Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 904K
2: EX-31.1 Certification -- §302 - SOA'02 HTML 25K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 25K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 22K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 22K
12: R1 Cover HTML 79K
13: R2 Condensed Consolidated Balance Sheets HTML 150K
14: R3 Condensed Consolidated Balance Sheets HTML 41K
(Parenthetical)
15: R4 Condensed Consolidated Statements of Operations HTML 133K
16: R5 Condensed Consolidated Statements of Comprehensive HTML 54K
Income (Loss)
17: R6 Condensed Consolidated Statements of Changes in HTML 88K
Equity
18: R7 Condensed Consolidated Statements of Cash Flows HTML 99K
19: R8 The Company and Financial Statement Presentation HTML 51K
20: R9 Earnings Per Share HTML 60K
21: R10 Investments in Real Estate HTML 102K
22: R11 Dispositions and Impairment HTML 36K
23: R12 Fair Value Measurements HTML 55K
24: R13 Investments in Non-Consolidated Entities HTML 36K
25: R14 Debt HTML 57K
26: R15 Derivatives and Hedging Activities HTML 44K
27: R16 Lease Accounting HTML 136K
28: R17 Concentration of Risk HTML 24K
29: R18 Equity HTML 53K
30: R19 Related Party Transactions HTML 24K
31: R20 Commitments and Contingencies HTML 27K
32: R21 Supplemental Disclosure of Statement of Cash Flow HTML 25K
Information
33: R22 Subsequent Events HTML 24K
34: R23 The Company and Financial Statement Presentation HTML 66K
(Policies)
35: R24 The Company and Financial Statement Presentation HTML 33K
(Tables)
36: R25 Earnings Per Share (Tables) HTML 58K
37: R26 Investments in Real Estate (Tables) HTML 102K
38: R27 Dispositions and Impairment (Tables) HTML 36K
39: R28 Fair Value Measurements (Tables) HTML 54K
40: R29 Investments in Non-Consolidated Entities (Tables) HTML 35K
41: R30 Debt (Tables) HTML 59K
42: R31 Derivatives and Hedging Activities (Tables) HTML 46K
43: R32 Lease Accounting (Tables) HTML 77K
44: R33 Equity (Tables) HTML 47K
45: R34 The Company and Financial Statement Presentation - HTML 41K
Additional Information (Details)
46: R35 The Company and Financial Statement Presentation - HTML 46K
Schedule of Variable Interest Entities (Details)
47: R36 Earnings Per Share (Details) HTML 58K
48: R37 Investments in Real Estate - Schedule of Real HTML 105K
Estate Acquisitions (Details)
49: R38 Investments in Real Estate - Schedule of Real HTML 80K
Estate Properties Development (Details)
50: R39 Investments in Real Estate - Narrative (Details) HTML 25K
51: R40 Dispositions and Impairment - Additional HTML 73K
Information (Details)
52: R41 Dispositions and Impairment - Schedule of HTML 39K
Properties Held for Sale (Details)
53: R42 Fair Value Measurements - Schedule Fair Value HTML 50K
Measurements Inputs (Details)
54: R43 Fair Value Measurements - Fair Value by Balance HTML 30K
Sheet Grouping (Details)
55: R44 Investments in Non-Consolidated Entities - HTML 50K
Schedule of Investment in Non-Consolidated
Entities (Details)
56: R45 Debt - Schedule of Mortgages and Notes Payable HTML 32K
(Details)
57: R46 Debt - Additional Information (Details) HTML 107K
58: R47 Debt - Schedule of Debt Instrument Redemption HTML 51K
(Details)
59: R48 Debt - Schedule of Credit Agreement Terms HTML 52K
(Details)
60: R49 Derivatives and Hedging Activities (Details) HTML 50K
61: R50 Lease Accounting - Additional Information HTML 39K
(Details)
62: R51 Lease Accounting - Lease Income (Details) HTML 30K
63: R52 Lease Accounting - Future Fixed Rental Receipts HTML 38K
(Details)
64: R53 Lease Accounting - Supplemental Balance Sheet HTML 26K
Information (Details)
65: R54 Lease Accounting - Components of Lease Expense HTML 34K
(Details)
66: R55 Lease Accounting - Operating Lease Liabilities HTML 43K
Maturity (Details)
67: R56 Equity - Schedule of ATM Offering Program HTML 26K
(Details)
68: R57 Equity - Additional Information (Details) HTML 97K
69: R58 Equity - Changes in Other Comprehensive Income HTML 44K
(Details)
70: R59 Equity - Effects of Changes in Noncontrolling HTML 42K
Interests (Details)
71: R60 Commitments and Contingencies (Details) HTML 31K
72: R61 Supplemental Disclosure of Statement of Cash Flow HTML 59K
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73: R62 Subsequent Events - Additional Information HTML 33K
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(Address of principal executive offices) (zip code)
(i212)
i692-7200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iShares
of beneficial interest, par value $0.0001 per share, classified as Common Stock
iLXP
iNew York Stock Exchange
i6.50%
Series C Cumulative Convertible Preferred Stock, par value $0.0001 per share
iLXPPRC
iNew York Stock Exchange
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. iYes☒ 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). iYes☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth
company
i☐
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No
☒
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: i282,817,432 common shares of beneficial interest, par value $0.0001 per share, as of November 2, 2021.
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.
Deferred
revenue - including below-market leases, net
i15,490
i17,264
Prepaid
rent
i14,679
i13,335
Total
liabilities
i1,690,115
i1,502,089
Commitments
and contingencies
i
i
Equity:
Preferred
shares, par value $ii0.0001/ per share;
authorized ii100,000,000/ shares:
Series
C Cumulative Convertible Preferred, liquidation preference $ii96,770/;
iiii1,935,400///
shares issued and outstanding
i94,016
i94,016
Common
shares, par value $ii0.0001/ per share; authorized ii400,000,000/
shares, ii282,638,707/ and ii277,152,450/
shares issued and outstanding in 2021 and 2020, respectively
i28
i28
Additional
paid-in-capital
i3,239,850
i3,196,315
Accumulated
distributions in excess of net income
(i1,276,134)
(i1,301,726)
Accumulated
other comprehensive loss
(i10,891)
(i17,963)
Total
shareholders’ equity
i2,046,869
i1,970,670
Noncontrolling
interests
i21,493
i20,467
Total
equity
i2,068,362
i1,991,137
Total
liabilities and equity
$
i3,758,477
$
i3,493,226
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
(Unaudited
and dollars in thousands, except share/unit and per share/unit data)
(1)iThe 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 portfolio of equity investments focused on single-tenant industrial properties.
As of September 30, 2021, the Company had ownership interests in approximately i140
consolidated real estate properties, located in i28 states. The properties in which the Company has an interest are primarily net leased to tenants in various industries.
The Company believes it has qualified as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). Accordingly, the
Company will not be subject to federal income tax, provided that distributions to its shareholders equal at least the amount of its REIT taxable income as defined under the Code. The Company is permitted to participate in certain activities from which it was previously precluded 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 indirectly through (1) property owner subsidiaries,
which are single purpose entities, (2) a wholly-owned TRS, Lexington Realty Advisors, Inc. (“LRA”), and (3) joint ventures. 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 nine months ended September 30, 2021 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 presentation 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, 2020 filed with the SEC on February 18, 2021 (“Annual Report”).
iBasis 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. iThe 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.
During the nine months ended September 30, 2021, the Company acquired interests in ifour
joint ventures with developers, with ownership interests ranging from i80% to i93%. Each joint venture acquired land parcels to develop industrial properties. The
Company determined that the joint ventures are variable interest entities in accordance with the applicable accounting guidance. The Company concluded that it is the primary beneficiary in each of the joint ventures and as such, the joint ventures' operations are consolidated in the Company’s financial statements.
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
In addition, the Company is the primary beneficiary of certain VIEs as it has a controlling financial interest in these entities. Lepercq Corporate Income Fund L.P. ("LCIF") and ATL Fairburn L.P. ("Fairburn JV"), are consolidated and the Company, as of September 30, 2021, had an approximate i99%
and i87% interest, respectively, are VIEs.
