Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2017.
or
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o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from _________________ to ________________
Commission File Number
1-12386 (Lexington Realty Trust)
33-04215 (Lepercq Corporate Income Fund L.P.)
LEXINGTON REALTY TRUST
LEPERCQ CORPORATE INCOME FUND L.P.
(Exact name of registrant as specified in its charter)
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Maryland (Lexington Realty Trust) | 13-3717318 (Lexington Realty Trust) |
Delaware (Lepercq Corporate Income Fund L.P.) | 13-3779859 (Lepercq Corporate Income Fund L.P.) |
(State or other jurisdiction of incorporation of organization) | (I.R.S. Employer Identification No.) |
One Penn Plaza, Suite 4015, New York, NY 10119-4015 (Address of principal executive offices) (zip code) |
(212) 692-7200 (Registrant's telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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Lexington Realty Trust | Yes x No ¨ |
Lepercq Corporate Income Fund L.P. | Yes x No ¨ |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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Lexington Realty Trust | Yes x No ¨ |
Lepercq Corporate Income Fund L.P. | Yes x No ¨ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Lexington Realty Trust: | | | | |
Large accelerated filer x | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ | Emerging growth |
| | (Do not check if a smaller reporting company) | | company ¨ |
Lepercq Corporate Income Fund L.P.: | | | | |
Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer x | Smaller reporting company ¨ | Emerging growth |
| | (Do not check if a smaller reporting company) | | company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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Lexington Realty Trust | Yes ¨ No x |
Lepercq Corporate Income Fund L.P. | Yes ¨ No x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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Lexington Realty Trust | Yes ¨ No x |
Lepercq Corporate Income Fund L.P. | Yes ¨ No x |
Indicate the number of shares outstanding of each of Lexington Realty Trust's classes of common stock, as of the latest practicable date: 240,621,239 common shares of beneficial interest, par value $0.0001 per share, as of August 4, 2017.
EXPLANATORY NOTE
This report combines the Quarterly Reports on Form 10-Q for the period ended June 30, 2017, which we refer to as this Quarterly Report, of (1) Lexington Realty Trust, which we refer to as the Company or the Trust, and subsidiaries and (2) Lepercq Corporate Income Fund L.P., which we refer to as the Partnership or LCIF, and subsidiaries. Unless stated otherwise or the context otherwise requires, (1) “we,” “our,” and “us” refer collectively to the Company and its consolidated subsidiaries, including LCIF and its consolidated subsidiaries, and (2) LCIF or the Partnership refers to LCIF and its consolidated subsidiaries. All of the Company's and LCIF's interests in properties are held, and all property operating activities are conducted, through special purpose entities, which we refer to as property owner subsidiaries or lender subsidiaries, which are separate and distinct legal entities, but in some instances are consolidated for financial statement purposes and/or disregarded for income tax purposes.
The Company is the sole equity owner of (1) Lex GP-1 Trust, or Lex GP, a Delaware statutory trust, and (2) Lex LP-1 Trust, or Lex LP, a Delaware statutory trust. The Company, through Lex GP and Lex LP, holds, as of June 30, 2017, approximately 96% of LCIF's outstanding units of limited partner interest, which we refer to as OP units. The remaining OP units are beneficially owned by E. Robert Roskind, Chairman of the Trust, and certain non-affiliated investors. As the sole equity owner of LCIF’s general partner, the Company has the ability to control all of LCIF’s day-to-day operations subject to the terms of LCIF’s partnership agreement.
OP units not owned by LXP are accounted for as partners’ capital in LCIF’s unaudited condensed consolidated financial statements and as noncontrolling interests in the Trust’s unaudited condensed consolidated financial statements.
We believe it is important to understand the differences between the Trust and LCIF in the context of how the Trust and LCIF operate as an interrelated, consolidated company. The Trust’s and LCIF’s businesses are substantially the same; except that LCIF is dependent on the Trust for management of LCIF’s operations and future investments as LCIF does not have any employees, executive officers or a board of directors.
The Trust also invests in assets and conducts business directly and through other subsidiaries. The Trust allocates investments to itself and its other subsidiaries or LCIF as it deems appropriate and in accordance with certain obligations under LCIF’s partnership agreement with respect to allocations of non-recourse liabilities. The Trust and LCIF are co-borrowers under the Trust’s unsecured revolving credit facility and unsecured term loans. LCIF is a guarantor of the Trust’s publicly-traded debt securities.
We believe combining the quarterly reports on Form 10-Q of the Trust and LCIF into this single report results in the following benefits:
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• | combined reports better reflect how management and the analyst community view the business as a single operating unit; |
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• | combined reports enhance investors’ understanding of the Trust and LCIF by enabling them to view the business as a whole and in the same manner as management; |
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• | combined reports are more efficient for the Trust and LCIF and result in savings in time, effort and expense; and |
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• | combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review. |
To help investors understand the significant differences between the Trust and LCIF, this Quarterly Report separately presents the following for each of the Trust and LCIF: (1) the unaudited condensed consolidated financial statements and the notes thereto, (2) Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, (3) Part I, Item 4. Controls and Procedures, and (4) Exhibit 31 and Exhibit 32 certifications.
TABLE OF CONTENTS
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PART I. — FINANCIAL INFORMATION | | |
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PART II — OTHER INFORMATION | | |
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WHERE YOU CAN FIND MORE INFORMATION:
We file and furnish annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission, which we refer to as the SEC. You may read and copy any materials that we file or furnish with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We file and furnish information electronically with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file or furnish electronically with the SEC. The address of the SEC's Internet site is http://www.sec.gov. We also maintain a web site at http://www.lxp.com through which you can obtain copies of documents that we file or furnish with the SEC. The contents of that web site are not incorporated by reference in or otherwise a part of this Quarterly Report on Form 10-Q or any other document that we file or furnish with the SEC.
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands, except share and per share data)
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| June 30, 2017 | | December 31, 2016 |
Assets: | | | |
Real estate, at cost | $ | 3,638,123 |
| | $ | 3,533,172 |
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Real estate - intangible assets | 575,172 |
| | 597,294 |
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Investments in real estate under construction | 29,442 |
| | 106,652 |
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| 4,242,737 |
| | 4,237,118 |
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Less: accumulated depreciation and amortization | 1,185,911 |
| | 1,208,792 |
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Real estate, net | 3,056,826 |
| | 3,028,326 |
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Assets held for sale | 5,984 |
| | 23,808 |
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Cash and cash equivalents | 93,279 |
| | 86,637 |
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Restricted cash | 35,939 |
| | 31,142 |
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Investment in and advances to non-consolidated entities | 61,771 |
| | 67,125 |
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Deferred expenses, net | 32,873 |
| | 33,360 |
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Loans receivable, net | — |
| | 94,210 |
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Rent receivable – current | 5,407 |
| | 7,516 |
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Rent receivable – deferred | 41,789 |
| | 31,455 |
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Other assets | 32,935 |
| | 37,888 |
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Total assets | $ | 3,366,803 |
| | $ | 3,441,467 |
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Liabilities and Equity: | |
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Liabilities: | |
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Mortgages and notes payable, net | $ | 703,845 |
| | $ | 738,047 |
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Term loans payable, net | 501,602 |
| | 501,093 |
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Senior notes payable, net | 494,780 |
| | 494,362 |
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Trust preferred securities, net | 127,146 |
| | 127,096 |
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Dividends payable | 48,037 |
| | 47,264 |
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Liabilities held for sale | 324 |
| | 191 |
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Accounts payable and other liabilities | 33,901 |
| | 59,601 |
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Accrued interest payable | 5,953 |
| | 6,704 |
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Deferred revenue - including below market leases, net | 39,116 |
| | 39,895 |
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Prepaid rent | 15,974 |
| | 14,723 |
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Total liabilities | 1,970,678 |
| | 2,028,976 |
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Commitments and contingencies |
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Equity: | |
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Preferred shares, par value $0.0001 per share; authorized 100,000,000 shares: | |
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Series C Cumulative Convertible Preferred, liquidation preference $96,770; 1,935,400 shares issued and outstanding | 94,016 |
| | 94,016 |
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Common shares, par value $0.0001 per share; authorized 400,000,000 shares, 240,612,821 and 238,037,177 shares issued and outstanding in 2017 and 2016, respectively | 24 |
| | 24 |
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Additional paid-in-capital | 2,822,217 |
| | 2,800,736 |
