lxp-20201231
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
For the fiscal year ended December 31, 2020
or
For the transition period from _________________ to ________________
Commission File Number 1-12386
LEXINGTON REALTY TRUST
(Exact name of registrant as specified in its charter)
One Penn Plaza, Suite 4015, New York, NY10119-4015
(Address of principal executive offices) (zip code)
(212) 692-7200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐No☒
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. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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). Yes☒ No ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ 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 an 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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the shares of beneficial interest, par value $0.0001 per share, classified as common stock (“common shares”) of Lexington Realty Trust held by non-affiliates as of June 30, 2020, which was the last business day of the registrant's most recently completed second fiscal quarter, was 2,857,720,689 based on the closing price of the common shares on the New York Stock Exchange as of that date, which was $10.55 per share.
Number of common shares outstanding as of February 16, 2021 was 277,554,740.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the Definitive Proxy Statement for Lexington Realty Trust's Annual Meeting of Shareholders, to be held on May 18, 2021, is incorporated by reference in this Annual Report on Form 10-K in response to Part III, Items 10, 11, 12, 13 and 14, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
TABLE OF CONTENTS
Description Page
PART I
ITEM 1. Business 3
ITEM 1A. Risk Factors 11
ITEM 1B. Unresolved Staff Comments 24
ITEM 2. Properties 25
ITEM 3. Legal Proceedings 36
ITEM 4. Mine Safety Disclosures 37
PART II
ITEM 6. Selected Financial Data 39
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk 53
ITEM 8. Financial Statements and Supplementary Data 54
ITEM 9A. Controls and Procedures 94
ITEM 9B. Other Information 94
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance 95
ITEM 11. Executive Compensation 95
ITEM 14. Principal Accounting Fees and Services 95
PART IV
ITEM 15. Exhibits, Financial Statement Schedules 96
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Introduction
Unless stated otherwise or the context otherwise requires, the “Company,” the “Trust,” “Lexington,” “we,” “our,” and “us” refer collectively to Lexington Realty Trust and its consolidated subsidiaries. All of the Company's interests in properties are held, and all property operating activities are conducted, through special purpose entities, which we refer to as property owner subsidiaries or lender subsidiaries, which are separate and distinct legal entities, but in some instances are consolidated for financial statement purposes and/or disregarded for income tax purposes.
When we use the term “REIT,” we mean real estate investment trust. All references to 2020, 2019 and 2018 refer to our fiscal years ended December 31, 2020, December 31, 2019 and December 31, 2018, respectively.
When we use the term “GAAP,” we mean United States generally accepted accounting principles in effect from time to time.
When we use the term “common shares,” we mean our shares of beneficial interest par value $0.0001, classified as common stock. When we use the term “Series C Preferred Shares,” we mean our beneficial interest classified as 6.50% Series C Convertible Preferred Stock.
When we use the term “base rent,” we mean GAAP rental revenue and ancillary income, but excluding billed tenant reimbursements and lease termination income.
The terms “FFO,” “Adjusted Company FFO,” and “NOI” are defined in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Annual Report.
Cautionary Statements Concerning Forward-Looking Statements
This Annual Report, together with other statements and information publicly disseminated by us, contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or 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, among the factors that could cause actual results, performances or achievements to differ materially from current expectations, strategies or plans include, among others, those risks discussed below under “Risk Factors” in Part I, Item 1A of this Annual Report and under “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Annual Report. Except as required by law, we undertake no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Accordingly, there is no assurance that our expectations will be realized.
PART I.
Item 1. Business
General
We are a Maryland real estate investment trust, qualified as a REIT for federal income tax purposes, focused on single-tenant industrial real estate investments. A majority of our properties are subject to net or similar leases, where the tenant bears all or substantially all of the costs, including cost increases, for real estate taxes, utilities, insurance and ordinary repairs. However, certain leases provide that the landlord is responsible for certain operating expenses.
As of December 31, 2020, we had equity ownership interests in approximately 130 consolidated real estate properties, located in 29 states and containing an aggregate of approximately 56.1 million square feet of space, approximately 98.3% of which was leased.
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History and Current Corporate Structure
We became a Maryland REIT in December 1997. Prior to that, our predecessor was organized in the state of Delaware in October 1993 upon the rollup of two partnerships. Primarily all of our business is conducted through wholly-owned subsidiaries, but we conduct a portion of our business through an operating partnership subsidiary, Lepercq Corporate Income Fund L.P., which we refer to as LCIF, and four non-consolidated ventures.
Historically, LCIF enabled us to acquire properties by issuing limited partner interests in LCIF, which we refer to as OP units, to sellers of property, as a form of consideration in exchange for the property. The outstanding OP units not held by Lexington are generally redeemable for our common shares on a one OP unit for approximately 1.13 common shares basis, or, at our election in certain instances, cash. As of December 31, 2020, there were approximately 2.5 million OP units outstanding, other than OP units held by Lexington, which were convertible into approximately 2.9 million common shares, assuming redemptions are satisfied entirely with common shares.
Strategy
General. Our current business strategy is focused on enhancing our cash flow stability, growing our portfolio with attractive warehouse/distribution properties, reducing lease rollover risk and maintaining a strong flexible balance sheet to allow us to act on opportunities as they arise to generate a return to investors. In addition, we continue our efforts to reduce the percentage of non-industrial assets in our portfolio. We believe we have a diversified tenant base and are not dependent upon any one tenant. See “Item 2—Properties—Tenant Diversification.”
Investment Strategy. Our investment strategy is to grow our industrial portfolio by acquiring warehouse/distribution properties that are predominately single-tenant. We provide capital to merchant builders by providing construction financing and a takeout for build-to-suit projects and acquire speculative development properties and recently developed properties with vacancy.
We believe our development strategy provides us with higher returns than we could obtain in the existing purchase market. This strategy mitigates against most development risk, because we generally invest in opportunities that are essentially “shovel-ready”, thereby avoiding entitlement risk. Further, our merchant builder partners are generally responsible for typical cost overruns. We currently avoid the overhead of an internal development team by partnering with merchant builders. However, we are constantly exploring ways to be more efficient and earn higher returns.
We believe our current strategy will provide shareholders with a secure dividend that mitigates against unexpected costs and the cyclicality of many asset classes and investment strategies. While we believe our strategy is more defensive than most industrial REITs, we believe this makes us a “safe alternative” for investors in the industrial sector and the net lease sector.
Target Markets. We focus our investment strategy on growing markets where we believe there are advantages to building a geographic concentration. The main driver of the growth in these markets is primarily to service population growth and the expansion of e-commerce and supply chains. This differs from our historical net lease strategy where we favored credit and term over location. However, we focus less on market size, and more on the growth prospects of a market, including the potential for a market to become a top 25 or top 50 market.
Our current target markets are in the Sunbelt and the Midwest. While our investment strategy of investing in predominately single-tenant warehouse and distribution properties is not limited to specific markets, we believe that having concentration in certain markets allows us to better manage our investments and source additional investments. However, we may purchase and develop properties in other markets if favorable opportunities are identified and we may refine our investment strategy from time to time depending on market developments.
Our target markets in the Sunbelt are Phoenix, Dallas-Fort Worth, Memphis, Atlanta, Savannah, Greenville/Spartanburg and Central Florida. The markets in the Southeast offer favorable business climates, proximity to one of the fastest-growing population regions in the United States and access to significant rail, port and air logistics networks. Dallas is a central location benefiting from Texas having 16 seaports, 26 commercial airports and the nation’s largest network of freight rail and public roads. Phoenix is a lower-cost alternative to markets in California, with lower energy and labor costs. We believe the foregoing attributes attract tenants and drive demand for space in these markets.
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Our target markets in the Mid-West are in Illinois, Indiana and Ohio, with a particular focus on the lower Mid-West markets of Cincinnati, Columbus and Indianapolis. The markets in this geographic region are attractive to e-commerce tenants primarily due to less expensive occupancy costs compared to coastal markets, their central location with access to major U.S. population centers and extensive multi-modal transportation linkages. In Illinois, Chicago's population size is driving demand with limited supply of warehouse and distribution product. In Indiana, Indianapolis is home to a significant FedEx hub, which makes it a desired location within the larger distribution network. In Ohio, Cincinnati will be home to an Amazon Air freight hub and Columbus is within a one-day drive of approximately 50% of US households. We believe the creation of these hubs will drive demand for users of our space and future development.
We expect to grow within each of these target markets while reviewing additional markets for expansion.
Building Type. We target general purpose warehouse/distribution facilities that are versatile and easily leased to alternative users and have other attractive features, including some or all of the following features:
•Clear heights generally ranging from 28 feet for smaller buildings to 40 feet for larger buildings.
•Wide column spacing and speed bays.
•Efficient loading dock ratios.
•Deep truck courts.
•Cross docking for larger facilities.
•Ample trailer and employee parking.
The average age of the properties we acquired in 2020 was two years.
Insurance
We maintain comprehensive property, liability and pollution insurance policies with limits that we believe are appropriate for our portfolio. Our property insurance policy includes business interruption and windstorm coverage.
Regulation
We are subject to various laws, ordinances and regulations, including:
REIT. We elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, which we refer to as the Code, commencing with our taxable year ended December 31, 1993. We intend to continue to qualify as a REIT. If we qualify for taxation as a REIT, we generally will not be subject to federal corporate income taxes on our net taxable income that is currently distributed to our common shareholders. We conduct certain taxable activities through our taxable REIT subsidiary, Lexington Realty Advisors, Inc.
Americans with Disabilities Act. Our properties must comply with the Americans with Disabilities Act of 1990, as amended, or the Americans with Disabilities Act, to the extent that such properties are “public accommodations” as defined under the Americans with Disabilities Act. Although we believe that our properties in the aggregate substantially comply with current requirements of the Americans with Disabilities Act, and we have not received any notice for correction, we have not conducted a comprehensive audit or investigation of all of our properties to determine whether we are in compliance.
Environmental Matters. Under various federal, state and local environmental laws, statutes, ordinances, rules and regulations, an owner of real property may be liable for the costs of removal or remediation of certain hazardous or toxic substances at, on, in or under such property as well as certain other potential costs relating to hazardous or toxic substances.
Competition
There are numerous developers, real estate companies, financial institutions, such as banks and insurance companies, and other investors with greater financial or other resources that compete with us in seeking properties for acquisition and tenants who will lease space in these properties.
Operating Segments
We manage our operations on an aggregated, single segment basis for purposes of assessing performance and making operating decisions, and accordingly, have only one reporting and operating segment.
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Human Capital
While our investment focus is on physical assets, human capital is critical to our success. We rely on our employees and the employees of our contractors and vendors to operate our business and implement our strategy.
Employees. As of December 31, 2020, we had 55 full-time employees and one part-time employee. Each of our employees work in one or more of the following departments: Investments, Asset Management, Accounting, Tax, Corporate, Legal and Information Technology.
We do not believe that any one employee is material to our operations, but we believe that all of our employees are important for our operations. However, the compensation for employees with the title Assistant Vice President and above generally includes long-term equity awards in an effort to retain their services.
On an annual basis, our Chief Executive Officer submits a management succession plan that provides for the ordinary course and emergency succession for our Chief Executive Officer and other key members of management, which is reviewed by the Nominating and Corporate Governance Committee of our Board of Trustees and, ultimately, our Board of Trustees.
In the beginning of March 2020, we began taking steps to prepare our employees for remote working due to the impending COVID-19 pandemic and implemented a technology allowance to offset the costs of working from home. On March 15, 2020, we moved all of our employees to remote working. Since then, we have regularly engaged with our employees through company-wide video-conference meetings and social events.
In addition, in the beginning of April 2020, we accelerated our “holiday pay” (our annual benefit where each employee receives an extra paycheck in December as an advance payment of their bonus) to make sure our employees had extra funds during the extremely uncertain days of the beginning of the COVID-19 pandemic.
Attraction & Retention of Talent. We attract talent by maintaining a good office culture and providing competitive compensation and benefits. Some of our benefit highlights are:
•Medical insurance with a portion of the premiums paid by us. The minimum employee portion of premium to participate in one of the medical insurance plans for a single employee making less than $100,000 in base salary per year is $1 per month.
