LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010 and 2009
(Unaudited and dollars in thousands, except per share/unit data)
Lexington Realty Trust (the “Company”) is a self-managed and self-administered Maryland statutory real estate investment trust (“REIT”) that acquires, owns and manages a geographically diversified portfolio of predominately net-leased office, industrial and retail properties. The Company also provides investment advisory and asset management services to investors in the net-lease area. As of September 30, 2010, the Company owned or had interests in approximately 195 consolidated properties in 40 states. The real properties owned by the Company are generally subject to net leases or similar leases where the tenant pays all or substantially all of the cost and/or cost increases for real estate taxes, insurance, utilities and ordinary maintenance of the property. However, certain leases provide that the Company is responsible for certain 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 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 Company conducts its operations either directly or indirectly through operating partnerships in which the Company is the sole unit holder of the general partner and the sole unit holder of the limited partner that holds a majority of the limited partner interests (“OP units”) or through a wholly owned TRS.
The unaudited condensed consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary to present fairly 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 consolidated financial statements (including the notes thereto) previously filed with the Securities and Exchange Commission ("SEC") on March 1, 2010 included in the Company's Annual Report on Form 10-K for the year ended December 31, 2009 (the “Annual Report”).
|
(2)
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Summary of Significant Accounting Policies
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Basis of Presentation and Consolidation. The Company’s condensed consolidated financial statements are prepared on the accrual basis of accounting. The financial statements reflect the accounts of the Company and its consolidated subsidiaries. The Company consolidates its wholly owned subsidiaries, partnerships and joint ventures which it controls (i) through voting rights or similar rights or (ii) by means other than voting rights if the Company is the primary beneficiary of a variable interest entity ("VIE"). Entities which the Company does not control and entities which are VIEs in which the Company is not the primary beneficiary are accounted for under appropriate U.S. generally accepted accounting principles (“GAAP”).
The Company implemented new accounting guidance effective January 1, 2010 regarding VIEs. In accordance with the guidance, the Company re-evaluated all of its equity and loan investments and all other potential variable interests to determine if they are VIEs. For each of these investments, the Company has evaluated (1) the sufficiency of the entities’ equity investments at risk to permit the entity to finance its activities without additional subordinated financial support; (2) that as a group the holders of the equity investments at risk have (a) the power through voting rights or similar rights to direct the entities’ activities that most significantly impact the entity’s economic performance, (b) the obligation to absorb the expected losses of the entity and their obligations are not protected directly or indirectly and (c) the right to receive the expected residual return of the entity and their rights are not capped and (3) the voting rights of these investors are not proportional to their obligations to absorb the expected losses of the entity, their rights to receive the expected returns of the entity, or both, and that substantially all of the entities’ activities do not involve or are not conducted on behalf of an investor that has disproportionately few voting rights.
If an investment is determined to be a VIE, the Company then performs an analysis to determine if the Company is the primary beneficiary of the VIE. GAAP requires a VIE to be consolidated by its primary beneficiary. The primary beneficiary is the party that has a controlling financial interest in an entity. In order for a party to have a controlling financial interest in an entity it must have (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, and (2) the obligation to absorb losses of an entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.
Consolidated Variable Interest Entities. The Company’s consolidated VIEs were determined to be VIEs primarily because the entities’ equity holders’ obligation to absorb losses is protected or their equity investment at risk is not sufficient to permit the entities to finance their activities without additional financial support. The Company determined that it was the primary beneficiary of these VIEs as it has a controlling financial interest in the entities.
The Company determined that a wholly owned entity which owns an office building in Greenville, South Carolina is a VIE as the entity’s obligation to absorb losses is protected. The tenant has an option to purchase the property on December 31, 2014 at fair market value, but not for less than $10,710 and not for greater than $11,550. If the tenant does not exercise the purchase option, the Company has the right to require the tenant to purchase the property for $10,710.
The Company had a loan which was made to a VIE, Camfex Associates Limited Partnership (“Camfex”). The Company determined that it was the primary beneficiary of the VIE and, accordingly, consolidated Camfex in its financial statements. Camfex owned two multi-tenanted office buildings in California and had outstanding third-party mortgage debt. In January 2010, one property was sold to its tenant/lender. During the first quarter of 2010, the Company took a deed in lieu of foreclosure on the second property and satisfied the third-party mortgage debt; thus Camfex was no longer a VIE of the Company. As of December 31, 2009, the aggregate assets of Camfex that could only be used to settle the obligations of the VIE were $37,808. These assets were primarily classified in real estate in the Company’s Condensed Consolidated Balance Sheet. As of December 31, 2009, the aggregate liabilities of Camfex were $24,455 and were primarily classified in mortgage notes payable in the Company’s Condensed Consolidated Balance Sheet. Neither creditors nor noncontrolling equity investors of the VIE have any recourse to the general credit of the Company.
Non-Consolidated Variable Interest Entities. At September 30, 2010 and December 31, 2009, the Company held variable interests in certain non-consolidated VIEs; however, the Company was not the primary beneficiary of these VIEs as the Company does not have a controlling financial interest in the entities. The Company determined Concord Debt Holdings LLC and related entities are VIEs. The Company’s carrying value of these investments is zero and the Company has no obligation to fund future operations. (see note 9). The Company has certain acquisition commitments and/ or acquisition, development and construction arrangements with VIEs. The Company is obligated to fund certain amounts as discussed in note 15. During the second quarter of 2010, the Company determined that its subsidiary entity, which owns the Salt Lake City, Utah property, is a VIE as a result of a lease amendment entered into during the quarter. The lease amendment provided that the building lease is coterminous with the ground lease and are both with the same party. The Company determined that it was not the primary beneficiary of the VIE as it no longer has a controlling financial interest in the entity. However, in accordance with GAAP, the Company has not derecognized the real estate associated with the entity as a sale has not been consummated. As a result, the approximate $25,000 of real estate and $36,700 related non-recourse mortgage loan are included in the Company’s Condensed Consolidated Balance Sheet at September 30, 2010.
Use of Estimates. Management has made a number of significant 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 GAAP. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions. Management adjusts such estimates when facts and circumstances dictate. The most significant estimates made include the recoverability of accounts receivable, allocation of property purchase price to tangible and intangible assets acquired and liabilities assumed, the determination of VIEs and which entities should be consolidated, the determination of impairment of long-lived assets, loans receivable and equity method investments, valuation of derivative financial instruments and the useful lives of long-lived assets. Actual results could differ materially from those estimates.
Fair Value Measurements. The Company follows the guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification ("ASC") Topic 820, Fair Value Measurements and Disclosures ("Topic 820") to determine the fair value of financial and non-financial instruments. Topic 820 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. Topic 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 – quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 – observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and Level 3 – unobservable inputs, which are used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as considering counterparty credit risk.
Revenue Recognition. The Company recognizes lease revenue 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 the renewals are not reasonably assured. 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 of revenue on a straight-line basis over the respective lease term. The Company recognizes lease termination fees as rental revenue in the period received and writes off unamortized lease-related intangible and other lease-related account balances, provided there are no further Company obligations under the lease. Otherwise, such fees and balances are recognized on a straight-line basis over the remaining obligation period.
Impairment of Real Estate. The Company evaluates the carrying value of all tangible and intangible real estate assets held for investment for possible impairment when an event or change in circumstance has occurred that indicates its carrying value may not be recoverable. The evaluation includes estimating and reviewing anticipated future undiscounted cash flows to be derived from the asset. If such cash flows are less than the asset’s carrying value, an impairment charge is recognized to the extent by which the asset’s carrying value exceeds the estimated fair value. Estimating future cash flows is highly subjective and such estimates could differ materially from actual results.
Impairment of Equity Method Investments. On a quarterly basis, the Company assesses whether there are indicators that the value of its equity method investments may be impaired. An impairment charge is recognized only if the Company determines that a decline in the value of the investment below its carrying value is other-than-temporary. The assessment of impairment is highly subjective and involves the application of significant assumptions and judgments about the Company’s intent and ability to recover its investment given the nature and operations of the underlying investment, including the level of the Company’s involvement therein, among other factors. To the extent an impairment is deemed to be other-than-temporary, the loss is measured as the excess of the carrying amount of the investment over the estimated fair value of the investment.
Loans Receivable. Loans held for investment are intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan origination costs and fees, loan purchase discounts, and net of an allowance for loan losses when such loan is deemed to be impaired. Loan origination costs and fees and loan purchase discounts are amortized over the term of the loan. The Company considers a loan impaired when, based upon current information and events, it is probable that it will be unable to collect all amounts due for both principal and interest according to the contractual terms of the loan agreement. Significant judgments are required in determining whether impairment has occurred. The Company performs an impairment analysis by comparing either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable current market price or the fair value of the underlying collateral to the net carrying value of the loan, which may result in an allowance and corresponding charge to loan loss.
Acquisition, Development and Construction Arrangements. The Company evaluates loans receivable where the Company participates in residual profits through loan provisions or other contracts to ascertain whether the Company has the same risks and rewards as an owner or a joint venture partner. Where the Company concludes that such arrangements are more appropriately treated as an investment in real estate and the Company expects to receive less than 50% of the residual profits, the Company reflects such investment as part of investments in and advances to non-consolidated entities. In these cases, the loan receivable is treated as preference capital in the hypothetical joint venture rather than a loan receivable and no interest income is recorded.
Derivative Financial Instruments. The Company accounts for its interest rate swap agreements in accordance with FASB ASC Topic 815, Derivatives and Hedging ("Topic 815"). In accordance with Topic 815, these agreements are carried on the balance sheet at their respective fair values, as an asset if fair value is positive, or as a liability if fair value is negative. The interest rate swap is designated as a cash flow hedge whereby the effective portion of the swap's change in fair value is reported as a component of other comprehensive income (loss); the ineffective portion, if any, is recognized in earnings as an increase or decrease to interest expense.
Cash and Cash Equivalents. The Company considers all highly liquid instruments with original maturities of three months or less from the date of purchase to be cash equivalents.
Restricted Cash. Restricted cash is comprised primarily of cash balances held in escrow with lenders.
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 remediation 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, 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 the Company’s 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 any such obligations, should they exist. 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. As of September 30, 2010, the Company was not aware of any environmental matter relating to any of its assets that would have a material impact on the financial statements.
Reclassifications. Certain amounts included in the 2009 financial statements have been reclassified to conform to the 2010 presentation.
Recently Issued Accounting Guidance. In July 2010, the FASB issued guidance that will significantly expand the disclosures about the credit quality of financing receivables and the allowance for credit losses. The disclosures as of the end of the reporting period (such as accounting policies, ending balances of allowance for credit losses and credit quality indicators) are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period (such as modifications and roll forward of allowance for credit losses) are effective for interim and annual reporting periods beginning on or after December 15, 2010. Management has determined that the guidance will not have a material impact on the Company’s financial position, results of operations or cash flows.
The Company’s non-vested share-based payment awards are considered participating securities, and as such, the Company is required to use the two-class method for the computation of basic and diluted earnings per share. Under the two-class computation method, net losses are not allocated to participating securities unless the holder of the security has a contractual obligation to share in the losses. The non-vested share-based payment awards are not allocated losses as the awards do not have a contractual obligation to share in losses of the Company.
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, 2010 and 2009:
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Three months ended September 30,
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Nine months ended September 30,
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2010
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2009
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2010
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2009
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BASIC AND DILUTED
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| |
|
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|
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|
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|
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Loss from continuing operations attributable to common shareholders
|
|
$ |
(1,290 |
) |
|
$ |
(3,243 |
) |
|
$ |
(36,244 |
) |
|
$ |
(158,833 |
) |
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Income (loss) from discontinued operations attributable to common shareholders
|
|
|
1,348 |
|
|
|
(25,231 |
) |
|
|
(27,125 |
) |
|
|
(31,794 |
) |
|
Net income (loss) attributable to common shareholders
|
|
$ |
58 |
|
|
$ |
(28,474 |
) |
|
$ |
(63,369 |
) |
|
$ |
(190,627 |
) |
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Weighted average number of common shares outstanding
|
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133,713,505 |
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|
112,217,415 |
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129,487,281 |
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105,490,039 |
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Income (loss) per common share:
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Loss from continuing operations
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$ |
(0.01 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.28 |
) |
|
$ |
(1.51 |
) |
|
Income (loss) from discontinued operations
|
|
|
0.01 |
|
|
|
(0.22 |
) |
|
|
(0.21 |
) |
|
|
(0.30 |
) |
|
Net income (loss) attributable to common shareholders
|
|
$ |
0.00 |
|
|
$ |
(0.25 |
) |
|
$ |
(0.49 |
) |
|
$ |
(1.81 |
) |
For per common share amounts all incremental shares are considered anti-dilutive for periods that have a loss from continuing operations attributable to common shareholders. In addition, other common share equivalents may be anti-dilutive in certain periods.