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Accumulated distributions in excess of net income | (1,538,442 | ) | | (1,500,966 | ) |
Accumulated other comprehensive income (loss) | 443 |
| | (1,033 | ) |
Total shareholders’ equity | 1,378,258 |
| | 1,392,777 |
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Noncontrolling interests | 17,867 |
| | 19,714 |
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Total equity | 1,396,125 |
| | 1,412,491 |
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Total liabilities and equity | $ | 3,366,803 |
| | $ | 3,441,467 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except share and per share data) |
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| Three months ended June 30, | | Six months ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Gross revenues: | | | | | | | |
Rental | $ | 87,565 |
| | $ | 108,982 |
| | $ | 176,219 |
| | $ | 212,202 |
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Tenant reimbursements | 8,119 |
| | 7,930 |
| | 15,564 |
| | 15,987 |
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Total gross revenues | 95,684 |
| | 116,912 |
| | 191,783 |
| | 228,189 |
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Expense applicable to revenues: | |
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Depreciation and amortization | (42,320 | ) | | (41,272 | ) | | (85,211 | ) | | (84,399 | ) |
Property operating | (12,974 | ) | | (11,293 | ) | | (25,090 | ) | | (23,371 | ) |
General and administrative | (8,141 | ) | | (7,747 | ) | | (17,598 | ) | | (15,522 | ) |
Non-operating income | 1,371 |
| | 3,553 |
| | 3,992 |
| | 6,420 |
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Interest and amortization expense | (19,216 | ) | | (22,679 | ) | | (38,941 | ) | | (45,572 | ) |
Debt satisfaction charges, net | (46 | ) | | (3,194 | ) | | (46 | ) | | (3,356 | ) |
Impairment charges and loan loss | (13,599 | ) | | (3,014 | ) | | (21,591 | ) | | (3,014 | ) |
Gains on sales of properties | 10,240 |
| | 25,326 |
| | 44,433 |
| | 42,341 |
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Income before provision for income taxes and equity in earnings (losses) of non-consolidated entities | 10,999 |
| | 56,592 |
| | 51,731 |
| | 101,716 |
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Provision for income taxes | (377 | ) | | (224 | ) | | (799 | ) | | (637 | ) |
Equity in earnings (losses) of non-consolidated entities | (3,257 | ) | | 312 |
| | (1,347 | ) | | 6,054 |
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Net income | 7,365 |
| | 56,680 |
| | 49,585 |
| | 107,133 |
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Less net income attributable to noncontrolling interests | (213 | ) | | (1,148 | ) | | (393 | ) | | (2,158 | ) |
Net income attributable to Lexington Realty Trust shareholders | 7,152 |
| | 55,532 |
| | 49,192 |
| | 104,975 |
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Dividends attributable to preferred shares – Series C | (1,573 | ) | | (1,573 | ) | | (3,145 | ) | | (3,145 | ) |
Allocation to participating securities | (60 | ) | | (84 | ) | | (131 | ) | | (175 | ) |
Net income attributable to common shareholders | $ | 5,519 |
| | $ | 53,875 |
| | $ | 45,916 |
| | $ | 101,655 |
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Net income attributable to common shareholders - per common share basic | $ | 0.02 |
| | $ | 0.23 |
| | $ | 0.19 |
| | $ | 0.44 |
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Weighted-average common shares outstanding – basic | 237,720,198 |
| | 232,592,998 |
| | 237,451,355 |
| | 232,617,901 |
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Net income attributable to common shareholders - per common share diluted | $ | 0.02 |
| | $ | 0.23 |
| | $ | 0.19 |
| | $ | 0.43 |
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Weighted-average common shares outstanding – diluted | 241,531,313 |
| | 235,227,199 |
| | 241,310,529 |
| | 235,151,256 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited and in thousands)
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| Three months ended June 30, | | Six months ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net income | $ | 7,365 |
| | $ | 56,680 |
| | $ | 49,585 |
| | $ | 107,133 |
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Other comprehensive income (loss): | |
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Change in unrealized gain (loss) on interest rate swaps, net | 184 |
| | (956 | ) | | 1,476 |
| | (5,581 | ) |
Other comprehensive income (loss) | 184 |
| | (956 | ) | | 1,476 |
| | (5,581 | ) |
Comprehensive income | 7,549 |
| | 55,724 |
| | 51,061 |
| | 101,552 |
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Comprehensive income attributable to noncontrolling interests | (213 | ) | | (1,148 | ) | | (393 | ) | | (2,158 | ) |
Comprehensive income attributable to Lexington Realty Trust shareholders | $ | 7,336 |
| | $ | 54,576 |
| | $ | 50,668 |
| | $ | 99,394 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited and in thousands)
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Six Months ended June 30, 2017 | | Lexington Realty Trust Shareholders | | |
| Total | | Preferred Shares | | Common Shares | | Additional Paid-in-Capital | | Accumulated Distributions in Excess of Net Income | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests |
Balance December 31, 2016 | $ | 1,412,491 |
| | $ | 94,016 |
| | $ | 24 |
| | $ | 2,800,736 |
| | $ | (1,500,966 | ) | | $ | (1,033 | ) | | $ | 19,714 |
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Redemption of noncontrolling OP units for common shares | — |
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| | — |
| | 485 |
| | — |
| | — |
| | (485 | ) |
Issuance of common shares and deferred compensation amortization, net | 20,996 |
| | — |
| | — |
| | 20,996 |
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| | — |
| | — |
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Dividends/distributions | (88,423 | ) | | — |
| | — |
| | — |
| | (86,668 | ) | | — |
| | (1,755 | ) |
Net income | 49,585 |
| | — |
| | — |
| | — |
| | 49,192 |
| | — |
| | 393 |
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Other comprehensive income | 1,476 |
| | — |
| | — |
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| | — |
| | 1,476 |
| | — |
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Balance June 30, 2017 | $ | 1,396,125 |
| | $ | 94,016 |
| | $ | 24 |
| | $ | 2,822,217 |
| | $ | (1,538,442 | ) | | $ | 443 |
| | $ | 17,867 |
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Six Months ended June 30, 2016 | | Lexington Realty Trust Shareholders | | |
| Total | | Preferred Shares | | Common Shares | | Additional Paid-in-Capital | | Accumulated Distributions in Excess of Net Income | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests |
Balance December 31, 2015 | $ | 1,462,531 |
| | $ | 94,016 |
| | $ | 23 |
| | $ | 2,776,837 |
| | $ | (1,428,908 | ) | | $ | (1,939 | ) | | $ | 22,502 |
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Repurchase of common shares | (8,973 | ) | | — |
| | — |
| | (8,973 | ) | | — |
| | — |
| | — |
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Redemption of noncontrolling OP units for common shares | — |
| | — |
| | — |
| | 22 |
| | — |
| | — |
| | (22 | ) |
Issuance of common shares and deferred compensation amortization, net | 7,583 |
| | — |
| | 1 |
| | 7,582 |
| | — |
| | — |
| | — |
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Dividends/distributions | (84,580 | ) | | — |
| | — |
| | — |
| | (82,841 | ) | | — |
| | (1,739 | ) |
Net income | 107,133 |
| | — |
| | — |
| | — |
| | 104,975 |
| | — |
| | 2,158 |
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Other comprehensive loss | (5,581 | ) | | — |
| | — |
| | — |
| | — |
| | (5,581 | ) | | — |
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Balance June 30, 2016 | $ | 1,478,113 |
| | $ | 94,016 |
| | $ | 24 |
| | $ | 2,775,468 |
| | $ | (1,406,774 | ) | | $ | (7,520 | ) | | $ | 22,899 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
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| Six Months ended June 30, |
| 2017 | | 2016 |
Net cash provided by operating activities: | $ | 105,966 |
| | $ | 116,920 |
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Cash flows from investing activities: | |
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Acquisition of real estate, including intangible assets | (152,474 | ) | | (27,197 | ) |
Investment in real estate under construction | (76,933 | ) | | (65,102 | ) |
Capital expenditures | (8,548 | ) | | (1,256 | ) |
Net proceeds from sale of properties | 148,960 |
| | 131,985 |
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Net proceeds from sale of non-consolidated investment | 6,127 |
| | — |
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Principal payments received on loans receivable | 89,243 |
| | 141 |
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Investments in and advances to non-consolidated entities | (4,068 | ) | | (25,005 | ) |
Distributions from non-consolidated entities in excess of accumulated earnings | 425 |
| | 7,061 |
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Increase in deferred leasing costs | (3,056 | ) | | (4,707 | ) |
Change in restricted cash | (6,607 | ) | | (2,130 | ) |
Change in real estate deposits, net | 11,683 |
| | (68 | ) |
Net cash provided by investing activities | 4,752 |
| | 13,722 |
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Cash flows from financing activities: | |
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Dividends to common and preferred shareholders | (85,895 | ) | | (82,229 | ) |
Principal amortization payments | (14,797 | ) | | (12,499 | ) |
Principal payments on debt, excluding normal amortization | (19,757 | ) | | (58,942 | ) |
Retirement of convertible notes | — |
| | (672 | ) |
Change in revolving credit facility borrowings, net | — |
| | (54,000 | ) |
Payment of developer liabilities | — |
| | (3,851 | ) |
Change in deferred financing costs | (292 | ) | | (2,176 | ) |
Proceeds of mortgages and notes payable | — |
| | 57,500 |
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Change in restricted cash | 1,572 |
| | — |
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Cash distributions to noncontrolling interests | (1,755 | ) | | (1,739 | ) |
Issuance of common shares, net | 16,848 |
| | 3,466 |
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Repurchase of common shares | — |
| | (8,973 | ) |
Net cash used in financing activities | (104,076 | ) | | (164,115 | ) |
Change in cash and cash equivalents | 6,642 |
| | (33,473 | ) |
Cash and cash equivalents, at beginning of period | 86,637 |
| | 93,249 |
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Cash and cash equivalents, at end of period | $ | 93,279 |
| | $ | 59,776 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017 and 2016
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
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(1) | The Company and Financial Statement Presentation |
Lexington Realty Trust (together with its consolidated subsidiaries, except when the context only applies to the parent entity, the “Company”) is a Maryland real estate investment trust (“REIT”) that owns a diversified portfolio of equity and, from time to time, debt investments in single-tenant commercial properties.