•Dental and vision benefits at no cost to our employees.
•A minimum of 14 paid time off, or PTO, days for first year employees, which increases to 19 PTO days in the third and fourth year of employment and 24 PTO days in the fifth year of employment.
•Flexible working arrangements where employees are able to work from home one day per workweek (during non-pandemic times).
•Technology allowance to offset the costs of working remotely during the COVID-19 pandemic.
Due to the small size of our employee base, our turnover is generally low. In 2020, seven employees voluntarily or involuntarily separated service from us and we hired five employees for a net change of two employees.
Demographics. We believe there are many benefits to diversity in our employee base. Of our 55 full-time employees at December 31, 2020, 58% were female and 38% were non-white. Of our ten executive employees at December 31, 2020, 30% were female and 10% were non-white.
In 2020, our employees formed a Diversity, Equity and Inclusion Committee, or the DEIC, which consisted of 15 employees as of December 31, 2020. The mission of the DEIC is to make Lexington better by actively promoting diversity, equity and inclusion officewide as well as for and among our current and future stakeholders. To that end, we are establishing programs and initiatives to motivate and empower Lexington to make a positive difference, including programs focused on recruiting.
Training and Development. We maintain training programs for sustainability, accounting, cybersecurity and harassment.
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Employee Engagement. We regularly engage our employees through the following methods:
•During 2020, we conducted a mid-year performance review for our non-executive employees and a year-end performance review for all of our employees. The year-end performance review consisted of a 180-degree review where non-executive employees reviewed their immediate supervisor. We believe this 180-degree review provides an objective measurement of our employees' performance.
•During 2020, we engaged our employees with several surveys, including an employee satisfaction survey.
Vendors and Contractors. We outsource the following material functions:
•Information Technology. We use TetherView, LLC for managed IT services and BDO USA, LLC for virtual chief technology officer services, including cybersecurity.
•Internal Audit. We use CohnReznick LLP for our internal audit function.
•Property Management. We primarily use CBRE, Cushman & Wakefield and Jones Lang LaSalle for the management of our property where we have operating responsibilities. We also use the management affiliates of the developer/sellers of properties we acquire for the management of such properties if we have operating responsibilities and we believe it is important for such management affiliates to continue to manage the property.
•ESG. We use Lord Green Real Estate Strategies, Inc. to assist us with our environmental, social and governance, or ESG, initiatives.
Summary of 2020 Transactions and Recent Developments
The following summarizes certain of our transactions during 2020, including transactions disclosed elsewhere and in our other periodic reports.
Leasing Activity.
During 2020, we entered into new leases and lease extensions encompassing 5.2 million square feet. The average fixed rent on these extended leases was $4.73 per square foot compared to the average fixed rent on these leases before extension of $4.61 per square foot. The weighted-average cost of tenant improvements and lease commissions was $2.57 per square foot for new leases and $3.45 per square foot for extended leases.
Investments/Capital Recycling.
– Acquired 16 warehouse/distribution properties for an aggregate cost of $611.8 million.
–Invested approximately $60.2 million in five development projects.
– Disposed of our interests in 16 properties for an aggregate gross disposition price of $432.8 million.
Debt.
– Satisfied $236.0 million of non-recourse debt with a weighted-average interest rate of 4.5%, including debt encumbering sold assets.
– Issued $400.0 million aggregate principal amount of 2.70% Senior Notes due 2030, or 2030 Senior Notes, at an issuance price of 99.233% of the principal amount.
– Repurchased $61.2 million and $51.1 million aggregate principal balance of our outstanding 4.25% Senior Notes due 2023 (the "2023 Senior Notes") and 4.40% Senior Notes due 2024 (the "2024 Senior Notes"), respectively, pursuant to a tender offer.
Equity.
– Repurchased and retired approximately 1.3 million common shares at an average price of $8.28 per common share.
–Issued 17.3 million common shares in an underwritten offering generating net proceeds of approximately $164.0 million.
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–Issued 6.0 million common shares under our At-the-Market offering program generating net proceeds of approximately $61.0 million.
–Entered into forward sales contracts to sell 5.0 million common shares under our At-the-Market offering program with a then aggregate settlement price of $55.1 million at December 31, 2020.
Subsequent to December 31, 2020, we:
– acquired three warehouse/distribution properties for an aggregate cost of approximately $50.8 million; and
– disposed of two office properties for an aggregate gross disposition price of approximately $20.2 million.
Corporate Responsibility
We seek to create a sustainable ESG platform that enhances both our company and shareholder value. We are committed to supporting our shareholders, employees, tenants, suppliers, creditors, and communities as we execute on our ESG objectives and initiatives. The ESG objectives below are integrated throughout our investment process and contribute to our ongoing long-term success on behalf of our shareholders.
Due to the properties in our portfolio primarily being subject to net leases where tenants are responsible for maintaining the buildings and are in control of their energy usage and environmental sustainability practices, our ability to implement ESG initiatives throughout our portfolio may be limited.
Environmental, Sustainability and Climate Change
Developing strategies that reduce our environmental impact and operational costs is a critical component of our ESG program.
Actions:
•Track and monitor all landlord-paid utilities and track tenant utility data wherever possible.
•Strategically implement green building certifications to highlight sustainability initiatives where feasible.
•Annually review and evaluate sustainability opportunities to increase efficiency and reduce costs.
Performance:
•In process to collect, track and monitor landlord paid energy, water and, waste and recycling across the portfolio.
•Evaluated the portfolio for green building certifications and initially identified two properties for near-term certification.
•Circulated sustainability focused resources for tenants and property managers including Tenant Fit-Out Guide and the Industrial Tenant Sustainability Guide.
•In process to evaluate solar arrays across the portfolio to reduce energy consumption and drive down greenhouse gas emissions.
Social
We believe that actively engaging with stakeholders is critical to our business and ESG efforts, providing valuable insight to inform strategy, attract and retain top talent, and strengthen tenant relationships.
Actions:
•Continuously engage with our tenants to understand leasing and operational needs at our assets and provide tools and resources to promote sustainable tenant operations.
•Coordinate with tenants and property managers on health and well-being focused initiatives.
•Assess our tenant satisfaction and feedback through annual tenant surveys.
•Provide annual training, industry updates and access to tools and resources related to ESG for our employees.
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•Provide health and well-being efforts focused on physical, emotional and financial health for our employees.
•Support the communities in which we live and work through philanthropic events and support local charities through volunteer events.
Performance:
•Engaged third-party to begin the process of collecting and assessing feedback from our tenants.
•Engage with our employees through regular surveys, including an employee satisfaction survey.
•Organized volunteer opportunities at non-profit organizations on company time and participated in clothing and food drives.
•Invited our employees to commit time and/or money to a non-profit organization that was important to them and employees supported 20 different organizations focusing on diversity, equity and/or inclusion.
•Organized step and other health related challenges for our employees.
•Provide an employee assistance program with 24/7 unlimited access to referrals and resources for all work-life needs, including access to face-to-face and telephonic counseling sessions, legal and financial referrals and consultations.
Governance
Transparency to our stakeholders is essential. We pride ourselves on providing our stakeholders with regular reports and detailed disclosures on our operational and financial health, and ESG efforts.
Actions:
•Strive to implement best governance practices, mindful of the concerns of our shareholders.
•Increase our ESG transparency and disclosure through reporting to frameworks, such as GRESB (the global ESG benchmark for real assets), and providing regular ESG updates to shareholders and other stakeholders.
•Evaluate various industry groups that promote our alignment with recognized industry sustainability and ESG frameworks.
Performance:
•Maintain a Code of Business Conduct and Ethics, which includes a whistleblower policy.
•Perform enterprise risk assessments and management succession planning.
•Developed a Stakeholder Engagement Policy to disclose our process when working with our key stakeholders including investors, property management teams, and tenants.
•Became a supporter of the Task Force on Climate-Related Financial Disclosures (TCFD) reporting framework as of December 2020.
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Corporate Information
Principal Executive Offices. Our principal executive offices are located at One Penn Plaza, Suite 4015, New York, New York 10119-4015; our telephone number is (212) 692-7200.
Web Site. Our Internet address is www.lxp.com. We make available, free of charge, on or through the Investors section of our web site or by contacting our Investor Relations Department, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as well as proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or SEC. Also posted on our web site, and available in print upon request of any shareholder to our Investor Relations Department, are our declaration of trust and by-laws, charters for the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee of our Board of Trustees, our Corporate Governance Guidelines, and our Code of Business Conduct and Ethics governing our trustees, officers and employees (which contains our whistleblower procedures). Within the time period required by the SEC and the NYSE, we will post on our web site any amendment to the Code of Business Conduct and Ethics and any waiver applicable to any of our trustees or executive officers. In addition, our web site includes information concerning purchases and sales of our equity securities by our executive officers and trustees as well as disclosure relating to certain non-GAAP financial measures (as defined in the SEC's Regulation G) that we may make public orally, telephonically, by webcast, by broadcast or by similar means from time to time. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding LXP at http://www.sec.gov. Information contained on our web site or the web site of any other person is not incorporated by reference into this Annual Report or any of our other filings with or documents furnished to the SEC.
Our Investor Relations Department can be contacted at Lexington Realty Trust, One Penn Plaza, Suite 4015, New York, New York 10119-4015, Attn: Investor Relations, by telephone: (212) 692-7200, or by e-mail: ir@lxp.com.
NYSE CEO Certification. Our Chief Executive Officer made an unqualified certification to the NYSE with respect to our compliance with the NYSE corporate governance listing standards in 2020.
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Item 1A. Risk Factors
Set forth below are material factors that may adversely affect our business and operations.
Risks Related to Our Business
We are subject to risks related to defaults under, or termination or expiration of, our leases.
We focus our acquisition activities on industrial real estate properties that are generally net leased to single tenants, and certain of our tenants and/or their guarantors constitute a significant percentage of our rental revenues. Therefore, the financial failure of, or other default by, a single tenant under its lease is likely to cause a significant or complete reduction in the operating cash flow generated by the property leased to that tenant and might decrease the value of that property and result in a non-cash impairment charge. If the tenant represents a significant portion of our rental revenues, the impact on our financial position may be material. Further, in any such event, our property owner subsidiary will be responsible for 100% of the operating costs following a vacancy at a single-tenant building.
Under current bankruptcy law, a tenant can generally assume or reject a lease within a certain number of days of filing its bankruptcy petition. If a tenant rejects the lease, a landlord's damages, subject to availability of funds from the bankruptcy estate, are generally limited to the greater of (1) one year's rent and (2) the rent for 15% of the remaining term of the lease, not to exceed three years.
Our property owner subsidiaries may not be able to retain tenants in any of our properties upon the expiration of leases. Upon the expiration or other termination of current leases, our property owner subsidiaries may not be able to re-let all or a portion of the vacancy, or the terms of re-letting (including the cost of concessions to tenants and leasing commissions) may be less favorable than current lease terms or market rates. If one of our property owner subsidiaries is unable to promptly re-let all or a substantial portion of the vacancy, or if the rental rates a property owner subsidiary receives upon re-letting are significantly lower than current rates, our earnings and ability to satisfy our debt service obligations and to make expected distributions to our shareholders may be adversely affected due to the resulting reduction in rent receipts and increase in property operating costs.
Certain of our leases may permit tenants to terminate the leases to which they are a party.
Certain of our leases contain tenant termination options or economic discontinuance options, that permit the tenants to terminate their leases. While these options generally require a payment by the tenants, in most cases, the payments are less than the total remaining expected rental revenue. The termination of a lease by a tenant may impair the value of the property. In addition, we will be responsible for 100% of the operating costs following the termination by any such tenant and subsequent vacating of the property, and we will incur re-leasing costs.
Our ability to fully control the maintenance of our net-leased properties may be limited.
The tenants of our net-leased properties are responsible for maintenance and other day-to-day management of the properties. If a property is not adequately maintained in accordance with the terms of the applicable lease, we may incur expenses for deferred maintenance or other liabilities once the property is no longer leased. We generally visit our properties on an annual basis, but these visits are not comprehensive inspections and deferred maintenance items may go unnoticed. While our leases generally provide for recourse against the tenant in these instances, a bankrupt or financially-troubled tenant may be more likely to defer maintenance, and it may be more difficult to enforce remedies against such a tenant.
