Business Context and Reporting Period
Company: Lexington Realty Trust (formerly Lexington Corporate Properties Trust)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: A self-managed REIT focused on acquiring, owning, and managing a geographically diverse portfolio of net-leased office, industrial, and retail properties. Substantially all properties are subject to triple net leases.
Key Event: On December 31, 2006, the Company completed a merger with Newkirk Realty Trust, Inc. (the "Merger"). While the Consolidated Balance Sheet includes Newkirk's assets and liabilities, the Consolidated Statements of Operations for 2006 exclude Newkirk's operating results.
Key Financial Metrics (Year Ended Dec 31, 2006)
| Metric | 2006 Value | 2005 Value |
|---|---|---|
| Total Gross Revenues | $207.4 million | $183.5 million |
| Net Income | $7.8 million | $32.7 million |
| Net Income (Loss) Allocable to Common Shareholders | $(8.7) million | $16.3 million |
| Net Cash Provided by Operating Activities | $108.0 million | $105.5 million |
| Total Assets (Consolidated) | $4.6 billion | $2.2 billion |
| Total Debt (Mortgages, Notes, Credit Facility) | $2.1 billion | $1.2 billion |
| Weighted Average Interest Rate on Debt | 6.1% | 6.0% |
| Dividends Declared per Common Share | $1.46 | $1.44 |
Material Changes vs. Prior Period
- Revenue Growth: Total gross revenues increased by $23.9 million (13%) primarily due to an $18.1 million increase in rental revenue from portfolio growth and a $6.7 million increase in tenant reimbursements.
- Net Income Decline: Net income decreased by $24.9 million. This was driven by a $7.2 million increase in impairment charges, a $17.9 million increase in general and administrative expenses (largely due to accelerated amortization of non-vested shares), and increased interest and amortization expenses.
- Loss to Common Shareholders: The Company reported a net loss allocable to common shareholders of $8.7 million in 2006, compared to net income of $16.3 million in 2005. This shift was primarily due to the aforementioned expense increases and impairment charges, offset by gains on debt satisfaction and discontinued operations.
- Balance Sheet Expansion: Total assets more than doubled to $4.6 billion, reflecting the inclusion of Newkirk's assets in the balance sheet at the time of the Merger.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management anticipates continued growth through strategic transactions, acquisitions, and joint ventures. The Company expects to maintain its REIT status and continue paying regular quarterly dividends. In February 2007, the Company completed an offering of Series D Preferred Shares raising $150 million. In January 2007, the MLP issued $300 million in guaranteed exchangeable notes.
Unusual Items
- Impairment Charges: The Company recorded $7.2 million in impairment charges in 2006, including a $6.1 million charge related to a property in Warren, Ohio, where a tenant exercised a purchase option at fair market value.
- Bankruptcy Impact: Dana Corporation, a tenant in 11 properties, filed for Chapter 11 bankruptcy in March 2006. The Company recorded impairment charges and accelerated amortization related to rejected leases but realized a $6.9 million gain from selling its bankruptcy claims.
- Discontinued Operations: Significant activity in discontinued operations included $21.5 million in gains on sales of properties and $21.6 million in impairment charges.
Risks and Contingencies
- Refinancing Risk: Significant balloon payments are due in 2008 ($699.5 million). The Company's ability to meet these obligations depends on refinancing or property sales.
- Single Tenant Risk: The business model relies on single-tenant net leases. The financial failure of a major tenant could significantly reduce cash flow.
- Joint Venture Put Rights: The Company has contingent commitments of approximately $611.1 million related to put rights held by partners in various joint ventures, which could require cash or share issuance.
Important Facts for Investor Verification
- Merger Accounting: Verify the distinction between the Consolidated Balance Sheet (which includes Newkirk) and the Consolidated Statements of Operations (which excludes Newkirk) to avoid misinterpreting 2006 operating performance.
- Debt Maturity Wall: Confirm the Company's refinancing strategy for the $699.5 million in debt maturing in 2008, as this represents a significant liquidity requirement.
- Impairment Drivers: Review the specific details of the $28.2 million impairment charge recorded in the third quarter of 2006 related to the Warren, Ohio property purchase option.
- Dividend Coverage: Assess the sustainability of the $1.46 per share dividend given the net loss allocable to common shareholders, noting that REITs often distribute cash flow rather than GAAP net income.
- Joint Venture Exposure: Evaluate the potential cash outflow risk associated with the $611.1 million in contingent put rights from joint venture partners.