As of June 30, 2017, the Company had ownership interests in approximately 185 consolidated real estate properties, located in 38 states. The properties in which the Company has an interest are primarily net leased to tenants in various industries.
As of June 30, 2017, the Company operated in a manner intended to enable it to continue to qualify 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 historically prohibited for REITs 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 are subject to federal income taxes on the income from these activities.
The Company conducts its operations either directly or indirectly through (1) property owner subsidiaries and lender subsidiaries, which are single purpose entities, (2) an operating partnership, Lepercq Corporate Income Fund L.P. (“LCIF”), 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, (3) a wholly-owned TRS, and (4) investments in joint ventures. References to “OP units” refer to units of limited partner interests in LCIF. Property owner subsidiaries are landlords under leases for properties in which the Company has an interest and/or borrowers under loan agreements secured by properties in which the Company has an interest and lender subsidiaries are lenders under loan agreements where the Company made an investment in a loan asset, but in all cases are separate and distinct legal entities. Each property owner subsidiary is a separate legal entity that maintains separate books and records. The assets and credit of each property owner subsidiary with a property subject to a mortgage loan are not available to creditors to satisfy the debt and other obligations of any other person, including any other property owner subsidiary or any other affiliate. Consolidated entities that are not property owner subsidiaries do not directly own any of the assets of a property owner subsidiary (or the general partner, member or managing member of such property owner subsidiary), but merely hold partnership, membership or beneficial interests therein, which interests are subordinate to the claims of such property owner subsidiary's (or its general partner's, member's or managing member's) creditors.
The financial statements contained in this Quarterly Report on Form 10-Q (this “Quarterly Report”) for the three and six months ended June 30, 2017 have been prepared by the Company in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, the interim financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results of the periods presented. Interim results are not necessarily indicative of the results that may be expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 1, 2017 (“Annual Report”).
Basis of Presentation and Consolidation. The Company's unaudited condensed consolidated financial statements are prepared on the accrual basis of accounting in accordance with GAAP. The financial statements reflect the accounts of the Company and its consolidated subsidiaries. The Company consolidates the 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 a primary beneficiary are accounted for under appropriate GAAP.
LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017 and 2016
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
The Company determined that it was the primary beneficiary of certain VIEs as it has a controlling financial interest in these entities, including LCIF, in which the Company has an approximate 96% interest. See the unaudited condensed consolidated financial statements of LCIF included within this Quarterly Report.
The Company has a joint venture limited partnership with a developer which is a consolidated VIE. In January 2017, the joint venture completed the development of an office campus in Lake Jackson, Texas. The Company currently has a 100% interest in the joint venture; however, the developer has certain protective rights, and, upon project close-out, the developer will be credited with a notional capital account for a profit interest and certain cost savings. As of June 30, 2017, the joint venture had $145,664 in real estate, net.
The assets of each VIE are only available to satisfy such VIE's respective liabilities. As of June 30, 2017, the VIEs' mortgages and notes payable are non-recourse to the Company. Below is a summary of selected financial data of consolidated VIEs for which the Company is the primary beneficiary included in the unaudited condensed consolidated balance sheets as of June 30, 2017 and December 31, 2016:
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
Real estate, net | $ | 807,895 |
| | $ | 778,265 |
|
Total assets | $ | 873,063 |
| | $ | 899,801 |
|
Mortgages and notes payable, net | $ | 361,328 |
| | $ | 364,099 |
|
Total liabilities | $ | 374,264 |
| | $ | 395,332 |
|
Use of Estimates. Management has made a number of significant estimates and assumptions to prepare these unaudited condensed consolidated financial statements in conformity with GAAP, including, among others, those relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. 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. Management adjusts such estimates when facts and circumstances dictate. The most significant estimates made include the recoverability of accounts receivable, the 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, the valuation of derivative financial instruments, the valuation of compensation plans 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 Topic 820, Fair Value Measurements and Disclosures, as amended (“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. The Company has formally elected to apply the portfolio exception within Topic 820 with respect to measuring counterparty risk for all of its derivative transactions subject to master netting arrangements.
LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017 and 2016
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
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, the Company reflects such loan receivable as an equity investment in real estate under construction in the unaudited condensed consolidated balance sheets. In these cases, no interest income is recorded on the loan receivable and the Company capitalizes interest during the construction period. In arrangements where the Company engages a developer to construct a property or provides funds to a tenant to develop a property, the Company will capitalize the funds provided to the developer/tenant and internal costs of interest and real estate taxes, if applicable, during the construction period.
Revision to Previously Issued Financial Statements. During the quarter ended December 31, 2016, the Company corrected an immaterial error in the treatment of a lease termination payment received in the quarter ended June 30, 2016 in the amount of $7,685. The lease termination payment was originally amortized over the life of the new tenant lease that necessitated the lease termination. As corrected, the payment was fully recognized in the Company's total gross revenues in the quarter ended June 30, 2016.
The Company concluded that the error noted above was not material to any historical periods presented. However, in order to correctly present the treatment of the lease termination payment, management elected to revise previously issued financial statements in the Company's next subsequent periodic filing that included such financial statements. The following table shows the affected line items within the Company's unaudited condensed consolidated financial statements:
|
| | | | | | | | | | | |
Three Months ended June 30, 2016 | | | | | |
| As Originally Reported | | Correction | | As Adjusted |
Total gross revenues | $ | 109,577 |
| | $ | 7,335 |
| | $ | 116,912 |
|
Net income | $ | 49,345 |
| | $ | 7,335 |
| | $ | 56,680 |
|
Net income attributable to common shareholders | $ | 46,830 |
| | $ | 7,045 |
| | $ | 53,875 |
|
Net income attributable to common shareholders - basic per share | $ | 0.20 |
| | $ | 0.03 |
| | $ | 0.23 |
|
Net income attributable to common shareholders - diluted per share | $ | 0.20 |
| | $ | 0.03 |
| | $ | 0.23 |
|
|
| | | | | | | | | | | |
Six Months ended June 30, 2016 | | | | | |
| As Originally Reported | | Correction | | As Adjusted |
Total gross revenues | $ | 221,193 |
| | $ | 6,996 |
| | $ | 228,189 |
|
Net income | $ | 100,137 |
| | $ | 6,996 |
| | $ | 107,133 |
|
Net income attributable to common shareholders | $ | 94,937 |
| | $ | 6,718 |
| | $ | 101,655 |
|
Net income attributable to common shareholders - basic per share | $ | 0.41 |
| | $ | 0.03 |
| | $ | 0.44 |
|
Net income attributable to common shareholders - diluted per share | $ | 0.41 |
| | $ | 0.02 |
| | $ | 0.43 |
|
Recently Issued Accounting Guidance. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the guidance for revenue recognition to eliminate the industry-specific revenue recognition guidance and replace it with a principle based approach for determining revenue recognition. The effective date of the new guidance was updated by ASU 2015-14 and is effective for reporting periods beginning after December 15, 2017. The Company’s revenue-producing contracts are primarily leases that are not within the scope of this standard as leases are excluded from ASU 2014-09. The Company expects that it may be impacted in its recognition of non-lease revenue, non-lease components of revenue from lease agreements (upon adoption of ASU 2016-02) and the timing of its recognition of real estate sale transactions. Under ASU 2014-09, revenue recognition for real estate sales is largely based on the transfer of control and the buyer having the ability to direct the use of, or obtain substantially all of the remaining benefit from, the asset (which generally will occur on the closing date); the factor of continuing involvement is no longer a specific consideration for the timing of recognition. As a result, the Company generally expects that the new guidance may result in transactions qualifying as sales of real estate at an earlier date than under current accounting guidance. The Company is in the process of evaluating the impact of the standard but currently believes the impact would be limited to the timing and income statement presentation of revenue and not the total amount of revenue recognized over time. The
LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017 and 2016
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
Company will adopt ASU 2014-09 effective January 1, 2018 and anticipates using the modified retrospective with cumulative-effective transition method. As the majority of the Company’s revenue is from rental income related to leases, the Company does not expect the ASU to have a material impact on the consolidated financial statements upon adoption.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize a right of use asset and related lease liability for those leases classified as operating leases at the commencement date that have lease terms of more than 12 months and amends certain lessor guidance. The ASU is expected to result in the recognition of a right-to-use asset and related liability to account for the Company's future obligations under its ground lease arrangements for which the Company is the lessee. From a lessor perspective, the Company expects that it will be required to bifurcate lease agreements to separately recognize and disclose non-lease components that are executory in nature. Lease components will continue to be primarily recognized on a straight-line basis over the lease term and certain non-lease components will be accounted for under the new revenue recognition guidance in ASU 2014-09 (upon adoption of ASU 2016-02). Additionally, the new ASU will require that the Company capitalize, as initial direct costs, only those costs that are incurred due to the execution of a lease. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018, and interim periods within those years, and requires a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements; with early adoption permitted. The Company continues to evaluate the impact of the adoption of the new guidance on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation-Improvements to Employee Share-Based Payment Accounting (Topic 718), which involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company adopted this new guidance on January 1, 2017. This new guidance did not have a material impact on the Company's consolidated financial statements. The Company has made an accounting policy election to account for share-based award forfeitures in compensation costs when they occur.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those years; however early adoption is permitted. The Company does not believe this guidance will have a material impact on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which clarifies guidance on the classification and presentation of changes in restricted cash. The ASU is effective for reporting periods beginning after December 15, 2017, with early adoption permitted, and will be applied retrospectively to all periods presented. Upon adoption, restricted cash balances will be included along with cash and cash equivalents as of the end of the period and beginning of period, respectively, in the Company's unaudited condensed consolidated statement of cash flows for all periods presented. Upon adoption, separate line items showing changes in restricted cash balances will be eliminated from the Company's consolidated statement of cash flows.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The Company expects that acquisitions of real estate or in-substance real estate will not meet the revised definition of a business and thus will be treated as asset acquisitions. Acquisition costs for those acquisitions that are not businesses will be capitalized rather than expensed.
