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| LXP > SEC Filings for LXP > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
incur additional debt to fund acquisitions is dependent upon our existing
leverage, the value of the assets we are attempting to leverage, general
economic and credit market conditions, and the other factors described in our
periodic reports filed with the SEC, which may be outside of management's
control or influence.
As of September 30, 2008, we held interests in approximately 240 consolidated
properties, which were located in 42 states and the Netherlands. Our real estate
assets are primarily 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. However, certain leases
provide that we are responsible for certain operating expenses.
During the nine months ended September 30, 2008, we purchased two properties
for a capitalized cost of $56.1 million and sold 23 properties to unrelated
third parties for aggregate sales proceeds of $189.5 million, which resulted in
a gain of $12.0 million. During the nine months ended September 30, 2007, in
addition to the acquisition of the co-investment programs, we purchased seven
properties from third parties for a capitalized cost of $117.8 million and sold
33 properties to unrelated third parties for aggregate sales proceeds of
$225.9 million, which resulted in a gain of $39.8 million.
During the nine months ended September 30, 2007, we acquired the remaining
interests we did not already own in three co-investment programs and liquidated
another co-investment program. We paid $366.6 million in cash and assumed
approximately $785.0 million in non-recourse mortgage debt to acquire full
interests in 48 real estate properties.
For the nine months ended September 30, 2008 and 2007, the leases on our
consolidated properties generated $308.4 million and $269.8 million,
respectively, in rental revenue. In June 2008, we completed an offering of
3.45 million common shares, raising net proceeds of $47.2 million. In
February 2007, we completed an offering of 6.2 million Series D Preferred
Shares, having a liquidation amount of $25 per share and an annual dividend rate
of 7.55%, raising net proceeds of $149.8 million.
As previously disclosed, we intend to reduce our existing leverage by
repurchasing existing debt at a discount to face value and issuing common shares
when appropriate.
Dividends. In connection with our intention to continue to qualify as a REIT
for federal income tax purposes, we expect to continue paying regular dividends
to our 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, we generally intend to maintain a
conservative dividend payout ratio, reserving such amounts as we consider
necessary for the maintenance or expansion of properties in our portfolio, debt
reduction, the acquisition of interests in new properties as suitable
opportunities arise, and such other factors as our Board of Trustees considers
appropriate.
Dividends paid to our common and preferred shareholders increased to
$213.0 million in the nine months ended September 30, 2008, compared to
$106.4 million in the nine months ended September 30, 2007. The increase is
primarily attributable to the $2.10 per share/unit special dividend paid in
January 2008.
Although we receive the majority of our base rental payments on a monthly
basis, we intend to continue paying dividends quarterly. Amounts accumulated in
advance of each quarterly distribution are invested by us in short-term money
market or other suitable instruments.
Cash Flows. We believe that cash flows from operations will continue to
provide adequate capital to fund our 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, we
anticipate that cash on hand, borrowings under our credit facility, issuance of
equity and debt and co-investment programs as well as other alternatives, will
provide the necessary capital required by us. Cash flows from operations as
reported in the Consolidated Statements of Cash Flows decreased to
$187.4 million for 2008 from $235.9 million for 2007. 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. We believe the net lease
structure of the majority of our 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 our cash management
program.
Net cash provided by (used in) investing activities totaled $200.8 million in
2008 and $(316.4) million in 2007. Cash used in investing activities related
primarily to investments in real estate properties, joint ventures and an
increase in leasing costs. Cash provided by investing activities related
primarily to proceeds from the sale of marketable securities, distributions from
non-consolidated entities in excess of accumulated earnings, principal payments
on loan receivable and proceeds from the sale of properties. Therefore, the
fluctuation in investing activities relates primarily to the timing of
investments and dispositions.
Net cash (used in) provided by financing activities totaled $(692.2) million
in 2008 and $224.0 million in 2007. Cash provided by (used in) financing
activities during each year was primarily attributable to proceeds from equity
and debt offerings offset by dividend and distribution payments, repurchases of
debt instruments, repurchases of common and preferred shares and debt
amortization payments.
UPREIT Structure. Our UPREIT structure permits us to effect acquisitions by
issuing to a property owner, as a form of consideration in exchange for the
property, OP Units in our operating partnerships. Substantially all outstanding
OP Units are redeemable by the holder at certain times for common shares on a
one-for-one basis or, at our election, with respect to certain OP Units, cash.