You should not rely on the credit ratings of our tenants.
Some of our tenants, guarantors and/or their parent or sponsor entities are rated by certain rating agencies. In certain instances, we may disclose the credit ratings of our tenants or their parent or sponsor entities even though those parent or sponsor entities are not liable for the obligations of the tenant or guarantor under the lease. Any such credit ratings are subject to ongoing evaluation by these credit rating agencies and we cannot assure you that any such ratings will not be changed or withdrawn by these rating agencies in the future if, in their judgment, circumstances warrant. If these rating agencies assign a lower-than-expected rating or reduce or withdraw, or indicate that they may reduce or withdraw, the credit rating of a tenant, guarantor or its parent entity, the value of our investment in any properties leased by such tenant could significantly decline.
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Our assets may be subject to impairment charges.
We periodically evaluate our real estate investments and other assets for impairment indicators. The judgment regarding the existence of impairment indicators is based on GAAP, which includes a variety of factors such as market conditions, the status of significant leases, the financial condition of major tenants and other factors that could affect the cash flow or value of an investment. Based on this evaluation, we may from time to time take non-cash impairment charges. These impairments could have a material adverse effect on our financial condition and results of operations. If we take an impairment charge on a property subject to a non-recourse secured mortgage and reduce the book value of such property below the balance of the mortgage on our balance sheet, upon foreclosure or other disposition, we may be required to recognize a gain on debt satisfaction.
Our real estate development activities are subject to additional risks.
Development activities generally require various government and other approvals, which we may not receive. We rely on third-party construction managers and/or engineers to monitor certain construction activities. If we engage or partner with a developer, we rely on the developer to monitor construction activities and our interests may not be aligned. In addition, development activities, including speculative development and redevelopment and renovation of vacant properties, are subject to risks including, but not limited to:
•unsuccessful development opportunities could cause us to incur direct expenses;
•construction costs of a project may exceed original estimates, possibly making the project less profitable than originally estimated or unprofitable;
•time required to complete the construction of a project or to lease up the completed project may be greater than originally anticipated, thereby adversely affecting our cash flow and liquidity;
•legal action to compel performance of contractors, developers or partners may cause delays and our costs may not be reimbursed;
•we may not be able to find tenants to lease the space built on a speculative basis or in a redeveloped or renovated building, which will impact our cash flow and ability to finance or sell such properties;
•there may be gaps in warranty obligations of our developers and contractors and the obligations to a tenant;
•occupancy rates and rents of a completed project may not be sufficient to make the project profitable; and
•favorable financing sources to fund development activities may not be available.
A tenant’s bankruptcy proceeding may result in the re-characterization of related sale-leaseback transactions or in the restructuring of the tenant's payment obligations to us, either of which could adversely affect our financial condition.
We have entered and may continue to enter into sale-leaseback transactions, whereby we purchase a property and then lease the same property back to the person from whom we purchased it. In the event of the bankruptcy of a tenant, a transaction structured as a sale-leaseback may be re-characterized as either a financing or a joint venture. As a result of the foregoing, the re-characterization of a sale-leaseback transaction could adversely affect our financial condition, cash flow and the amount available for distributions to our shareholders.
If the sale-leaseback were re-characterized as a financing, we might not be considered the owner of the property, and as a result, would have the status of a creditor in relation to the tenant. In that event, we would no longer have the right to sell or encumber our ownership interest in the property. Instead, we would have a claim against the tenant for the amounts owed under the lease, with the claim arguably secured by the property. The tenant/debtor might have the ability to propose a plan restructuring the term, interest rate and amortization schedule of its outstanding balance. If confirmed by the bankruptcy court, we could be bound by the new terms and prevented from foreclosing our lien on the property. If the sale-leaseback were re-characterized as a joint venture, our tenant and we could be treated as co-venturers with regard to the property. As a result, we could be held liable, under some circumstances, for debts incurred by the tenant relating to the property.
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A significant portion of our leases are long-term and do not have fair market rental rate adjustments, which could negatively impact our income and reduce the amount of funds available to make distributions to shareholders.
A significant portion of our rental income comes from long-term net leases, which generally provide the tenant greater discretion in using the leased property than ordinary property leases, such as the right to freely sublease the property, to make alterations in the leased premises and to terminate the lease prior to its expiration under specified circumstances. Furthermore, net leases typically have longer lease terms and, thus, there is an increased risk that contractual rental increases in future years will fail to result in fair market rental rates during those years. If we do not accurately judge the potential for increases in market rental rates when negotiating these long-term leases or if we are unable to obtain any increases in rental rates over the terms of our leases, significant increases in future property operating costs, to the extent not covered under the net leases, could result in us receiving less than fair value from these leases. As a result, our income and distributions to our shareholders could be lower than they would otherwise be if we did not engage in long-term net leases.
In addition, increases in interest rates may also negatively impact the value of our properties that are subject to long-term leases. While a significant number of our net leases provide for annual escalations in the rental rate, the increase in interest rates may outpace the annual escalations.
Our interests in loans receivable, if any, are subject to delinquency, foreclosure and loss.
While loan receivables are not a primary focus, we may make loans to purchasers of our properties or developers. Our interests in loans receivable, if any, are generally non-recourse and secured by real estate properties owned by borrowers that were unable to obtain similar financing from a commercial bank. These loans are subject to many risks including delinquency. The ability of a borrower to repay a loan secured by a real estate property is typically and primarily dependent upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If a borrower were to default on a loan, it is possible that we would not recover the full value of the loan as the collateral may be non-performing.
Our inability to carry out our growth strategy could adversely affect our financial condition and results of operations.
Our growth strategy is based on the acquisition and development of additional industrial properties and related assets. In the context of our business plan, “development” generally means an expansion or renovation of an existing property or the financing and/or acquisition of a newly constructed build-to-suit or speculative property and/or the development of a land parcel. For newly constructed properties, we may (1) provide a developer with either a combination of financing for the construction of a property or a commitment to acquire a property upon completion of construction of a property and commencement of rent from the tenant, (2) acquire a property subject to a lease and engage a developer to complete construction of a property as required by the lease, or (3) partner with a developer to acquire and develop or acquire on our own and engage a developer to develop land and pursue development opportunities.
Our plan to grow through the acquisition and development of new properties could be adversely affected by trends in the real estate and financing businesses. The consummation of any future acquisitions will be subject to satisfactory completion of an extensive valuation analysis and due diligence review and to the negotiation of definitive documentation. Our ability to implement our strategy may be impeded because we may have difficulty finding new properties and investments at attractive prices that meet our investment criteria, negotiating with new or existing tenants or securing acceptable financing. If we are unable to carry out our strategy, our financial condition and results of operations could be adversely affected. Acquisitions of additional properties entail the risk that investments will fail to perform in accordance with expectations, including operating and leasing expectations.
Some of our acquisitions and developments may be financed using the proceeds of periodic equity or debt offerings, lines of credit or other forms of secured or unsecured financing that may result in a risk that permanent financing for newly acquired projects might not be available or would be available only on disadvantageous terms. If permanent debt or equity financing is not available on acceptable terms to refinance acquisitions undertaken without permanent financing, further acquisitions may be curtailed, or cash available to satisfy our debt service obligations and distributions to shareholders may be adversely affected.
Our investment and disposition activity may lead to dilution.
Our strategy is to increase our investment in general purpose, well located warehouse/distribution assets and reduce our exposure to all other asset types. We believe this strategy will lessen capital expenditures over time and mitigate revenue reductions on renewals and re-tenanting. To implement this strategy, we have been selling non-industrial assets, which generally have higher capitalization rates, and buying warehouse and distribution properties, which, in the current competitive market, generally have lower capitalization rates. This strategy impacts growth in the short-term period. There can be no assurance that the implementation of our strategy will lead to improved results or that we will be able to execute our strategy as contemplated or on terms acceptable to us.
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Investment activities may not produce expected results and may be affected by outside factors.
The demand for industrial space in the United States is generally related to the level of economic output. Accordingly, reduced economic output may lead to lower occupancy rates for our properties. The concentration of our investments, among other factors, in industrial assets may expose us to the risk of economic downturns specific to industrial assets to a greater extent than if our investments were diversified.
Investment in commercial properties entail certain risks, such as (1) underwriting assumptions, including occupancy, rental rates and expenses, may differ from estimates, (2) the properties may become subject to environmental liabilities that we were unaware of at the time we acquired the property despite any environmental testing, (3) we may have difficulty obtaining financing on acceptable terms or paying the operating expenses and debt service associated with acquired properties prior to sufficient occupancy and (4) projected exit strategies may not come to fruition due to a variety of factors such as market conditions and/or tenant credit conditions at the time of dispositions.
We may not be successful in identifying suitable real estate properties or other assets that meet our investment criteria. We may also fail to complete investments on satisfactory terms. Failure to identify or complete investments could slow our growth, which could, in turn, have a material adverse effect on our financial condition and results of operations.
Properties where we have operating responsibilities and multi-tenant properties expose us to additional risks.
Properties where we have operating responsibilities involve risks not typically encountered in real estate properties which are fully operated by a single tenant. The ownership of properties which are not fully operated by a single tenant expose us to the risk of potential "CAM slippage," which may occur when the actual cost of taxes, insurance and maintenance at the property exceeds the operating expenses paid by tenants and/or the amounts budgeted. Depending on the tenant’s leverage in the lease negotiation, the tenant may be successful in negotiating for caps on certain operating expenses and we are responsible for any amounts in excess of any cap.
Multi-tenant properties are also subject to the risk that a sufficient number of suitable tenants may not be found to enable the property to operate profitably and provide a return to us. Moreover, tenant turnover and fluctuation in occupancy rates, could affect our operating results. This risk may be compounded by the failure of existing tenants to satisfy their obligations due to various factors. These risks, in turn, could cause a material adverse impact to our results of operations and business.
Uninsured losses or a loss in excess of insured limits could adversely affect our financial condition.
We carry comprehensive liability, fire, extended coverage and rent loss insurance on certain of the properties in which we have an interest, with policy specifications and insured limits that we believe are customary for similar properties. However, with respect to those properties where the leases do not provide for abatement of rent under any circumstances, we generally do not maintain rent loss insurance. In addition, certain of our leases require the tenant to maintain all insurance on the property, and the failure of the tenant to maintain the proper insurance could adversely impact our investment in a property in the event of a loss. Furthermore, there are certain types of losses, such as losses resulting from wars, terrorism or certain acts of God, that generally are not insured because they are either uninsurable or not economically insurable. Should an uninsured loss or a loss in excess of insured limits occur, we could lose capital invested in a property as well as the anticipated future revenues from a property, while remaining obligated for any mortgage indebtedness or other financial obligations related to the property. Any loss of these types could adversely affect our financial condition and results of operations.
Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, misappropriation of assets and/or damage to our business relationships, all of which could negatively impact our financial results.
Cyber incidents may result in disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation and damage to our tenant, investor and/or vendor relationships. As our reliance on technology has increased, so have the risks posed to our information systems, both internal and those we have outsourced. Any processes, procedures and internal controls that we implement, as well as our increased awareness of the nature and extent of a risk of a cyber incident, do not guarantee that our financial results, operations, business relationships or confidential information will not be negatively impacted by such an incident.
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Insider or employee cyber and security threats are increasingly a concern for all companies, including ours. In addition, social engineering and phishing are a particular concern for companies with employees. As a landlord, we are also susceptible to cyber attacks on our tenants and their payment systems. We are continuously working to install new, and to upgrade our existing, network and information technology systems and to provide employee awareness training around phishing, malware and other cyber risks to ensure that we are protected, to the greatest extent possible, against cyber risks and security breaches. However, such upgrades, new technology and training may not be sufficient to protect us from all risks.
As a smaller company, we use third-party vendors to assist us with our network and information technology requirements. While we carefully select these third-party vendors, we cannot control their actions. Any problems caused by these third parties, including those resulting from breakdowns or other disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher volumes, cyber attacks and security breaches at a vendor could adversely affect our operations.