The assets of each VIE are only available to satisfy such VIE's respective liabilities. As of September 30, 2021 and December 31, 2020, the VIEs' mortgages and notes payable were non-recourse to the Company. iBelow
is a summary of selected financial data of the consolidated VIEs for which the Company is the primary beneficiary included in the unaudited condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020:
In
addition, the Company acquires, from time to time, properties using a reverse like-kind exchange structure pursuant to Section 1031 of the Internal Revenue Code (a "reverse 1031 exchange") and, as such, the properties are in the possession of an Exchange Accommodation Titleholder ("EAT") until the reverse 1031 exchange is completed. The EAT is classified as a VIE as it is a “thinly capitalized” entity. The Company consolidates the EAT because it is the primary beneficiary as it has the ability to control the activities that most significantly impact the EAT's economic performance and can collapse the 1031 exchange structure at any time. The assets of the EAT primarily consist of leased property (net real estate and intangibles).
iRevenue
Recognition. The Company recognizes lease revenue on a straight-line basis over the term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. Revenue is recognized on a contractual basis for leases with escalations tied to a consumer price index with no floor. The Company evaluates the collectability of its rental payments and recognizes revenue on a cash basis when the Company believes it is no longer probable that it will receive substantially all of the remaining lease payments. Renewal options in leases with rental terms that are lower than those in the primary term are excluded from
the calculation of straight-line rent if the renewals are not reasonably certain. If the Company funds tenant improvements and the improvements are deemed to be owned by the Company, revenue recognition will commence when the improvements are substantially completed and possession or control of the space is turned over to the tenant. If the Company determines that the tenant allowances are lease incentives, the Company commences revenue recognition when possession or control of the space is turned over to the tenant for tenant work to begin. The lease incentive is recorded as a deferred expense and amortized as a reduction of revenue
on a straight-line basis over the respective lease term. The Company recognizes lease termination fees as rental revenue in the period received and writes off unamortized lease-related intangible and other lease-related account balances, provided there are no further Company obligations under the lease. Otherwise, such fees and balances are recognized on a straight-line basis over the remaining obligation period with the termination payments being recorded as a component of rent receivable-deferred on the unaudited condensed consolidated balance sheets.
iUse
of Estimates. Management has made a number of significant estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses to prepare these unaudited condensed consolidated financial statements in conformity with GAAP. These estimates and assumptions are based on management's best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. Management adjusts such estimates when facts and circumstances dictate. The most significant estimates made include the recoverability of current and deferred 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, valuation of derivative financial instruments, valuation of awards granted under compensation plans, the determination of the incremental borrowing rate for leases where the Company is the lessee and the useful lives of long-lived assets. Actual results could differ materially from those estimates.
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
iCost Capitalization. The Company capitalizes interest and direct and indirect project costs associated with the initial construction of a property up to the
time the property is substantially complete and ready for its intended use within investments in real estate under construction in the unaudited condensed consolidated balance sheets. In addition, the Company capitalizes operating costs, including real estate taxes, insurance and utilities, that have been allocated to vacant space based on the square footage of the portion of the building not held available for immediate occupancy during the extended lease-up periods after the construction of the building shell has been completed if costs are being incurred to ready the vacant space for its intended use. If costs and activities incurred to ready the vacant space cease, then cost capitalization is also discontinued until such activities are resumed. Once construction has been completed on a vacant space, project costs are no longer capitalized.
iRestricted
Cash. Restricted cash is comprised primarily of cash balances held by lenders and operating cash reserves held at one property.
iFair Value Measurements. The Company follows the guidance in the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 820, Fair Value Measurements and Disclosures ("Topic 820"), to determine the fair value
of financial and non-financial instruments. Topic 820 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. Topic 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 - quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 - observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and Level 3 - unobservable inputs, which are used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize
the use of unobservable inputs to the extent possible, as well as considering counterparty credit risk. 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.
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 recent sale contracts (Level 2 inputs) or 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.
iRecently Issued Accounting Guidance. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts that reference the London Interbank Offered Rate, or LIBOR, or another reference rate expected to be discontinued because of reference
rate reform. The guidance in ASU 2020-04 is optional, applies for a limited period of time to ease the potential burden in accounting for (or recognizing the effect of) reference rate reform on financial reporting, in response to concerns about structural risks of interbank offered rates, and, particularly, the risk of cessation of LIBOR and may be elected over time as reference rate reform activities occur. As of March 31, 2020, the Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The
Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
(Unaudited and dollars
in thousands, except share/unit and per share/unit data)
In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842): Lessors-Certain Leases with Variable Lease Payments, to amend the guidance to provide alternative accounting for sales type and direct finance leases with variable lease payments. The amendments in ASU 2021-05 amend the accounting guidance to allow lessors to classify and account for a lease with variable leases payments that do not depend on a reference index or a rate as an operating lease if certain criteria are met. The standard is effective for fiscal years beginning after December 15, 2021 with early adoption permitted. The Company does not currently have any leases that are classified as sales-type or direct finance leases. Therefore, the
Company determined that it will apply the amendment on a prospective basis to applicable leases that commence or are modified on or after July 1, 2021.
(2)iEarnings Per Share
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.
i
The
following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the three and nine months ended September 30, 2021 and 2020:
Weighted-average
number of common shares outstanding - basic
i278,124,204
i274,696,046
i276,379,718
i264,211,668
Net
income attributable to common shareholders - per common share basic
$
i0.02
$
i0.15
$
i0.42
$
i0.28
DILUTED
Net
income attributable to common shareholders
$
i5,028
$
i40,285
$
i115,470
$
i74,088
Weighted-average
common shares outstanding - basic
i278,124,204
i274,696,046
i276,379,718
i264,211,668
Effect
of dilutive securities:
Shares issuable under forward sales agreements
i2,765,030
i—
i1,290,968
i—
Unvested
share-based payment awards and options
i1,159,224
i1,326,716
i911,163
i1,234,553
Weighted-average
common shares outstanding - diluted
i282,048,458
i276,022,762
i278,581,849
i265,446,221
Net
income attributable to common shareholders - per common share diluted
$
i0.02
$
i0.15
$
i0.41
$
i0.28
/
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.
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
(3)iInvestments in Real Estate
i
The
Company completed the following warehouse/distribution acquisition and development transactions during the nine months ended September 30, 2021:
Market(1)
Acquisition/Completion
Date
Initial Cost Basis
Primary Lease Expiration at Acquisition Date
Land
Building and Improvements
Lease in-place Value Intangible
Above (Below) Market Lease Intangible, net
Indianapolis, IN
January 2021
$
i14,310
12/2024
$
i1,208
$
i12,052
$
i1,035
$
i15
Indianapolis,
IN
January 2021
i14,120
08/2025
i1,162
i11,825
i1,133
i—
Central
Florida
January 2021
i22,358
05/2031
i1,416
i19,910
i1,032
i—
Columbus,
OH(2)
March 2021(2)
i19,517
03/2024
i2,800
i16,717
i—
i—
Houston,
TX
May 2021
i28,292
08/2028
i4,272
i22,295
i1,725
i—
Houston,
TX
May 2021
i37,686
12/2026
i6,489
i28,470
i2,727
i—
Houston,
TX
May 2021
i11,512
08/2024
i1,792
i9,089
i631
i—
Cincinnati/Dayton,
OH
June 2021
i18,674
06/2023
i1,109
i16,477
i1,088
i—
Central
Florida
June 2021
i48,593
N/A
i2,610
i45,983
i—
i—
Greenville-Spartanburg,
SC
June 2021
i36,903
09/2025
i2,376
i32,121
i2,406
i—
Greenville-Spartanburg,
SC
June 2021
i23,812
06/2026
i1,329
i21,419
i1,064
i—
Greenville-Spartanburg,
SC
July 2021
i29,421
04/2029
i2,819
i24,508
i2,094
i—
Greenville-Spartanburg,
SC
July 2021
i26,106
12/2029
i1,169
i23,070
i1,867
i—
Greenville-Spartanburg,
SC(3)
July 2021
i18,394
N/A
i1,020
i17,374
i—
i—
Greenville-Spartanburg,
SC
July 2021
i31,646
09/2026
i1,710
i27,817
i2,119
i—
Columbus,
OH
August 2021
i29,265
11/2029
i2,251
i25,184
i1,830
i—
$
i410,609
$
i35,532
$
i354,311
$
i20,751
$
i15
(1) A
land parcel located in Hebron, OH was also purchased for $i371.
(2) Development project substantially completed and placed into service in March 2021.
/
(3) Subsequent to acquisition, property fully leased for i5.5
years.
i
As of September 30, 2021, the details of the warehouse/distribution real estate under construction are as follows (in $000's, except square feet):
Project
(% owned)
# of Buildings
Market
Estimated Sq. Ft.
Estimated Project Cost
GAAP Investment Balance as of 9/30/2021
Amount Funded as of 9/30/2021(3)
Estimated Building Completion Date
% Leased as of 9/30/2021
Approximate Lease Term (Years)
Fairburn (i87%)(1)(2)
i1
Atlanta,
GA
i907,675
$
i53,800
$
i47,551
$
i43,900
2Q
2021
i—
%
TBD
KeHE Distributors, BTS (i100%)
i1
Phoenix,
AZ
i468,182
i72,000
i60,044
i52,329
4Q
2021
i100
%
i15
Mt.