Substantially all outstanding OP Units require us to pay quarterly distributions
to the holders of such OP Units an amount equal to the dividends paid to our
common shareholders and the remaining OP Units have stated distributions in
accordance with their respective partnership agreement. To the extent that our
dividend per share is less than a stated distribution per unit per the
applicable partnership agreement, the stated distributions per unit are reduced
by the percentage reduction in our dividend. No OP Units have a liquidation
preference. We account for outstanding 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 our common
shares. As of September 30, 2008, there were 39.4 million OP Units outstanding.
As of September 30, 2008, the Company's common shares had a closing price of
$17.22 per share. Assuming all outstanding OP Units not held by us were redeemed
on such date, the estimated fair value of the OP Units was $678.5 million.
Financing
Revolving Credit Facility. Our $200.0 million revolving credit facility with
Wachovia Bank N.A. and a consortium of other banks, (1) expires June 2009 and
(2) bears interest at 120-170 basis points over LIBOR depending on our leverage
(as defined) in the credit facility. Our credit facility contains customary
financial covenants including restrictions on the level of indebtedness, amount
of variable debt to be borrowed and net worth maintenance provisions. As of
September 30, 2008, we were in compliance with all covenants, no borrowings were
outstanding, $198.0 million was available to be borrowed, and $2.0 million in
letters of credit were outstanding under the credit facility.
During the nine months ended September 30, 2008, the MLP obtained
$25.0 million and $45.0 million secured term loans from KeyBank N.A. The loans
are interest only at LIBOR plus 60 basis points and mature in 2013. The net
proceeds of the loans ($68.0 million) were used to partially repay indebtedness
on three cross-collateralized mortgages. After such repayment, the amount owed
on the three mortgages was $103.5 million, the three loans were combined into
one loan, which is interest only instead of having a portion as self-amortizing
and matures in September 2014.
Pursuant to the new secured term loan agreements, the MLP simultaneously
entered into an interest-rate swap agreement with KeyBank N.A to swap the LIBOR
rate on the loans for a fixed rate of 4.9196% through March 18, 2013, and the
MLP assumed a liability for the fair value of the swap at inception of
approximately $5.7 million ($3.0 million at September 30, 2008).
The MLP has another secured loan with Key Bank, N.A., which bears interest at
LIBOR plus 60 basis points. As of September 30, 2008, $197.9 million was
outstanding under the secured loan. The secured loan is scheduled to mature in
June 2009 however the MLP has an option to extend the maturity date to
December 1, 2009. The secured loan requires monthly payments of interest only.
The MLP is also required to make principal payments from the proceeds of certain
property sales and certain refinancings if such proceeds are not reinvested into
net leased properties. The required principal payments are based on a minimum
release price set forth in the secured loan agreement. The secured loan has
customary covenants, which the MLP was in compliance with at September 30, 2008.
During the nine months ended September 30, 2007, the MLP issued
$450.0 million in 5.45% Exchangeable Guaranteed Notes due in 2027, which can be
put by the holder to us every five years commencing 2012 and upon certain
events. The net
proceeds of the issuance were used to repay indebtedness. During the nine months
ended September 30, 2008, the MLP repurchased $150.5 million of these notes for
$132.5 million, which resulted in a gain of $15.4 million, including the
write-off of $2.7 million in deferred financing costs. As of September 30, 2008,
$299.5 million is outstanding.
During the nine months ended September 30, 2007, we issued $200.0 million in
Trust Preferred Securities. These Trust Preferred Securities, which are
classified as debt, (1) are due in 2037, (2) are redeemable by us commencing
April 2012 and (3) bear interest at a fixed rate of 6.804% through April 2017
and thereafter at a variable rate of three month LIBOR plus 170 basis points
through maturity. During the nine months ended September 30, 2008, we
repurchased $70.9 million of these Trust Preferred Securities for $44.6 million,
which resulted in a gain of $24.7 million, including the write-off of
$1.6 million in deferred financing costs. As of September 30, 2008,
$129.1 million is outstanding.
Other
Lease Obligations. Since our tenants generally bear all or substantially all
of the cost of property operations, maintenance and repairs, we do not
anticipate significant needs for cash for these costs; however, for certain
properties, we have a level of property operating expense responsibility. We
generally fund property expansions with additional secured borrowings, the
repayment of which is funded out of rental increases under the leases covering
the expanded properties. To the extent there is a vacancy in a property, we
would be obligated for all operating expenses, including real estate taxes and
insurance. In addition certain leases require us to fund tenant expansions.