Competition may adversely affect our ability to purchase properties.
There are numerous other companies and individuals with greater financial and other resources than we have that compete with us in seeking investments and tenants. This competition may result in a higher cost for properties and lower returns and impact our ability to grow.
We may have limited control over our joint venture investments.
Our joint venture investments involve risks not otherwise present for investments made solely by us, including the possibility that our partner might, at any time, become bankrupt, have different interests or goals than we do, or take action contrary to our expectations, its previous instructions or our instructions, requests, policies or objectives, including our policy with respect to maintaining our qualification as a REIT. Other risks of joint venture investments include impasses on decisions, such as a sale, because neither we nor our partner may have full control over the joint venture. Also, there is no limitation under our organizational documents as to the amount of funds that may be invested in joint ventures.
Our ability to change our portfolio is limited because real estate investments are illiquid.
Investments in real estate are relatively illiquid and, therefore, our ability to change our portfolio promptly in response to changed conditions is limited. Our Board of Trustees may establish investment criteria or limitations as it deems appropriate, but currently does not limit the number or type of properties in which we may seek to invest or on the concentration of investments in any one geographic region.
Our Board of Trustees may change our investment policy without shareholders' approval.
Subject to our fundamental investment policy to maintain our qualification as a REIT and invest in core assets, our Board of Trustees will determine our investment and financing policies, growth strategy and our debt, capitalization, distribution, acquisition, disposition and operating policies.
Our Board of Trustees may revise or amend these strategies and policies at any time without a vote by shareholders. Changes made by our Board of Trustees may not serve the interests of debt or equity security holders and could adversely affect our financial condition or results of operations, including our ability to satisfy our debt service obligations, distribute cash to shareholders and qualify as a REIT. Accordingly, shareholders' control over changes in our strategies and policies is limited to the election of trustees.
Industry and Economic Risks
The current outbreak of COVID-19, or the future outbreak of any other highly infectious or contagious diseases, could adversely impact or cause disruption to our business, financial condition, results of operations and cash flows. Further, the spread of the COVID-19 outbreak has caused severe disruptions in the U.S. and global economy, may further disrupt financial markets and could potentially create widespread business continuity issues.
In recent years the outbreaks of a number of diseases, including Avian Bird Flu, H1N1, and various other "super bugs," have increased the risk of a pandemic. On March 11, 2020, the World Health Organization declared COVID-19, a novel strain of the coronavirus, a pandemic, and on March 13, 2020 the United States declared a national emergency with respect to COVID-19.
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The potential impact and duration of COVID-19 or another pandemic could have repercussions across regional and global economies and financial markets. The outbreak of COVID-19 in many countries continues to adversely impact global economic activity and has contributed to significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and, as cases of the virus have continued to be identified in additional countries, many countries, including the United States, have reacted by instituting quarantines and restrictions on travel and commerce. The duration of such restrictions is currently unknown. Furthermore, unrest in certain areas of the United States has resulted. These restrictions and unrest have, and may continue to, create disruption in global supply chains and adversely impact a number of industries, including industries in which our tenants participate.
The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19. Nevertheless, the COVID-19 outbreak has had, and future pandemics could have, a significant adverse impact on economic and market conditions of economies around the world, including the United States, the results of which have and would present material uncertainty and risk with respect to our performance, financial condition, results of operations and cash flows.
Potential disruptions in the financial markets could affect our ability to obtain debt financing on reasonable terms and have other adverse effects on us.
The United States credit markets have periodically experienced significant dislocations and liquidity disruptions, which have caused the spreads on prospective debt financings to widen considerably. These circumstances may materially impact liquidity in the debt markets, making financing terms for borrowers less attractive, and in certain cases may result in the unavailability of certain types of debt financing. Uncertainty in the credit markets may negatively impact our ability to access additional debt financing on reasonable terms, which may negatively affect our ability to make acquisitions. A prolonged downturn in the credit markets may cause us to seek alternative sources of potentially less attractive financing and may require us to adjust our business plan accordingly. In addition, these factors may make it more difficult for us to sell properties or may adversely affect the price we receive for properties that we do sell, as prospective buyers may experience increased costs of capital or difficulties in obtaining capital. These events in the credit markets may have an adverse effect on other financial markets in the United States, which may make it more difficult or costly for us to raise capital through the issuance of our common shares or preferred shares. These disruptions in the financial markets may have other adverse effects on us, our tenants or the economy in general.
Natural disasters, public health epidemics and the effects of climate change could have a concentrated impact on the areas where we operate and could adversely impact our results.
We invest in properties on a nationwide basis. Natural disasters, including earthquakes, storms, tornados, floods and hurricanes, could impact our properties in these and other areas in which we operate. Public health epidemics could impact our employees or the national or global supply chain. Potentially adverse consequences of global warming, including rising sea levels, could similarly have an impact on our properties. Over time, these conditions could result in declining demand for space in our buildings or the inability of us to operate the buildings at all. Climate change may also have indirect effects on our business by increasing the cost of (or making unavailable) property insurance on terms we find acceptable, increasing the cost of energy at our properties and requiring us to expend funds as we seek to repair and protect our properties against such risks. The incurrence of these losses, costs or business interruptions may adversely affect our operating and financial results.
Risks Related to our Indebtedness
We have a substantial amount of indebtedness.
Our substantial indebtedness could adversely affect our financial condition and our ability to fulfill our obligations under the documents governing our unsecured indebtedness and otherwise adversely impact our business and growth prospects.
We have a substantial amount of debt. We may be more leveraged than certain of our competitors. We have incurred, and may continue to incur, direct and indirect indebtedness in furtherance of our activities. Neither our declaration of trust nor any policy statement formerly adopted by our Board of Trustees limits the total amount of indebtedness that we may incur, and accordingly, we could become even more highly leveraged. As of December 31, 2020, our total consolidated indebtedness was approximately $1.4 billion and we had approximately $600.0 million available for borrowing under our principal credit agreement, subject to covenant compliance.
Our substantial indebtedness could adversely affect our financial condition and results of operations and have important consequences to us and our debt and equity security holders. For example, it could:
•make it more difficult for us to satisfy our indebtedness and debt service obligations and adversely affect our ability to pay distributions;
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•increase our vulnerability to adverse economic and industry conditions;
•require us to dedicate a substantial portion of our cash flow from operations to the payment of interest on and principal of our indebtedness, thereby reducing the availability of cash to fund working capital, capital expenditures and other general corporate purposes;
•limit our ability to borrow money or sell stock to fund our development projects, working capital, capital expenditures, general corporate purposes or acquisitions;
•restrict us from making strategic acquisitions or exploiting business opportunities;
•place us at a disadvantage compared to competitors that have less debt; and
•limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.
In addition, the agreements that govern our current indebtedness contain, and the agreements that may govern any future indebtedness that we may incur may contain, financial and other restrictive covenants, which may limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default that, if not cured or waived, could result in the acceleration of our debt.
Market interest rates could have an adverse effect on our borrowing costs, profitability and the value of our fixed-rate debt securities.
We have exposure to market risks relating to increases in interest rates due to our variable-rate debt. An increase in interest rates may increase our costs of borrowing on existing variable-rate indebtedness, leading to a reduction in our earnings. As of December 31, 2020, we have $129.1 million of trust preferred securities that matures in April 2037 that is LIBOR indexed. In addition, we have a $300.0 million unsecured term loan which matures January 2025 that is LIBOR indexed and is subject to interest rate swap agreements through January 2025. Also, our unsecured revolving credit facility is subject to a variable interest rate. The level of our variable-rate indebtedness, along with the interest rate associated with such variable-rate indebtedness, may change in the future and materially affect our interest costs and earnings. In addition, our interest costs on our fixed-rate indebtedness may increase if we are required to refinance our fixed-rate indebtedness upon maturity at higher interest rates. Also, fixed-rate debt securities generally decline in value as market rates rise because the premium, if any, over market interest rates will decline.
The LIBOR index rate may not be available in the future.
In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee (or ARRC) has proposed that the Secured Overnight Financing Rate (or SOFR) is the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. Our trust preferred securities do not provide for a clear alternative to USD-LIBOR.
We have engaged and may engage in hedging transactions that may limit gains or result in losses.
We have used derivatives to hedge certain of our variable-rate liabilities. As of December 31, 2020, we had aggregate interest rate swap agreements on $300.0 million of borrowings. The counterparties of these arrangements are major financial institutions; however, we are exposed to credit risk in the event of non-performance or default by the counterparties. Further, additional risks, including losses on a hedge position, may reduce the return on our investments. Such losses may exceed the amount invested in such instruments. We may also have to pay certain costs, such as transaction fees or breakage costs, related to hedging transactions.
Covenants in certain of the agreements governing our debt could adversely affect our financial condition, investment activities and/or operating activities.
Our unsecured revolving credit facility, unsecured term loan and indentures governing our senior notes contain certain cross-default and cross-acceleration provisions as well as customary restrictions, requirements and other limitations on our ability to incur indebtedness and consummate mergers, consolidations or sales of all or substantially all of our assets. Our ability to borrow under our unsecured revolving credit facility is also subject to compliance with certain other covenants. In addition, failure to comply with our covenants could cause a default under the applicable debt instrument and we may then be required to repay such
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debt with capital from other sources. Under those circumstances, other sources of capital may not be available to us or be available only on unattractive terms. Additionally, our ability to satisfy current or prospective lenders' insurance requirements may be adversely affected if lenders generally insist upon greater insurance coverage than is available to us in the marketplace or on commercially reasonable terms.
We rely on debt financing, including borrowings under our unsecured revolving credit facility, unsecured term loan, debt securities, and debt secured by individual properties, for working capital, including to finance our investment activities. If we are unable to obtain financing from these or other sources, or to refinance existing indebtedness upon maturity, our financial condition and results of operations could be adversely affected.
The documents governing our non-recourse indebtedness contain restrictions on the operations of our property owner subsidiaries and their properties. Certain activities, like leasing and alterations, may be subject to the consent of the applicable lender. In addition, certain lenders engage third-party loan servicers that may not be as responsive as we would be or as the leasing market requires.
We face risks associated with refinancings.
Some of the properties in which we have an interest are subject to a mortgage or other secured notes with balloon payments due at maturity. In addition, our corporate level borrowings require interest only payments with all principal due at maturity.
Our ability to make the scheduled balloon payments on any corporate recourse note will depend on our access to the capital markets, including our ability to refinance the maturing note. Our ability to make the scheduled balloon payment on any non-recourse mortgage note will depend upon (1) in the event we determine to contribute capital, our cash balances and the amount available under our unsecured credit facility, and (2) the property owner subsidiary's ability either to refinance the related mortgage debt or to sell the related property. If the property owner subsidiary is unable to refinance or sell the related property, the property may be conveyed to the lender through foreclosure or other means or the property owner subsidiary may declare bankruptcy.
We face risks associated with returning properties to lenders.
Some of the properties in which we have an interest are subject to non-recourse mortgages, which generally provide that a lender's only recourse upon an event of default is to foreclose on the property. In the event these properties are conveyed via foreclosure to the lenders thereof, we would lose all of our interest in these properties. The loss of a significant number of properties to foreclosure or through bankruptcy of a property owner subsidiary could adversely affect our financial condition and results of operations, relationships with lenders and ability to obtain additional financing in the future.
In addition, a lender may attempt to trigger a carve out to the non-recourse nature of a mortgage loan. To the extent a lender is successful, the ability of our property owner subsidiary to return the property to the lender may be inhibited and/or we may be liable for all or a portion of such loan.
Certain of our indebtedness is subject to cross-default and cross-acceleration provisions.
Substantially all of our corporate level borrowings and, in the future, certain of our secured indebtedness may, contain cross-default and/or cross-acceleration provisions, which may be triggered if we default on certain indebtedness in excess of certain thresholds. In the event of such a default, the resulting cross defaults and/or cross-accelerations may adversely impact our financial condition.
We may not be able to generate sufficient cash flow to meet our debt service obligations.