Comfort (i80%)(1)
i1
Indianapolis,
IN
i1,053,360
i60,300
i15,808
i9,912
2Q
2022
i—
%
TBD
Smith Farms (i90%)(1)
i3
Greenville-Spartansburg,
SC
i1,939,524
i132,800
i17,609
i13,396
2Q
2022
i—
%
TBD
Cotton 303 (i93%)(1)
i2
Phoenix,
AZ
i880,678
i84,200
i23,636
i20,339
2Q
2022
i—
%
TBD
Ocala (i80%)(1)
i1
Central
Florida
i1,085,280
i80,900
i21,056
i15,093
3Q
2022
i—
%
TBD
$
i484,000
$
i185,704
$
i154,969
(1) Estimated
project cost includes estimated tenant improvements and leasing costs and excludes potential developer partner promote.
(2) Base building substantially completed during the second quarter of 2021. Property not placed into service as of September 30, 2021. Subsequent to September 30, 2021, signed a seven-year lease for all i907,675 square feet.
(Unaudited
and dollars in thousands, except share/unit and per share/unit data)
As of September 30, 2021, the Company's aggregate investment in the development arrangements was $i185,704, which included capitalized interest of $i1,806
for the nine months ended September 30, 2021 and is presented as investments in real estate under construction in the accompanying unaudited condensed consolidated balance sheets. For the nine months ended September 30, 2020, capitalized interest for the development arrangements was $i578.
(4)iDispositions
and Impairment
During the nine months ended September 30, 2021 and 2020, the Company disposed of its interests in various properties for an aggregate gross disposition price of $i218,796 and $i140,573,
respectively, and recognized aggregate gains on sales of properties of $i104,767 and $i41,876, respectively.
Included
in the 2021 dispositions are ithree non-industrial properties with a disposition price of $i35,369,
which was satisfied through (i) the redemption of i1,598,906 operating partnership units ("OP units"), (ii) the assumption of $i11,610 of third
party mortgage financing that encumbered itwo of the properties and (iii) $i1,497
of seller financing. The seller financing note receivable has a fixed interest rate of i6.0% per annum and matures on August 1, 2025.
Included in the 2020 dispositions are itwo
office properties located in Charleston, South Carolina and Overland Park, Kansas, each of which was conveyed to the lender in forgiveness of the mortgage loan encumbering the applicable property. The balance of the non-recourse mortgage loan was in excess of the value of the property collateral, resulting in a debt satisfaction gain, net of $i29,016.
As of September 30, 2021, the
Company had ifour properties classified as held for sale because the properties met the criteria included under the held for sale accounting guidance and a sale to a third party within the next 12 months was deemed probable. As of December 31, 2020, the Company had itwo
properties that met the held for sale criteria.
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, change in the estimated holding period of the asset, the potential sale or transfer of the property in the near future and changes in economic conditions. An asset is determined to be impaired if the asset's carrying value is in excess of its estimated fair value and the Company estimates that its cost will not be recovered.
During the nine months ended September 30, 2021, the Company recognized an impairment charge of $i2,048
related to a vacant office property located in McDonough, Georgia. During the nine months ended September 30, 2020, the Company recognized aggregate impairment charges of $i7,792, consisting of itwo
impairment charges of $i1,617 and $i6,175 on a vacant office property located in Houston, Texas, later sold in 2020, and an industrial property located in Kalamazoo, Michigan, respectively.
(Unaudited and
dollars in thousands, except share/unit and per share/unit data)
(5)iFair Value Measurements
i
The
following tables present the Company's assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2021 and December 31, 2020, aggregated by the level in the fair value hierarchy within which those measurements fall:
(1) Represents
non-recurring fair value measurement as of the impairment date. The fair value is calculated as of the impairment date. The Company measured the $i2,980 fair value based on a discounted cash flow analysis, using a discount rate and residual capitalization rate of ii8.0/%,
respectively. As significant inputs to the discounted cash flow models are unobservable, the Company determined that the value determined for this property falls within Level 3 of the fair value reporting hierarchy.
(2) Represents non-recurring fair value measurement as of the impairment date. The fair value is calculated as of the impairment date. $i2,480 was based on an observable contract
thus Level 2. The Company measured $i18,661 of these fair values based on discounted cash flow analysis, using a discount rate of i9.0%
and residual capitalization rates ranging from i8.0% to i9.0%. As significant inputs to the discounted cash flow models are unobservable, the
Company determined that the value determined for these properties falls within Level 3 of the fair value reporting hierarchy.
/
The majority of the inputs used to value the Company's interest rate swaps fell 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 utilized Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of September 30,
2021 and December 31, 2020, 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 were classified in Level 2 of the fair value hierarchy.
i
The table below sets forth the carrying amounts and estimated fair values of the
Company's financial instruments, excluding held for sale assets, as of September 30, 2021 and December 31, 2020:
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.
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
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.
(6)iInvestments
in Non-Consolidated Entities
i
Below is a schedule of the Company's investments in non-consolidated entities:
(1) NNN
JV is a joint venture formed in 2018 and owns office properties formerly owned by the Company.
(2) Joint venture formed in 2017 with a developer entity to acquire a parcel of land. The Company determined that it is not the primary beneficiary.
(3) Joint venture formed in 2019 with a developer entity to acquire a parcel of land. The Company determined that it is not the primary beneficiary.
/
(4) A joint venture investment, which owns a single-tenant,
net-leased asset.
During the nine months ended September 30, 2020, NNN JV sold itwo assets and the Company recognized a gain on the transaction of $i557
within equity in earnings (losses) of non-consolidated entities in its unaudited condensed consolidated statement of operations. In conjunction with these property sales, NNN JV received net proceeds of $i8,504 after the satisfaction of an aggregate of $i40,800
of its non-recourse mortgage indebtedness.
Interest
rates, including imputed rates on mortgages and notes payable, ranged from i3.5% to i5.4%, and i3.5%
to i6.3%, at September 30, 2021 and December 31, 2020, respectively, and all mortgages and notes payables mature between 2023 and 2032 as of September 30, 2021. The weighted-average interest rate was i4.3%
and i4.5% at September 30, 2021 and December 31, 2020, respectively.
On July 12, 2021, LCIF encumbered itwo
of its properties with mortgage debt in the amount of $i11,610. Subsequently, on July 12, 2021, certain operating partnership unitholders assumed the mortgages upon purchasing the properties. See note 4, Dispositions and Impairment.
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 make-whole premium.
In August 2021, the Company issued $i400,000 aggregate principal amount of i2.375%
Senior Notes due 2031 (“2031 Senior Notes”) at an issuance price of i99.758% of the principal amount. The Company issued the 2031 Senior Notes at an initial discount of $i968
which is being recognized as additional interest expense over the term of the 2031 Senior Notes.
During the three months ended September 30, 2021, the Company used a portion of the net proceeds from the offering of the 2031 Senior Notes to redeem the $i188,756 aggregate principal balance of its outstanding i4.25%
Senior Notes due 2023 (“2023 Senior Notes”). The consideration paid included a make-whole premium of $i12,191 and $i2,028
of accrued and unpaid interest. The Company recognized a $i12,948 debt satisfaction loss related to the aggregate redemptions.
In August 2020, the Company issued $i400,000
aggregate principal amount of i2.7% Senior Notes due 2030 (“2030 Senior Notes”) at an issuance price of i99.233% of the principal amount. The
Company issued the 2030 Senior Notes at an initial discount of $i3,068 which is being recognized as additional interest expense over the term of the 2030 Senior Notes.
During the three months ended September 30, 2020, the Company used a portion of the net proceeds from the offering of the 2030 Senior Notes to repurchase $i61,244
and $i51,068 aggregate principal balance of its outstanding 2023 Senior Notes and i4.40% Senior Notes due 2024 (“2024 Senior Notes”), respectively, through a tender
offer. The tender offer consideration included $i9,477 in prepayment costs and fees and $i1,024 of accrued interest.
The Company recognized a $i10,066 debt satisfaction loss related to the aggregate repurchases, which included a write-off of the proportionate amount of unamortized discount and debt issuance costs related to the 2023 Senior Notes and 2024 Senior Notes.
The Company has an unsecured credit agreement with KeyBank National Association, as agent.
iThe maturity dates and interest rates as of September 30, 2021, are as follows:
Maturity Date
Current
Interest Rate
$i600,000 Revolving Credit Facility(1)
February 2023
LIBOR + i0.90%
$i300,000
Term Loan(2)
January 2025
LIBOR + i1.00%
(1) Maturity date of the revolving credit facility can be extended to February 2024 at the Company's option. The interest rate ranges from LIBOR plus i0.775%
to i1.45%. At September 30, 2021, the Company had ino borrowings outstanding
and availability of $i600,000, subject to covenant compliance.