During the second quarter of 2009, 503,100 Series C Cumulative Convertible Preferred Shares were converted into 2,955,368 common shares. In accordance with GAAP, the difference between the fair value of the securities transferred over the fair value of the securities issuable pursuant to the original conversion terms constitutes a deemed dividend, even though the conversion is for equivalent fair values and is dilutive to the common shareholders. Accordingly, the deemed dividend has been deducted from net loss attributable to Lexington Realty Trust shareholders to arrive at net loss attributable to common shareholders for the nine months ended September 30, 2009.
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(4)
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Investments in Real Estate and Intangibles
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In February 2010, the Company purchased an adjacent land parcel and parking lot in a sale/leaseback transaction with an existing tenant, Nevada Power Company, which leases a property owned by the Company in Las Vegas, Nevada. The purchase price was $3,275, a portion of which was financed with a $2,450 non-recourse mortgage note that matures in September 2014 and bears interest at 7.5%. In connection with the transaction, the Nevada Power Company’s lease on the Company’s existing property was extended from January 2014 to January 2029.
During the first quarter of 2009, the Company acquired the remainder interests in land in Long Beach, California in connection with a tenant’s lease surrender obligations for an estimated fair value of approximately $2,500 and recorded it as non-operating income, of which $1,125 was attributable to a noncontrolling interest in the property.
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(5)
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Sales of Real Estate and Discontinued Operations
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During the nine months ended September 30, 2010, the Company sold nine properties to unrelated third parties for an aggregate gross disposition price of $112,027, which includes the assumption of $38,101 of non-recourse mortgage debt. The Company recognized an aggregate gain on sale of properties of $2,523 and debt satisfaction gains of $3,808 as a result of these sales during the nine months ended September 30, 2010. During the nine months ended September 30, 2009, the Company sold eight properties to unrelated third parties for an aggregate gross sales price of $87,565, which resulted in an aggregate gain of $6,280 and debt satisfaction gains, net of $4,607. As of September 30, 2010, the Company had no properties classified as held for sale. (See note 10).
The following presents the operating results for the properties sold and properties classified as held for sale for the applicable periods:
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Three Months ended
September 30,
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Nine Months ended
September 30,
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2010
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2009
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2010
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2009
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Total gross revenues
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|
$ |
433 |
|
|
$ |
5,373 |
|
|
$ |
4,621 |
|
|
$ |
22,209 |
|
|
Pre-tax income (loss), including gains on sale
|
|
$ |
1,081 |
|
|
$ |
(25,307 |
) |
|
$ |
(33,737 |
) |
|
$ |
(31,379 |
) |
In June 2009, the Company received gross proceeds of $4,750 in a sale-leaseback transaction of land in Palm Beach Gardens, Florida. The Company is leasing back the land for 30 years and has an option to purchase the land in June 2014 and June 2015. In accordance with GAAP, the Company has not recognized a gain on the transaction as the Company is considered to have continued involvement in the property due to the purchase option.
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(6)
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Impairments and Loan Losses
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The Company assesses on a regular basis whether there are any indicators that the value of any Company asset has become impaired. Potential indicators may include an increase in vacancy at a property, tenant reduction in utilization of a property and tenant financial instability. If an asset is determined to be impaired, the Company reduces the asset’s carrying value to its estimated fair value. During the nine months ended September 30, 2010 and 2009, the Company recognized $55,067 and $40,363, respectively, of impairment charges and loan losses, including amounts in discontinued operations, relating to real estate assets and certain loan assets as follows:
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·
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During the nine months ended September 30, 2010, the Company recognized aggregate impairment charges of $12,430 on four real estate assets, classified in continuing operations. The Company factored the possible disposition of these properties into its evaluation and determined that the current market prices for these assets were below their carrying values, which were determined not to be recoverable. The real estate assets are non-core retail or vacant properties. These assets had an aggregate carrying value of $21,148 and were written down to their estimated fair value of $8,718.
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·
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The Company recognized impairments of $38,713 and $38,787 during the nine months ended September 30, 2010 and 2009, respectively, on real estate assets that were sold or were anticipated to be sold below their carrying value.
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·
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During the second quarter of 2010, the Company recorded a $3,756 loan loss on a loan receivable as the tenant supporting the collateral declared bankruptcy and announced liquidation proceedings. In addition, the Company recognized an other-than-temporary impairment of $168 on a bond investment.
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·
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During the first quarter of 2009, the Company agreed to the discounted payoff of two loans receivable with an aggregate carrying value of $4,950. The Company wrote the loans receivable down to the aggregate agreed upon discounted payoff amount of $3,865, which approximated fair value, and recognized a loan loss of $1,085. In addition, the Company sold investments in debt securities for $9,451 during the three months ended September 30, 2009 and realized a loss of $491.
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The Company recorded aggregate other-than-temporary impairments of $68,213 on its investment in Lex-Win Concord LLC during the six months ended June 30, 2009, reducing the carrying value of the Company’s investment to zero at June 30, 2009. In addition, the Company recorded an impairment charge of $6,480 on its investment in a non-consolidated hotel real estate joint venture acquired in the merger with Newkirk Realty Trust (“Newkirk”) during the third quarter of 2009 due to the expiration of the net-lease on the hotel.
As of September 30, 2010 and December 31, 2009, the Company’s loans receivable, including accrued interest and net of origination fees and loan losses, are comprised primarily of first and second mortgage loans on real estate aggregating $93,409 and $60,567, respectively. The loans bear interest, including imputed interest, at rates ranging from 4.6% to 16.0% and mature at various dates between 2010 and 2022.
During the nine months ended September 30, 2010, the Company:
- funded a 15%, $13,640 mortgage loan to an entity which owns an office building in Schaumburg, Illinois, which matures January 15, 2012 but can be extended one additional year by the borrower for a 50 basis point fee. The property is net leased to Career Education Corporation from January 1, 2011 through December 31, 2022 for an average annual rent of $3,968. In addition, the Company is obligated to lend an additional $4,894 over the two-year term of the mortgage upon the occurrence of certain events. If the borrower exercises the one-year extension option and certain other events occur, the Company will become obligated to lend an additional $12,199 for tenant improvement costs; and
- made a $17,000 loan to entities which own five medical facilities, which are primarily subject to net leases. The loan is (i) guaranteed by a parent entity and principal, (ii) principally secured by either ownership pledges for, second mortgage liens or mortgage liens against the five medical facilities, (iii) matures in December 2011 and (iv) requires payments of interest only at a rate of 14% through February 2011 and 16% thereafter.
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(8)
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Fair Value Measurements
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The following table presents the Company’s assets and liabilities from continuing operations measured at fair value on a recurring and non-recurring basis as of September 30, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall:
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Balance
September 30, 2010
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Fair Value Measurements Using
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Description
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(Level 1)
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(Level 2)
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(Level 3)
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Forward purchase equity asset
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$ |
24,434 |
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|
$ |
-- |
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|
$ |
24,434 |
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|
$ |
-- |
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| |
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Interest rate swap liability
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$ |
(6,107 |
) |
|
$ |
-- |
|
|
$ |
(6,107 |
) |
|
$ |
-- |
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| |
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Impaired real estate assets*
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$ |
8,594 |
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|
$ |
-- |
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|
$ |
-- |
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|
$ |
8,594 |
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Impaired loan asset *
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$ |
6,860 |
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|
$ |
-- |
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|
$ |
-- |
|
|
$ |
6,860 |
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*Represents a non-recurring fair value measurement. See note 6 regarding impairments and loan losses.
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The following table presents the Company’s assets and liabilities from continuing operations measured at fair value on a recurring and non-recurring basis as of December 31, 2009, aggregated by the level in the fair value hierarchy within which those measurements fall:
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Balance
December 31, 2009
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Fair Value Measurements Using
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Description
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(Level 1)
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(Level 2)
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(Level 3)
|
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| |
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Forward purchase equity asset
|
|
$ |
20,141 |
|
|
$ |
-- |
|
|
$ |
20,141 |
|
|
$ |
-- |
|
| |
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Interest rate swap liability
|
|
$ |
(5,240 |
) |
|
$ |
-- |
|
|
$ |
(5,240 |
) |
|
$ |
-- |
|
| |
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Impaired real estate assets*
|
|
$ |
36,658 |
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|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
36,658 |
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|
|
*Represents a non-recurring fair value measurement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below sets forth the carrying amounts and estimated fair values of the Company’s financial instruments as of September 30, 2010 and December 31, 2009.
| |
|
As of September 30, 2010
|
|
|
As of December 31, 2009
|
|
| |
|
Carrying Amount
|
|
|
Fair Value
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Receivable
|
|
$ |
93,409 |
|
|
$ |
80,603 |
|
|
$ |
60,567 |
|
|
$ |
44,092 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
$ |
1,926,542 |
|
|
$ |
1,744,126 |
|
|
$ |
2,087,990 |
|
|
$ |
1,748,617 |
|
The Company has determined that the forward purchase equity asset should fall within Level 2 of the fair value hierarchy as its value is based not only on the value of the Company’s common share price but also on other observable inputs.
The majority of the inputs used to value the Company’s interest rate swap liability fall within Level 2 of the fair value hierarchy, such as observable market interest rate curves; however, the credit valuation associated with the interest rate swap liability utilizes Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. As of September 30, 2010 and December 31, 2009, the Company determined that the credit valuation adjustment relative to the overall interest rate swap liability is not significant. As a result, the entire interest rate swap liability has been classified in Level 2 of the fair value hierarchy.
The Company estimates the fair value of its real estate assets by using income and market valuation techniques. The Company may estimate fair values using market information such as broker opinion of value, recent sales data for similar real estate assets or discounted cash flow models, which primarily rely on Level 3 inputs. The cash flow models include estimated cash inflows and outflows over a specified holding period. These cash flows may include contractual rental revenues, projected future rental revenues and expenses and forecasted tenant improvements and lease commissions based upon market conditions determined through discussion with local real estate professionals, experience the Company has with its other owned properties in such markets and expectations for growth. Capitalization rates and discount rates utilized in these models are estimated by management based upon rates that management believes to be within a reasonable range of current market rates for the respective properties based upon an analysis of factors such as property and tenant quality, geographical location and local supply and demand observations. To the extent the Company under estimates forecasted cash outflows (tenant improvements, lease commissions and operating costs) or over estimates forecasted cash inflows (rental revenue rates), the estimated fair value of its real estate assets could be overstated.
Fair values cannot be determined with precision, may not be substantiated by comparison to quoted prices in active markets and may not be realized upon sale. Additionally, there are inherent uncertainties in any fair value measurement technique, and changes in the underlying assumptions used, including discount rates, liquidity risks and estimates of future cash flows, could significantly affect the fair value measurement amounts.
Cash Equivalents, Restricted Cash, Accounts Receivable and Accounts Payable. The Company estimates that the fair value approximates carrying value due to the relatively short maturity of the instruments.
|
(9)
|
Investment in and Advances to Non-Consolidated Entities
|
Net Lease Strategic Assets Fund L.P. (“NLS”). NLS is a co-investment program with a subsidiary of Inland American Real Estate Trust, Inc. (“Inland”). NLS was established to acquire single-tenant net-lease specialty real estate in the United States. Inland and the Company own 85% and 15%, respectively, of NLS’s common equity, and the Company owns 100% of NLS’s preferred equity.
Inland and the Company are currently entitled to a return on/of their respective investments as follows: (1) Inland, 9% on its common equity ($220,590 in common equity), (2) the Company, 6.5% on its preferred equity ($162,487 in preferred equity), (3) the Company, 9% on its common equity ($38,928 in common equity), (4) return of the Company preferred equity ($162,487 in preferred equity), (5) return of Inland common equity ($220,590 in common equity), (6) return of the Company common equity ($38,928 in common equity) and (7) any remaining cash flow is allocated 65% to Inland and 35% to the Company as long as the Company is the general partner, if not, allocations are 85% to Inland and 15% to the Company.
