LXP

Business Context and Reporting Period

Company: Lexington Corporate Properties Trust (LXP)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2005
Business Overview: LXP is a self-managed Maryland statutory REIT that acquires, owns, and manages a geographically diverse portfolio of net-leased office, industrial, and retail properties. As of December 31, 2005, the portfolio consisted of 189 properties in 39 states, totaling 40.2 million net rentable square feet, with an occupancy rate of 98.3%. The Company utilizes a UPREIT structure and engages in co-investment programs with institutional partners.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total gross revenues increased by $53.8 million (37.5%) primarily due to a $47.8 million increase in rental revenue from portfolio growth.
• Net Income Decline: Net income decreased by $12.1 million (27.0%). This decline was driven by a $12.1 million impairment charge on a vacant property in Milpitas, California, and increased preferred dividends ($9.5 million increase) due to new issuances.
• Acquisitions and Dispositions: The Company purchased 43 properties for a capitalized cost of $1.1 billion. It sold eight properties for net proceeds of $74.7 million and contributed seven properties to non-consolidated entities.
• Capital Structure: The Company raised $60.7 million from common share offerings and $19.5 million from Series C preferred shares. It also secured $840.3 million in new non-recourse mortgage financing, reducing the weighted average interest rate on outstanding debt from 6.6% to 6.0%.
• Impairment: A significant $12.1 million impairment charge was recorded in Q4 2005 for the Milpitas property, where the Company ceased debt service payments and planned a deed-in-lieu of foreclosure.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items:
  • Dana Corporation Bankruptcy: In March 2006 (subsequent to year-end), Dana Corporation, a tenant in 10 of the Company's properties, filed for Chapter 11 bankruptcy. As of Dec 31, 2005, these properties had a net carrying cost of $144.6 million and scheduled 2006 rent of $12.5 million.
  • Milpitas Property: The Company ceased debt service on a Milpitas, CA property in December 2005 due to vacancy, resulting in the aforementioned impairment charge.
• Risks:
  • Tenant Concentration: The 15 largest tenants represented 37.8% of trailing twelve-month base rent. No single tenant exceeded 10%.
  • Refinancing Risk: Significant balloon payments are due in 2008 ($59.0 million), 2009 ($47.7 million), and 2010 ($56.6 million).
  • Joint Venture Put Rights: Partners in joint ventures have the right to "put" their interests to the Company. The aggregate contingent commitment was approximately $443.9 million as of year-end.
• Outlook: Management focuses on extending lease maturities, revenue-enhancing expansions, and opportunistic sales. The Company expects to continue paying regular dividends to maintain REIT status, funded by operating cash flows and capital markets access.

Investor Verification Checklist

• Dana Corporation Exposure: Verify the impact of Dana's Chapter 11 filing on the 10 affected properties and potential rent abatement or vacancy risks.
• Milpitas Resolution: Confirm the status of the deed-in-lieu of foreclosure for the Milpitas property and any potential debt satisfaction gains or losses in 2006.
• Debt Maturities: Review the Company's refinancing strategy for the $163.3 million in balloon payments due between 2008 and 2010.
• Joint Venture Put Rights: Assess the liquidity impact if joint venture partners exercise their put rights, potentially requiring cash or share issuance totaling up to $443.9 million.
• FFO vs. Net Income: Note the divergence between FFO growth ($104.2M) and Net Income decline ($16.3M) due to non-cash impairment charges and depreciation.