(2) The LIBOR portion of the interest rate was swapped to obtain a current fixed rate of i2.732%
per annum. The aggregate unamortized debt issuance costs for the term loan was $i1,680 and $i2,057 as of September 30, 2021 and December 31,
2020, respectively.
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
The
Company was compliant with all applicable financial covenants contained in its corporate-level debt agreements at September 30, 2021.
During 2007, the Company issued $i200,000 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 and bear interest at a variable rate of three-month LIBOR plus i170 basis points through maturity. The interest rate at September 30, 2021 was i1.829%.
As of September 30, 2021 and December 31, 2020, there was $ii129,120/
original principal amount of Trust Preferred Securities outstanding and $i1,550 and $i1,625, respectively, of unamortized debt issuance costs.
Capitalized
interest recorded during the nine months ended September 30, 2021 and 2020 was $i2,124 and $i1,112,
respectively.
(8) iDerivatives 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 nine months ended September 30, 2021 and 2020.
During July 2019, the Company entered into ifour interest rate swap agreements with its counterparties. The swaps were designated as cash flow hedges of the risk of variability attributable to changes in the LIBOR swap rates
on its $i300,000 LIBOR-indexed variable-rate unsecured term loan. Accordingly, changes in fair value of the swaps are recorded in other comprehensive income (loss) and reclassified to earnings as interest becomes receivable or payable. The swaps expire coterminous with the extended maturity of the term loan in January 2025. During the next 12 months ending September 30, 2022, the Company estimates that an additional $i4,863
will be reclassified as an increase to interest expense if the swaps remain outstanding.
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
i
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:
The
table below presents the effect of the Company's derivative financial instruments on the unaudited condensed consolidated statements of operations for the nine months ended September 30, 2021 and 2020.
Derivatives
in Cash Flow
Amount of Gain (Loss) Recognized in OCI on Derivatives September 30,
Amount of Loss Reclassified from Accumulated OCI into Income (1) September 30,
Hedging Relationships
2021
2020
2021
2020
Interest Rate Swaps
$
i3,381
$
(i19,934)
$
i3,691
$
i2,175
(1) Amounts
reclassified from accumulated other comprehensive income (loss) to interest expense within the unaudited condensed consolidated statement of operations.
/
Total interest expense presented in the unaudited condensed consolidated statements of operations in which the effects of cash flow hedges are recorded was $i35,170 and $i42,610
for the nine months ended September 30, 2021 and 2020, respectively.
The Company's agreements with swap derivatives 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 September 30, 2021, the Company had not posted
any collateral related to the agreements.
(9) iiLease
Accounting/
The following is a summary of the Company's accounting for leases as of and during the nine months ended September 30, 2021 and 2020:
i
Lessor
Lexington’s
lease portfolio as a lessor primarily includes general purpose, single-tenant net-leased industrial and office real estate assets. Most of the Company’s leases require tenants to pay fixed annual rental payments that escalate on an annual basis and variable payments for other operating expenses, such as real estate taxes, insurance, common area maintenance ("CAM"), and utilities, that are based on the actual expenses incurred.
Certain leases allow for the tenant to renew the lease term upon expiration or earlier. Periods covered by a renewal option are included within the lease term only when renewals are deemed to be reasonably certain. Certain leases allow for the tenant to terminate the lease before the expiration of lease term and certain leases provide the tenant with the right to purchase the leased property at fair market value
or a stipulated price upon expiration of the lease term or before.
Accounting guidance under Topic 842 requires the Company to make certain assumptions and judgments in applying the guidance, including determining whether an arrangement includes a lease and determining the lease term when the contract has renewal, purchase or early termination provisions.
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
The Company analyzes its accounts receivable, customer creditworthiness and current economic trends when evaluating the adequacy of the collectability of the lessee's total accounts receivable balance on a lease by lease basis. In addition, tenants in bankruptcy are analyzed and considerations are made in connection with the expected pre-petition and post-petition claims. If a lessee's accounts receivable balance is considered uncollectable, the
Company will write-off the receivable balances associated with the lease to rental revenue and cease to recognize lease income, including straight-line rent, unless cash is received. If the Company subsequently determines that it is probable it will collect substantially all of the lessee's remaining lease payments under the lease term; the Company will reinstate the straight-line balance adjusting for the amount related to the period when the lease was accounted for on a cash basis. During the nine months ended September 30, 2020, the Company wrote off a deferred rent receivable balance of $i615,
as a reduction of rental revenue, related to a tenant that dissolved and surrendered its leased premises in an industrial property located in the Columbus, Ohio market.
Certain tenants have been experiencing financial difficulties as a result of the COVID-19 pandemic. During the nine months ended September 30, 2020, the Company wrote off an aggregate deferred rent receivable balance of $i1,383,
as a reduction of rental revenue, related to tenants with rent collectability concerns. During the nine months ended September 30, 2021 and 2020, the Company wrote off an aggregate of $i463 and $i177,
respectively, accounts receivable relating to certain tenants suffering from the current economic conditions.
The Company determined that the lease and non-lease components in its leases are a single lease component, which is, therefore, being recognized as rental revenue in its unaudited condensed consolidated statements of operations. The primary non-lease service is included within rental revenue is CAM services provided as part of the Company’s real estate leases. Topic 842 requires that the Company capitalize, as initial direct costs, only those costs that are incurred due to the execution of a lease. As of September 30, 2020,
the Company incurred $i67 of costs that were not incremental to the execution of leases, which are included in property operating expenses on its unaudited condensed consolidated statements of operations. The Company incurred ino
leasing costs that were not incremental for the execution of leases as of September 30, 2021.
The Company manages the risk associated with the residual value of its leased properties by including contract clauses that make tenants responsible for surrendering the space in good condition upon lease termination, holding a diversified portfolio, and other activities. The Company does not have residual value guarantees on specific properties.
i
The
following table presents the Company’s classification of rental revenue for its operating leases for the three and nine months ended September 30, 2021 and 2020:
(2) Variable income contains termination income of $i14,105 and $i662
for the nine months ended September 30, 2021 and 2020, respectively. The 2021 termination fee income primarily related to a tenant that terminated its lease at the Company's Durham, New Hampshire industrial property.
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
i
Future fixed rental receipts for leases, assuming no new or re-negotiated leases as of September 30, 2021 were as follows:
2021 - remainder
$
i68,554
2022
i277,267
2023
i277,523
2024
i241,780
2025
i211,975
2026
i188,128
Thereafter
i767,235
Total
$
i2,032,462
/
i
Lessee
The
Company, as lessee, has ground leases, corporate leases for office space, and office equipment leases. All leases were classified as operating leases as of September 30, 2021. The leases have remaining lease terms of up to i42 years, some of which include options to extend the leases in i5
to i10-year increments for up to i52 years. Renewal periods are included in the lease term only when renewal is deemed to be reasonably certain. The lease term also includes periods covered by an option to terminate the lease if the
Company is reasonably certain not to exercise the termination option. The Company measures its lease payments by including fixed rental payments and variable rental payments that tie to an index or a rate, such as CPI. The Company recognizes lease expense for its operating leases on a straight-line basis over the lease term and variable lease expense not included in the lease payment measurement as incurred.
The accounting guidance under Topic 842 requires the Company to make certain assumptions and judgments in applying the guidance, including determining whether an arrangement includes a lease, determining the term of a lease when the contract
has renewal or termination provisions and determining the discount rate.
The Company determines whether an arrangement is or includes a lease at contract inception by evaluating whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. If the Company has the right to obtain substantially all of the economic benefits from and can direct the use of, the identified asset for a period of time, the Company accounts for the contract
as a lease.
The Company uses the information available at the lease commencement date to determine the discount rate for any new leases. The Company used a portfolio approach to determine its incremental borrowing rate. Lease contracts were grouped based on similar lease terms and economic environments in a manner in which the Company reasonably expects that the outcome from applying a portfolio approach does not differ materially from an individual lease approach. The Company estimated a collateralized
discount rate for each portfolio of leases.
The
following table shows the Company's maturity analysis of its operating lease liabilities as of September 30, 2021:
Operating Leases
2021 - remainder
$
i1,192
2022
i5,005
2023
i5,155
2024
i5,021
2025
i5,021
2026
i3,985
Thereafter
i13,486
Total
lease payments
$
i38,865
Less: Imputed interest
(i8,756)
Present
value of operating lease liabilities
$
i30,109
/
(10)iConcentration
of Risk
The Company seeks to reduce its operating and leasing risks through the geographic diversification of its properties, tenant industry diversification, avoidance of dependency on a single asset and the creditworthiness of its tenants. For the nine months ended September 30, 2021 and 2020, 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.