The Company’s wholly owned TRS, Lexington Realty Advisors, Inc (“LRA”), has entered into a management agreement with NLS whereby LRA will receive (1) a management fee of 0.375% of the equity capital, (2) a property management fee of up to 3.0% of actual gross revenues from certain assets for which the landlord is obligated to provide property management services (contingent upon the recoverability of such fees from the tenant under the applicable lease) and (3) an acquisition fee of 0.5% of the gross purchase price of each acquired asset by NLS.
The following is summary historical cost basis selected balance sheet data as of September 30, 2010 and December 31, 2009 and statement of operations data for the three and nine months ended September 30, 2010 and 2009 for NLS:
| |
|
9/30/10
|
|
|
12/31/09
|
|
|
Real estate, including intangibles, net
|
|
$ |
649,964 |
|
|
$ |
682,165 |
|
|
Cash, including restricted cash
|
|
|
10,029 |
|
|
|
10,586 |
|
|
Mortgages payable
|
|
|
303,913 |
|
|
|
312,273 |
|
|
Noncontrolling preferred interest
|
|
|
181,518 |
|
|
|
175,730 |
|
|
Partners’ capital
|
|
|
176,635 |
|
|
|
200,610 |
|
| |
|
Three Months ended
September 30,
|
|
|
Nine Months ended
September 30,
|
|
| |
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Total gross revenues
|
|
$ |
14,942 |
|
|
$ |
13,955 |
|
|
$ |
45,843 |
|
|
$ |
44,700 |
|
|
Depreciation and amortization
|
|
|
(9,886 |
) |
|
|
(9,792 |
) |
|
|
(29,156 |
) |
|
|
(29,362 |
) |
|
Interest expense
|
|
|
(4,770 |
) |
|
|
(4,949 |
) |
|
|
(14,297 |
) |
|
|
(14,779 |
) |
|
Other expenses, net
|
|
|
(1,110 |
) |
|
|
(895 |
) |
|
|
(2,937 |
) |
|
|
(2,547 |
) |
|
Net loss
|
|
$ |
(824 |
) |
|
$ |
(1,681 |
) |
|
$ |
(547 |
) |
|
$ |
(1,988 |
) |
During the nine months ended September 30, 2010 and 2009, the Company recognized $14,478 and $7,601, respectively, of equity in income relating to NLS based upon the hypothetical liquidation book value method. The difference between the assets contributed to NLS and the fair value of the Company’s initial equity investment in NLS is $94,723 and is accreted into income over the estimated useful lives of NLS’s assets. During each of the nine months ended September 30, 2010 and 2009, the Company recorded earnings of $2,727 related to this difference, which is included in equity in earnings (losses) of non-consolidated entities on the accompanying Condensed Consolidated Statements of Operations.
The Company loaned a NLS entity $7,614 in August 2010 to satisfy a non-recourse mortgage balloon payment. The short-term loan bears interest at 6.93% and is scheduled to mature in the fourth quarter of 2010.
Concord Debt Holdings LLC (“Concord”), Lex-Win Concord LLC (“Lex-Win Concord”) and CDH CDO LLC. On December 31, 2006 in connection with the merger with Newkirk, the Company acquired a 50% interest in a co-investment program, Concord, which owns bonds and loans secured, directly and indirectly, by real estate assets. The other 50% interest in Concord was held by WRT Realty L.P. (“Winthrop”). The Company and Winthrop each contributed its interest in Concord to Lex-Win Concord. During 2008, a wholly-owned subsidiary of Inland America Real Estate Trust (“Inland Concord”) was admitted to Concord as a preferred member. During the six months ended June 30, 2009, the Company reduced its investment in Lex-Win Concord to zero.
During the third quarter of 2010, Concord was restructured upon the effectiveness of a settlement agreement with Inland Concord. As a result of the restructuring (i) Lex-Win Concord was dissolved, (ii) Concord is now owned equally by subsidiaries of the Company, Winthrop and Inland Concord and (iii) a new entity, CDH CDO LLC (“CDH CDO”), was created. The new entity purchased Concord Real Estate CDO 2006-1 LTD from Concord with funds contributed by Inland Concord. CDH CDO is also owned equally by subsidiaries of the Company, Winthrop and Inland Concord. The Company has made no additional contributions and it has not recognized any income or loss as a result of the restructuring. The Company’s investment in these ventures is valued at zero. The Company determined that Concord and CDH CDO are variable interest entities as the equity at risk is not sufficient to finance the entity’s activities; however, the Company is not the primary beneficiary as it does not have a controlling financial interest in either entity.
Other. The Company’s investment in and advances to non-consolidated entities includes an investment in a loan receivable (an acquisition, development and construction arrangement) where the Company anticipates that it will participate in residual profits through the loan provisions and other contracts. The Company is funding the construction of a 672,000 square foot industrial facility in Shelby, North Carolina. As of September 30, 2010, the Company’s investment in the arrangement is $2,610. The Company has agreed to purchase the facility upon completion of construction and the commencement of a 20 year net-lease.
|
(10)
|
Mortgages and Notes Payable
|
During the third quarter of 2010, the Company obtained an $11,319 non-recourse mortgage loan on its North Berwick, Maine property leased to United Technologies Corporation. The 3.56% fixed rate, fully amortizing mortgage loan matures in April 2019.
During the second quarter of 2010, the Company obtained a $37,000 non-recourse mortgage loan on its Salt Lake City, Utah property leased to the University of Utah. The 5.53% fixed rate, fully-amortizing loan matures in October 2028. In addition, the Company obtained a $9,000 non-recourse mortgage loan on its Greenville, South Carolina property leased to Canal Insurance Company. The 5.50% fixed rate loan is interest only and matures in January 2015.
During the first quarter of 2010, the Company issued $115,000 aggregate principal amount of 6.00% Convertible Guaranteed Notes. The notes pay interest semi-annually in arrears and mature on January 15, 2030. The holders of the notes may require the Company to repurchase their notes on January 15, 2017, January 15, 2020 and January 15, 2025 for cash equal to 100% of the notes to be repurchased, plus any accrued and unpaid interest. The Company may not redeem any notes prior to January 15, 2017, except to preserve its REIT status. The notes have an initial conversion rate of 141.1383 common shares per $1,000 principal amount of the notes, representing a conversion price of approximately $7.09 per common share. The initial conversion rate is subject to adjustment under certain circumstances. The notes are convertible by the holders under certain circumstances for cash, common shares or a combination of cash and common shares at the Company’s election. The notes are convertible prior to the close of business on the second business day immediately preceding the stated maturity date, at any time beginning on January 15, 2029 and also upon the occurrence of specified events. As of September 30, 2010, the notes aggregate if-converted value exceeded the aggregate principal amount by $1,213. The notes had an outstanding liability balance of $102,726, net of a discount of $12,274 and a $13,134 equity component as of September 30, 2010. The notes had an initial aggregate discount of $13,566 which is being amortized as additional interest expense through January 2017. Coupon interest expense on the notes was $4,683 for the nine months ended September 30, 2010 and discount amortization on the notes was $1,292 for the nine months ended September 30, 2010. The notes had an effective interest rate of 8.0% for the nine months ended September 30, 2010.
On February 13, 2009, the Company entered into a secured credit facility with KeyBank N.A. (“KeyBank”), as agent, consisting of a term loan portion and a revolving loan portion. The secured credit facility bears interest at 285 basis points over LIBOR and matures in February 2011, but can be extended to February 2012 at the Company’s option. During 2010, the Company amended the loan agreement, which increased the availability under the secured credit facility from $150,000 to $220,000. The secured credit facility is currently secured by ownership interest pledges and guarantees by certain of the Company’s subsidiaries that in the aggregate own interests in a borrowing base consisting of 75 properties. The borrowing availability of the facility is based upon the net operating income of the properties comprising the borrowing base as defined in the secured credit facility. As of September 30, 2010, the available additional borrowing under the secured credit facility was $201,228 less outstanding letters of credit of $6,909. The outstanding balance of the secured credit facility was $18,772 as of September 30, 2010. In addition, the Company fully repaid $164,348 in term loan borrowings under the secured credit facility during 2010. In connection with the refinancing and the subsequent increase in the availability under the facility, the Company has incurred aggregate financing costs of $5,738 and $4,977 as of September 30, 2010 and December 31, 2009, respectively, and recognized $247 in debt satisfaction charges during the nine months ended September 30, 2009. The secured credit facility is subject to financial covenants which the Company was in compliance with at September 30, 2010.
The Company has $25,000 and $35,551 secured term loans with KeyBank. The loans are interest only at LIBOR plus 60 basis points and mature in 2013. These secured term loans contain financial covenants which the Company was in compliance with as of September 30, 2010. Pursuant to the secured term loan agreements, the Company simultaneously entered into an interest-rate swap agreement with KeyBank to swap the LIBOR rate on the loans for a fixed rate of 4.9196% through March 18, 2013, and the Company assumed a liability for the fair value of the swap at inception of approximately $5,696 ($6,107 at September 30, 2010). The debt is presented net of a discount of $5,696 ($2,432 at September 30, 2010). The discount is being amortized as additional interest expense over the term of the loans.
During 2007, the Company issued an aggregate $450,000 of 5.45% Exchangeable Guaranteed Notes due in 2027. These notes can be put to the Company commencing in 2012 and every five years thereafter through maturity. The notes are exchangeable by the holders into common shares at a current price of $19.49 per share, subject to adjustment upon certain events, including increases in the Company’s rate of dividends above a certain threshold and the issuance of stock dividends. Upon exchange, the holders of the notes would receive (1) cash equal to the principal amount of the note and (2) to the extent the conversion value exceeds the principal amount of the note, either cash or common shares at the Company’s option. The notes had an outstanding liability balance of $61,272 and $85,709, net of a discount of $878 and $1,941, as of September 30, 2010 and December 31, 2009, respectively. The notes had an equity component of $20,293 as of September 30, 2010 and December 31, 2009. The initial discount of $23,693 is being amortized as additional interest expense through January 2012, the first put date of the notes. Coupon interest expense on the notes was $2,657 and $6,360, respectively, for the nine months ended September 30, 2010 and 2009, and the discount amortization on the notes was $523 and $1,237, respectively, for the nine months ended September 30, 2010 and 2009. The notes had an effective interest rate of 7.0% for each of the nine months ended September 30, 2010 and 2009. During the nine months ended September 30, 2010 and 2009, the Company repurchased $25,500 and $105,800, respectively, original principal amount of the notes for cash payments of $25,493 and $84,219, respectively. This resulted in gains (charges), net on debt extinguishment of ($760) and $17,200, respectively, including write-offs of $768 and $4,381, respectively, of the debt discount and deferred financing costs. As of September 30, 2010, $62,150 original principal amount of the notes was outstanding.
During the nine months ended September 30, 2010 and 2009, in connection with the satisfaction of mortgage notes, the Company incurred debt satisfaction charges of $436 and $85, respectively, including discontinued operations.
|
(11)
|
Derivatives and Hedging Activities
|
Risk Management Objective of Using Derivatives. The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.
Cash Flow Hedges of Interest Rate Risk. The Company’s objectives in using interest rate derivatives are to add stability to interest expense, to manage its exposure to interest rate movements and therefore manage its cash outflows as it relates to the underlying debt instruments. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy relating to certain of its variable rate debt instruments. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.
The Company has designated the interest-rate swap agreement with KeyBank as a cash flow hedge of the risk of variability attributable to changes in the LIBOR swap rate on $35,551 and $25,000 of LIBOR-indexed variable-rate secured term loans. Accordingly, changes in the fair value of the swap are recorded in other comprehensive income (loss) and reclassified to earnings as interest becomes receivable or payable. Because the fair value of the swap at inception of the hedge was not zero, the Company cannot assume that there will be no ineffectiveness in the hedging relationship. However, the Company expects the hedging relationship to be highly effective and will measure and report any ineffectiveness in earnings.
Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on these secured term loans. During the next 12 months, the Company estimates that an additional $1,777 will be reclassified as an increase to interest expense.