Our ability to make payments on and to refinance our indebtedness depends on our ability to generate cash in the future. To a certain extent, our cash flow is subject to general economic, industry, financial, competitive, operating, legislative, regulatory and other factors, many of which are beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations or that future sources of cash will be available to us in an amount sufficient to enable us to pay amounts due on our indebtedness. Additionally, if we incur additional indebtedness in connection with future acquisitions or development projects or for any other purpose, our debt service obligations could increase.
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The effective subordination of our unsecured indebtedness and any related guaranty may reduce amounts available for payment on our unsecured indebtedness and any related guaranty.
The holders of our secured debt may foreclose on the assets securing such debt, reducing the cash flow from the foreclosed property available for payment of unsecured debt and any related guaranty. The holders of any of our secured debt also would have priority with respect to the secured collateral over unsecured creditors in the event of a bankruptcy, liquidation or similar proceeding.
None of our subsidiaries are guarantors of our unsecured debt; therefore assets of our subsidiaries may not be available to make payments on our unsecured indebtedness.
We are the sole borrower of our unsecured indebtedness and none of our subsidiaries were guarantors of our unsecured indebtedness. In the event of a bankruptcy, liquidation or reorganization of any of our subsidiaries, holders of subsidiary debt, including trade creditors, will generally be entitled to payment of their claims from the assets of our subsidiaries before any assets are made available for distribution to us.
All of our assets are held through our subsidiaries. Consequently, our cash flow and our ability to meet our debt service obligations depend in large part upon the cash flow of our subsidiaries and the payment of funds by our subsidiaries to us in the form of distributions or otherwise.
Risks Related to Investment in our Equity
We may change the dividend policy for our common shares in the future.
The decision to declare and pay dividends on our common shares in the future, as well as the timing, amount and composition of any such future dividends, will be at the sole discretion of our Board of Trustees in light of conditions then existing, including our earnings, financial condition, capital requirements, debt maturities, the availability of debt and equity capital, applicable REIT and legal restrictions and the general overall economic conditions and other factors. The actual dividend payable will be determined by our Board of Trustees based upon the circumstances at the time of declaration and the actual dividend payable may vary from such expected amount. Any change in our dividend policy could have a material adverse effect on the market price of our common shares.
Securities eligible for future sale may have adverse effects on our share price.
We have an unallocated universal shelf registration statement and we also maintain a direct share purchase plan, pursuant to which we may issue additional common shares. There is no restriction on our issuing additional common or preferred shares, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common or preferred shares or any substantially similar securities. We maintain an At-the-Market offering program pursuant to which we may enter into forward sale agreements. Settlement provisions contained in any forward sale agreement could result in substantial dilution to our earnings per share or result in substantial cash payment obligations. In addition, in the case of our bankruptcy or insolvency, any forward sale agreement will automatically terminate, and we would not receive the expected proceeds from the sale of our common shares under such agreement.
We disclose certain non-GAAP financial measures in documents filed and/or furnished with the SEC; however, the non-GAAP financial measures we disclose are not equivalent to applicable comparable GAAP measures, and you should consider GAAP measures to be more relevant to our operating performance.
We use and disclose to investors FFO, Adjusted Company FFO, NOI and other non-GAAP financial measures. FFO, Adjusted Company FFO, NOI and the other non-GAAP financial measures are not equivalent to our net income or loss as determined in accordance with GAAP, and investors should consider GAAP measures to be more relevant to evaluating our operating performance. FFO, Adjusted Company FFO and NOI, and GAAP net income (loss) differ because FFO, Adjusted Company FFO and NOI exclude many items that are factored into GAAP net income or loss.
Because of the differences between FFO, Adjusted Company FFO, NOI and GAAP net income or loss, FFO, Adjusted Company FFO and NOI may not be accurate indicators of our operating performance, especially during periods in which we are acquiring and selling properties. In addition, FFO, Adjusted Company FFO and NOI are not necessarily indicative of cash flow available to fund cash needs and investors should not consider FFO, Adjusted Company FFO or NOI as alternatives to cash flows from operations, as an indication of our liquidity or as indicative of funds available to fund our cash needs, including our ability to make distributions to our shareholders.
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Neither the SEC nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO, Adjusted Company FFO and NOI. Also, because not all companies calculate FFO, Adjusted Company FFO and NOI the same way, comparisons with other companies’ measures with similar titles may not be meaningful.
There are certain limitations on a third party's ability to acquire us or effectuate a change in our control.
Severance payments under our executive severance policy. Substantial termination payments may be required to be paid under our executive severance policy applicable to and related agreements with our executives upon the termination of an executive. If those executive officers are terminated without cause, as defined, or resign for good reason, as defined, those executive officers may be entitled to severance benefits based on their current annual base salaries and trailing average of recent annual cash bonuses as defined in our executive severance policy and related agreements and the acceleration of certain non-vested equity awards. Accordingly, these payments may discourage a third party from acquiring us.
Our ability to issue additional shares. Our declaration of trust authorizes 1,000,000,000 shares of beneficial interest (par value $0.0001 per share) consisting of 400,000,000 common shares, 100,000,000 preferred shares and 500,000,000 shares of beneficial interest classified as excess stock, or excess shares. Our Board of Trustees is authorized to cause us to issue these shares without shareholder approval. Our Board of Trustees may establish the preferences and rights of any such class or series of additional shares, which could have the effect of delaying or preventing someone from taking control of us, even if a change in control were in shareholders' best interests. At December 31, 2020, in addition to common shares, we had outstanding 1,935,400 Series C Preferred Shares. Our Series C Preferred Shares include provisions, such as increases in dividend rates or adjustments to conversion rates, which may deter a change of control. The establishment and issuance of shares of our existing series of preferred shares or a future class or series of shares could make a change of control of us more difficult.
Maryland Takeover Statutes. Certain provisions of the Maryland General Corporation Law, including the Maryland Business Combination Act, the Maryland Control Share Act, and certain elective provisions of Maryland law under Subtitle 8 of the Maryland General Corporation Law, each as further described under the heading “Restrictions on Transfers of Capital Stock and Anti-Takeover Provisions – Maryland Law” in Exhibit 4.10 of this Annual Report, are applicable to Maryland REITs, such as the Company. We are subject to the Maryland Business Combination Act, and while our by-laws contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions by any person of our shares, we cannot assure you that this provision will not be amended or eliminated at any time in the future. We have also not elected to be governed by any of the specific provisions of Subtitle 8, however, through provisions of our declaration of trust and/or by-laws, as applicable, unrelated to Subtitle 8, we provide for an 80% shareholder vote to remove trustees and then only for cause, and that the number of trustees may be determined by a resolution of our Board of Trustees, subject to a minimum number. In addition, we can elect to be governed by any or all of the provisions of Subtitle 8 of the Maryland General Corporation Law at any time in the future. These statutes could have the effect of discouraging offers to acquire us and of increasing the difficulty of consummating any such offers, even if such acquisition would be in shareholders' best interests.
Limits on ownership of our capital shares may have the effect of delaying, deferring or preventing someone from taking control of us.
For us to qualify as a REIT for federal income tax purposes, among other requirements, not more than 50% of the value of our outstanding capital shares may be owned, directly or indirectly, by five or fewer individuals (as defined for federal income tax purposes to include certain entities) during the last half of each taxable year, and these capital shares must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year (in each case, other than the first such year for which a REIT election is made). Our declaration of trust includes certain restrictions regarding transfers of our capital shares and ownership limits.
In order to protect against the loss of our REIT status, among other things, actual or constructive ownership of our capital shares in violation of the restrictions contained in our declaration of trust or in excess of 9.8% in value of our outstanding equity shares, defined as our common shares, or preferred shares, subject to certain exceptions, would cause the violative transfer or ownership to be void or cause the shares to be transferred to a charitable trust and then sold to a person or entity who can own the shares without violating these limits. As a result, if a violative transfer were made, the recipient of the shares would not acquire any economic or voting rights attributable to the transferred shares. Additionally, the constructive ownership rules for these limits are complex, and groups of related individuals or entities may be deemed a single owner and consequently in violation of the share ownership limits.
However, these restrictions and limits may not be adequate in all cases to prevent the transfer of our capital shares in violation of the ownership limitations. The ownership limits discussed above may have the effect of delaying, deferring or preventing someone from taking control of us, even though a change of control could involve a premium price for the common shares or otherwise be in shareholders' best interests.
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The trading price of our common shares has been, and may continue to be, subject to significant fluctuations.
The market price of our common shares may fluctuate in response to company-specific and general market events and developments, including those described in this Annual Report. In addition, our leverage may impact investor demand for our common shares, which could have a material effect on the market price of our common shares.
Furthermore, the public valuation of our common shares is related primarily to the earnings that we derive from rental income with respect to the properties in which we have an interest and not from the underlying appraised value of the properties themselves. As a result, interest rate fluctuations and capital market conditions can affect the market value of our common shares. For instance, if interest rates rise, the market price of our common shares may decrease because potential investors seeking a higher yield than they would receive from our common shares may sell our common shares in favor of higher yielding securities.
Legal and Regulatory Risks
We face possible liability relating to environmental matters.
Under various federal, state and local environmental laws, statutes, ordinances, rules and regulations, as an owner of real property, our property owner subsidiaries may be liable for the costs of removal or remediation of certain hazardous or toxic substances at, on, in or under the properties in which we have an interest as well as certain other potential costs relating to hazardous or toxic substances. These liabilities may include government fines and penalties and damages for injuries to persons and adjacent property. These laws may impose liability without regard to whether we knew of, or were responsible for, the presence or disposal of those substances. This liability may be imposed on our property owner subsidiaries in connection with the activities of an operator of, or tenant at, the property. The cost of any required remediation, removal, fines or personal or property damages, and our liability therefore, could be significant and could exceed the value of the property and/or our aggregate assets. In addition, the presence of those substances, or the failure to properly dispose of or remove those substances, may adversely affect a property owner subsidiary's ability to sell or rent that property or to borrow using that property as collateral, which, in turn, would reduce our revenues and ability to satisfy our debt service obligations and to pay dividends.
A property can also be adversely affected either through physical contamination or by virtue of an adverse effect upon value attributable to the migration of hazardous or toxic substances, or other contaminants that have or may have emanated from other properties. Although the tenants of the properties in which we have an interest are primarily responsible for any environmental damages and claims related to the leased premises, in the event of the bankruptcy or inability of any of the tenants of the properties in which we have an interest to satisfy any obligations with respect to the property leased to that tenant, our property owner subsidiary may be required to satisfy such obligations. In addition, we may be held directly liable for any such damages or claims irrespective of the provisions of any lease.
From time to time, in connection with the conduct of our business, our property owner subsidiaries authorize the preparation of Phase I environmental reports and, when recommended, Phase II environmental reports, with respect to their properties. There can be no assurance that these environmental reports will reveal all environmental conditions at the properties in which we have an interest. We are also subject to exposure to material liability from the discovery of previously unknown environmental conditions; changes in law; activities of tenants; or activities relating to properties in the vicinity of the properties in which we have an interest.
Changes in laws increasing the potential liability for environmental conditions existing on properties or increasing the restrictions on discharges or other conditions may result in significant unanticipated expenditures or may otherwise adversely affect the operations of the tenants of the properties in which we have an interest, which could adversely affect our financial condition or results of operations.
Costs of complying with changes in governmental laws and regulations may adversely affect our results of operations.
We cannot predict what laws or regulations may be enacted, repealed or modified in the future, how future laws or regulations will be administered or interpreted, or how future laws or regulations will affect our properties. Compliance with new or modified laws or regulations, or stricter interpretation of existing laws, may require us or our tenants to incur significant expenditures, impose significant liability, restrict or prohibit business activities and could cause a material adverse effect on our results of operations.
Legislation such as the Americans with Disabilities Act may require us to modify our properties at substantial costs and noncompliance could result in the imposition of fines or an award of damages to private litigants. Future legislation may impose additional requirements. We may incur additional costs to comply with any future requirements.
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Risks Related to Our REIT Status
There can be no assurance that we will remain qualified as a REIT for federal income tax purposes.