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
(11)iEquity
Shareholders'
Equity:
At-The-Market Offering Program. The Company maintains an At-The-Market offering program ("ATM program") under which the Company can issue common shares, including through forward sales contracts. iThe following table summarizes
common share issuances under the ATM program for the nine months ended September 30, 2021 and September 30, 2020, respectively:
During
the nine months ended September 30, 2021, the Company settled i3,875,751 common shares previously sold on a forward basis on the maturity date of the contracts and received $i41,933
of net proceeds. There were ino forward share settlements during the nine months ended September 30, 2020.
As of September 30, 2021, an aggregate of i4,763,989
common shares were sold in forward sales contracts that have not been settled and had an aggregate settlement price of $i50,721, which is subject to adjustment in accordance with the forward sales contracts. The Company expects to settle the forward
sales contracts by the maturity dates in February 2022.
In February 2021, the Company amended the terms of its ATM offering program, under which the Company may, from time to time, sell up to $i350,000 of common shares over the term of the program.
As of September 30, 2021, common shares with an aggregate value of $i294,985 remain available for issuance under the ATM program.
Underwritten equity offerings. In May 2021, the Company entered into forward sales contracts for the
sale of i16,000,000 common shares at a public offering price of $i12.11 per common share in an underwritten equity offering that have not yet settled.
Subject to the Company's rights to elect cash or net share settlement, the Company expects to settle the forward sales contracts by the maturity date in May 2022. As of September 30, 2021, the forward sales contracts had an aggregate settlement price of $i189,777,
which is subject to adjustment in accordance with the forward sales contracts.
During 2020, the Company issued i17,250,000 common shares at a public offering price of $i9.60
per common share in an underwritten equity offering and generated net proceeds of approximately $i164,000. The proceeds were used for general corporate purposes, including acquisitions, and pending the application of the proceeds were used to pay down all of the then outstanding balance under the Company's revolving credit facility.
Nonemployee Stock Based
Compensation. During the nine months ended September 30, 2021 and 2020, the Company issued i38,803 and i35,880,
respectively, of fully vested common shares to non-management members of the Company's Board of Trustees with a fair value of $i437 and $i375,
respectively.
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
Share
Repurchase Program. In July 2015, the Company's Board of Trustees authorized the repurchase of up to i10,000,000 common shares and increased this authorization by i10,000,000
in 2018. This share repurchase program has no expiration date. During the nine months ended September 30, 2020, the Company repurchased and retired i1,329,940 common shares at an average price of $i8.28
per common share under the share repurchase program. There were ino common shares repurchased during the nine months ended September 30, 2021. As of September 30, 2021, i8,976,315
common shares remain available for repurchase under this authorization. The Company records a liability for repurchases that have not yet been settled as of the period end.
Series C Preferred Stock. The Company had i1,935,400 shares of Series C Cumulative Convertible Preferred Stock (“Series
C Preferred”) outstanding at September 30, 2021. The shares have a dividend of $i3.25 per share per annum, have a liquidation preference of $i96,770,
and the Company, if certain common share prices are achieved, can force conversion into common shares of the Company. As of September 30, 2021, each share was convertible into i2.4339 common shares. This conversion ratio may increase over time if the Company's
common share dividend exceeds certain quarterly thresholds.
If certain fundamental changes occur, holders may require the Company, in certain circumstances, to repurchase all or part of their shares of Series C Preferred. In addition, upon the occurrence of certain fundamental changes, the Company will, under certain circumstances, increase the conversion rate by a number of additional common shares or, in lieu thereof, may in certain circumstances elect to adjust the conversion rate upon the shares of Series C Preferred becoming convertible into shares of the public acquiring or surviving company.
The
Company may, at the Company's option, cause shares of Series C Preferred to be automatically converted into that number of common shares that are issuable at the then prevailing conversion rate. The Company may exercise its conversion right only if, at certain times, the closing price of the Company's common shares equals or exceeds i125%
of the then prevailing conversion price of the Series C Preferred.
Holders of shares of Series C Preferred generally have no voting rights, but will have limited voting rights if the Company fails to pay dividends for six or more quarters and under certain other circumstances. Upon conversion, the Company may choose to deliver the conversion value to investors in cash, common shares, or a combination of cash and common shares.
i
A
summary of the changes in accumulated other comprehensive income (loss) related to the Company's cash flow hedges is as follows:
Other
comprehensive gain (loss) before reclassifications
i3,381
(i19,934)
Amounts
of loss reclassified from accumulated other comprehensive income to interest expense
i3,691
i2,175
Balance
at end of period
$
(i10,891)
$
(i19,687)
/
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 i1.13
common shares, subject to future adjustments.
During the nine months ended September 30, 2021, LCIF redeemed and cancelled i1,598,906 OP units in connection with the disposition of ithree
properties. As of September 30, 2021, there were approximately i824,000 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.
Net income attributable to Lexington Realty Trust shareholders
$
i120,358
$
i78,924
Transfers
from noncontrolling interests:
Increase in additional paid-in-capital for reallocation of noncontrolling interests
i435
i—
Increase
in additional paid-in-capital for redemption of noncontrolling OP units
i670
i632
Change
from net income attributable to shareholders and transfers from noncontrolling interests
$
i121,463
$
i79,556
/
(12)iRelated
Party Transactions
There were no related party transactions other than those disclosed elsewhere in this Quarterly Report and the audited consolidated financial statements in the Annual Report.
(13)iCommitments and Contingencies
In addition
to the commitments and contingencies disclosed elsewhere, 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.
As of September 30,
2021, the Company has committed to develop isix consolidated development projects and expects to incur approximately $i99,776,
$i153,024 and $i38,675 in 2021, 2022 and 2023, respectively, excluding noncontrolling interests' share, to substantially complete
the construction of the projects. The remaining itwo development projects are owned by non-consolidated joint ventures. Due to the early stage of development of each non-consolidated project and the uncertainty of construction schedules at such stage, the Company is unable to estimate the timing of the required fundings for the non-consolidated development projects.
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 are repaid. No amounts have been advanced under this agreement.
From
time to time, the Company is directly or 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.
(Unaudited and dollars in thousands, except share/unit and per share/unit data)
(14)iSupplemental
Disclosure of Statement of Cash Flow Information
In addition to disclosures discussed elsewhere, during the nine months ended September 30, 2021 and 2020, the Company paid $i35,515 and $i34,818,
respectively, for interest and $i1,273 and $i1,525, respectively, for income taxes.
As a result of the foreclosure of itwo
office properties located in South Carolina and Kansas, during the nine months ended September 30, 2020, there was a non-cash change of $i38,942 and $i14,188
in mortgages and notes payable, net, and real estate, net, respectively.
During the nine months ended September 30, 2021 and 2020, the Company exercised extension options on leases that resulted in a non-cash increase of $ii438/
and $ii719/, respectively,
to the related operating lease liability and right of use asset.
During the nine months ended September 30, 2021, LCIF disposed of ithree real estate assets. The consideration included the redemption of OP units valued at $i22,305
and the assumption of the aggregate related non-recourse mortgage debt of $i11,610.
The acquisition of the RR Ocala 44, LLC joint venture included a $ii489/
non-cash increase to investments in real estate under construction and the noncontrolling interest because a member of the joint venture made a non-cash contribution of the land in exchange for its ownership interest in the joint venture.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
When we use the terms “the
Company,”“we,”“us” and “our,” we mean Lexington Realty Trust and all entities owned by us, including non-consolidated entities, except where it is clear that the term means only Lexington Realty Trust. References herein to ‘‘this Quarterly Report” are to this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2021. The results of operations contained herein for the three and nine months ended September 30, 2021 and 2020 are not necessarily indicative of the results that may be expected for a full year.
The following is a discussion and analysis of the unaudited condensed consolidated financial condition and results of operations of Lexington Realty Trust for the three and nine months
ended September 30, 2021 and 2020, and significant factors that could affect its prospective financial condition and results of operations. This discussion should be read together with the accompanying unaudited condensed consolidated financial statements of the Company included herein and notes thereto and with the consolidated financial statements and notes thereto included in the Company's most recent Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission, or SEC, on February 18, 2021, which we refer to as the Annual Report. Historical results may not be indicative of future performance.