As of September 30, 2010, the Company had the following outstanding interest rate derivative that was designated as a cash flow hedge of interest rate risk:
|
Interest Rate Derivative
|
Number of Instruments
|
Notional
|
|
Interest Rate Swap
|
1
|
$60,551
|
Derivatives Not Designated as Hedges
The Company does not use derivatives for trading or speculative purposes. As of September 30, 2010, the Company had the following outstanding derivative that was not designated as a hedge in a qualifying hedging relationship:
|
Product
|
Number of Instruments
|
Notional
|
|
Forward purchase equity commitment
|
1
|
$28,458
|
During 2008, the Company entered into a forward purchase equity commitment with a financial institution to finance the purchase of 3,500,000 common shares of the Company at $5.60 per share under the Company’s common share repurchase plan as approved by the Board of Trustees. The Company has prepaid $15,576 with the remainder to be paid in October 2011 through (i) physical settlement or (ii) net cash settlement, net share settlement or a combination of both, at the Company’s option. The Company agreed to make floating payments during the term of the forward purchase at LIBOR plus 250 basis points per annum, and the Company retains the cash dividends paid on the common shares; however, the counterparty retains any stock dividends as additional collateral. In addition, the Company may be required to make additional prepayments pursuant to the forward purchase equity commitment. The Company’s third-party consultant determined the fair value of the equity commitment to be $24,434 and $20,141 at September 30, 2010 and December 31, 2009, respectively, and the Company recognized earnings during the nine months ended September 30, 2010 and 2009 of $5,400 and $2,596, respectively, primarily relating to the increase in the fair value of the common shares held as collateral.
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009.
| |
As of September 30, 2010
|
|
As of December 31, 2009
|
|
| |
Balance Sheet Location
|
|
Fair Value
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap Liability
|
Accounts Payable and Other Liabilities
|
|
$ |
(6,107 |
) |
Accounts Payable and Other Liabilities
|
|
$ |
(5,240 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
Forward Purchase Equity Commitment
|
Other Assets
|
|
$ |
24,434 |
|
Other Assets
|
|
$ |
20,141 |
|
The tables below present the effect of the Company’s derivative financial instruments on the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2010 and 2009.
|
Derivatives in Cash Flow Hedging Relationships
|
|
Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)
September 30,
|
|
Location of Loss Reclassified from Accumulated OCI into Income (Effective Portion)
|
|
Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion)
September 30,
|
|
| |
2010
|
|
|
2009
|
|
|
|
2010
|
|
|
2009
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap
|
|
$ |
(3,020 |
) |
|
$ |
(521 |
) |
Interest expense
|
|
$ |
2,153 |
|
|
$ |
1,813 |
|
|
Derivatives Not Designated as Hedging Instruments
|
|
Location of Gain or (Loss) Recognized in Income on Derivative
|
|
Amount of Gain or (Loss) Recognized in Income on Derivative
September 30,
|
|
| |
|
2010
|
|
|
2009
|
|
| |
|
|
|
|
|
|
|
|
|
Forward Purchase Equity Commitment
|
|
Change in value of forward equity commitment
|
|
$ |
5,400 |
|
|
$ |
2,596 |
|
The change in value of the forward purchase equity commitment includes cash dividends received on common shares held by the counterparty.
The Company’s agreement with the swap derivative counterparty contains a provision whereby if the Company defaults on the underlying indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default of the swap derivative obligation. As of September 30, 2010, the Company has not posted any collateral related to the agreement. If the Company had breached any of these provisions at September 30, 2010, it would have been required to settle its obligations under the agreements at the termination value of $6,537, which includes accrued interest.
The Company’s forward purchase equity commitment contains default provisions, which, if triggered, would require the Company to settle the contract. The settlement value of the contract at September 30, 2010 was $4,024, net of prepayments.
|
(12)
|
Concentration of Risk
|
The Company seeks to reduce its operating and leasing risks through the geographic diversification of its properties, tenant industry diversification, avoidance of dependency on a single asset and the creditworthiness of its tenants. For the nine months ended September 30, 2010 and 2009, no single tenant represented greater than 10% of rental revenues.
Cash and cash equivalent balances at certain institutions may exceed insurable amounts. The Company believes it mitigates this risk by investing in or through major financial institutions.
Shareholders’ Equity:
During the nine months ended September 30, 2010, the Company issued 11,659,148 common shares under its direct share purchase plan and through a public offering, raising net proceeds of approximately $75,695. During the nine months ended September 30, 2009, the Company issued 3,359,611 common shares under its direct share purchase plan, raising net proceeds of $15,960. The proceeds from these common share offerings were primarily used to retire indebtedness.
During the first quarter of 2010, the Company recorded $13,134 in additional paid-in-capital, representing the conversion feature of the 6.00% Convertible Guaranteed Notes.
The following represents the components of accumulated other comprehensive income (loss) as of:
| |
|
September 30,
2010
|
|
|
December 31,
2009
|
|
|
Unrealized gain on foreign currency translation
|
|
$ |
-- |
|
|
$ |
740 |
|
|
Unrealized loss on interest rate swap
|
|
|
(934 |
) |
|
|
(67 |
) |
|
Total accumulated other comprehensive income (loss)
|
|
$ |
(934 |
) |
|
$ |
673 |
|
During the nine months ended September 30, 2009, the Company’s Board of Trustees declared three quarterly common share dividends of $0.18 each to be paid in a combination of cash (10% in the aggregate) and common shares. On April 24, 2009, the Company issued 5,097,229 common shares and paid $1,819 in cash to satisfy the first quarter dividend. On July 30, 2009, the Company issued 4,333,183 common shares and paid $1,970 in cash to satisfy the second quarter dividend. On October 16, 2009, the Company issued 3,873,786 common shares and paid $2,110 in cash to satisfy the third quarter dividend.
In June 2009, the Company converted 503,100 of its Series C Cumulative Convertible Preferred Shares by issuing 2,955,368 common shares. The difference between the fair value of common shares issued and the fair value of common shares issuable pursuant to the original conversion terms is considered a deemed dividend and as such is recorded as a reduction in shareholders’ equity and as an increase to preferred dividends paid for calculating earnings per share, even though the conversion is for equivalent fair values.
Noncontrolling Interests:
In conjunction with several of the Company’s acquisitions in prior years, sellers were issued OP units as a form of consideration. All OP units, other than OP units owned by the Company, are redeemable at certain times, only at the option of the holders, and are not otherwise mandatorily redeemable by the Company. The OP units are classified as a component of permanent equity as the Company has determined that the OP units are not redeemable securities as defined by GAAP. Each OP unit is currently redeemable for approximately 1.13 common shares, subject to future adjustments.
During the nine months ended September 30, 2010 and 2009, 313,020 and 179,189 OP units, respectively, were redeemed or repurchased by the Company for an aggregate value of $1,897 and $1,227, respectively.
As of September 30, 2010, there were approximately 4,473,500 OP units outstanding other than OP units owned by the Company. All OP units receive distributions in accordance with their respective partnership agreements. To the extent that the Company’s dividend per common share is less than the stated distribution per OP unit per the applicable partnership agreement, the distributions per OP unit are reduced by the percentage reduction in the Company’s dividend per common share. No OP units have a liquidation preference.
The following discloses the effects of changes in the Company’s ownership interests in its noncontrolling interests:
| |
|
Net Loss Attributable to Shareholders and Transfers (to) from Noncontrolling Interests
|
|
| |
|
Nine Months ended September 30,
|
|
| |
|
2010
|
|
|
2009
|
|
| |
|
|
|
|
|
|
|
Net loss attributable to Lexington Realty Trust shareholders
|
|
$ |
(44,534 |
) |
|
$ |
(164,185 |
) |
| |
|
|
|
|
|
|
|
|
|
Transfers from noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
Increase in additional paid-in-capital for redemption of noncontrolling OP units
|
|
|
1,897 |
|
|
|
1,227 |
|
|
Change from net loss attributable to shareholders and transfers from noncontrolling interest
|
|
$ |
(42,637 |
) |
|
$ |
(162,958 |
) |
|
(14)
|
Related Party Transactions
|
In addition to related party transactions discussed elsewhere, the Company has an indemnity obligation to one of its significant shareholders with respect to actions by the Company that affect the significant shareholder’s status as a REIT.
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Commitments and Contingencies
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The Company is obligated under certain tenant leases, including leases for non-consolidated entities, to fund the expansion of the underlying leased properties.
During the second quarter of 2010, the Company executed a purchase and sale agreement to acquire, upon completion of construction and occupancy by the tenant, a 514,000 square foot industrial facility located in Byhalia, Mississippi for an anticipated cost of $27,500. The facility will be leased to ASICS America Corporation, with ASICS Corporation as guarantor, for a term of 15 years upon completion of construction, which is expected to occur in the second quarter of 2011.
During the third quarter of 2010, the Company executed a contract to fund the construction of a 672,000 square foot industrial facility located in Shelby, North Carolina for an estimated cost of approximately $24,000. The Company intends to purchase the facility upon completion of construction and commencement of a 20 year net-lease to Clearwater Paper Corporation, which is expected to occur in the second quarter of 2011. The Company has variable interests in the developer entities constructing the facilities but is not the primary beneficiary of the entities as the Company does not have a controlling financial interest.
From time to time, the Company is involved in legal proceedings arising in the ordinary course of business. Management believes, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on the Company’s financial condition, but could be material to the Company’s operating results for any particular period, depending, in part, upon the operating results for such period. Predicting the outcome of these matters is inherently difficult, and a loss is recognized only when the amount or range of such loss can be estimated and is probable of occurring.
Deutsche Bank Securities, Inc. and SPCP Group LLC v. Lexington Drake, L.P., et al. (Supreme Court of the State of New York-Index No. 603051/08). On June 30, 2006, the Company, including a co-investment program as it relates to the Antioch claim, sold to Deutsche Bank Securities, Inc., (“Deutsche Bank”), (1) a $7,680 bankruptcy damage claim against Dana Corporation for $5,376, the (“Farmington Hills claim”) and (2) a $7,727 bankruptcy damage claim against Dana Corporation for $5,680, (“Antioch claim”). Under the terms of the agreements covering the sale of the claims, the Company is obligated to reimburse Deutsche Bank should the claim ever be disallowed, subordinated or otherwise impaired, to the extent of such disallowance, subordination or impairment, plus interest at the rate of 10% per annum from the date of payment of the purchase price by Deutsche Bank to the Company. On October 12, 2007, Dana Corporation filed an objection to both claims. The Company assisted Deutsche Bank and the then holders of the claims in the preparation and filing of a response to the objection. Despite a belief by the Company that the objections were without merit, the holders of the claims, without the Company’s consent, settled the allowed amount of the claims at $6,500 for the Farmington Hills claim and $7,200 for the Antioch claim. Deutsche Bank made a formal demand with respect to the Farmington Hills claim in the amount of $826 plus interest, but did not make a formal demand with respect to the Antioch claim. Following a rejection of the demand by the Company, Deutsche Bank and SPCP Group, LLC filed a summons and complaint with the Supreme Court of the State of New York, County of New York for the Farmington Hills and Antioch claims, and claimed damages of $1,200 plus interest and expenses.
The Company answered the complaint on November 26, 2008 and served numerous discovery requests. After almost a year of inactivity, on March 18, 2010, the Company and the plaintiffs filed motions for summary judgment and related opposing and supporting motions.
If plaintiffs are successful on their motion for summary judgment, the Company intends to appeal any such decision by the court. If the court denies both summary judgment motions, the Company intends to continue to vigorously defend the claims for a variety of reasons, including that (1) the holders of the claims arbitrarily settled the claims for reasons based on factors other than the merits, (2) the holders of the claims voluntarily reduced the claims to participate in certain settlement pools and (3) the contract language that supports the plaintiff’s position was specifically negotiated out of the agreement covering the sale of the claims.
Newkirk Skoob L.P. v. Elsevier STM, Inc. (Orange County, Florida Circuit Court – Case No. 09-CA-020180 Complex Business Litigation Court). On June 24, 2009, Newkirk Skoob L.P., a wholly owned subsidiary, (as successor to Skoob Associates L.P.) filed a complaint in the Complex Business Litigation Court of the Circuit Court of the Ninth Judicial Circuit in Orange County, Florida against Elsevier STM, Inc. (as successor to Harcourt Brace Jovanovich, Inc.), (“Elsevier,”) the former tenant in the Company’s Orlando, Florida facility, for breach of lease and holdover rent pursuant to the lease and Section 83.06, Florida Statutes, for the time Elsevier remained on the premises after the lease’s expiration. The complaint was amended to add certain claims and the answer was amended to add certain defenses. Trial was set for April 2011.