We believe that Lexington has met the requirements for qualification as a REIT for federal income tax purposes beginning with its taxable year ended December 31, 1993, and we intend for Lexington to continue to meet these requirements in the future. However, qualification as a REIT involves the application of highly technical and complex provisions of the Code, for which there are only limited judicial or administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may affect Lexington's ability to continue to qualify as a REIT. No assurance can be given that Lexington has qualified or will remain qualified as a REIT. In addition, no assurance can be given that legislation, regulations, administrative interpretations or court decisions will not significantly change the requirements for qualification as a REIT or the federal income tax consequences of such qualification. If Lexington does not qualify as a REIT, Lexington would not be allowed a deduction for dividends paid to shareholders in computing its net taxable income and Lexington would not be required to continue making distributions. In addition, Lexington's income would be subject to tax at the regular corporate rates. Lexington also could be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. Cash required to be used to pay taxes would not be available to satisfy Lexington's debt service obligations and to make distributions to its shareholders. Although we currently intend for Lexington to continue to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause Lexington, without the consent of the shareholders, to revoke the REIT election or to otherwise take action that would result in disqualification.
We may be subject to the REIT prohibited transactions tax, which could result in significant U.S. federal income tax liability to us.
A REIT will incur a 100% tax on the net income from a prohibited transaction. Generally, a prohibited transaction includes a sale or disposition of property held primarily for sale to customers in the ordinary course of business. While we believe that the dispositions of our assets pursuant to our investment strategy should not be treated as prohibited transactions, whether a particular sale will be treated as a prohibited transaction depends on the underlying facts and circumstances. We have not sought and do not intend to seek a ruling from the Internal Revenue Service regarding any dispositions. Accordingly, there can be no assurance that our dispositions of such assets will not be subject to the prohibited transactions tax. If all or a significant portion of those dispositions were treated as prohibited transactions, we would incur a significant U.S. federal income tax liability, which could have a material adverse effect on our financial position.
Distribution requirements imposed by law limit our flexibility.
To maintain Lexington's status as a REIT for federal income tax purposes, Lexington is generally required to distribute to its shareholders at least 90% of its taxable income for that calendar year. Lexington's taxable income is determined without regard to any deduction for dividends paid and by excluding net capital gains. To the extent that Lexington satisfies the distribution requirement but distributes less than 100% of its taxable income, Lexington will be subject to federal corporate income tax on its undistributed income. In addition, Lexington will incur a 4% nondeductible excise tax on the amount by which its distributions in any year are less than the sum of (i) 85% of its ordinary income for that year, (ii) 95% of its capital gain net income for that year and (iii) 100% of its undistributed taxable income from prior years. We intend for Lexington to continue to make distributions to its shareholders to comply with the distribution requirements of the Code and to reduce exposure to federal taxes. Differences in timing between the receipt of income and the payment of expenses in determining its taxable income and the effect of required debt amortization payments could require Lexington to borrow funds on a short-term basis in order to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT.
Legislative or regulatory tax changes could have an adverse effect on us.
At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. Any of those new laws or interpretations may take effect retroactively and could adversely affect us or you as a debt or equity security holder.
Federal tax legislation passed in 2017 made numerous changes to tax rules. These changes do not affect the REIT qualification rules directly, but may otherwise affect us or our shareholders. For example, the top federal income tax rate for individuals was reduced to 37%, there is a deduction available for certain Qualified Business Income that reduces the top effective tax rate applicable to ordinary dividends from REITs to 29.6% (through a 20% deduction for ordinary REIT dividends received) and various deductions are eliminated or limited. Most of the changes applicable to individuals are temporary.
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General
A downgrade in our credit ratings could have a material adverse effect on our business and financial condition.
The credit ratings assigned to us and our debt could change based upon, among other things, our results of operations and financial condition or the real estate industry generally. These ratings are subject to ongoing evaluation by credit rating agencies, and we cannot assure you that any rating will not be changed or withdrawn by a rating agency in the future if, in the applicable rating agency's judgment, circumstances warrant. Moreover, these credit ratings do not apply to our common and preferred shares and are not recommendations to buy, sell or hold any other securities. Any downgrade of us or our debt could have a material adverse effect on the market price of our debt securities and our common and preferred shares. If any credit rating agency that has rated us or our debt downgrades or lowers its credit rating, or if any credit rating agency indicates that it has placed any such rating on a so-called “watch list” for a possible downgrading or lowering or otherwise indicates that its outlook for that rating is negative, it could also have a material adverse effect on our costs and availability of capital, which could, in turn, have a material adverse effect on our financial condition, results of operations, cash flows and our ability to satisfy our debt service obligations and to make dividends and distributions on our common shares and preferred shares.
We are dependent upon our key personnel.
We are dependent upon key personnel, particularly our executive officers. We do not have employment agreements with our executive officers, but we have entered into severance arrangements with certain of our executive officers that provide certain payments upon specified termination events.
Our inability to retain the services of any of our key personnel, an unplanned loss of any of their services or our inability to replace them upon termination as needed, could adversely impact our operations. We do not have key man life insurance coverage on our executive officers.
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Item 1B. Unresolved Staff Comments
There are no unresolved written comments that were received from the SEC staff relating to our periodic or current reports under the Securities Exchange Act of 1934.
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Item 2. Properties
Real Estate Portfolio
General. As of December 31, 2020, we had equity ownership interests in approximately 130 consolidated real estate properties containing approximately 56.1 million square feet of rentable space, which were approximately 98.3% leased based upon net rentable square feet. Generally, all properties in which we have an interest are held through at least one property owner subsidiary.
Ground Leases. Certain of the properties in which we have an interest are subject to long-term ground leases where either the tenant of the building on the property or a third party owns and leases the underlying land to the property owner subsidiary. Certain of these properties are economically owned through the holding of industrial revenue bonds primarily for real estate tax abatement purposes and as such, neither ground lease payments nor bond interest payments are made or received, respectively. For certain of the properties held under a ground lease, the ground lessee has a purchase option. At the end of these long-term ground leases, unless extended or the purchase option is exercised, the land together with all improvements thereon reverts to the landowner.
Office Leases. We lease our headquarters office space in New York, New York and our satellite office in Dallas, Texas.
Leverage. As of December 31, 2020, we had outstanding mortgages and notes payable of approximately $138.4 million with a weighted-average interest rate of approximately 4.5% and a weighted-average maturity of 7.8 years.
Property Charts. The following tables list our properties by type, their locations, the net rentable square feet, the expiration of the current lease term and percent leased, as applicable, as of December 31, 2020.
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LEXINGTON CONSOLIDATED PORTFOLIOPROPERTY CHARTINDUSTRIAL
Single-tenant properties:
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LEXINGTON CONSOLIDATED PORTFOLIOPROPERTY CHARTINDUSTRIAL
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LEXINGTON CONSOLIDATED PORTFOLIOPROPERTY CHARTINDUSTRIAL
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LEXINGTON CONSOLIDATED PORTFOLIOPROPERTY CHARTINDUSTRIAL
Multi-tenant/vacant properties:
The 2020 net effective annual base cash rent for the industrial portfolio as of December 31, 2020 was $4.33 per square foot and the weighted-average remaining lease term was 7.4 years.
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LEXINGTON CONSOLIDATED PORTFOLIOPROPERTY CHARTNON-INDUSTRIAL
Single-tenant office properties:
Multi-tenant/vacant office properties:
Single-tenant other properties:
Multi-tenant/vacant other properties:
King St./1042 Fort St. Mall Honolulu HI 77,459 Various 37 %
The 2020 net effective annual base cash rent for the office/other portfolio as of December 31, 2020 was $16.46 per square foot, excluding single-tenant other property, and the weighted-average remaining lease term was 7.2 years.
The 2020 net effective annual base cash rent for the consolidated portfolio as of December 31, 2020 was $4.79 per square foot, excluding single-tenant other property, and the weighted-average remaining lease term was 7.4 years.
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LEXINGTONNON-CONSOLIDATED PORTFOLIO PROPERTYCHART
In addition, we have two non-consolidated joint ventures with a developer, which own developable parcels of land in Etna, Ohio.
The 2020 net effective annual base cash rent for our proportionate share of the non-consolidated portfolio as of December 31, 2020 was $17.17 per square foot and the weighted-average remaining lease term was 9.3 years.
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Development Projects
The following is a summary of our industrial development projects as of December 31, 2020:
Development Projects
Consolidated:
Non-consolidated:
(1) GAAP investment balance is in real estate under construction for consolidated projects and in investments in non-consolidated entities for non-consolidated projects.
(2) Estimated project cost excludes potential developer partner promote.
(3) In December 2019, we acquired a 23.6-acre parcel in Rickenbacker, OH. In January 2020, we commenced construction of a 320,190 square-foot warehouse. In December 2020, we executed a lease with the distribution subsidiary of an international consumer products company for an initial term of approximately three years.
(4) In December 2017, we acquired a 155-acre parcel of developable land in a joint venture. In December 2018, we acquired a subdivided parcel consisting of 57 acres from the joint venture for a cost basis of $3.6 million, which we ground leased to a national retailer and the national retailer built a distribution center. In December 2020, we sold our interest in the ground-leased parcel to the tenant for $10.6 million.
(5) Plans and specifications for completion have not been completed and the square footage, estimated project costs and completion date cannot be determined.
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Tenant Diversification
We believe our tenant mix is well diversified, and, over time, we expect to reduce our exposure to the automotive industry by growing our exposure to other industries such as the e-commerce and transportation/logistics industries. Below are the industries in our industrial portfolio based on 2020 base rent for consolidated properties owned as of December 31, 2020:
Lease Term. We strive to maintain a weighted-average lease term that is longer than most industrial REITs, favoring certainty of cash flow over lease-rollover risk. However, we will invest in shorter-term leases if we are optimistic about the location in a releasing context. As of December 31, 2020, the weighted-average lease term in our industrial portfolio was 7.4 years.
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The following table sets forth information about the 15 largest tenants/guarantors in our portfolio as of December 31, 2020 based on total base rental revenue as of December 31, 2020 (in '000's, except square feet).
(1) Tenant, guarantor or parent.
(2) Excludes vacant square feet
(3) Total shown may differ from detail amounts due to rounding
(4) Excludes rents from prior tenants.
(5) Lease restricts certain disclosures.
(6) Includes parking operations.
In 2020, 2019 and 2018, no tenant/guarantor represented greater than 10% of our annual base rental revenue.
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The following chart sets forth certain information regarding lease expirations for the next ten years in our consolidated portfolio at December 31, 2020:
The following chart sets forth the 2020 base rent ($000's) based on the credit rating of our consolidated tenants at December 31, 2020(1):
Base Rent Percentage of Base Rental Revenue
(1) Credit ratings are based upon either tenant, guarantor or parent/ultimate parent. Generally, all multi-tenant assets are included in unrated. See Item 1A “Risk Factors”.
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Item 3. Legal Proceedings
From time to time we are directly and indirectly involved in legal proceedings arising in the ordinary course of our business. 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.
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Item 4. Mine Safety Disclosures
Not applicable.
Executive Officers of Lexington
The following sets forth certain information relating to our executive officers:
Name Business Experience
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PART II.
Item 5. Market For Registrant's Common Equity, Related StockholderMatters And Issuer Purchases of Equity Securities
Market Information. Our common shares are listed for trading on the NYSE under the symbol “LXP”.
Holders. As of February 16, 2021, we had 2,443 common shareholders of record.
Dividends. Since our predecessor's formation in 1993, we have made quarterly distributions without interruption.
While we intend to continue paying regular quarterly dividends to holders of our common shares, the authorization of future dividend declarations will be at the discretion of our Board of Trustees and will depend on our actual cash flow, our financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and such other factors as our Board of Trustees deems relevant. The actual cash flow available to pay dividends will be affected by a number of factors, including, among others, the risks discussed under “Risk Factors” in Part I, Item 1A and “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Annual Report.
We do not believe that the financial covenants contained in our debt instruments will have any adverse impact on our ability to pay dividends in the normal course of business to our common and preferred shareholders or to distribute amounts necessary to maintain our qualification as a REIT.
Equity Compensation Plan Information. The following table sets forth certain information, as of December 31, 2020, with respect to our Amended and Restated 2011 Equity-Based Award Plan under which our equity securities are authorized for issuance as compensation.