Forward-Looking
Statements. This Quarterly Report, together with other statements and information publicly disseminated by us, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “believes,”“expects,”“intends,”“anticipates,”“estimates,”“projects,”“may,”“plans,”“predicts,”“will,”“will likely result” or similar expressions. Readers should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect actual results, performances or achievements. In particular, the factors that could cause actual results, performances or achievements to differ materially from current expectations, strategies or plans include, among others, any risks discussed below in “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and under the headings “Risk Factors” in this Quarterly Report and “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report and other periodic reports filed by the Company with
the SEC. Except as required by law, we undertake no obligation to publicly release any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Accordingly, there is no assurance that our expectations will be realized.
Overview
COVID-19 Impact. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020 the United States declared a national emergency with respect to COVID-19. Our management continues to monitor events and is taking steps to mitigate
the potential impact and risks to us.
Related supply chain disruptions have caused delays in receiving, and increased the costs of, building materials. We do not currently believe such disruptions will have a material impact on our financial condition.
We remain unable to estimate the long-term impacts COVID-19 will have on our financial condition.
The following summarizes our significant transactions
during the three months ended September 30, 2021.
Leasing Activity:
During the third quarter of 2021, we entered into new leases and lease extensions encompassing 2.6 million square feet. The average fixed rent on these extended leases was $5.07 per square foot compared to the average fixed rent on these leases before extension of $4.78 per square foot. The weighted-average cost of tenant improvements and lease commissions was $0.45 per square foot for extended leases and $2.67 per square foot for new leases.
Investments:
•Acquired five industrial properties for an aggregate cost of $134.8 million.
•We also invested an aggregate of $57.1 million in six
consolidated development projects, which amount excludes our joint venture partners' share.
Capital Recycling:
•Disposed of our interests in three consolidated properties for an aggregate gross disposition price of $35.4 million.
Debt:
•Repaid $215.0 million on our revolving credit facility.
•Issued $400.0 million aggregate principal amount of 2.375% Senior Notes due 2031 ("2031 Senior Notes") at an issuance price of 99.758% of the principal amount.
•Repurchased $188.8 million aggregate principal balance of our outstanding 4.25% Senior Notes due 2023 ("2023 Senior Notes").
•Satisfied
a $10.6 million non-recourse mortgage loan encumbering our Whippany, New Jersey office property.
Equity:
•Issued 1.1 million common shares under our At-the-Market offering program and generated net proceeds of $13.9 million.
•Settled 3.9 million common shares previously sold on a forward basis for net proceeds of $41.9 million.
During
the nine months ended September 30, 2021, we acquired/completed the following warehouse/distribution assets, inclusive of the acquisitions referenced above:
Market (1)
Square Feet
Initial Capitalized Cost (millions)
Date
Acquired/Completed
Approximate Lease Term
(years)(2)
% Leased at Acquisition
Indianapolis, IN
149,072
$
14.3
January 2021
4
100
%
Indianapolis, IN
149,072
14.1
January
2021
6
100
%
Central Florida
222,134
22.4
January 2021
10
53
%
Columbus, OH(3)
320,190
19.5
March 2021
3
100
%
Houston,
TX
233,190
28.3
May 2021
7
100
%
Houston, TX
402,648
37.7
May 2021
6
100
%
Houston, TX
102,863
11.5
May
2021
3
100
%
Cincinnati/Dayton, OH
194,936
18.7
June 2021
2
100
%
Central Florida
510,484
48.6
June 2021
N/A
—
%
Greenville-Spartanburg,
SC
396,073
36.9
June 2021
4
100
%
Greenville-Spartanburg, SC
210,820
23.8
June 2021
7
62
%
Greenville-Spartanburg, SC
275,400
29.4
July
2021
8
100
%
Greenville-Spartanburg, SC
235,600
26.1
July 2021
9
100
%
Greenville-Spartanburg, SC(4)
195,000
18.4
July
2021
N/A
—
%
Greenville-Spartanburg, SC
327,360
31.6
July 2021
5
100
%
Columbus, OH
292,730
29.3
August 2021
8
100
%
4,217,572
$
410.6
(1) Land
parcel in Hebron, OH was also purchased for a total investment of $0.4 million.
(2) Represents the lease term of the primary tenant.
(3) Development project substantially completed and placed into service.
(4) Subsequent to acquisition, property fully leased for 5.5 years.
During the nine months ended September 30, 2021, we disposed of ten properties, inclusive of the dispositions reference above, for an aggregate gross disposition price of $218.8 million
Development Activity:
As of September 30, 2021, we had six consolidated development projects in process
with an aggregate estimated total cost of $484.0 million. We anticipate our remaining funding obligation to substantially complete the construction of these six projects, exclusive of our joint venture partners' share, to be approximately $291.5 million.
Management's discussion and analysis of financial condition and results of operations is based upon our unaudited
condensed consolidated financial statements, which have been prepared in accordance with GAAP. In preparing our unaudited condensed consolidated financial statements in accordance with GAAP and pursuant to the rules and regulations of the SEC, we make assumptions, judgments and estimates that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosures of contingent assets and liabilities. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances, including the recent economic uncertainty primarily caused by COVID-19. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates. Certain of our accounting policies are discussed under (1) Item 7, “Management's Discussion and Analysis of Financial Condition and Results
of Operations” in our Annual Report, (2) note 2 to our consolidated financial statements contained in our Annual Report and (3) note 1 to our unaudited condensed consolidated financial statements contained in this Quarterly Report. We believe there have been no material changes to the items that we disclosed as our critical accounting policies under Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report.
Liquidity and Capital Resources
Cash Flows. We believe that cash flows from operations will continue to provide adequate capital to fund our operating and administrative expenses, regular debt service obligations
and all dividend payments in accordance with applicable REIT requirements in both the short-term and long-term. However, our cash flow from operations may be negatively affected in the near term if we grant tenant rent relief packages or experience tenant defaults as a result of the effects of COVID-19. In addition, we anticipate that cash on hand, borrowings under our unsecured revolving credit facility, capital recycling proceeds, issuances of equity, mortgage proceeds and other debt, as well as other available alternatives, will provide the necessary capital required by our business.
At September 30, 2021, our property owner subsidiaries do not have mortgage maturities with balloon payments due until 2025. In addition, certain of our subsidiaries
are obligated to fund the construction of our development projects and we sometimes guaranty these obligations. We believe our property owner subsidiaries have sufficient sources of liquidity to meet these obligations through future cash flows from operations, the credit markets and, if determined appropriate by us, a capital contribution from us from either cash on hand ($150.1 million at September 30, 2021), property sale proceeds, borrowing capacity under our unsecured revolving credit facility ($600.0 million at September 30, 2021, subject to covenant compliance), which expires in 2023, but can be extended by us to 2024, unsettled forward common share sale contracts, and future cash flows
from operations.
Cash flows from operations were $167.4 million for the nine months ended September 30, 2021 as compared to $152.5 million for the nine months ended September 30, 2020. The increase was primarily related to the impact of cash flow generated from acquiring properties and termination fee income, partially offset by property sales and vacancies. The underlying drivers that impact our working capital, and therefore cash flows from operations, are the timing of collection of rents, including reimbursements from tenants, payment of interest on mortgage debt and payment of operating and general and administrative costs. We believe the net-lease structure of the leases encumbering a majority of the properties in which we have an interest mitigates the risks of the timing of cash
flows from operations since the payment and timing of operating costs related to the properties are generally borne directly by the tenant. The collection and timing of tenant rents are closely monitored by management as part of our cash management program.
Net cash used in investing activities totaled $344.1 million and $370.6 million during the nine months ended September 30, 2021 and 2020, respectively. Cash used in investing activities related primarily to acquisitions of real estate, investments in real estate under construction, capital expenditures, lease costs, investments in non-consolidated entities, investment in a note receivable and changes in real estate deposits, net. Cash provided by investing activities primarily related to net proceeds received from the disposition of real estate and distributions from non-consolidated
entities.
Net cash provided by financing activities totaled $147.7 million and $378.5 million during the nine months ended September 30, 2021 and 2020, respectively. Cash provided by financing activities primarily related to the issuance of the 2031 Senior Notes, revolving credit facility borrowings, mortgage proceeds, issuances of common shares and cash contributions from noncontrolling interests. Cash used in financing activities primarily related to the redemption of the 2023 Senior Notes, dividend and debt service payments.
At-The-Market Offering Program. We maintain an At-The-Market offering program ("ATM program") under which the Company can issue common shares, including through forward sales contracts. The following table summarizes common share issuances under the ATM program for the nine months ended September 30, 2021 and September 30, 2020:
During the nine months ended September 30, 2021, we settled 3,875,751 common shares previously sold on a forward basis on the maturity date of the contract and received $41.9 million of net proceeds. There were no forward share settlements during the nine months ended September 30, 2020.
