002. Cash flows from operations was negatively impacted in 2003 and 2002 by the payment of $7.2 million and, $0.3 million respectively in prepayment penalties on debt satisfactions.
Net cash used in investing activities totaled $202.5 million in 2004, $298.6 million in 2003 and $107.1 million in 2002. Cash used in investing activities relates primarily to investments in real estate properties and joint ventures. Therefore, the fluctuation in investing activities relates primarily to the timing of investments and dispositions.
Net cash provided by financing activities totaled $242.7 million in 2004, $229.0 million in 2003 and $47.6 million in 2002. Cash provided by financing activities during each year was primarily attributable to proceeds from equity offerings, non-recourse mortgages and advances/repayments under the Companys credit facility offset by dividend and distribution payments and mortgage principal payments.
UPREIT Structure. The Companys UPREIT structure permits the Company to effect acquisitions by issuing to a property owner, as a form of consideration in exchange for the property, OP Units in partnerships controlled by the Company. All of such OP Units are redeemable at certain times for common shares on a one-for-one basis and all of such OP Units require the Company to pay certain distributions to the holders of such OP Units. The Company accounts for these OP Units in a manner similar to a minority interest holder. The number of common shares that will be outstanding in the future should be expected to increase, and minority interest expense should be expected to decrease, as such OP Units are redeemed for common shares.
The following table provides certain information with respect to such OP Units as of December 31, 2004 (assuming the Companys annualized dividend rate remains at the current $1.44 per share).