Plan Category (a) (b) (c)
Equity compensation plans approved by security holders — $ — 2,359,683
Equity compensation plans not approved by security holders — — —
Recent Sales of Unregistered Securities.
We did not issue any common shares during 2020 on an unregistered basis.
Share Repurchase Program.
There were no share repurchases during the quarter ended December 31, 2020 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 as of December 31, 2020.
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Item 6. Selected Financial Data
The following sets forth selected consolidated financial data as of and for each of the years in the five-year period ended December 31, 2020. The selected consolidated financial data should be read in conjunction with Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations” below, and the Consolidated Financial Statements and the related notes set forth in Item 8 “Financial Statements and Supplementary Data”, below. ($000's, except per share data):
(1) 2018 and 2017 amounts reclassified upon the adoption of ASC 842.
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Item 7. Management's Discussion and Analysis of Financial Condition andResults of Operations
In this discussion, we have included statements that may constitute “forward-lookingstatements” within the meaning of the safe harbor provisions of the PrivateSecurities Litigation Reform Act of 1995. Forward-looking statements are nothistorical facts but instead represent only our beliefs regarding future events, manyof which, by their nature, are inherently uncertain and outside our control. Thesestatements may relate to our future plans and objectives, among other things. Byidentifying these statements for you in this manner, we are alerting you to thepossibility that our actual results may differ, possibly materially, from theanticipated results indicated in these forward-looking statements. Important factorsthat could cause our results to differ, possibly materially, from those indicated inthe forward-looking statements include, among others, those discussed above in“Risk Factors” in Part I, Item 1A of this Annual Report and “CautionaryStatements Concerning Forward-Looking Statements” in the beginning of this AnnualReport.
Introduction
The following is a discussion and analysis of the consolidated financial condition and results of operations of Lexington Realty Trust for the years ended December 31, 2020 and 2019, and significant factors that could affect its prospective financial condition and results of operations. This discussion should be read together with our accompanying consolidated financial statements included herein and notes thereto.
COVID-19 Impact. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. 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.
We have received a limited number of, and may in the future receive, rent relief requests from our tenants. However, as of December 31, 2020, we do not believe that these rent relief requests will have a material impact on our rental revenues. A limited number of our other tenants, particularly retail tenants and those with businesses tied to the aviation industry, continue to be impacted by COVID-19 and related government restrictions and social distancing requirements. We continue to believe that the impacts of COVID-19 on our portfolio are mitigated due to our focus on warehouse and distribution properties and the diversity of our tenant base, both geographically and by industry exposure.
While our acquisition activity has recovered from the reduced level experienced earlier in 2020, we believe that there continues to be limited financing available for potential purchasers of certain of our properties, which has impacted our disposition activities. In addition, there is increased competition for investment in warehouses and distribution properties due to the resilience of this part of the industrial sector during the COVID-19 pandemic.
We remain unable to estimate the long-term impacts COVID-19 will have on our financial condition.
Investment Trends
General. Over the last several years, we have focused our investment activity primarily on income producing single-tenant warehouse and distribution assets.
In 2020, we acquired $611.8 million of warehouse and distribution assets, which is a decrease of $92.0 million compared to 2019 investment activity of $703.8 million. The decrease was primarily due to the COVID-19 "stay-at-home" orders and increased competition.
As of December 31, 2020, our percentage of gross book value from industrial assets increased to 90.8% compared to 81.5% as of December 31, 2019 as a result of our acquisition and capital recycling efforts. We expect to continue to recycle our non-industrial assets into warehouse and distribution facilities. While our capital recycling strategy has had and may continue to have a near-term dilutive impact on earnings due to the sales of revenue-producing properties, we believe this strategy will benefit shareholder value in the long term.
The industrial real estate market was one of the most resilient real estate markets during the COVID-19 pandemic. The main driver of growth in the industrial real estate market has been e-commerce. We believe that growth will also be driven by companies increasing their inventories in the United States to keep up with demand and to protect against future disruptions in the supply chain.
While we believe the industrial market will continue to grow, there continues to be an increase in competition for the acquisition of industrial properties, specifically warehouse/distribution properties, which drives up the cost of the assets we buy
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and drives down the yield we are able to obtain. This trend was highlighted when initial capitalization rates compressed further during 2020.
Lease Term. We primarily acquire assets subject to intermediate and long-term leases with escalating rents, which we believe strengthen our future cash flows and provide a partial hedge against rising interest rates. We intend to maintain a weighted-average lease term longer than many comparable companies and balance our lease expiration schedule.
Our industrial investment underwriting focuses less on tenant credit than our historical office investment underwriting as we focus on real estate characteristics such as location and related demographic and local economic trends. This has allowed us to acquire certain short-term leased warehouse/distribution assets, which may be acquired at a discount compared to long-term leased warehouse/distribution assets and allow for a value-add strategy through the lease renewal or a multi-tenanting process.
Development. As a result of the competition for income producing single-tenant warehouse/distribution assets, in 2017, we began selectively investing in development projects. We believe we can achieve higher yields from development projects than we can by purchasing existing properties.
Our development activities have been focused on speculative development. Our target markets are experiencing low vacancy rates. Despite an increase in construction in recent years, we believe there is sufficient tenant demand for our development projects.
Leasing
General. Re-leasing properties that are currently vacant or as leases expire at favorable effective rates is a primary area of focus for our asset management. Renewals of industrial leases, particularly for warehouse/distribution facilities, are generally dependent on location and occupancy alternatives for our tenants. We believe our older industrial assets face more challenges than our newer industrial assets because the location of our older industrial assets is generally tied to the specific tenant need as opposed to the national or regional distribution supply chain. In addition, our older industrial assets may need to be renovated to meet current market specs.
If a property cannot be re-let to a single user and the property can be adapted to multi-tenant use, we determine whether the costs of adapting the property to multi-tenant use outweigh the benefit of funding operating costs while searching for a single-tenant and whether selling a vacant property, which limits operating costs and allows us to redeploy capital, is in the best interest of our shareholders.
During 2020, we entered into 20 new leases and lease extensions encompassing approximately 5.2 million square feet. The average base rent on these extended leases was approximately $4.73 per square foot compared to the average base rent on these leases before extension of $4.61 per square foot. The weighted-average cost of tenant improvements and lease commissions during 2020 was approximately $2.57 per square foot for new leases and $3.45 per square foot for extended leases.
As of December 31, 2020, we had six single-tenant leases in our industrial portfolio where the lease term is scheduled to expire in 2021, covering approximately 3.7 million square feet.
Inherent Growth. Many leases have scheduled fixed rent increases or rent increases based upon the consumer price index. As of December 31, 2020, 86% of our single-tenant industrial leases had scheduled rent increases. The average escalation rate of these leases was 2.1% as of December 31, 2020. A majority of our leases require tenants to pay operating expenses, including maintenance, real estate taxes, insurance and utilities, thereby reducing our exposure to increases in costs and operating expenses. However, certain of our leases provide for some level of landlord responsibility for capital repairs and replacements, the cost of which is generally factored into the rental rate. Our motivation to release vacant space requires us to meet market demands with respect to rental rates, tenant concessions and landlord responsibilities. Developers are similarly motivated when signing leases with tenants due to the significant competition in the industrial space. As a result, the obligations of our property owner subsidiaries on new leases and newly renewed or extended leases may increase to include, among other items, some form of responsibility for operating expenses and/or capital repairs and replacements.
Tenant Credit. We continue to monitor the credit of tenants of properties in which we have an interest by (1) subscribing to rating agency information, so that we can monitor changes in the ratings of our rated tenants, (2) reviewing financial statements that are publicly available or that are required to be delivered to us under the applicable lease, (3) monitoring news reports regarding our tenants and their respective businesses, (4) monitoring the timeliness of rent collections and (5) meeting with our tenants. During 2020, this credit monitoring was essential to allow us to differentiate between legitimate rent relief requests and opportunistic rent relief requests.
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Non-Industrial Properties
We continue to recycle out of our non-industrial investments. As of December 31, 2020, our non-industrial assets represented 9.2% of our gross book value. We have historically marketed non-industrial assets for sale when we believe we have obtained the highest possible valuation through various means, including lease renewals. As the number of non-industrial assets continues to shrink, we continue to explore ways to accelerate the sale of the remaining non-industrial assets.
Non-Recourse Mortgage Loan Resolutions
During 2020, we conveyed three properties in foreclosure or via a deed-in-lieu of foreclosure due to the balance of the non-recourse mortgage loans encumbering the properties being in excess of the value of the property collateral.
Since we have a limited number of industrial properties subject to non-recourse mortgages, we do not expect many foreclosures in the future.
Impairment charges
During 2020 and 2019, we incurred impairment charges on certain of our assets of $14.5 million and $5.3 million, respectively, due to each asset's carrying value being below its estimated fair value. Most of the impairment charges in 2020 and 2019 were incurred on non-core assets due to anticipated shortened holding periods. We cannot estimate if we will incur, or the amount of, future impairment charges on our assets. See Part I, Item 1A “Risk Factors”, of this Annual Report.
Critical Accounting Policies
Our accompanying consolidated financial statements have been prepared in accordance with GAAP, which requires our management to make estimates that affect the amounts of revenues, expenses, assets and liabilities reported and related disclosures of contingent assets and liabilities. A summary of our significant accounting policies which are important to the portrayal of our financial condition and results of operations is set forth in note 2 to the Consolidated Financial Statements, which are included in “Financial Statements and Supplementary Data” in Part II, Item 8 of this Annual Report.
The following is a summary of our critical accounting policies, which require some of management's most difficult, subjective and complex judgments.
Acquisition of Real Estate. The fair value of the real estate acquired, which includes the impact of fair value adjustments for assumed mortgage debt related to property acquisitions, is allocated to the acquired tangible assets, consisting of land, building and improvements and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and value of tenant relationships, based in each case on their fair values.
The fair value of the tangible assets of an acquired property (which includes land, building and improvements and fixtures and equipment) is determined by valuing the property as if it were vacant. The “as-if-vacant” value is then allocated to land and building and improvements based on our management's determination of relative fair values of these assets. Factors considered by our management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, our management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Our management also estimates costs to execute similar leases including leasing commissions. Our management generally retains a third party to assist in the allocations.
In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market lease values are recorded based on the difference between the current in-place lease rent and management's estimate of current market rents. Below-market lease intangibles are recorded as part of deferred revenue and amortized into rental revenue over the non-cancelable periods and bargain renewal periods of the respective leases. Above-market leases are recorded as part of intangible assets and amortized as a direct charge against rental revenue over the non-cancelable portion of the respective leases.
The aggregate value of other acquired intangible assets, which may consist of in-place leases and/or tenant relationship values, is measured by the excess of (1) the purchase price paid for a property over (2) the estimated fair value of the property as if vacant, determined as set forth above. This aggregate value is allocated between in-place lease values and tenant relationship values based on management's evaluation of the specific characteristics of each tenant's lease. The value of in-place leases is amortized to expense over the remaining non-cancelable periods and any bargain renewal periods of the respective leases. The value of tenant relationships is amortized to expense over the applicable lease term plus expected renewal periods.
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Revenue Recognition. We recognize 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. We evaluate the collectability of our rental payments and recognize revenue on a cash basis when we believe it is no longer probable that we 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 assured. In those instances in which we fund tenant improvements and the improvements are deemed to be owned by us, revenue recognition will commence when the improvements are substantially completed and possession or control of the space is turned over to the tenant. When we determine that the tenant allowances are lease incentives, we commence 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. We recognize lease termination fees as rental revenue in the period received and write off unamortized leases related intangibles and other lease related account balances, provided that there are no further obligations under the lease. Otherwise, such fees and balances are recognized on a straight-line basis over the remaining obligation period.
Impairment of Real Estate. We evaluate the carrying value of all tangible and intangible real estate assets held for investment for possible impairment when an event or change in circumstance has occurred that indicates its carrying value may not be recoverable. We consider the strategic decisions regarding the future plans to sell properties and other market factors. We regularly update significant estimates and assumptions including rental rates, capitalization rates and discount rates, which are included in the anticipated future undiscounted cash flows derived from the asset. If such cash flows are less than the asset's carrying value, an impairment charge is recognized to the extent by which the asset's carrying value exceeds its estimated fair value, which may be below the balance of any non-recourse financing. Estimating future cash flows and fair values is highly subjective and such estimates could differ materially from actual results.