In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Topic 610-20), which requires that all entities account for the derecognition of a business in accordance with ASC 810, including instances in which the business is considered in-substance real estate. The ASU requires the Company to measure at fair value any retained interest in a partial sale of real estate. The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2017. The Company will adopt ASU 2017-05 effective January 1, 2018, along with the adoption of ASU 2014-09, and it is not expected to have a material impact on its consolidated financial statements.
LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017 and 2016
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
A portion of 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 six months ended June 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | |
| Three Months ended June 30, | | Six months ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
BASIC | | | | | | | |
Net income attributable to common shareholders | $ | 5,519 |
| | $ | 53,875 |
| | $ | 45,916 |
| | $ | 101,655 |
|
Weighted-average number of common shares outstanding - basic | 237,720,198 |
| | 232,592,998 |
| | 237,451,355 |
| | 232,617,901 |
|
| |
| | | | |
| | |
|
Net income attributable to common shareholders - per common share basic | $ | 0.02 |
| | 0.23 |
| | $ | 0.19 |
| | $ | 0.44 |
|
| | | | | | | |
DILUTED | | | | | | | |
Net income attributable to common shareholders - basic | $ | 5,519 |
| | $ | 53,875 |
| | $ | 45,916 |
| | $ | 101,655 |
|
Impact of assumed conversions | — |
| | 315 |
| | (19 | ) | | 628 |
|
Net income attributable to common shareholders | $ | 5,519 |
| | $ | 54,190 |
| | $ | 45,897 |
| | $ | 102,283 |
|
| | | | | | | |
Weighted-average common shares outstanding - basic | 237,720,198 |
| | 232,592,998 |
| | 237,451,355 |
| | 232,617,901 |
|
Effect of dilutive securities: | | | | | | | |
Share options | 86,653 |
| | 273,920 |
| | 111,252 |
| | 204,783 |
|
6.00% Convertible Guaranteed Notes | — |
| | 1,878,445 |
| | — |
| | 1,909,841 |
|
OP Units | 3,724,462 |
| | — |
| | 3,747,922 |
| | — |
|
Non-vested common shares | — |
| | 481,836 |
| | — |
| | 418,731 |
|
Weighted-average common shares outstanding - diluted | 241,531,313 |
| | 235,227,199 |
| | 241,310,529 |
| | 235,151,256 |
|
| | | | | | | |
Net income attributable to common shareholders - per common share diluted | $ | 0.02 |
| | $ | 0.23 |
| | $ | 0.19 |
| | $ | 0.43 |
|
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.
LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017 and 2016
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
| |
(3) | Investments in Real Estate and Real Estate Under Construction |
The Company completed the following acquisition and build-to-suit transactions during the six months ended June 30, 2017:
|
| | | | | | | | | | | | | | | | | | | | | |
Property Type | Location | Acquisition Date | Initial Cost Basis | Lease Expiration | Land and Land Estate | | Building and Improvements | | Lease in-place Value Intangible | | Below Market Lease Intangible |
Office | Lake Jackson, TX(1) | January 2017 | $ | 70,401 |
| 10/2036 | $ | 3,078 |
| | $ | 67,323 |
| | $ | — |
| | $ | — |
|
Industrial | New Century, KS | February 2017 | 12,056 |
| 01/2027 | — |
| | 13,198 |
| | 1,648 |
| | (2,790 | ) |
Industrial | Lebanon, IN | February 2017 | 36,194 |
| 01/2024 | 2,100 |
| | 29,443 |
| | 4,651 |
| | — |
|
Office | Charlotte, NC | April 2017 | 61,339 |
| 04/2032 | 3,771 |
| | 47,064 |
| | 10,504 |
| | — |
|
Industrial | Cleveland, TN | May 2017 | 34,400 |
| 03/2024 | 1,871 |
| | 29,743 |
| | 2,786 |
| | — |
|
Industrial | Grand Prairie, TX | June 2017 | 24,317 |
| 03/2037 | 3,166 |
| | 17,985 |
| | 3,166 |
| | — |
|
Industrial | San Antonio, TX | June 2017 | 45,507 |
| 04/2027 | 1,311 |
| | 36,644 |
| | 7,552 |
| | — |
|
| | | $ | 284,214 |
| | $ | 15,297 |
| | $ | 241,400 |
| | $ | 30,307 |
| | $ | (2,790 | ) |
| |
(1) | Completed the construction of the final building of a four-building project. Initial basis excludes estimated developer partner payout of approximately $8,000. |
The Company recognized aggregate transaction costs of $488 and $214 for the six months ended June 30, 2017 and 2016, respectively, which are included as property operating expenses within the Company's unaudited condensed consolidated statements of operations.
The Company is engaged in various forms of build-to-suit development activities. The Company, through lender subsidiaries and property owner subsidiaries, may enter into the following acquisition, development and construction arrangements: (1) lend funds to construct a build-to-suit project subject to a single-tenant lease with an agreement to purchase the property upon completion of construction and commencement of the single-tenant lease, (2) hire a developer to construct a built-to-suit project on owned property leased to a single tenant, (3) fund the construction of a build-to-suit project on owned property pursuant to the terms of a single-tenant lease or (4) enter into a purchase and sale agreement with a developer to acquire a single-tenant build-to-suit property upon completion of construction and commencement of a single-tenant lease.
As of June 30, 2017, the Company had the following development arrangement outstanding:
|
| | | | | | | | | | | | | | | |
Location | Property Type | Square Feet (000's) | | Maximum Commitment/Estimated Completion Cost | | Lease Term (Years) | | Estimated Completion/Acquisition Date | | GAAP Investment Balance as of 6/30/2017 |
Opelika, AL | Industrial | 165 |
| | $ | 37,370 |
| | 25 | | 3Q 17 | | $ | 29,442 |
|
As of June 30, 2017 and December 31, 2016, the Company's aggregate investment in development arrangements was $29,442 and $106,652, respectively, which included $458 and $3,442 of capitalized interest, respectively, and is presented as investments in real estate under construction in the accompanying unaudited condensed consolidated balance sheets.
LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017 and 2016
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
In addition, as of June 30, 2017, the Company had the following forward purchase commitments:
|
| | | | | | | | | | | | | |
Location | | Square Feet (000's) | | Property Type | | Maximum Acquisition Cost | | Estimated Acquisition Date | | Approximate Lease Term (Yrs) |
Warren, MI (1) | | 260 |
| | Industrial | | $ | 47,000 |
| | 3Q 17 | | 15 |
Romulus, MI | | 500 |
| | Industrial | | 39,330 |
| | 3Q 17 | | 15 |
| | 760 |
| | | | $ | 86,330 |
| | | | |
(1) A $4,600 letter of credit secures the Company's obligation to purchase the property.
The Company can give no assurances that any of these development arrangements or forward purchase commitments will be consummated or, if consummated, will perform to the Company's expectations.
| |
(4) | Property Dispositions and Real Estate Impairment |
During the six months ended June 30, 2017, the Company sold its interests in various properties for an aggregate gross sales price of $151,856. During the six months ended June 30, 2016, the Company disposed of its interest in various properties, including land investments, for an aggregate gross sales price of $166,834.
During the six months ended June 30, 2017 and 2016, the Company recognized aggregate gains on sales of properties of $44,433 and $42,341, respectively. In addition, during the six months ended June 30, 2017 and 2016, the Company recognized debt satisfaction charges of $44 and $3,321, respectively, relating to sold properties.
As of June 30, 2017 and December 31, 2016, the Company had one property and two properties, respectively, classified as held for sale.