As of September 30, 2021, an aggregate of 4,763,989 common shares were sold in forward sales contracts
that have not been settled and had an aggregate settlement price of $50.7 million, which is subject to adjustment in accordance with the forward sales contracts.
In February 2021, we amended the terms of our ATM offering program, under which we may, from time to time, sell up to $350.0 million common shares over the term of the program. As of September 30, 2021, common shares with an aggregate value of $295.0 million remain available for issuance under the ATM program.
Underwritten Equity Offerings. In May 2021, we entered into forward sales contracts
for the sale of 16,000,000 common shares at a public offering price of $12.11 per common share in an underwritten equity offering that have not yet settled. Subject to our rights to elect cash or net share settlement, we expect to settle the forward sales contracts by the maturity date of May 2022. As of September 30, 2021, the forward sales contracts had an aggregate settlement price of $189.8 million, which is subject to adjustment in accordance with the forward sales contracts.
During 2020, we issued 17,250,000 common shares at a public offering price of $9.60 per
common share in an underwritten equity offering and generated net proceeds of approximately $164.0 million. The proceeds were used for general corporate purposes, including acquisitions, and pending the application of the proceeds were used to pay down all of the then outstanding balance under our revolving credit facility.
The volatility in the capital markets primarily resulting from the effects of the COVID-19 pandemic may negatively affect our ability to access the capital markets through our ATM program and other offerings.
Dividends. Dividends paid to our common and preferred shareholders were $95.9 million and $88.0 million in the nine months ended September 30, 2021 and 2020,
respectively.
We declared a quarterly dividend of $0.1075 per common share during the three months ended September 30, 2021, which is an increase from the $0.105 per common share quarterly dividend declared during the three months ended September 30, 2020.
UPREIT Structure. As of September 30, 2021, 0.8 million units of limited partner interests, or OP units, in our operating partnership, LCIF, were outstanding not including OP units held by us. Assuming all outstanding OP units not held by us were redeemed on such date, the estimated fair value of such OP units was $11.8 million based on our closing price of $12.75 per common share as of September 30, 2021 and
a redemption factor of approximately 1.13 common shares per OP unit.
Financings. The following senior notes were outstanding as of September 30, 2021:
Issue
Date
Face Amount ($000)
Interest Rate
Maturity Date
Issue Price
August 2021
$
400,000
2.375
%
October 2031
99.758
%
August
2020
400,000
2.70
%
September 2030
99.233
%
May 2014
198,932
4.40
%
June 2024
99.883
%
$
998,932
Each
series of senior notes is unsecured and requires payment of interest semi-annually in arrears. We may redeem the notes at our option at any time prior to maturity in whole or in part by paying the principal amount of the Senior Notes being redeemed plus a make-whole premium.
In August 2021, we issued $400.0 million aggregate principal amount of 2031 Senior Notes at an issuance price of 99.758% of the principal amount. We issued the 2031 Senior Notes at an initial discount of $1.0 million, which is being recognized as additional interest expense over the term of the 2031 Senior Notes.
During the three months ended September 30, 2021, we used a portion of the net proceeds from the offering of the 2031 Senior Notes to redeem the $188.8 million aggregate principal balance of our outstanding 2023 Senior Notes. The consideration paid included
a make-whole premium of $12.2 million and $2.0 million of accrued and unpaid interest. We recognized a $12.9 million debt satisfaction loss related to the aggregate redemption.
A summary of the maturity dates and interest rates of our unsecured credit agreement, as of September 30, 2021, are as follows:
Maturity Date
Current Interest Rate
$600.0
Million Revolving Credit Facility(1)
February 2023
LIBOR + 0.90%
$300.0 Million Term Loan(2)
January 2025
LIBOR + 1.00%
(1) Maturity date of the revolving credit facility can be extended to February 2024 at our option. The interest rate ranges from LIBOR plus 0.775% to 1.45%. At September 30, 2021, we had no borrowings outstanding and availability of $600.0 million, subject to covenant compliance.
(2) The LIBOR portion
of the interest rate was swapped to obtain a current fixed rate of 2.732% per annum.
As of September 30, 2021, we were compliant with all applicable financial covenants contained in our corporate-level debt agreements.
Results of Operations
Three months ended September 30, 2021 compared with three months ended September 30, 2020. The decrease in net income attributable to common shareholders of $35.3 million was primarily due to the items discussed
below.
The decrease in total gross revenues of $1.1 million was primarily due to a decrease in rental revenue due to the sale of properties, partially offset by acquisition revenue.
The increase in depreciation and amortization expense of $4.8 million was primarily due to acquisition activity.
The increase in general and administrative expense of $1.1 million was primarily due to an increase in payroll expense.
The decrease in interest and amortization expense of $1.4 million related primarily to a decrease in the amount of our mortgage debt outstanding and a decrease in our overall borrowing rate.
The decrease in debt satisfaction gains, net, of $30.8 million was primarily related to the recognition of a debt satisfaction gain of $27.6 million upon the
foreclosure of our Overland Park, Kansas office property, offset by a $10.1 million debt satisfaction loss incurred as a result of the repurchase of a portion of the 2023 Senior Notes and 2024 Senior Notes pursuant to a tender offer in 2020. During the third quarter of September 2021, we incurred debt satisfaction losses of $13.2 million primarily related to the redemption of our 2023 Senior Notes.
The decrease in impairment charges of $4.1 million is related to the timing of an impairment charge recognized on certain properties. The impairments were primarily due to a potential sale, vacancy and lack of leasing prospects.
The
decrease in gains on sales of properties of $4.8 million related to the timing of property dispositions.
The decrease in net income attributable to noncontrolling interests of $1.3 million was primarily attributable to an allocation of the OP unit's share of gains on sale of properties from LCIF.
Nine months ended September 30, 2021 compared with nine months ended September 30, 2020. The increase in net income attributable to common shareholders of $41.4 million was primarily due to the items discussed below.
The increase in total gross revenues of $10.4 million was primarily a result of an increase of $13.4 million in termination income recognized during the nine months ended September 30,
2021. The increase was offset by a decrease in rental revenue of $2.3 million primarily due to the timing of property sales and a $0.8 million decrease in other revenue primarily due to an incentive fee earned upon the sale of a property that we managed for a third-party real estate owner in 2020 with no comparable revenue earned in 2021.
The increase in depreciation and amortization expense of $9.7 million was primarily due to acquisition activity.
The increase in property operating expense of $2.1 million was primarily due to an increase in operating expense responsibilities at certain properties.
The increase in general and administrative expenses of $2.1 million was primarily due to an increase in payroll expense.
The increase in non-operating income of $0.6 million was primarily
due to funds received for land easements at two of our properties in 2021 with no comparable income in 2020.
The decrease in interest and amortization expense of $7.4 million related primarily to a decrease in the amount of our mortgage debt outstanding and a decrease in our overall borrowing rate.
The decrease in debt satisfaction gains, net, of $32.2 million was primarily the recognition of aggregate debt satisfaction gains of $29.0 million upon the foreclosure of our Charleston, South Carolina and Overland Park, Kansas properties, offset by a $10.1 million debt satisfaction loss incurred as a result of the repurchase of a portion of the 2023 Senior Notes and 2024 Senior Notes pursuant to a tender offer in 2020. During the third quarter of September 2021, we incurred debt satisfaction losses of $13.2 million primarily related to the redemption of our 2023 Senior Notes.
The
decrease in impairment charges of $5.7 million is related to the timing of an impairment charge recognized on certain properties. The impairments were primarily due to a potential sale, vacancy and lack of leasing prospects.
The increase in gains on sales of properties of $62.9 million related to the timing of property dispositions.
The increase in net income or decrease in net loss in future periods will be closely tied to the level of acquisitions made by us. Without acquisitions, the sources of growth in net income are limited to fixed rent adjustments and index adjustments (such as the consumer price index), reduced interest expense on amortizing mortgages and variable rate indebtedness and by controlling other variable overhead costs. However, there are many factors beyond management's control that could offset these items including, without limitation, changes in economic conditions
such as the recent economic uncertainty primarily caused by the COVID-19 pandemic, increased interest rates and tenant monetary defaults and the other risks described in this Quarterly Report. Furthermore, our ability to complete acquisitions may be limited due to travel restrictions and social distancing measures during the COVID-19 pandemic.