In October, 2009, Elsevier paid a portion of past due rent, but a rent balance of $916 (not including default interest) remained unpaid. In August 2010, a settlement agreement was executed and the Company received $1,850.
Experian Information Solutions, Inc. v. Lexington Allen L.P, Lexington Allen Manager LLC and Lexington Realty Trust (United States District Court for the Eastern District of Texas Sherman Division – Civil Action No. 4:10cv144). On March 30, 2010, Experian Information Solutions, Inc. (“Experian”) filed a complaint against Lexington Allen L.P., a wholly owned subsidiary of NLS, and the Company for breach of lease agreement, fraud/fraudulent inducement, claim under Section 91.004 of the Texas Property Code (breach of lease and ability to obtain a lien on other landlord property), promissory estoppel and quantum meruit, in connection with the alleged failure of Lexington Allen L.P. to fund up to $5,854 of tenant improvements. The Company was named as a defendant under an “alter-ego” theory. On May 5, 2010, the Company filed a motion to dismiss the complaint, and on May 21, 2010, Experian filed an amended complaint, adding Lexington Allen Manager LLC as a defendant, and an opposition to the Company’s motion to dismiss. On June 7, 2010, the Company filed another motion to dismiss and on June 24, 2010, Experian filed an opposition to the Company’s motion to dismiss. The Company’s motion to dismiss was denied and the Company answered the amended complaint on October 22, 2010. Discovery requests have been exchanged, and a mediation is scheduled for November 5, 2010. On October 29, 2010, Experian filed a motion for summary judgment with respect to certain of its claims against Lexington Allen L.P. The Company believes, after consultation with counsel, meritorious defenses to these claims exist and intends to vigorously defend the claims against it.
The partnership agreement for NLS provides that NLS must indemnify the Company for its costs in connection with these claims.
The Company maintains an equity award plan pursuant to which qualified and non-qualified options may be issued. The Company granted 1,265,500 and 2,000,000 common share options on January 8, 2010 (“2009 options”) and December 31, 2008 (“2008 options”), respectively, at an exercise price of $6.39 and $5.60, respectively. The 2009 options (1) vest 20% annually on each December 31, 2010 through 2014 and (2) terminate on the earlier of (x) six months of termination of service with the Company and (y) December 31, 2019. The 2008 options (1) vest 50% following a 20-day trading period where the average closing price of a common share of the Company on the New York Stock Exchange (“NYSE”) is $8.00 or higher and 50% following a 20-day trading period where the average closing price of a common share of the Company on the NYSE is $10.00 or higher, and (2) expire 10 years from the grant date. The conversion rate on the 2008 options is currently approximately 1.13.
The Company engaged a third party to value the options as of the grant date. The third party determined the value to be $2,771 for the 2009 options using the Black-Scholes model and $2,480 for the 2008 options using the Monte Carlo model. The options are considered equity awards as the number of options issued is fixed and determinable at the date of grant. As such, the options were valued as of the date of the grant and do not require subsequent remeasurement.
There were several assumptions used to fair value the options including the expected volatility in the Company’s common share price based upon the fluctuation in the Company’s historical common share price. The more significant assumptions underlying the determination of fair value for the 2009 options were as follows:
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Weighted average fair value of options granted
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$2.19 |
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Weighted average spot rate
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3.29 |
% |
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Weighted average expected option lives (in years)
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6.70 |
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Weighted average expected volatility
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59.08 |
% |
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Weighted average expected dividend yield
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6.26 |
% |
The Company recognizes compensation expense relating to these options over an average of 5.0 years for the 2009 options and 3.6 years for the 2008 options. The Company recognized $928 and $516 in compensation expense during the nine months ended September 30, 2010 and 2009, respectively, and has unrecognized compensation costs of $3,613 relating to the outstanding options as of September 30, 2010.
During the nine months ended September 30, 2010 and 2009, the Company recognized $2,583 and $2,539, respectively, in compensation expense relating to scheduled vesting and issuance of common share grants.
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Supplemental Disclosure of Statement of Cash Flow Information
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In addition to disclosures discussed elsewhere, during the nine months ended September 30, 2010 and 2009, the Company paid $91,512 and $104,068, respectively, for interest and $1,375 and $2,319, respectively, for income taxes.
The Company’s property in Richmond, Virginia previously leased to Circuit City Stores, Inc., with a carrying value of $9,452, was conveyed to the mortgage lender through a foreclosure during the nine months ended September 30, 2009 in satisfaction of the $15,458 outstanding mortgage loan. The Company recorded a $6,006 gain on debt satisfaction as a result of the foreclosure.
Subsequent to September 30, 2010 and in addition to any events discussed elsewhere in the financial statements, the Company:
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sold one vacant property for a gross purchase price of $6,100 to an unaffiliated third party; and
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repaid an aggregate $38,905 of non-recourse mortgage debt and contract right payable on three properties.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
When we use the terms “Lexington,” the “Company,” “we,” “us” and “our,” we mean Lexington Realty Trust and all entities owned by us, including non-consolidated entities, except where it is clear that the term means only the parent company. References herein to our Quarterly Report are to this Quarterly Report on Form 10-Q for the quarter ended September 30, 2010.
Forward-Looking Statements. The following is a discussion and analysis of our unaudited condensed consolidated financial condition and results of operations for the three and nine months ended September 30, 2010 and 2009, and significant factors that could affect our prospective financial condition and results of operations. This discussion should be read together with the accompanying unaudited condensed consolidated financial statements and notes thereto and with our consolidated financial statements and notes thereto included in our most recent Annual Report on Form 10-K, or Annual Report, filed with the Securities and Exchange Commission, or SEC, on March 1, 2010. Historical results may not be indicative of future performance.
This Quarterly Report, together with other statements and information publicly disseminated by us 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. We intend 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 our 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 our control and which could materially affect actual results, performances or achievements and include, but are not limited to, those discussed under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our most recent Annual Report and other periodic reports filed with the SEC, including risks related to: (i) changes in general business and economic conditions, (ii) competition, (iii) increases in real estate construction costs, (iv) changes in interest rates, (v) potential impairment charges on our assets or (vi) changes in accessibility of debt and equity capital markets. We undertake 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 our expectations will be realized.
Overview
General. We are a self-managed and self-administered real estate investment trust formed under the laws of the State of Maryland. We operate primarily in one segment, and our primary business is the investment in and the acquisition, ownership and management of a geographically diverse portfolio of net-leased office, industrial and retail properties. Substantially all of our properties are subject to triple net leases or similar leases, where the tenant bears all or substantially all of the costs and/or cost increases for real estate taxes, utilities, insurance and ordinary repairs.
As of September 30, 2010, we had ownership interests in approximately 195 consolidated real estate properties, located in 40 states and encompassing approximately 37.4 million square feet. We lease our properties to tenants in various industries, including finance/insurance, automotive, energy, consumer products and technology.
Our revenues and cash flows are generated predominantly from property rent receipts. As a result, growth in revenues and cash flows is directly correlated to our ability to (1) acquire income producing real estate assets, (2) to re-lease properties that are vacant, or may become vacant at favorable rental rates and (3) earn fee income.
Business Strategy. We continue to focus our strategy on strengthening our balance sheet. We believe we have strengthened our balance sheet primarily by (i) repurchasing and retiring our debt and senior securities or by extending their maturity date, (ii) financing our properties at what we believe are favorable rates and using the proceeds to retire higher rate or shorter term debt and (iii) issuing equity at favorable prices. Our strategy also includes continuing our capital recycling effort by selling non-core properties in order to create additional liquidity and focus on acquiring core single-tenant office and industrial properties. We have used proceeds from non-core property sales and issuances of common shares to also repurchase or retire our debt.
When opportunities arise, we make investments in strategically strong core assets, which we believe will generate favorable returns. We grow our portfolio primarily by: (1) buying properties and leasing them back to the sellers under net leases, (2) acquiring properties already subject to net leases, (3) making mortgage and mezzanine loans secured by single tenant buildings and (4) providing funds to corporations seeking to raise capital through the sale of their real estate holdings and to developers who are engaged in “build-to-suit” projects for corporate users.
Portfolio diversification is central to our investment strategy as we seek to create and maintain an asset base that provides steady growth while being insulated against rising property operating expenses, regional recessions, industry-specific downturns and fluctuations in property values and market rent levels. Regardless of capital market and economic conditions, we stay focused on enhancing operating results, improving portfolio quality, mitigating risks relating to interest rates and the real estate cycle and implementing strategies where our management skills and real estate expertise can add value. We believe that our business strategy will continue to improve our liquidity and strengthen our overall balance sheet to create meaningful shareholder value.
Third Quarter 2010 Transaction Summary
The following summarizes our significant transactions during the three months ended September 30, 2010.
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We sold our interests in four properties to unaffiliated third parties for an aggregate disposition price of approximately $69.7 million.
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We executed a contract to fund the construction of a 672,000 square foot industrial facility located in Shelby, North Carolina for an estimated cost of approximately $24.0 million. We intend to purchase the facility upon completion of construction and commencement of a 20 year net-lease, which is expected to occur in the second quarter of 2011.
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Leasing.
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We entered into 11 new leases and lease extensions encompassing approximately 760,000 square feet.
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We received notification that the tenant in the Farmington Hills, Michigan property exercised its termination option. The lease, which was scheduled to expire on December 31, 2016, now expires December 31, 2011. The tenant paid $6.8 million as a termination payment, which is held in escrow by the non-recourse mortgage lender.
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We obtained $11.3 million of non-recourse mortgage financing secured by our property in North Berwick, Maine at a fixed interest rate of 3.56%.
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We increased the availability under our revolving secured credit facility from $175.0 million to $220.0 million.
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We retired $80.0 million of debt under our secured term credit facility.
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We retired $47.2 million of non-recourse balloon mortgages.
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Other.
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We recognized aggregate impairments of $1.1 million on real estate in discontinued operations. The real estate assets were impaired as the assets were sold. We adjusted the $8.3 million aggregate carrying value of these assets to their estimated aggregate fair value of $7.2 million.
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Subsequent to Quarter End Highlights
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We increased our quarterly common share dividend to $0.115 per common share from $0.10 per common share, a 15% increase.
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We sold one vacant property to an unaffiliated third party for a disposition price of $6.1 million.
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We satisfied $38.9 million in non-recourse mortgage debt and contract right payable on three properties.
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Critical Accounting Policies
Management’s discussion and analysis of financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles, which we refer to as GAAP. In preparing our unaudited condensed consolidated financial statements in accordance with GAAP and pursuant to the rules and regulations of the SEC, we make assumptions, judgments and estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates. Our accounting policies are discussed under (i) Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report, (ii) Note 2 to our Consolidated Financial Statements contained in our Annual Report and (iii) Note 2 to our Unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report. We believe there have been no material changes to the items that we disclosed as our critical accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report.
Liquidity and Capital Resources
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 secured credit facility, issuances of equity and co-investment programs, as well as other alternatives, will provide the necessary capital required by us.
We attempt to effectively manage our balance sheet in order to accretively reduce leverage through cash flow management of our tenant leases, maintaining occupancy, pursuing and executing well on property dispositions, recycling of capital and accessing the capital markets when opportunities arise. During the nine months ended September 30, 2010, we (1) issued $115.0 million of 6.00% Convertible Guaranteed Notes which generated $111.3 million of net proceeds, (2) raised $5.0 million from sales of common shares under our direct share purchase plan, (3) raised $70.7 million in a common share offering and (4) raised approximately $57.3 million, before closing costs, by financing three properties. These proceeds were primarily used to retire indebtedness encumbering our properties and corporate level debt. As of September 30, 2010, we have approximately $201.2 million of borrowing capacity under our revolving credit facility less $6.9 million in outstanding letters of credit. Also, we have an accordion feature in our credit facility, which can be exercised, with lender’s approval, by providing additional properties as collateral for the borrowing base, thereby increasing the revolving portion of the facility up to $335.0 million.
We generally finance our business with property specific non-recourse mortgage debt, as well as corporate level debt. As of September 30, 2010, we had $74.4 million of property specific non-recourse mortgage debt maturing during the remainder of 2010 and 2011. We believe we have sufficient sources of liquidity to meet these obligations through cash on hand ($59.3 million), current borrowing capacity on our revolving credit facility ($180.8 million), which expires in 2011, but can be extended by us to 2012, and future cash flow from operations.