Our tenants generally pay the rental obligations on ground leases either
directly to the fee holder or to us as increased rent.
Capital Expenditures. As leases expire, we expect to incur costs in extending
the existing tenant leases 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, cash on hand or borrowings on our credit facility.
Current Operating Environment. The global credit and financial crisis has gained
momentum in the past few weeks and there is considerable uncertainty as to how
severe the current downturn may be and how long it may continue. It is difficult
to predict the impact on our business but we expect that the economy will
continue to strain the resources of our tenants and their customers. We saw
relatively little impact of the current financial crisis on our core operating
results in the current quarter. However, there is no guarantee that this will
continue. Leased space was 93.8% at September 30, 2008, down 2.0% from last
year. We expect leased space to remain relatively constant over the remainder of
2008. We lease our properties to tenants in various industries, including
finance/insurance, food, energy, technology and automotive. Tenant defaults at
our properties could negatively impact our operating results. In addition, we
have a $200.0 million credit facility which expires in June 2009, of which no
borrowings are outstanding and a $197.9 million term loan which is scheduled to
mature June 2009, with our option to extend the maturity to December 2009.
Refinancing these agreements, including a reduction of the credit facility to
$100.0 million, are of significant importance to us and we are currently working
with our lenders and prospective lenders in an effort to extend these
maturities. The spreads to LIBOR have increased since we entered into our
current agreements and we do not expect our current spreads to remain in place
after the refinancings, if completed, are done.
We have interest rate swap agreements directly and through our investment in
Lex-Win Concord. Also subsequent to September 30, 2008, we entered into a
forward equity commitment. The counterparties of these arrangements are major
financial institutions, however we are exposed to credit risk in the event of
non-performance by the counterparties.
Three months ended September 30, 2008 compared with September 30, 2007. Of
the decrease in total gross revenues in 2008 of $10.8 million, $11.8 million is
attributable to a decrease in rental revenue which was offset by an increase of
$1.0 million attributable to tenant reimbursements and advisory and incentive
fees. The decrease in rental revenue is primarily attributable to the
sale/contribution of properties to a newly formed joint venture in the fourth
quarter of 2007 and first two quarters of 2008 coupled with lease terminations
in the second quarter of 2008.
The decrease in interest and amortization expense of $10.9 million is due to
the satisfaction of long-term debt and the sale/contribution of properties to a
newly formed joint venture which are encumbered by debt.
The increase in property operating expense of $3.8 million is primarily due
to an increase in properties for which we have operating expense responsibility
and an increase in vacancy.
The decrease in depreciation and amortization of $12.6 million is due
primarily to the acceleration of amortization of certain intangible assets
relating to lease terminations in the second quarter of 2008 and the
sale/contribution of properties to a newly formed co-investment program.
Intangible assets are amortized over a shorter period of time (generally the
lease term) than real estate assets.
The decrease in non-operating income of $0.8 million is primarily
attributable to a reduction in interest and dividends earned.
Debt satisfaction gains, net increased $2.3 million due to the timing of debt
being satisfied at a discount.
Equity in earnings (losses) of non-consolidated entities was a loss of
$(1.5) million in 2008 compared with earnings of $4.1 million in 2007. The
primary reason for the fluctuation between periods is the losses incurred
attributable to us on our newly formed co-investment program.
Net income (loss) was $(3.7) million in 2008 and $14.5 million in 2007
primarily due to the net impact of the items discussed above plus a decrease of
$22.6 million in income from discontinued operations.
Discontinued operations represent properties sold or held for sale. The total
discontinued operations decreased $22.6 million primarily due to a decrease in
income from discontinued operations of $8.4 million, a decrease in gains on sale
of properties of $19.6 million and an increase in impairment charges of
$1.1 million offset by a decrease in minority interests' share of income of
$3.2 million and a decrease in debt satisfaction charges of $3.5 million.
Net income (loss) allocable to common shareholders in 2008 was $(10.3)
million compared to $7.4 million in 2007. The decrease of $17.7 million is due
to the items discussed above offset by a decrease in preferred dividends of
$0.4 million resulting from the repurchase of our Series C Preferred during
2008. The increase in net income in future periods will be closely tied to the
level of acquisitions made by us. Without acquisitions, the sources of growth in
net income are limited to index adjusted rents (such as the consumer price
index), and 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 and the other
risks described in our periodic reports filed with the SEC.
Nine months ended September 30, 2008 compared with September 30, 2007.