Assets and liabilities of held for sale properties as of June 30, 2017 and December 31, 2016 consisted of the following:
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
Assets: | | | |
Real estate, at cost | $ | 5,941 |
| | $ | 25,957 |
|
Real estate, intangible assets | — |
| | 7,789 |
|
Accumulated depreciation and amortization | — |
| | (13,346 | ) |
Rent receivable - deferred | — |
| | 1,715 |
|
Other assets | 43 |
| | 1,693 |
|
| $ | 5,984 |
| | $ | 23,808 |
|
| | | |
Liabilities: | | | |
Other | $ | 324 |
| | $ | 191 |
|
| $ | 324 |
| | $ | 191 |
|
The Company assesses on a regular basis whether there are any indicators that the carrying value of its real estate assets may be impaired. Potential indicators may include an increase in vacancy at a property, tenant financial instability and the potential sale or transfer of the property in the near future. An asset is determined to be impaired if the asset's carrying value is in excess of its estimated fair value. During the six months ended June 30, 2017 and 2016, the Company recognized aggregate impairment charges of $16,297 and $3,014, respectively, on properties sold and properties held for use.
LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017 and 2016
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
As of June 30, 2017, all of the Company's loans receivable were fully satisfied. As of December 31, 2016, the Company's loans receivable were comprised primarily of mortgage loans on real estate.
The following is a summary of the Company's loans receivable as of December 31, 2016:
|
| | | | | | | | | | |
| Loan carrying-value(1) | | | |
Loan | | | 12/31/2016 | | Interest Rate | | Maturity Date |
Kennewick, WA(2) | | | $ | 85,709 |
| | 9.00 | % | | 05/2022 |
Oklahoma City, OK(3) | | | 8,501 |
| | 11.50 | % | | 03/2016 |
| | | $ | 94,210 |
| | | | |
| |
(1) | Loan carrying value includes accrued interest and is net of origination costs, if any. |
| |
(2) | Loan provided for a current pay rate of 8.75%, an accrual rate of 9.0% and a balloon of $87,245 at maturity. During the six months ended June 30, 2017, the loan was assigned to a third party for 94% of its principal balance. The Company recognized a $5,294 loan loss on the transaction. |
| |
(3) | In June 2015, the Company loaned a tenant-in-common $8,420. The loan was secured by the tenant-in-common's interest in an office property, in which the Company had a 40% tenant-in-common interest. The loan was satisfied in full in February 2017. The Company incurred professional fees of $376 to collect this loan. Such fees are included in general and administrative expenses on the Company's unaudited condensed consolidated statements of operations for the six months ended June 30, 2017. |
(6) Fair Value Measurements
The following tables present the Company's assets and liabilities measured at fair value on a recurring and non-recurring basis as of June 30, 2017 and December 31, 2016, aggregated by the level in the fair value hierarchy within which those measurements fall:
|
| | | | | | | | | | | | | | | |
| Balance | | Fair Value Measurements Using |
Description | June 30, 2017 | | (Level 1) | | (Level 2) | | (Level 3) |
Interest rate swap assets | $ | 600 |
| | $ | — |
| | $ | 600 |
| | $ | — |
|
Impaired real estate assets* | $ | 23,190 |
| | $ | — |
| | $ | — |
| | $ | 23,190 |
|
Interest rate swap liabilities | $ | (157 | ) | | $ | — |
| | $ | (157 | ) | | $ | — |
|
|
| | | | | | | | | | | | | | | |
| Balance | | Fair Value Measurements Using |
Description | December 31, 2016 | | (Level 1) | | (Level 2) | | (Level 3) |
Interest rate swap assets | $ | 44 |
| | $ | — |
| | $ | 44 |
| | $ | — |
|
Impaired real estate assets* | $ | 15,801 |
| | $ | — |
| | $ | — |
| | $ | 15,801 |
|
Interest rate swap liabilities | $ | (1,077 | ) | | $ | — |
| | $ | (1,077 | ) | | $ | — |
|
*Represents a non-recurring fair value measurement.
LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017 and 2016
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
The table below sets forth the carrying amounts and estimated fair values of the Company's financial instruments as of June 30, 2017 and December 31, 2016.
|
| | | | | | | | | | | | | | | |
| As of June 30, 2017 | | As of December 31, 2016 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Assets | | | | | | | |
Loans Receivable | $ | — |
| | $ | — |
| | $ | 94,210 |
| | $ | 94,911 |
|
| | | | | | | |
Liabilities | |
| | |
| | |
| | |
|
Debt | $ | 1,827,373 |
| | $ | 1,784,714 |
| | $ | 1,860,598 |
| | $ | 1,814,824 |
|
The majority of the inputs used to value the Company's interest rate swaps 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 swaps utilizes Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of June 30, 2017 and December 31, 2016, the Company determined that the credit valuation adjustment relative to the overall fair value of the interest rate swaps was not significant. As a result, the interest rate swaps have been classified in Level 2 of the fair value hierarchy.
The Company estimates the fair value of its real estate assets, including non-consolidated real estate assets, by using income and market valuation techniques. The Company may estimate fair values using market information such as broker opinions of value, recent sale offers 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.
The Company estimated the fair values of its loans receivable utilizing Level 3 inputs by using a discounted cash flow analysis consisting of scheduled cash flows and discount rate estimates to approximate those that a willing buyer and seller might use and/or the estimated value of the underlying collateral.
The fair value of the Company's debt is primarily estimated utilizing Level 3 inputs by using a discounted cash flow analysis, based upon estimates of market interest rates, except for the Company's senior notes payable. The Company determines the fair value of its senior notes payable using market prices. The inputs used in determining the fair value of these notes are categorized as Level 1 due to the fact that the Company uses quoted market rates to value these instruments. However, the inputs used in determining the fair value could be categorized as Level 2 if trading volumes are low.
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 of cash equivalents, restricted cash, accounts receivable and accounts payable approximates carrying value due to the relatively short maturity of the instruments.
LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017 and 2016
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
| |
(7) | Investment in and Advances to Non-Consolidated Entities |
As of June 30, 2017, the Company had ownership interests ranging from 15% to 25% in certain non-consolidated entities, which primarily own single-tenant net-leased assets. The acquisitions of these assets by the non-consolidated entities were partially funded through non-recourse mortgage debt with an aggregate balance of $46,734 at June 30, 2017 (the Company's proportionate share was $8,411) with rates ranging from 3.7% to 4.7%.
In February 2017, the Company sold its 40% tenant-in-common interest in its Oklahoma City, Oklahoma office property for $6,198. In January 2016, the Company received $6,681 in connection with the sale of a non-consolidated office property in Russellville, Arkansas. The Company recognized gains of $1,452 and $5,378, respectively, in connection with these sales, which are included in equity in earnings of non-consolidated entities.
During the six months ended June 30, 2017, the Company recognized an impairment charge of $3,512 on its investment in a retail property in Palm Beach Gardens, Florida due to the bankruptcy of its tenant. This impairment charge reduced the Company's investment balance to zero.
In November 2014, the Company formed a joint venture to construct a private school in Houston, Texas. As of June 30, 2017, the Company had a 25% equity interest in the joint venture. The joint venture completed the project during 2016 for a total construction cost of $79,964. The Company was contractually obligated to provide construction financing to the joint venture up to $56,686. As of June 30, 2017, the Company's loan balance, net of origination costs, of $49,424 was included in investment in and advances to non-consolidated entities. The Houston, Texas property is net leased for a 20-year term that expires in August 2036.
The Company had the following mortgages and notes payable outstanding as of June 30, 2017 and December 31, 2016:
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
Mortgages and notes payable | $ | 710,608 |
| | $ | 745,173 |
|
Unamortized debt issuance costs | (6,763 | ) | | (7,126 | ) |
| $ | 703,845 |
| | $ | 738,047 |
|
Interest rates, including imputed rates on mortgages and notes payable, ranged from 2.2% to 7.8% at June 30, 2017 and December 31, 2016 and all mortgages and notes payables mature between 2017 and 2036 as of June 30, 2017. The weighted-average interest rate was 4.6% at June 30, 2017 and December 31, 2016.
The Company had the following senior notes outstanding as of June 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | | | |
Issue Date | | June 30, 2017 | | December 31, 2016 | | Interest Rate | | Maturity Date | | Issue Price |
May 2014 | | $ | 250,000 |
| | $ | 250,000 |
| | 4.40 | % | | June 2024 | | 99.883 | % |
June 2013 | | 250,000 |
| | 250,000 |
| | 4.25 | % | | June 2023 | | 99.026 | % |
| | 500,000 |
| | 500,000 |
| | | | | | |
Unamortized discount | | (1,644 | ) | | (1,780 | ) | | | | | | |
Unamortized debt issuance cost | | (3,576 | ) | | (3,858 | ) | | | | | | |
| | $ | 494,780 |
| | $ | 494,362 |
| | | | | | |
Each series of the senior notes is unsecured and requires payment of interest semi-annually in arrears. The Company may redeem the notes at its option at any time prior to maturity in whole or in part by paying the principal amount of the notes being redeemed plus a premium.
LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017 and 2016
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
The Company has a $905,000 unsecured credit agreement with KeyBank National Association, as agent. With lender approval, the Company can increase the size of the facility to an aggregate $1,810,000. A summary of the significant terms are as follows:
|
| | | |
| Maturity Date
| | Current Interest Rate |
$400,000 Revolving Credit Facility(1) | August 2019 | | LIBOR + 1.00% |
$250,000 Term Loan(2)(4) | August 2020 | | LIBOR + 1.10% |
$255,000 Term Loan(3)(4) | January 2021 | | LIBOR + 1.10% |
| |
(1) | Maturity date can be extended to August 2020 at the Company's option. The interest rate ranges from LIBOR plus 0.85% to 1.55%. At June 30, 2017, the revolving credit facility had no borrowings outstanding, $4,600 of letters of credit and availability of $395,400, subject to covenant compliance. |
| |
(2) | The interest rate ranges from LIBOR plus 0.90% to 1.75%. The Company previously entered into aggregate interest-rate swap agreements to fix the LIBOR component at a weighted-average rate of 1.09% through February 2018 on the $250,000 of outstanding LIBOR-based borrowings. |
| |
(3) | The interest rate ranges from LIBOR plus 0.90% to 1.75%. The Company previously entered into aggregate interest-rate swap agreements to fix the LIBOR component at a weighted-average rate of 1.42% through January 2019 on the $255,000 of outstanding LIBOR-based borrowings. |
| |
(4) | The aggregate unamortized debt issuance costs for the term loans were $3,398 and $3,907 as of June 30, 2017 and December 31, 2016, respectively. |
The Company was in compliance with all applicable financial covenants contained in its corporate level debt agreements at June 30, 2017.
During 2007, the Company issued $200,000 original principal amount of Trust Preferred Securities. The Trust Preferred Securities, which are classified as debt, are due in 2037, are open for redemption at the Company's option, bore interest at a fixed rate of 6.804% through April 2017 and bear interest at a variable rate of three month LIBOR plus 170 basis points thereafter through maturity. The interest rate at June 30, 2017 was 2.870%. As of June 30, 2017 and December 31, 2016, there was $129,120 original principal amount of Trust Preferred Securities outstanding and $1,974 and $2,024, respectively, of unamortized debt issuance costs.
| |
(9) | 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 type, 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 these objectives, 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 did not incur any ineffectiveness during the six months ended June 30, 2017 and 2016.
LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017 and 2016
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
The Company has designated the interest-rate swap agreements with its counterparties as cash flow hedges of the risk of variability attributable to changes in the LIBOR swap rate on $505,000 of LIBOR-indexed variable-rate unsecured term loans. Accordingly, changes in the fair value of the swaps are recorded in other comprehensive income (loss) and reclassified to earnings as interest becomes receivable or payable.
Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the term loans. During the next 12 months, the Company estimates that an additional $167 will be reclassified as a decrease to interest expense.
As of June 30, 2017, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
|
| | |
Interest Rate Derivative | Number of Instruments | Notional |
Interest Rate Swaps | 10 | $505,000 |
The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the unaudited condensed consolidated balance sheets as of June 30, 2017 and December 31, 2016.
|
| | | | | | | | | | | |
| As of June 30, 2017 | | As of December 31, 2016 |
| Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
Derivatives designated as hedging instruments | | | | | | | |
Interest Rate Swap Asset | Other Assets | | $ | 600 |
| | Other Assets | | $ | 44 |
|
Interest Rate Swap Liability | Accounts Payable and Other Liabilities | | $ | (157 | ) | | Accounts Payable and Other Liabilities | | $ | (1,077 | ) |
The tables below present the effect of the Company's derivative financial instruments on the unaudited condensed consolidated statements of operations for the six months ended June 30, 2017 and 2016.
|
| | | | | | | | | | | | | | | | | | | |
Derivatives in Cash Flow | | | Amount of Income (Loss) Recognized in OCI on Derivatives (Effective Portion) June 30, | | Location of Loss Reclassified from Accumulated OCI into Income (Effective Portion) | | Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion) June 30, |
Hedging Relationships | | | 2017 | | 2016 | | | 2017 | | 2016 |
Interest Rate Swaps | | | $ | 554 |
| | $ | (7,688 | ) | | Interest expense | | $ | 922 |
| | $ | 2,107 |
|
The Company's agreements with swap derivative counterparties contain provisions 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 June 30, 2017, the Company had not posted any collateral related to the agreements.
LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017 and 2016
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
| |
(10) | 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 six months ended June 30, 2017 and 2016, 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 six months ended June 30, 2017, the Company issued 1,593,603 common shares under its At-The-Market offering program and generated aggregate gross proceeds of $17,362. During the six months ended June 30, 2016, the Company issued 577,823 common shares under its direct share purchase plan, which includes its dividend reinvestment plan, raising net proceeds of $4,115.
During the six months ended June 30, 2017 and 2016, the Company granted common shares to certain employees as follows:
|
| | | |
| Six Months ended June 30, |
| 2017 | | 2016 |
Performance Shares(1) | | | |
Shares granted: | | | |
Index - 1Q | 106,706 | | 404,466 |
Peer - 1Q | 106,705 | | 404,463 |
Index - 2Q | 163,466 | | — |
Peer - 2Q | 163,463 | | — |
| | | |
Grant date fair value per share:(2) | | | |
Index - 1Q | $6.82 | | $4.53 |
Peer - 1Q | $6.34 | | $4.58 |
Index - 2Q | $4.05 | | — |
Peer - 2Q | $4.27 | | — |
| | | |
Non-Vested Common Shares:(3) | | | |
Shares issued | 237,560 | | 225,090 |
Grant date fair value | $2,551 | | $1,724 |
| |
(1) | The shares vest based on the Company's total shareholder return growth after a three-year measurement period relative to an index and a group of Company peers. Dividends will not be paid on these grants until earned. Once the performance criteria are met and the actual number of shares earned is determined, such shares vest immediately. The 2Q shares were subject to shareholder approval, which was obtained in May 2017. |
| |
(2) | The fair value of grants was determined at the grant date using a Monte Carlo simulation model. |
| |
(3) | The shares vest ratably over a three-year service period. |
In addition, during the six months ended June 30, 2017 and 2016, the Company issued 36,136 and 35,147, respectively, of fully vested common shares to non-management members of the Company's Board of Trustees with a fair value of $382 and $273, respectively.
In July 2015, the Company's Board of Trustees authorized the repurchase of up to 10,000,000 common shares. During the six months ended June 30, 2016, the Company repurchased 1,184,113 common shares, at an average price of $7.56 per common share. No repurchases occurred during the six months ended June 30, 2017.
LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017 and 2016
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
A summary of the changes in accumulated other comprehensive income (loss) related to the Company's cash flow hedges is as follows:
|
| | | | | | | | |
| | Six Months ended June 30, |
| | 2017 | | 2016 |
Balance at beginning of period | | $ | (1,033 | ) | | $ | (1,939 | ) |
Other comprehensive income (loss) before reclassifications | | 554 |
| | (7,688 | ) |
Amounts of loss reclassified from accumulated other comprehensive income to interest expense | | 922 |
| | 2,107 |
|
Balance at end of period | | $ | 443 |
| | $ | (7,520 | ) |
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 for common shares at certain times, at the option of the holders, and are generally 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 at the holder's option for approximately 1.13 common shares, subject to future adjustments.
As of June 30, 2017, there were approximately 3,245,000 OP units outstanding other than OP units owned by the Company. All OP units receive distributions in accordance with the LCIF partnership agreement. To the extent that the Company's dividend per common share is less than the stated distribution per OP unit per the LCIF 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.
| |
(12) | Related Party Transactions |
In connection with efforts to procure non-recourse mezzanine financing from an affiliate of the Company's Chairman, pursuant to the terms of the EB-5 visa program administered by the United States Citizenship and Immigration Services (“USCIS”), for a joint venture in Houston, Texas, in which the Company has an investment, the Company executed a guaranty in favor of an affiliate of its Chairman. The guaranty provides that the Company will reimburse investors providing the funds for such financing if the following occurs: (1) the joint venture receives such funds, (2) the USCIS denies the financing solely because the project is not permitted under the EB-5 visa program, and (3) the joint venture fails to return such funds. As of June 30, 2017, the joint venture had not received any such funds and the Company had not recorded any liability related to this guaranty. The maximum amount of funds that would be subject to the guaranty obligation is $18,000.
In addition, in connection with efforts, on a non-binding basis, to procure non-recourse mezzanine financing from an affiliate of the Company's Chairman, pursuant to the terms of the EB-5 visa program administered by the USCIS, for an investment in Charlotte, North Carolina owned by LCIF, LCIF has agreed to reimburse the Chairman's affiliate up to approximately $7 for its expenses.
There were no other related party transactions other than those disclosed elsewhere in this Quarterly Report and the audited consolidated financial statements in the Annual Report.
LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017 and 2016
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
| |
(13) | Commitments and Contingencies |
In addition to the commitments and contingencies disclosed elsewhere, including in Note 12 above, and previously disclosed, the Company has the following commitments and contingencies.