The mortgages encumbering our properties are generally non-recourse to us, such that in situations where we believe it is beneficial to satisfy a mortgage obligation by transferring title of the property to the lender, we may.
Cash flows from operations as reported in the Condensed Consolidated Statements of Cash Flows decreased to $112.9 million for the nine months ended September 30, 2010 from $123.6 million for the nine months ended September 30, 2009. The decrease is primarily related to the sales of properties during 2010 and 2009 and an increase in vacancies in 2010. 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 (used in) provided by investing activities totaled ($5.5) million and $97.9 million during the nine months ended September 30, 2010 and 2009, respectively. Cash used in investing activities related primarily to investments in real estate properties, non-consolidated entities and loans receivable, an increase in leasing costs, deposits and restricted cash. Cash provided by investing activities related primarily to proceeds from the sale of properties, distributions from non-consolidated entities in excess of accumulated earnings, principal receipts on loans receivable, return of advances to non-consolidated entities, net of investment, proceeds from sale of debt investments and a decrease in escrow deposits. Therefore, the fluctuation in investing activities relates primarily to the timing of investments and dispositions.
Net cash used in financing activities totaled $102.0 million and $232.9 million during the nine months ended September 30, 2010 and 2009, respectively. Cash provided by financing activities related primarily to proceeds from term loans and convertible notes, borrowings on the revolving credit facility, proceeds of mortgages and notes payable, contributions from noncontrolling interests and the issuance of common shares, net. Cash used in financing activities was primarily attributable to dividend and distribution payments, repurchases of debt instruments, principal payments on debt, increase in financing costs, forward equity commitment payments, net and debt amortization payments.
Dividends. Dividends paid to our common and preferred shareholders increased to $57.6 million in the nine months ended September 30, 2010, compared to $41.3 million in the nine months ended September 30, 2009. We reduced our quarterly common dividend paid in 2010 to $0.10 per common share compared to $0.18 per common share per quarter paid in 2009; however, the $0.18 per common share paid per quarter in 2009 was payable 90% in common shares and 10% in cash for dividends paid in the second, third and fourth quarters. We resumed paying the dividend 100% in cash in 2010.
UPREIT Structure. As of September 30, 2010, there were 4.5 million units of limited partner interest, or OP units, in our operating partnerships outstanding other than OP units held by us. Assuming all outstanding OP units not held by us were redeemed on such date, the estimated fair value of the OP units was $36.1 million based on the closing price of $7.16 per common share on September 30, 2010 and a redemption factor of approximately 1.13.
Financings. During the third quarter of 2010, we obtained an $11.3 million fully amortizing, approximate nine-year non-recourse mortgage loan on our North Berwick, Maine property leased to United Technologies Corporation at a fixed interest rate of 3.56%. During the second quarter of 2010, we obtained a $9.0 million, non-recourse mortgage loan on our Greenville, South Carolina property net leased to Canal Insurance Company. The 5.50% fixed rate loan is interest only and matures in January 2015. In addition, we obtained a $37.0 million non-recourse mortgage loan on our Salt Lake City, Utah property net leased to the University of Utah. The 5.53% fixed rate loan matures simultaneously with the expiration of the lease term in the fall of 2028.
During the first quarter of 2010, we issued $115.0 million aggregate principal amount of 6.00% Convertible Guaranteed Notes. The notes pay interest semi-annually in arrears and mature on January 15, 2030. The holders of the notes may require us to repurchase their notes on January 15, 2017, January 15, 2020 and January 15, 2025 for cash equal to 100% of the notes to be repurchased, plus any accrued and unpaid interest. We may not redeem any notes prior to January 15, 2017, except to preserve our REIT status. The notes have an initial conversion rate of 141.1383 common shares per $1,000 principal amount of the notes, representing a conversion price of $7.09 per share. The initial conversion rate is subject to adjustment under certain circumstances. The notes are convertible by holders under certain circumstances for cash, common shares or a combination of cash and common shares at our election. We used the net proceeds primarily to reduce indebtedness.
On February 13, 2009, we entered into a secured credit facility with KeyBank N.A., as agent, consisting of a term loan portion and a revolving loan portion. The secured credit facility bears interest at 285 basis points over LIBOR and matures in February 2011 but can be extended to February 2012 at our option. During the second quarter of 2010, we amended the loan agreement, which increased the availability under the revolving loan portion of the secured credit facility from $150.0 million to $175.0 million. As amended, with the consent of the lenders, we can increase the size of the revolving loan portion of the secured credit facility up to $335.0 million by adding additional properties to the borrowing base and the term loan portion may not be increased. During the third quarter of 2010, we increased the availability under the revolving loan portion to $220.0 million. The secured credit facility is currently secured by ownership interest pledges and guarantees by certain of our subsidiaries that in the aggregate own interests in a borrowing base of 75 properties. As of September 30, 2010, $18.8 million was outstanding on the revolving loan portion, no amounts were outstanding under the term loan portion, and we were in compliance with the covenants contained in the loan agreement.
During 2007, we 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 first quarter of 2010, we repurchased $25.5 million original principal amount of these notes. As of September 30, 2010, $62.2 million original principal amount of the 5.45% Exchangeable Guaranteed Notes was outstanding.
Results of Operations
Three months ended September 30, 2010 compared with September 30, 2009. The decrease in total gross revenues in 2010 of $4.1 million is primarily attributable to a decrease in rental revenue and tenant reimbursements due to an increase in tenant vacancies.
The decrease in interest and amortization expense of $0.9 million is due to our deleveraging.
Depreciation and amortization decreased $1.0 million, primarily due to the full amortization of lease intangibles. Intangible assets are amortized over a shorter period of time (generally the lease term) than are real estate assets.
The decrease in debt satisfaction gains (charges), net of $3.2 million is primarily due to the timing of the retirement of our 5.45% Exchangeable Guaranteed Notes.
The decrease in property operating expense of $2.0 million is primarily due to a decrease in operating expenses at some of our multi-tenant properties.
Non-operating income increased $1.6 million, which is primarily attributable to interest earned on investments made during 2010 and the fourth quarter of 2009.
The change in value of our forward equity commitment of $2.1 million was primarily a reflection of the decrease in the per share price appreciation of our common shares in the third quarter of 2010 compared to the third quarter of 2009.
The impairment charges and loan losses of ($0.5) million in 2009 represent a loss on the sale of a debt security investment.
Equity in earnings (losses) of non-consolidated entities was earnings of $5.5 million in 2010 compared to a loss of ($0.5) million in 2009. The reason for the fluctuation between periods is primarily due to a ($6.5) million loss recognized on our investment in a hotel real estate joint venture during 2009.
Discontinued operations represent properties sold or held for sale. The change in total discontinued operations of $26.4 million is primarily due to a decrease in impairment charges of $28.1 million, an increase in gains on sales of properties of $2.0 million and an increase in income from discontinued operations of $2.2 million, offset by a decrease in debt satisfaction gains of $6.0 million.
Net (income) loss attributable to noncontrolling interests decreased by $1.0 million primarily due to an increase in operations of the operating partnerships.
Net income (loss) attributable to common shareholders in 2010 was income of $58 thousand compared to a loss of ($28.5) million in 2009. The increase of $28.5 million is due to the items discussed above.
The increase in net income in future periods will be closely tied to the level of acquisitions made by 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, 2010 compared with September 30, 2009. The decrease in total gross revenues in 2010 of $15.5 million is primarily attributable to a decrease in rental revenue and tenant reimbursements due to an increase in tenant vacancies and lower renewal rents.
The decrease in interest and amortization expense of $2.6 million is due to our deleveraging.
Depreciation and amortization decreased $2.5 million, primarily due to the full amortization of lease intangibles. Intangible assets are amortized over a shorter period of time (generally the lease term) than are real estate assets.
The decrease in debt satisfaction gains (charges), net of $17.6 million is primarily due to the timing of the retirement of our 5.45% Exchangeable Guaranteed Notes.
The decrease in property operating expense of $3.0 million is primarily due to decrease in operating expenses at some of our multi-tenant properties and certain properties converting to a net-lease from a modified gross lease.
General and administrative expense decreased $2.0 million primarily due to a decrease in professional fees.
Non-operating income increased by $1.1 million, which is primarily attributable to $3.1 million in interest earned on investments made during 2010 and $0.7 million earned revenue on a financing lease acquired in December 2009, offset primarily by $2.5 million of income recognized with the acquisition of land as part of tenant’s lease surrender obligation during 2009.
The change in value of our forward equity commitment of $2.8 million was primarily a reflection of the increase in the per share price appreciation of our common shares in the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009.
The change in impairment charges and loan losses was $14.8 million. During 2010, we recorded $12.4 million in impairment charges on four properties as a result of triggering events, including operational considerations, with respect to the properties. We recognized a loan loss of $3.8 million on a loan receivable as the tenant supporting the collateral declared bankruptcy and announced liquidation proceedings. In addition, we recognized an other-than-temporary impairment of $0.2 million on a bond investment. During 2009, we recognized $1.6 million of loan losses on two loans receivable and a debt security investment that were sold below their carrying value.
Equity in earnings (losses) of non-consolidated entities was earnings of $16.1 million in 2010 compared to a loss of ($130.8) million in 2009. The reason for the fluctuation between periods is primarily due to a ($135.3) million loss recognized on our investment in Lex-Win Concord LLC during 2009.
Discontinued operations represent properties sold or held for sale. The increase in total discontinued operations loss of $2.3 million is primarily due to a decrease in gains on sales of properties of $3.8 million and a decrease in debt satisfaction gains, net of $1.2 million offset by a decrease in loss from discontinued operations of $2.5 million.
The change of $9.0 million in net (income) loss attributable to noncontrolling interests is primarily due to the noncontrolling interests’ share ($9.5 million) of impairment charges taken in 2010.
Net loss attributable to common shareholders in 2010 was ($63.4) million compared to ($190.6) million in 2009. The decrease of $127.2 million is due to the items discussed above and a decrease in preferred dividends of $7.4 million.
Off-Balance Sheet Arrangements
Non-Consolidated Entities. As of September 30, 2010, we had investments in various non-consolidated entities with varying structures including our investments in Net Lease Strategic Assets Fund L.P., Concord Debt Holdings LLC, CDH CDO LLC and various real estate limited partnerships. Some of 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 lender’s 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 listed in the particular loan documents. These exceptions generally relate to limited circumstances including fraud and breaches of material representations.
In addition, we had $6.9 million in outstanding letters of credit.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk relates primarily to our variable rate debt not subject to interest rate swaps and our fixed rate debt. Our consolidated variable rate indebtedness was approximately $18.8 million and $195.0 million as of September 30, 2010 and 2009, respectively, which represented 1.0% and 9.1% of total long-term indebtedness, respectively. During the three months ended September 30, 2010 and 2009, our variable rate indebtedness had a weighted average interest rate of 3.2% and 3.1%, respectively. Had the weighted average interest rate been 100 basis points higher, our interest expense for the three months ended September 30, 2010 and 2009 would have been increased by approximately $0.2 million and $0.5 million, respectively. During the nine months ended September 30, 2010 and 2009, our variable rate indebtedness had a weighted average interest rate of 3.1% and 3.2%, respectively. Had the weighted average interest rate been 100 basis points higher, our interest expense for the nine months ended September 30, 2010 and 2009 would have been increased by approximately $0.8 million and $1.5 million, respectively. As of September 30, 2010 and 2009, our consolidated fixed rate debt was approximately $1.9 billion and $2.0 billion, respectively, which represented 99.0% and 90.9%, respectively, of total long-term indebtedness.
For certain of our financial instruments, fair values are not readily available since there are no active trading markets as characterized by current exchanges between willing parties. Accordingly, we derive or estimate fair values using various valuation techniques, such as computing the present value of estimated future cash flows using discount rates commensurate with the risks involved. However, the determination of estimated cash flows may be subjective and imprecise. Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. The following fair values were determined using the interest rates that we believe our outstanding fixed rate debt would warrant as of September 30, 2010 and are indicative of the interest rate environment as of September 30, 2010, and do not take into consideration the effects of subsequent interest rate fluctuations. Accordingly, we estimate that the fair value of our fixed rate debt is $1.7 billion as of September 30, 2010.
Our interest rate risk objectives are to limit the impact of interest rate fluctuations on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, we manage our exposure to fluctuations in market interest rates through the use of fixed rate debt instruments to the extent that reasonably favorable rates are obtainable with such arrangements. We may enter into derivative financial instruments such as interest rate swaps or caps to mitigate our interest rate risk on a related financial instrument or to effectively lock the interest rate on a portion of our variable rate debt. Currently, we have one interest rate swap agreement.
Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our 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, which we refer to as the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, our disclosure controls and procedures are effective.
Internal Control Over Financial Reporting. There have been no significant changes in our 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, our internal control over financial reporting.
Limitations on the Effectiveness of Controls. Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
PART II - OTHER INFORMATION
There have been no material legal proceedings beyond those previously disclosed in our Annual Report on form 10-K filed on March 1, 2010, except for the following:
Deutsche Bank Securities, Inc. and SPCP Group LLC v. Lexington Drake, L.P., et al. (Supreme Court of the State of New York-Index No. 603051/08)
On June 30, 2006, we, including a co-investment program as it relates to the Antioch claim, sold to Deutsche Bank Securities, Inc., which we refer to as Deutsche Bank, (1) a $7.7 million bankruptcy damage claim against Dana Corporation for $5.4 million, which we refer to as the Farmington Hills claim and (2) a $7.7 million bankruptcy damage claim against Dana Corporation for $5.7 million, which we refer to as the Antioch claim. Under the terms of the agreements covering the sale of the claims, we are obligated to reimburse Deutsche Bank should the claim ever be disallowed, subordinated or otherwise impaired, to the extent of such disallowance, subordination or impairment, plus interest at the rate of 10% per annum from the date of payment of the purchase price by Deutsche Bank to us. On October 12, 2007, Dana Corporation filed an objection to both claims. We assisted Deutsche Bank and the then holders of the claims in the preparation and filing of a response to the objection. Despite a belief by us that the objections were without merit, the holders of the claims, without our consent, settled the allowed amount of the claims at $6.5 million for the Farmington Hills claim and $7.2 million for the Antioch claim. Deutsche Bank made a formal demand with respect to the Farmington Hills claim in the amount of $0.8 million plus interest, but did not make a formal demand with respect to the Antioch claim. Following a rejection of the demand by us, Deutsche Bank and SPCP Group, LLC filed a summons and complaint with the Supreme Court of the State of New York, County of New York for the Farmington Hills and Antioch claims, and claimed damages of $1.2 million plus interest and expenses.
We answered the complaint on November 26, 2008 and served numerous discovery requests. After almost a year of inactivity, on March 18, 2010, we and the plaintiffs filed motions for summary judgment and related opposing and supporting motions.
If plaintiffs are successful on their motion for summary judgment, we intend to appeal any such decision by the court. If the court denies both summary judgment motions, we intend to continue to vigorously defend the claims for a variety of reasons, including that (1) the holders of the claims arbitrarily settled the claims for reasons based on factors other than the merits, (2) the holders of the claims voluntarily reduced the claims to participate in certain settlement pools and (3) the contract language that supports the plaintiff’s position was specifically negotiated out of the agreement covering the sale of the claims.
Newkirk Skoob L.P. v. Elsevier STM, Inc. (Orange County, Florida Circuit Court – Case No. 09-CA-020180 Complex Business Litigation Court)
On June 24, 2009, Newkirk Skoob L.P., a wholly owned subsidiary, (as successor to Skoob Associates L.P.) filed a complaint in the Complex Business Litigation Court of the Circuit Court of the Ninth Judicial Circuit in Orange County, Florida against Elsevier STM, Inc. (as successor to Harcourt Brace Jovanovich, Inc.), or Elsevier, the former tenant in our Orlando, Florida facility, for breach of lease and holdover rent pursuant to the lease and Section 83.06, Florida Statutes, for the time Elsevier remained on the premises after the lease’s expiration. The complaint was amended to add certain claims and the answer was amended to add certain defenses. Trial was set for April 2011.
In October, 2009, Elsevier paid a portion of past due rent, but a rent balance of $0.9 million (not including default interest) remained unpaid. In August 2010, a settlement agreement was executed and we received $1.9 million.
Experian Information Solutions, Inc. v. Lexington Allen L.P., Lexington Allen Manager LLC and Lexington Realty Trust (United States District Court for the Eastern District of Texas Sherman Division – Civil Action No. 4:10cv144)
On March 30, 2010, Experian Information Solutions, Inc., which we refer to as Experian, filed a complaint against Lexington Allen L.P., a wholly owned subsidiary of Net Lease Strategic Assets Fund L.P., which we refer to as NLS, and us for breach of lease agreement, fraud/fraudulent inducement, claim under Section 91.004 of the Texas Property Code (breach of lease and ability to obtain a lien on other landlord property), promissory estoppel and quantum meruit, in connection with the alleged failure of Lexington Allen L.P. to fund up to $5.9 million of tenant improvements. We were named as a defendant under an “alter-ego” theory. On May 5, 2010, we filed a motion to dismiss the complaint. On May 21, 2010, Experian filed an amended complaint, adding Lexington Allen Manager LLC as a defendant, and an opposition to our motion to dismiss, on June 7, 2010, we filed another motion to dismiss and on June 24, 2010, Experian filed an opposition to our motion to dismiss. Our motion to dismiss was denied and we answered the amended complaint on October 22, 2010. Discovery requests have been exchanged and a mediation is scheduled for November 5, 2010. On October 29, 2010, Experian filed a motion for summary judgment with respect to certain of its claims against Lexington Allen L.P. We believe, after consultation with counsel, meritorious defenses to these claims exist and intend to vigorously defend the claims against us.
The partnership agreement for NLS provides that NLS must indemnify us for its costs in connection with these claims.
There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K filed on March 1, 2010, other than the addition of the following risk factor.
We face risks associated with returning properties to lenders.
A significant number of our properties are subject to non-recourse mortgages, which generally provide that a lender can only look to the property in the event of a default. During 2008, a lender foreclosed on a vacant property in Auburn Hills, Michigan, in which we held an interest, because the borrower was unable to pay the required debt service. During 2009, (1) lenders foreclosed on vacant properties located in Richmond, Virginia and Plymouth, Michigan, in which we had an interest, because the borrowers were unable to pay the required debt service, and (2) a vacant property in Houston, Texas was lost in the bankruptcy of one of our subsidiaries because the subsidiary was unable to pay the required debt service. As a result, we lost all of our interest in these properties and any future opportunities to re-tenant these properties. The loss of a significant number of properties to foreclosure or bankruptcy could adversely affect our (1) financial condition and results of operations, (2) relationships with lenders and (3) ability to obtain additional financing in the future.
|
|
Unregistered Sales of Equity Securities and Use of Proceeds.
|
The following table summarizes repurchases of our common shares/operating partnership units during the three months ended September 30, 2010 under our common share/operating partnership unit repurchase authorization approved by our Board of Trustees.
Issuer Purchases of Equity Securities
|
Period
|
|
(a)
Total number of Shares/ Units Purchased
|
|
|
(b)
Average Price Paid Per Share/ Units
|
|
|
(c)
Total Number of Shares/Units Purchased as Part of Publicly Announced Plans or Programs(1)
|
|
|
(d)
Maximum Number of Shares/Units That May Yet Be Purchased Under the Plans or Programs(1)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1 - 31, 2010
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
1,056,731 |
|
|
August 1 - 31, 2010
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
1,056,731 |
|
|
September 1 – 30, 2010
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
1,056,731 |
|
|
Third quarter 2010
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
1,056,731 |
|
(1) Repurchase authorization last approved on December 14, 2007 and announced on December 17, 2007. 5,900,000 common shares were approved for repurchase.
|
|
Defaults Upon Senior Securities - not applicable.
|
|
|
Other Information - not applicable.
|
|
Exhibit
No.
|
|
|
|
Description
|
|
|
|
|
|
|
|
3.1
|
|
—
|
|
Articles of Merger and Amended and Restated Declaration of Trust of the Company, dated December 31, 2006 (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed January 8, 2007 (the “01/08/07 8-K”))(1)
|
|
3.2
|
|
—
|
|
Articles Supplementary Relating to the 7.55% Series D Cumulative Redeemable Preferred Stock, par value $.0001 per share (filed as Exhibit 3.3 to the Company’s Registration Statement on Form 8A filed February 14, 2007 (the “02/14/07 Registration Statement”))(1)
|
|
3.3
|
|
—
|
|
Amended and Restated By-laws of the Company (filed as Exhibit 3.2 to the 01/08/07 8-K)(1)
|
|
3.4
|
|
—
|
|
First Amendment to Amended and Restated By–laws of the Company (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed November 20, 2009)(1)
|
|
3.5
|
|
—
|
|
Fifth Amended and Restated Agreement of Limited Partnership of Lepercq Corporate Income Fund L.P. (“LCIF”), dated as of December 31, 1996, as supplemented (the “LCIF Partnership Agreement”) (filed as Exhibit 3.3 to the Company’s Registration Statement on Form S-3/A filed September 10, 1999 (the “09/10/99 Registration Statement”))(1)
|
|
3.6
|
|
—
|
|
Amendment No. 1 to the LCIF Partnership Agreement dated as of December 31, 2000 (filed as Exhibit 3.11 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, filed February 26, 2004 (the “2003 10-K”))(1)
|
|
3.7
|
|
—
|
|
First Amendment to the LCIF Partnership Agreement effective as of June 19, 2003 (filed as Exhibit 3.12 to the 2003 10-K)(1)
|
|
3.8
|
|
—
|
|
Second Amendment to the LCIF Partnership Agreement effective as of June 30, 2003 (filed as Exhibit 3.13 to the 2003 10-K)(1)
|
|
3.9
|
|
—
|
|
Third Amendment to the LCIF Partnership Agreement effective as of December 31, 2003 (filed as Exhibit 3.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, filed on March 16, 2005 (the “2004 10-K”))(1)
|
|
3.10
|
|
—
|
|
Fourth Amendment to the LCIF Partnership Agreement effective as of October 28, 2004 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November 4, 2004)(1)
|
|
3.11
|
|
—
|
|
Fifth Amendment to the LCIF Partnership Agreement effective as of December 8, 2004 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 14, 2004 (the “12/14/04 8-K”))(1)
|
|
3.12
|
|
—
|
|
Sixth Amendment to the LCIF Partnership Agreement effective as of June 30, 2003 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 3, 2005 (the “01/03/05 8-K”))(1)
|
|
3.13
|
|
—
|
|
Seventh Amendment to the LCIF Partnership Agreement (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November 3, 2005)(1)
|
|
3.14
|
|
—
|
|
Eighth Amendment to the LCIF Partnership Agreement effective as of March 26, 2009 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 27, 2009 (the “4/27/09 8-K”)(1)
|
|
3.15
|
|
—
|
|
Second Amended and Restated Agreement of Limited Partnership of Lepercq Corporate Income Fund II L.P. (“LCIF II”), dated as of August 27, 1998 the (“LCIF II Partnership Agreement”) (filed as Exhibit 3.4 to the 9/10/99 Registration Statement)(1)
|
|
3.16
|
|
—
|
|
First Amendment to the LCIF II Partnership Agreement effective as of June 19, 2003 (filed as Exhibit 3.14 to the 2003 10-K)(1)
|
|
3.17
|
|
—
|
|
Second Amendment to the LCIF II Partnership Agreement effective as of June 30, 2003 (filed as Exhibit 3.15 to the 2003 10-K)(1)
|
|
3.18
|
|
—
|
|
Third Amendment to the LCIF II Partnership Agreement effective as of December 8, 2004 (filed as Exhibit 10.2 to 12/14/04 8-K)(1)
|
|
3.19
|
|
—
|
|
Fourth Amendment to the LCIF II Partnership Agreement effective as of January 3, 2005 (filed as Exhibit 10.2 to 01/03/05 8-K)(1)
|
|
3.20
|
|
—
|
|
Fifth Amendment to the LCIF II Partnership Agreement effective as of July 23, 2006 (filed as Exhibit 99.5 to the Company’s Current Report on Form 8-K filed July 24, 2006)(1)
|
|
3.21
|
|
—
|
|
Sixth Amendment to the LCIF II Partnership Agreement effective as of December 20, 2006 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 22, 2006)(1)
|
|
3.22
|
|
—
|
|
Seventh Amendment to the LCIF II Partnership Agreement effective as of March 26, 2009 (filed as Exhibit 10.2 to the 4/27/09 8-K)(1)
|
|
3.23
|
|
—
|
|
Amended and Restated Agreement of Limited Partnership (“the Net 3 Partnership Agreement”) of Net 3 Acquisition L.P. (“Net 3”) (filed as Exhibit 3.16 to the Company’s Registration Statement on Form S-3 filed November 16, 2006)(1)
|
|
3.24
|
|
—
|
|
First Amendment to the Net 3 Partnership Agreement effective as of November 29, 2001 (filed as Exhibit 3.17 to the 2003 10-K)(1)
|
|
3.25
|
|
—
|
|
Second Amendment to the Net 3 Partnership Agreement effective as of June 19, 2003 (filed as Exhibit 3.18 to the 2003 10-K)(1)
|
|
3.26
|
|
—
|
|
Third Amendment to the Net 3 Partnership Agreement effective as of June 30, 2003 (filed as Exhibit 3.19 to the 2003 10-K)(1)