Changes in our results of operations are primarily due to the acquisition of the
outstanding interests in our four co-investment programs during the second
quarter of 2007. Of the increase in total gross revenues in 2008 of
$36.5 million, $38.6 million is attributable to rental revenue and $9.1 million
in tenant reimbursements which are together offset by a decrease of
$11.1 million in advisory and incentive fees. In addition to the acquisition of
our co-investment programs in 2007, the increase in rental revenue is primarily
attributable to the receipt of payments of $28.7 million from two tenant lease
terminations offset by the accelerated amortization of above and below market
leases of $4.1 million in 2008. The reduction in advisory and incentive fees
relate to incentive fees earned in 2007 in connection with the termination of
two co-investment programs.
The increase in interest and amortization expense of $5.8 million is due to
the increase in long-term debt due to the growth of our portfolio via the
acquisition of the outstanding interests in four of our co-investment programs
during 2007.
The increase in property operating expense of $18.8 million is primarily due
to an increase in properties for which we have operating expense responsibility
and an increase in vacancy.
The increase in depreciation and amortization of $26.8 million is due
primarily to the growth in real estate and intangibles through the acquisition
of properties from our co-investment programs and the acceleration of
amortization of certain intangible assets relating to lease terminations in
2008. Intangible assets are amortized over a shorter period of time (generally
the lease term) than real estate assets.
The decrease in general and administrative expenses of $3.2 million is due
primarily to a reduction in the costs of severance agreements with our former
officers.
The increase in non-operating income of $15.1 million is primarily
attributable to land received in connection with a lease termination in the
second quarter of 2008.
Debt satisfaction gains, net increased $39.0 million due to the timing of
debt being satisfied at a discount.
The increase in gains on sale - affiliates of $31.8 million relates to the
sale of properties to a newly formed co-investment program.
Minority interests' share of (income) loss fluctuated to a share of losses of
$5.4 million in 2008 from a share of income of $(3.5) million in 2007. The
primary reason for the fluctuation is the impairment losses incurred by Concord
Debt Holdings, LLC, an equity method investee of the MLP.
Equity in earnings (losses) of non-consolidated entities was a loss of
$(23.2) million in 2008 compared with earnings of $46.0 million in 2007. The
primary reason for the fluctuation between periods is that in 2007 we recognized
our proportionate share of the gain on sale of properties in our co-investment
programs, while in 2008 Concord recognized impairment charges of $65.2 million,
of which our share was $32.6 million.
Net income decreased by $25.8 million primarily due to the net impact of the
items discussed above plus a decrease of $39.8 million in income from
discontinued operations.
Discontinued operations represent properties sold or held for sale. The total
discontinued operations decreased $39.8 million due to a decrease in income from
discontinued operations of $24.1 million, an increase in impairment charges of
$3.8 million, and a decrease in gains on sale of $27.8 million, offset by a
reduction in minority interests' share of income of $10.3 million, debt
satisfaction charges of $3.2 million and provision for income taxes of
$2.4 million.
Net income allocable to common shareholders in 2008 was $5.2 million compared
to $25.9 million in 2007. The change is due to the items discussed above offset
by a net decrease in preferred dividends of $5.1 million resulting from the
issuance of the Series D Preferred in 2007, which resulted in an increase in
dividends of $1.4 million and the repurchase of Series C Preferred in 2008 which
resulted in a redemption discount of $5.7 million and a decrease in dividends of
$0.8 million. Since the Series C Preferred were redeemed by us at a discount to
the original historical cost basis, the discount is treated as an accretion to
net income allocable to common shareholders.
Environmental Matters
Based upon management's ongoing review of our properties, management is not
aware of any environmental condition with respect to any of our properties,
which would be reasonably likely to have a material adverse effect on us. There
can be no assurance, however, that (1) the discovery of environmental
conditions, which were previously unknown; (2) changes in law; (3) the conduct
of tenants; or (4) activities relating to properties in the vicinity of our
properties, will not expose us 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 our tenants, which would adversely affect our financial
condition and results of operations.
Off-Balance Sheet Arrangements
Non-Consolidated Real Estate Entities. As of September 30, 2008, we had
investments in various non-consolidated real estate entities with varying
structures. The non-consolidated real estate investments owned by the entities
are financed with non-recourse debt. Non-recourse debt is generally defined as
debt whereby the lenders' sole recourse with respect to borrower defaults is
limited to the value of the asset collateralized by the debt. 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
. . .
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