Same-store net operating income, or NOI, which is a non-GAAP measure, represents the NOI for consolidated properties that were owned and included in our portfolio for two comparable reporting
periods. We define NOI as operating revenues (rental income (less GAAP rent adjustments and lease termination income, net), and other property income) less property operating expenses. As same-store NOI excludes the change in NOI from acquired and disposed of properties, it highlights operating trends such as occupancy levels, rental rates and operating costs on properties. Other REITs may use different methodologies for calculating same-store NOI, and accordingly same-store NOI may not be comparable to other REITs. Management believes that same-store NOI is a useful supplemental measure of our operating performance. However, same-store NOI should not be viewed as an alternative measure of our financial performance since it does not reflect the operations of our entire portfolio, nor does it reflect the impact of general and administrative expenses, acquisition-related expenses, interest expense, depreciation and amortization costs, other nonproperty income and losses,
the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, or trends in development and construction activities which are significant economic costs and activities that could materially impact our results from operations. We believe that net income is the most directly comparable GAAP measure to same-store NOI.
The following presents our consolidated same-store NOI, for the nine months ended September 30, 2021 and 2020 ($000's):
Our reported same-store NOI increased from the first nine months of 2020 to the first nine months of 2021 by 0.7%. As of September 30, 2021 and 2020, our historical same-store square footage leased was 98.7% and 99.8%, respectively.
The increase in same-store NOI between periods primarily related to an increase in cash base rent and tenant reimbursements, which was partially offset by an increase in operating expense responsibilities
at certain properties. Our same-store results could be further impacted in the future due to COVID-19 related rent deferrals, rent forgiveness or tenant defaults (in the short-term and/or long-term).
Equity
in (earnings) losses of non-consolidated entities
249
(35)
Lease termination income, net
(13,787)
(662)
Straight-line adjustments
(8,146)
(10,224)
Lease incentives
605
732
Amortization
of above/below market leases
(1,211)
(1,110)
NOI
198,929
200,977
Less NOI:
Acquisitions and dispositions
(32,989)
(36,180)
Same-Store
NOI
$
165,940
$
164,797
Funds From Operations
We believe that Funds from Operations, or FFO, which is a non-GAAP measure, is a widely recognized and appropriate measure of the performance of an equity REIT. We believe FFO is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. FFO is intended to exclude GAAP historical
cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. As a result, FFO provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities, interest costs and other matters without the inclusion of depreciation and amortization, providing perspective that may not necessarily be apparent from net income.
The National Association of Real Estate Investment Trusts, or NAREIT, defines FFO as “net income (calculated in accordance with GAAP), excluding depreciation and amortization related to real estate, gains and losses from the sales of certain real estate assets, gains and losses from change in control and impairment write-downs of certain
real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. The reconciling items include amounts to adjust earnings from consolidated partially-owned entities and equity in earnings of unconsolidated affiliates to FFO.” FFO does not represent cash generated from operating activities in accordance with GAAP and is not indicative of cash available to fund cash needs.
We present FFO available to common shareholders and unitholders - basic and also present FFO available to all equityholders and unitholders - diluted on a company-wide basis as if all securities that are convertible, at the holder's option, into our common shares, are converted at the beginning of the period. We also present Adjusted Company FFO available to all equityholders and unitholders - diluted which adjusts FFO available to all equityholders and unitholders
- diluted for certain items which we believe are not indicative of the operating results of our real estate portfolio. We believe this is an appropriate presentation as it is frequently requested by security analysts, investors and other interested parties. Since others do not calculate these measures in a similar fashion, these measures may not be comparable to similarly titled measures as reported by others. These measures should not be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flow as a measure of liquidity.
The following presents a reconciliation of
net income attributable to common shareholders to FFO available to common shareholders and unitholders and Adjusted Company FFO available to all equityholders and unitholders for the three and nine months ended September 30, 2021 and 2020 (unaudited and dollars in thousands, except share and per share amounts):
As of September 30, 2021, we had investments in various real estate entities with varying structures. The real estate investments owned by these entities are generally financed with non-recourse debt. Non-recourse debt is generally defined as debt whereby the lenders' sole recourse with respect to borrower defaults is limited to the value of the assets collateralized by the debt. The lender generally does not have recourse against any other assets owned by the borrower or any of the members or partners of the borrower, except for certain specified exceptions listed in the particular loan documents. These exceptions generally relate to "bad boy" acts, including fraud, prohibited transfers and breaches of material representations. We have guaranteed
such obligations for certain of our non-consolidated entities with respect to $395.2 million of such non-recourse debt. We believe the likelihood of making any payments under such guaranties is remote and we generally have an agreement from each partner to reimburse us for its proportionate share of any liability related to a guarantee trigger unless such trigger is caused solely by us.
Our
exposure to market risk relates primarily to our variable-rate indebtedness not subject to interest rate swaps and our fixed-rate debt. Our consolidated aggregate principal variable-rate indebtedness not subject to interest rate swaps was $129.1 million at each of September 30, 2021 and 2020, which represented 8.4% and 8.3%, respectively, of our aggregate principal consolidated indebtedness. During the three months ended September 30, 2021 and 2020, our variable-rate indebtedness had a weighted-average interest rate of 1.4% and 2.0%, respectively. Had the weighted-average interest rate been 100 basis points higher, our interest expense for the three months ended September 30, 2021 and 2020
would have increased by $0.6 million and $0.4 million, respectively. During the nine months ended September 30, 2021 and 2020, our variable-rate interest rate was 1.7% and 2.5%, respectively. Had the weighted-average interest rate been 100 basis points higher, our interest expense for the nine months ended September 30, 2021 and 2020 would have increased by $1.3 million and $1.4 million, respectively. At each of September 30, 2021 and 2020, our aggregate principal consolidated fixed-rate debt was $1.4 billion, which represented 91.6% and 91.7%, respectively, of our aggregate principal indebtedness.
For
certain of our financial instruments, fair values are not readily available since there are no active trading markets as characterized by current exchanges between willing parties. Accordingly, we derive or estimate fair values using various valuation techniques, such as computing the present value of estimated future cash flows using discount rates commensurate with the risks involved. However, the determination of estimated cash flows may be subjective and imprecise. Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values, especially given the volatility of the current economic environment. The following fair value was determined using the interest rates that we believe our outstanding fixed-rate indebtedness would warrant as of September 30, 2021. We believe the fair value is indicative of the interest rate environment as of September 30,
2021, but this amount does not take into consideration the effects of subsequent interest rate fluctuations. Accordingly, we estimate that the fair value of our fixed-rate indebtedness was $1.4 billion as of September 30, 2021.
Our interest rate risk objectives are to limit the impact of interest rate fluctuations on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, we manage our exposure to fluctuations in market interest rates through the use of fixed-rate debt instruments to the extent that reasonably favorable rates are obtainable with such arrangements. We may enter into derivative financial instruments such as interest rate swaps or caps to mitigate our interest rate risk on a related financial instrument or to effectively lock the interest rate on a portion of our variable-rate debt.
As of September 30, 2021, we had four interest rate swap agreements (see note 8 to our unaudited condensed consolidated financial statements contained in this Quarterly Report).
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as such terms are defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report to determine if such controls and procedures were effective
to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management, including each of our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures were effective as of September 30, 2021.
Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this Quarterly Report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls. Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected
on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
From
time to time, we are directly and indirectly involved in legal proceedings arising in the ordinary course of our business, including claims by lenders under non-recourse carve-out guarantees. We believe, 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 our business, financial condition and results of operations.
ITEM 1A.Risk Factors.
There have been no material changes in our risk factors from those disclosed in the Annual Report.
ITEM
2.Unregistered Sales of Equity Securities and Use of Proceeds.
There were no share repurchases during the quarter ended September 30, 2021 under our share repurchase authorization most recently announced on November 2, 2018, which has no expiration date. There were 8,976,315 shares that may yet be purchased under our share repurchase authorization.
ITEM 3.Defaults Upon Senior Securities - not applicable.
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document (2, 5)
(3) Furnished herewith. This exhibit shall not be deemed "filed" for purposes of Section 11 or 12 of the Securities Act of 1933, as amended (the "Securities Act"), or Section 18 of the Securities Exchanges Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities of those sections, and shall not be part of any registration statement to which it may relate, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act or the Exchange Act, except as set forth by specific reference in such filing or document.
(4) Management contract
or compensatory plan or arrangement.
(5) The following materials from this Quarterly Report on Form 10-Q for the period ended September 30, 2021 are formatted in Inline XBRL (Extensible Business Reporting Language): (i) Unaudited Condensed Consolidated Balance Sheets of the Company; (ii) Unaudited Condensed Consolidated Statements of Operations of the Company; (iii) Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) of the Company; (iv) Unaudited Condensed Consolidated Statements of Changes in Equity of the Company;
(v) Unaudited Condensed Consolidated Statements of Cash Flows of the Company; and (vi) Notes to Unaudited Condensed Consolidated Financial Statements of the Company, detailed tagged.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