|
|
3.27
|
|
—
|
|
Fourth Amendment to the Net 3 Partnership Agreement effective as of December 8, 2004 (filed as Exhibit 10.3 to 12/14/04 8-K)(1)
|
|
3.28
|
|
—
|
|
Fifth Amendment to the Net 3 Partnership Agreement effective as of January 3, 2005 (filed as Exhibit 10.3 to 01/03/05 8-K)(1)
|
|
3.29
|
|
—
|
|
Sixth Amendment to the Net 3 Partnership Agreement effective as of March 26, 2009 (filed as Exhibit 10.4 to the 4/27/09 8-K)(1)
|
|
4.1
|
|
—
|
|
Specimen of Common Shares Certificate of the Company (filed as Exhibit 4.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006)(1)
|
|
4.2
|
|
—
|
|
Form of 8.05% Series B Cumulative Redeemable Preferred Stock certificate (filed as Exhibit 4.1 to the Company’s Registration Statement on Form 8A filed June 17, 2003)(1)
|
|
4.3
|
|
—
|
|
Form of 6.50% Series C Cumulative Convertible Preferred Stock certificate (filed as Exhibit 4.1 to the Company’s Registration Statement on Form 8A filed December 8, 2004)(1)
|
|
4.4
|
|
—
|
|
Form of 7.55% Series D Cumulative Redeemable Preferred Stock certificate (filed as Exhibit 4.1 to the 02/14/07 Registration Statement)(1)
|
|
4.5
|
|
—
|
|
Indenture, dated as of January 29, 2007, among the Company (as successor to the MLP), the other guarantors named therein and U.S. Bank National Association, as trustee (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed January 29, 2007 (the “01/29/07 8-K”))(1)
|
|
4.6
|
|
—
|
|
First Supplemental Indenture, dated as of January 29, 2007, among the Company (as successor to the MLP), the other guarantors named therein and U.S. Bank National Association, as trustee, including the Form of 5.45% Exchangeable Guaranteed Notes due 2027 (filed as Exhibit 4.2 to the 01/29/07 8-K)(1)
|
|
4.7
|
|
—
|
|
Second Supplemental Indenture, dated as of March 9, 2007, among the Company (as successor to the MLP), the other guarantors named therein and U.S. Bank National Association, as trustee (filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on March 9, 2007 (the “03/09/07 8-K”))(1)
|
|
4.8
|
|
—
|
|
Amended and Restated Trust Agreement, dated March 21, 2007, among the Company, The Bank of New York Trust Company, National Association, The Bank of New York (Delaware), the Administrative Trustees (as named therein) and the several holders of the Preferred Securities from time to time (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 27, 2007 (the “03/27/2007 8-K”))(1)
|
|
4.9
|
|
—
|
|
Third Supplemental Indenture, dated as of June 19, 2007, among the Company (as successor to The Lexington Master Limited Partnership), the other guarantors named therein and U.S. Bank National Association, as trustee (filed as Exhibit 4.1 to the Company’s Report on Form 8-K filed on June 22, 2007)(1)
|
|
4.10
|
|
—
|
|
Junior Subordinated Indenture, dated as of March 21, 2007, between Lexington Realty Trust and The Bank of New York Trust Company, National Association (filed as Exhibit 4.2 to the 03/27/07 8-K)(1)
|
|
4.11
|
|
—
|
|
Fourth Supplemental Indenture, dated as of December 31, 2008, among the Company, the other guarantors named therein and U.S. Bank National Association, as trustee (filed as Exhibit 4.1 to the Company’s Report on Form 8-K filed on January 2, 2009 (the “01/02/09 8-K”))(1)
|
|
4.12
|
|
—
|
|
Fifth Supplemental Indenture, dated as of June 9, 2009, among the Company (as successor to the MLP), the other guarantors named therein and U.S. Bank National Association, as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed on June 15, 2009)(1)
|
|
4.13
|
|
—
|
|
Sixth Supplemental Indenture, dated as of January 26, 2010 among the Company, the guarantors named therein and U.S. Bank National Association, as trustee (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed January 26, 2010)(1)
|
|
10.1
|
|
—
|
|
1994 Employee Stock Purchase Plan (filed as Exhibit D to the Company’s Definitive Proxy Statement dated April 12, 1994)(1, 4)
|
|
10.2
|
|
—
|
|
The Company’s 2007 Equity Award Plan (filed as Annex A to the Company’s Definitive Proxy Statement dated April 19, 2007)(1,4)
|
|
10.3
|
|
—
|
|
Form of Compensation Agreement (Long-Term Compensation) between the Company and each of the following officers: Richard J. Rouse and Patrick Carroll (filed as Exhibit 10.15 to the 2004 10-K)(1, 4)
|
|
10.4
|
|
—
|
|
Form of Compensation Agreement (Bonus and Long-Term Compensation) between the Company and each of the following officers: E. Robert Roskind and T. Wilson Eglin (filed as Exhibit 10.16 to the 2004 10-K)(1, 4)
|
|
10.5
|
|
—
|
|
Form of Nonvested Share Agreement (Performance Bonus Award) between the Company and each of the following officers: E. Robert Roskind, T. Wilson Eglin, Richard J. Rouse and Patrick Carroll (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 6, 2006 (the “02/06/06 8-K”))(1, 4)
|
|
10.6
|
|
—
|
|
Form of Nonvested Share Agreement (Long-Term Incentive Award) between the Company and each of the following officers: E. Robert Roskind, T. Wilson Eglin, Richard J. Rouse and Patrick Carroll (filed as Exhibit 10.2 to the 02/06/06 8-K)(1, 4)
|
|
10.7
|
|
—
|
|
Form of the Company’s Nonvested Share Agreement, dated as of December 28, 2006 (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 3, 2007 (the “01/03/07 8-K”))(1,4)
|
|
10.8
|
|
—
|
|
Form of Lock-Up and Claw-Back Agreement, dated as of December 28, 2006 (filed as Exhibit 10.4 to the 01/03/07 8-K)(1)
|
|
10.9
|
|
—
|
|
Form of 2007 Annual Long-Term Incentive Award Agreement (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 11, 2008)(1,4)
|
|
10.10
|
|
—
|
|
Form of Share Option Award Agreement (filed as Exhibit 10.3 to the 01/02/09 8-K)(1,4)
|
|
10.11
|
|
—
|
|
Form of 2010 Share Option Award Agreement (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed January 11, 2010)(1, 4)
|
|
10.12
|
|
—
|
|
Amended and Restated Rabbi Trust Agreement, originally dated January 26, 1999 (filed as Exhibit 10.2 to the 01/02/09 8-K)(1,4)
|
|
10.13
|
|
—
|
|
Form of Employment Agreement between the Company and each of E. Robert Roskind, T. Wilson Eglin, Richard J. Rouse and Patrick Carroll, dated January 15, 2010 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 20, 2010)(1, 4)
|
|
10.14
|
|
—
|
|
Form of Amended and Restated Indemnification Agreement between the Company and certain officers and trustees (filed as Exhibit 10.20 to the Company’s Quarterly Report Form 10-Q for the quarter ended September 30, 2008)(1)
|
|
10.15
|
|
—
|
|
Credit Agreement, dated as of February 13, 2009 among the Company, LCIF, LCIF II, Net 3, jointly and severally as borrowers, certain subsidiaries of the Company, as guarantors, KeyBank National Association, as agent, and each of the financial institutions initially a signatory thereto together with their assignees pursuant to Section 12.5 therein (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 17, 2009)(1)
|
|
10.16
|
|
—
|
|
First Amendment to Credit Agreement, dated June 29, 2010 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 2, 2010) (1)
|
|
10.17
|
|
—
|
|
Master Terms and Conditions for Issuer Forward Transactions between the Company and Citigroup Financial Products Inc., effective as of October 28, 2008 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November 6, 2008 (the “11/06/08 8-K”))(1)
|
|
10.18
|
|
—
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Funding Agreement, dated as of July 23, 2006, by and among LCIF, LCIF II and Net 3 Acquisition L.P. (“Net 3”) and the Company (filed as Exhibit 99.4)(1)
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10.19
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—
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Letter Agreement among the Company (as successor to Newkirk), Apollo Real Estate Investment Fund III, L.P., NKT Advisors LLC, Vornado Realty Trust, VNK Corp., Vornado Newkirk LLC, Vornado MLP GP LLC and WEM-Brynmawr Associates LLC (filed as Exhibit 10.15 to Amendment No. 5 to Newkirk Registration Statement on Form S-11/A filed October 28, 2005 (“Amendment No. 5 to NKT’s S-11”))(1)
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10.20
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—
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Amendment to the Letter Agreement among Newkirk, Apollo Real Estate Investment Fund III, L.P., NKT Advisors LLC, Vornado Realty Trust, Vornado Realty L.P., VNK Corp., Vornado Newkirk LLC, Vornado MLP GP LLC, and WEM-Brynmawr Associates LLC (filed as Exhibit 10.25 to Amendment No. 5 to Newkirk’s S-11)(1)
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10.21
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—
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Amended and Restated Ownership Limit Waiver Agreement, dated as of October 28, 2008, between the Company and Vornado Realty, L.P. (together with certain affiliates) (filed as Exhibit 10.2 to the 11/06/08 8-K)(1)
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10.22
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—
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Amendment No. 1 to Amended and Restated Ownership Limit Waiver Agreement, dated as of April 21, 2009, between the Company and Vornado Realty L.P. (filed as Exhibit 10.4 to the 4/27/09 8-K)(1)
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10.23
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—
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Registration Rights Agreement, dated as of December 31, 2006, between the Company and Michael L. Ashner (filed as Exhibit 10.10 to the 01/08/07 8-K)(1)
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10.24
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—
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Amended and Restated Registration Rights Agreement, dated as of November 3, 2008, between the Company and Vornado Realty, L.P. and Vornado LXP LLC (filed as Exhibit 10.3 to the 11/06/08 8-K)(1)
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10.25
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—
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Registration Rights Agreement, dated as of January 29, 2007, among the Company, LCIF, LCIF II, Net 3, Lehman Brothers Inc. and Bear, Stearns & Co. Inc., for themselves and on behalf of the initial purchasers named therein (filed as Exhibit 4.3 to the 01/29/07 8-K)(1)
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10.26
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—
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Registration Rights Agreement, dated as of March 9, 2007, among the MLP, the Company, LCIF, LCIF II, Net 3, Lehman Brothers Inc. and Bear, Stearns & Co. Inc., for themselves and on behalf of the initial purchasers named therein (filed as Exhibit 4.4 to the 03/09/07 8-K)(1)
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10.27
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—
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Second Amendment and Restated Limited Partnership Agreement of Net Lease Strategic Assets fund L.P. (“NLSAF”), dated as of February 20, 2008, among LMLP GP LLC, the Company (as successor to the MLP) Inland American (Net Lease) Sub, LLC (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 21, 2008) (1)
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10.28
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—
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Management Agreement, dated as of August 10, 2007, between NLSAF and Lexington Realty Advisors, Inc. (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on August 17, 2007)(1)
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—
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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(3)
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—
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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(3)
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—
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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(3)
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—
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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(3)
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(1)
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Incorporated by reference.
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(4)
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Management Contract or compensatory plan or arrangement.
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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.
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Lexington Realty Trust
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Date: November 5, 2010
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By:
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/s/ T. Wilson Eglin
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T. Wilson Eglin
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Chief Executive Officer, President and Chief
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Operating Officer
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Date: November 5, 2010
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By:
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/s/ Patrick Carroll
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Patrick Carroll
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Chief Financial Officer, Executive Vice President
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and Treasurer
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35