New Accounting Pronouncements
For a discussion of new accounting pronouncements, see note 2 "Summary of Significant Accounting Policies" to our consolidated financial statements included in this report.
Cybersecurity
While we have yet to experience a cyber attack that disrupted our operations in any material respect, all companies, including ours, are increasing the resources allocated to address and protect against cybersecurity threats. Due to the small size of our organization, we rely on third-parties to provide advice and services with respect to cybersecurity, which is not currently, but could become, a material cost.
Environmental, Social and Governance
ESG matters are becoming a central focus for our shareholders, employees, tenants, suppliers, creditors, and communities. We expect our ESG objectives and the resources allocated to ESG matters will continue to evolve over time as we assess strategies that are most appropriate for our organization.
Liquidity
General. Our principal sources of liquidity have been (1) undistributed cash flows generated from our investments, (2) the public and private equity and debt markets, (3) property specific debt, (4) corporate level borrowings, (5) commitments from co-investment partners and (6) proceeds from the sales of our investments. We believe our ratio of dividends to Adjusted Company Funds From Operations is conservative, and allows us to retain cash flow for internal growth.
Our ability to incur additional debt to fund acquisitions is dependent upon our existing leverage, the value of the assets we are attempting to leverage and general economic and credit market conditions, which may be outside of management's control or influence.
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.
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Cash flows from operations as reported in the Consolidated Statements of Cash Flows totaled $201.8 million for 2020 and $192.2 million for 2019. The increase was primarily related to the impact of cash flow generated from acquiring properties, 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 $(494.4) million in 2020 and $(187.0) million in 2019. 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 and changes in real estate deposits, net. Cash provided by investing activities related primarily to proceeds from the sale of properties, distributions from non-consolidated entities and changes in real estate deposits, net.
Net cash provided by (used in) financing activities totaled $342.6 million in 2020 and $(53.2) million in 2019. Cash provided by financing activities related primarily to the issuance of our 2030 Senior Notes, revolving credit facility borrowings and issuances of common shares. Cash used in financing activities was primarily attributable to the repurchase of a portion of the 2023 Senior Notes and 2024 Senior Notes through a tender offer, dividend and distribution payments, repayment of debt obligations and repurchases of common shares.
Public and Private Equity and Debt Markets. We access the public and private equity and debt markets on an opportunistic basis when we (1) believe conditions are favorable and (2) have a compelling use of proceeds.
We expect to continue to access debt and equity markets in the future to implement our business strategy and to fund future growth when market conditions are favorable. However, the volatility in the capital markets primarily resulting from the effects of the COVID-19 pandemic may negatively affect our ability to access these capital markets.
Equity:
At-The-Market Offering Program. We maintain an At-The-Market offering program, or ATM program, under which we can issue common shares. The following table summarizes common share issuances under the ATM program for the years ended December 31, 2020 and 2019, respectively:
Shares Sold Net Proceeds
Shares Sold Net Proceeds
Under the ATM program, we may also enter into forward sales agreements. During 2020, we entered into forward sales transactions for the sale of 5.0 million common shares that have not yet been settled. Subject to our right to elect cash or net share settlement, we expect to settle the forward sales transactions by the various maturity dates between August 2021 and November 2021. The shares had a then aggregate settlement price of $55.1 million at December 31, 2020, which is subject to adjustment in accordance with the forward sales contracts.
As of December 31, 2020, common shares with an aggregate value of $177.2 million remain available for issuance under the ATM program.
Underwritten Common Stock Offerings. During 2020, we issued 17,250,000 common shares at a public offering price of $9.60 per common share in an underwritten offering and generated net proceeds of approximately $164.0 million.
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Direct Share Purchase Plan. We maintain a direct share purchase plan, which has two components, (i) a dividend reinvestment component and (ii) a direct share purchase component. Under the dividend reinvestment component, common shareholders and holders of OP units may elect to automatically reinvest their dividends and distributions to purchase our common shares. Under the direct share purchase component, our current investors and new investors can make optional cash purchases of our common shares. The administrator of the plan, Computershare Trust Company, N.A., purchases common shares for the accounts of the participants under the plan, at our discretion, either directly from us, on the open market or through a combination of those two options. No shares were purchased from us under the plan in 2020, 2019 and 2018.
Share Repurchase Program. During 2015, our Board of Trustees authorized the repurchase of up to 10.0 million common shares and increased this authorization by 10.0 million common shares in 2018. The share repurchase program does not expire. During 2020 and 2019, we repurchased and retired approximately 1.3 million and 0.4 million common shares, respectively, at an average price of $8.28 and $8.13, respectively, per common share under the repurchase program. Approximately 9.0 million common shares remain available for repurchase at December 31, 2020. We have continued to, and in the future may, repurchase our common shares in the context of our overall capital plan, and to the extent we believe market volatility offers prudent investment opportunities based on our common share price versus net asset value per share.
Operating Partnership Units. In recent years there has not been a great demand for OP units as consideration and, as a result, we expect the percentage of common shares that will be outstanding in the future relative to OP units will increase, and income attributable to noncontrolling interests should be expected to decrease, as such OP units are redeemed for our common shares. Furthermore, our credit agreement requires us to own at least 95.5% of a subsidiary for the assets of such subsidiary to be included in the calculation of our credit agreement covenants, which incents us to maintain our percentage ownership in LCIF and not issue additional OP units.
As of December 31, 2020, there were 2.5 million OP units outstanding not owned by us which were convertible on a one OP unit for approximately 1.13 common shares basis into an aggregate of 2.9 million common shares assuming we satisfied redemptions entirely with common shares. All outstanding OP units are entitled to a distribution equal to the dividend on our common shares or a stated distribution that may adjust based on our commons share dividend amount.
Debt:
Corporate Borrowings. Due to lower borrowing costs, we issued $400.0 million aggregate principal amount of our 2030 Senior Notes. We used a portion of the net proceeds from the offering of the 2030 Senior Notes to repurchase $61.2 million and $51.1 million aggregate principal balance of our outstanding 2023 Senior Notes and 2024 Senior Notes, respectively, through a tender offer. We did not access the public debt markets in 2019.
The following Senior Notes were outstanding as of December 31, 2020:
Issue Date Face Amount (millions) Interest Rate Maturity Date Issue Price
The Senior Notes are unsecured and pay interest semi-annually in arrears. We may redeem the Senior 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.
A summary of the maturity dates and interest rates of our unsecured credit agreement, as of December 31, 2020, are as follows:
Maturity Date Interest Rate
(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 December 31, 2020, 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.
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As of December 31, 2020, we were in compliance with the financial covenants contained in our corporate level debt agreements.
During 2007, we issued $200.0 million in Trust Preferred Securities, which bore interest at a fixed rate of 6.804% through April 2017 and, thereafter, bears interest at a variable rate of three month LIBOR plus 170 basis points. These securities are (1) classified as debt, (2) due in 2037 and (3) currently redeemable by us. As of December 31, 2020, there were $129.1 million of these securities outstanding.
Property Specific Debt. As of December 31, 2020, we have a limited number of properties subject to mortgages, one of which was satisfied in January 2021. As of December 31, 2020, one of our property owner subsidiaries has a balloon payment of $10.4 million maturing in 2021. Our property owner subsidiaries do not have additional mortgage maturities with balloon payments due until 2025. With respect to mortgages encumbering properties where the expected lease rental revenues are sufficient to provide an estimated property value in excess of the mortgage balance, 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 ($178.8 million at December 31, 2020), property sale proceeds or borrowing capacity on our primary credit facility ($600.0 million as of December 31, 2020, subject to covenant compliance).
In 2019, we assumed through our consolidated property owner subsidiary a $41.9 million non-recourse mortgage loan with an interest rate of 4.3% and maturing in 2031. We did not obtain or assume any mortgage debt in 2020. Our secured debt decreased to approximately $138.4 million at December 31, 2020 compared to $393.9 million at December 31, 2019. We expect to continue to use property specific, non-recourse mortgages in certain situations as we believe that by properly matching a debt obligation, including the balloon maturity risk, with the terms of a lease, our cash-on-cash returns increase and the exposure to residual valuation risk is reduced. In addition, we may procure credit tenant lease financing in certain situations where we are able to monetize all or a significant portion of the rental revenues of a property at an attractive rate.
Co-investment Programs and Joint Ventures. We have entered into co-investment programs and joint ventures with institutional investors and other real estate companies to mitigate our risk in certain assets and increase our return on equity to the extent we earn management or other fees. However, investments in certain co-investment programs and joint ventures limit our ability to make investment decisions unilaterally relating to the assets and limit our ability to deploy capital. Due to our size, we do not expect to enter into co-investment programs and joint ventures seeking future investments, except with developers for industrial development projects.
Capital Recycling. Part of our strategy to effectively manage our balance sheet involves pursuing and executing well on property dispositions and recycling of capital. During 2020, we disposed of our interests in 16 properties for an aggregate gross price of $432.8 million. Additionally, we disposed of two properties in a non-consolidated joint venture for aggregate proceeds to us of $1.7 million. These proceeds were primarily used to (1) retire indebtedness encumbering properties in which we have an interest and corporate debt obligations and (2) make investments in real property.
As we near the completion of the capital recycling of our non-industrial assets, we expect to continue our recycling efforts with respect to our older industrial assets, including our manufacturing assets, where we believe we can take advantage of the strong current market. We believe capital recycling (1) provides cost effective and timely capital support for our investment activities and (2) allows us to maintain line capacity and cash in advance of what we expect to be a growing investment pipeline.
Liquidity Needs. Our principal liquidity needs are the contractual obligations set forth under the heading “Contractual Obligations,” below, and the payment of dividends to our shareholders and distributions to the holders of OP units. As we grow our development pipeline, we expect that development activities will become a greater part of our liquidity needs.
As of December 31, 2020, we had approximately $1.4 billion of indebtedness, consisting of mortgages and notes payable outstanding, a term loan, 2.70%, 4.40% and 4.25% Senior Notes and Trust Preferred Securities, with a weighted-average interest rate of approximately 3.3%. The ability of a property owner subsidiary to make debt service payments depends upon the rental revenues of its property and its ability to refinance the mortgage related thereto, sell the related property, or access capital from us or other sources. A property owner subsidiary's ability to accomplish such goals will be affected by numerous economic factors affecting the real estate industry, including the risks described under "Risk Factors" in Part I, Item 1A of this Annual Report.
If we are unable to satisfy our contractual obligations and other operating costs with our cash flow from operations, we intend to use borrowings and proceeds from issuances of equity or debt securities. If a property owner subsidiary is unable to satisfy its contractual obligations and other operating costs, it may default on its obligations and lose its assets in foreclosure or through bankruptcy proceedings.
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In connection with our intention to continue to qualify as a REIT for federal income tax purposes, we expect to continue paying regular dividends to our shareholders. These dividends are expected to be paid from operating cash flows and/or from other sources. Since cash used to pay dividends reduces amounts available for capital investments, we generally intend to maintain a conservative dividend payout ratio, reserving such amounts as we consider necessary for the maintenance or expansion of properties in our portfolio, debt reduction, the acquisition of interests in new properties as suitable opportunities arise, and such other factors as our Board of Trustees considers appropriate.
We paid approximately $118.4 million in cash dividends to our common and preferred shareholders in 2020. Although our property owner subsidiaries receive the majority of our base rental payments on a monthly basis, we intend to continue paying dividends quarterly. Amounts accumulated in advance of each quarterly distribution are invested by us in short-term money market or other suitable instruments.
Capital Resources
General. Due to the net-lease structure of a majority of our investments, our property owner subsidiaries historically have not incurred significant expenditures in the ordinary course of business to maintain the properties in which we have an interest. As leases expire, we expect our property owner subsidiaries to incur costs in extending the existing tenant leases, re-tenanting the properties with a single-tenant, or converting the property to multi-tenant use. The amounts of these expenditures can vary significantly depending on tenant negotiations, market conditions, rental rates and property type.