The Company is obligated under certain tenant leases, including its proportionate share for leases for non-consolidated entities, to fund the expansion of the underlying leased properties. The Company, under certain circumstances, may guarantee to tenants the completion of base building improvements and the payment of tenant improvement allowances and lease commissions on behalf of its subsidiaries.
The Company and LCIF are parties to a funding agreement under which the Company may be required to fund distributions made on account of LCIF's OP units. Pursuant to the funding agreement, the parties agreed that, if LCIF does not have sufficient cash available to make a quarterly distribution to its limited partners in an amount in accordance with the partnership agreement, Lexington will fund the shortfall. Payments under the agreement will be made in the form of loans to LCIF and will bear interest at prevailing rates as determined by the Company in its discretion, but no less than the applicable federal rate. LCIF's right to receive these loans will expire if no OP units remain outstanding and all such loans repaid. No amounts have been advanced under this agreement.
From time to time, the Company is directly and indirectly involved in legal proceedings arising in the ordinary course of business. Management believes, based on currently available information, and after consultation with legal counsel, that although the outcomes of those normal course proceedings are uncertain, the results of such proceedings, in the aggregate, will not have a material adverse effect on the Company's business, financial condition and results of operations.
GSMSC II 2006-GG6 Bridgewater Hills Corporate Center, LLC v. Lexington Realty Trust (Supreme Court of the State of New York, County of New York-Index No. 653117/2015)
On September 16, 2015, GSMSC II 2006-GG6 Bridgewater Hills Corporate Center, LLC commenced an action as lender against the Company based on a limited guaranty of recourse obligations executed by a predecessor entity of the Company in connection with a mortgage loan secured by a property owner subsidiary's commercial property in Bridgewater, New Jersey. The property owner subsidiary defaulted due to non-payment after the sole tenant vacated at the end of the lease term. The lender seeks approximately $9,200 in order to satisfy the outstanding amount of the loan, plus interest, reasonable attorney’s fees and other costs and disbursements related thereto. The Company has not recorded any liability relating to this litigation as of June 30, 2017 as the Company believes that a loss contingency is “reasonably possible” (as defined by FASB ASC 450-20-20) but not “probable” (as defined by FASB ASC 450-20-20).
The lender claims that the Company's limited guaranty was triggered due to the merger of Newkirk Realty Trust, Inc. and Lexington Corporate Properties Trust on December 31, 2006, arguing that it constituted an event of default because it was a transfer that was not permitted by the loan agreement. The limited guaranty provides that the guarantor's liability for the guaranteed obligations shall not exceed $10,000, which the Company believes is its maximum exposure to loss. The Company intends to vigorously defend the lender’s claim. The Company filed a motion to dismiss, which was generally denied. The parties are presently in the discovery phase, with document productions ongoing and with fact and expert depositions currently expected to be conducted and completed later this year.
The lender also brought a foreclosure action against the property owner subsidiary. A foreclosure sale was held September 13, 2016 and the lender acquired the property for a nominal amount.
During the six months ended June 30, 2017, the Company incurred $1,895 in legal costs relating to this litigation, which are included in general and administrative expense on the Company's unaudited condensed consolidated statement of operations.
LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017 and 2016
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
| |
(14) | Supplemental Disclosure of Statement of Cash Flow Information |
In addition to disclosures discussed elsewhere, during the six months ended June 30, 2017 and 2016, the Company paid $38,705 and $44,641, respectively, for interest and $1,278 and $855, respectively, for income taxes.
In April 2016, the Company sold its interest in a land investment, which included the assumption of $29,193 of related non-recourse mortgage debt.
Subsequent to June 30, 2017 and in addition to disclosures elsewhere in the unaudited condensed consolidated financial statements, the Company sold:
•two properties to unrelated third parties for an aggregate gross sales price of $7,662;
•acquired an industrial property located in McDonough, Georgia for $66,700; and
•borrowed $70,000 under its revolving credit facility.
LEPERCQ CORPORATE INCOME FUND L.P. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands)
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
Assets: | | | |
Real estate, at cost | $ | 775,910 |
| | $ | 731,202 |
|
Real estate - intangible assets | 114,134 |
| | 104,761 |
|
Investment in real estate under construction | — |
| | 40,443 |
|
| 890,044 |
| | 876,406 |
|
Less: accumulated depreciation and amortization | 232,417 |
| | 236,930 |
|
Real estate, net | 657,627 |
| | 639,476 |
|
Cash and cash equivalents | 24,404 |
| | 52,031 |
|
Restricted cash | 1,540 |
| | 1,545 |
|
Investment in and advances to non-consolidated entities | 6,374 |
| | 5,526 |
|
Deferred expenses, net | 6,727 |
| | 5,070 |
|
Rent receivable - current | 465 |
| | 358 |
|
Rent receivable - deferred | 19,710 |
| | 17,449 |
|
Related party advances, net | — |
| | 5,967 |
|
Other assets | 2,400 |
| | 1,182 |
|
Total assets | $ | 719,247 |
| | $ | 728,604 |
|
| | | |
Liabilities and Partners' Capital: | | | |
Liabilities: | | | |
Mortgages and notes payable, net | $ | 168,737 |
| | $ | 169,212 |
|
Co-borrower debt | 103,165 |
| | 146,404 |
|
Related party advances, net | 6,414 |
| | — |
|
Accounts payable and other liabilities | 6,220 |
| | 3,559 |
|
Accrued interest payable | 664 |
| | 673 |
|
Deferred revenue - including below market leases, net | 904 |
| | 1,003 |
|
Distributions payable | 33,203 |
| | 16,916 |
|
Prepaid rent | 3,388 |
| | 3,214 |
|
Total liabilities | 322,695 |
| | 340,981 |
|
| | | |
Commitments and contingencies |
| |
|
Partners' capital | 396,552 |
| | 387,623 |
|
Total liabilities and partners' capital | $ | 719,247 |
| | $ | 728,604 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
LEPERCQ CORPORATE INCOME FUND L.P. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except unit data)
|
| | | | | | | | | | | | | | | | |
| | Three Months ended June 30, | | Six months ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Gross revenues: | | | | | | | | |
Rental | | $ | 18,691 |
| | $ | 38,557 |
| | $ | 35,999 |
| | $ | 70,152 |
|
Tenant reimbursements | | 1,955 |
| | 2,215 |
| | 3,928 |
| | 4,720 |
|
Total gross revenues | | 20,646 |
| | 40,772 |
| | 39,927 |
| | 74,872 |
|
Expense applicable to revenues: | | | | | | | | |
Depreciation and amortization | | (9,209 | ) | | (8,171 | ) | | (18,381 | ) | | (17,609 | ) |
Property operating | | (3,042 | ) | | (3,506 | ) | | (6,599 | ) | | (7,708 | ) |
General and administrative | | (1,853 | ) | | (2,396 | ) | | (3,292 | ) | | (4,469 | ) |
Non-operating income | | 3 |
| | 255 |
| | 232 |
| | 255 |
|
Interest and amortization expense | | (3,932 | ) | | (8,410 | ) | | (7,339 | ) | | (16,726 | ) |
Debt satisfaction charges, net | | — |
| | (1,615 | ) | | — |
| | (1,615 | ) |
Impairment charges | | (2,762 | ) | | (2,426 | ) | | (5,259 | ) | | (2,426 | ) |
Gains on sales of properties | | — |
| | 8,190 |
| | — |
| | 16,029 |
|
Income (loss) before provision for income taxes and equity in earnings of non-consolidated entities | | (149 | ) | | 22,693 |
| | (711 | ) | | 40,603 |
|
Provision for income taxes | | (18 | ) | | (6 | ) | | (26 | ) | | (25 | ) |
Equity in earnings of non-consolidated entities | | 159 |
| | 67 |
| | 259 |
| | 203 |
|
Net income (loss) | | $ | (8 | ) | | $ | 22,754 |
| | $ | (478 | ) | | $ | 40,781 |
|
Net income (loss) per unit | | $ | — |
| | $ | 0.27 |
| | $ | (0.01 | ) | | $ | 0.49 |
|
Weighted-average units outstanding | | 83,241,396 |
| | 83,241,396 |
| | 83,241,396 |
| | 83,241,396 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
LEPERCQ CORPORATE INCOME FUND L.P. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(Unaudited and in thousands, except unit amounts)
|
| | | | | | | |
Six Months ended June 30, 2017 | | Units | | Partners' Capital |
Balance December 31, 2016 | | 83,241,396 |
| | $ | 387,623 |
|
Changes in co-borrower debt allocation | | — |
| | 43,239 |
|
Distributions | | — |
| | (33,832 | ) |
Net loss | | — |
| | (478 | ) |
Balance June 30, 2017 | | 83,241,396 |
| | $ | 396,552 |
|
| | | | |
Six Months ended June 30, 2016 | | | | |
Balance December 31, 2015 | | 83,241,396 |
| | $ | 461,657 |
|
Changes in co-borrower debt allocation | | — |
| | (21,505 | ) |
Distributions | | — |
| | (32,986 | ) |
Net income | | — |
| | 40,781 |
|
Balance June 30, 2016 | | 83,241,396 |
| | $ | 447,947 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
LEPERCQ CORPORATE INCOME FUND L.P. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
|
| | | | | | | |
| Six Months ended June 30, |
| 2017 | | 2016 |
Net cash provided by operating activities | $ | 21,180 |
| | $ | 25,402 |
|
Cash flows from investing activities: | | | |
Acquisition of real estate, including intangible assets | (24,317 | ) | | — |
|
Investments in real estate under construction | (20,894 | ) | | (14,936 | ) |
Capital expenditures | (3,814 | ) | | (570 | ) |
Net proceeds from the sale of properties | 7,106 |
| | 69,038 |
|
Investment in and advances to non-consolidated entities | (1,067 | ) | | — |
|
Distributions from non-consolidated entities in excess of accumulated earnings | 219 |
| | 285 |
|
Increase in deferred leasing costs | (339 | ) | | (505 | ) |
Change in restricted cash | 5 |
| | (460 | ) |
Real estate deposits | (17 | ) | | — |
|
Net cash provided by (used in) investing activities | (43,118 | ) | | 52,852 |
|
Cash flows from financing activities: | | | |
Distributions to partners | (17,545 | ) | | (33,707 | ) |
Principal amortization payments | (525 | ) | | (735 | ) |
Increase in deferred financing costs | — |
| | (79 | ) |
Principal payments on debt, excluding normal amortization | — |
| | (23,934 | ) |
Co-borrower debt payment | — |
| | (15,000 | ) |
Related party advances (payments), net | 12,381 |
| | 497 |
|
Net cash used in financing activities | (5,689 | ) | | (72,958 | ) |
Change in cash and cash equivalents | (27,627 | ) | | 5,296 |
|
Cash and cash equivalents, at beginning of period | 52,031 |
| | 19,130 |
|
Cash and cash equivalents, at end of period | $ | 24,404 |
| | $ | 24,426 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
LEPERCQ CORPORATE INCOME FUND L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017 and 2016
(Unaudited and dollars in thousands, except share/unit data)
(1) The Partnership and Financial Statement Presentation
Lepercq Corporate Income Fund L.P. (together with its consolidated subsidiaries, except when the context only applies to the parent entity, the “Partnership”) was organized in 1986 as a limited partnership under the Delaware Revised Uniform Limited Partnership Act. The Partnership's sole general partner, Lex GP-1 Trust (the “General Partner”), is a wholly-owned subsidiary of Lexington Realty Trust (“Lexington”). The Partnership serves as an operating partnership subsidiary for Lexington. As of June 30, 2017, Lexington, through Lex LP-1 Trust, a wholly-owned subsidiary, and the General Partner, owned approximately 96% of the outstanding units of the Partnership.
As of June 30, 2017, the Partnership had ownership interests in 33 consolidated real estate properties, located in 21 states. The properties in which the Partnership has an interest are leased to tenants in various industries.
The assets and credit of each property owner subsidiary of the Partnership with a property subject to a mortgage loan are not available to creditors to satisfy the debt and the other obligations of any other person, including any other property owner subsidiary of the Partnership or any other affiliate. Consolidated entities that are not property owner subsidiaries do not directly own any of the assets of a property owner subsidiary (or the general partner, member or managing member of such property owner subsidiary), but merely hold partnership, membership or beneficial interests therein, which interests are subordinate to the claims of such property owner subsidiary's (or its general partner's, member's or managing member's) creditors.
The financial statements contained in this Quarterly Report on Form 10-Q (this “Quarterly Report”) for the three and six months ended June 30, 2017 have been prepared by the Partnership in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, the interim financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results of the periods presented. Interim results are not necessarily indicative of the results that may be expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the Partnership's audited consolidated financial statements and notes thereto included in the Partnership's Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 1, 2017 (“Annual Report”).
Basis of Presentation and Consolidation. The Partnership's unaudited condensed consolidated financial statements are prepared on the accrual basis of accounting in accordance with GAAP. The financial statements reflect the accounts of the Partnership and its consolidated subsidiaries. The Partnership 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 Partnership is the primary beneficiary of a variable interest entity (“VIE”). Entities that the Partnership does not control and entities that are VIEs in which the Partnership is not the primary beneficiary are accounted for under appropriate GAAP.
Earnings Per Unit. Net income (loss) per unit is computed by dividing net income (loss) by the weighted-average number of units outstanding during the period. There are no potential dilutive securities.
Unit Redemptions. The Partnership's limited partner units that are issued and outstanding, other than those held by Lexington, are currently redeemable at certain times, only at the option of the holders, for shares of beneficial interests classified as common stock of Lexington, par value $0.0001 per share ("common shares"), on a one to approximately 1.13 basis, subject to future adjustments. These units are not mandatorily redeemable by the Partnership. As of June 30, 2017, Lexington's common shares had a closing price of $9.91 per share. The estimated fair value of these units was $36,214, assuming all outstanding limited partner units not held by Lexington were redeemed on such date.
Allocation of Overhead Expenses. The Partnership does not pay a fee to the General Partner for the day-to-day management of the Partnership. Certain expenses incurred by the General Partner and its affiliates, including Lexington, such as corporate-level interest, amortization of deferred loan costs, payroll and general and administrative expenses are allocated to the Partnership and reimbursed to the General Partner in accordance with the Partnership's partnership agreement. The allocation is based upon gross rental revenues.
LEPERCQ CORPORATE INCOME FUND L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017 and 2016
(Unaudited and dollars in thousands, except share/unit data)
Distributions; Allocations of Income and Loss. As provided in the Partnership's partnership agreement, distributions and income and loss for financial reporting purposes are allocated to the partners based on their ownership of units. Special allocation rules included in the partnership agreement affect the allocation of taxable income and loss. The Partnership paid or accrued gross distributions of $33,832 ($0.41 per weighted-average unit) and $32,986 ($0.40 per weighted-average unit) to its partners during the six months ended June 30, 2017 and 2016, respectively. Certain units owned indirectly by Lexington are entitled to aggregate annual distributions of $3.25 per unit.
Use of Estimates. The Partnership has made a number of significant estimates and assumptions to prepare these unaudited condensed consolidated financial statements in conformity with GAAP, including, among others, relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. These estimates and assumptions are based on management's best estimates and judgment. The Partnership evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors. The Partnership 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 and equity method investments and the useful lives of long-lived assets. Actual results could differ materially from those estimates.
Fair Value Measurements. The Partnership 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 Partnership 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.
Acquisition, Development and Construction Arrangements. The Partnership evaluates loans receivable where the Partnership participates in residual profits through loan provisions or other contracts to ascertain whether the Partnership has the same risks and rewards as an owner or a joint venture partner. Where the Partnership concludes that such arrangements are more appropriately treated as an investment in real estate, the Partnership reflects such loan receivable as an equity investment in real estate under construction in the unaudited condensed consolidated balance sheets. In these cases, no interest income is recorded on the loan receivable and the Partnership records capitalized interest during the construction period. In arrangements where the Partnership engages a developer to construct a property or provide funds to a tenant to develop a property, the Partnership will capitalize the funds provided to the developer/tenant and internal costs of interest and real estate taxes, if applicable, during the construction period.
Co-borrower Debt. The Partnership is subject to ASC 405-40, which requires recognition of such obligations as the sum of (a) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (b) any additional amount the reporting entity expects to pay on behalf of its co-obligors.
Revision to Previously Issued Financial Statements. During the quarter ended December 31, 2016, the Partnership corrected an immaterial error in the treatment of a lease termination payment received in the quarter of June 30, 2016 in the amount of $7,685. The lease termination payment was originally amortized over the life of the new tenant lease that necessitated the lease termination. As corrected, the payment was fully recognized in the Partnership's total gross revenues in the quarter ended June 30, 2016.
LEPERCQ CORPORATE INCOME FUND L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017 and 2016
(Unaudited and dollars in thousands, except share/unit data)
The Partnership concluded that the error noted above was not material to any historical periods presented. However, in order to correctly present the treatment of the lease termination payment, management elected to revise previously issued financial statements in the Partnership's next subsequent periodic filing that included such financial statements. The following table shows the affected line items within the Partnership's unaudited condensed consolidated financial statements:
|
| | | | | | | | | | | |
For the three months ended June 30, 2016 | | | | |
| As Originally Reported | | Correction | | As Adjusted |
Total gross revenues | $ | 33,437 |
| | $ | 7,335 |
| | $ | 40,772 |
|
Net income | $ | 15,907 |
| | $ | 6,847 |
| | $ | 22,754 |
|
Net income per unit | $ | 0.19 |
| | $ | 0.08 |
| | $ | 0.27 |
|
|
| | | | | | | | | | | |
For the six months ended June 30, 2016 | | | | |
| As Originally Reported | | Correction | | As Adjusted |
Total gross revenues | $ | 67,876 |
| | $ | 6,996 |
| | $ | 74,872 |
|
Net income | $ | 34,249 |
| | $ | 6,532 |
| | $ | 40,781 |
|
Net income per unit | $ | 0.41 | |