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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-50268
The Newkirk Master Limited Partnership
--------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-3636084
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7 Bulfinch Place, Suite 500, Boston, MA 02114-9507
- --------------------------------------- ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (617) 570-4600
--------------
Indicate by check mark whether 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 |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date. 6,319,391 Limited Partnership
Units Outstanding as of June 30, 2003.
1 of 34
Table of Contents
Page
Part I. FINANCIAL INFORMATION............................................... 3
Item 1. Financial Statements
Unaudited Consolidated Balance Sheet at June 30, 2003 and
Audited Consolidated Balance Sheet at December 31, 2002 ....... 3
Unaudited Consolidated Statements of Operations for the Three
Months and Six Months Ended June 30, 2003 and June 30, 2002.... 4
Unaudited Consolidated Statement of Partners' Equity for the
Six Months Ended June 30, 2003................................. 5
Unaudited Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2003 and June 30, 2002................... 6
Notes to Unaudited Consolidated Financial Statements........... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 28
Item 4. Controls and Procedures........................................ 29
Part II. OTHER INFORMATION.................................................. 30
Item 1. Legal Proceedings.............................................. 30
Item 6. Exhibits and Reports on Form 8-K............................... 31
Signatures.............................................................. 32
Exhibit Index........................................................... 33
2 of 34
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
THE NEWKIRK MASTER LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(In thousands, except unit data)
June 30, December 31,
2003 2002
----------- -----------
(Unaudited)
ASSETS
Real estate investments:
Land $ 42,379 $ 37,904
Land estates 47,783 54,524
Buildings and improvements 1,653,904 1,624,140
----------- -----------
Total real estate investments 1,744,066 1,716,568
Less accumulated depreciation and amortization (539,425) (512,678)
----------- -----------
Real estate investments, net 1,204,641 1,203,890
Real estate held for sale, net of accumulated depreciation of $761 and $61,027 1,060 105,331
Cash and cash equivalents, of which $8,720 and $8,109 is restricted 38,202 33,452
Receivables and deferred rental income 90,150 77,855
Equity investments in limited partnerships 9,342 --
Deferred costs, net of accumulated amortization of $30,219 and $26,656 21,805 24,418
Other assets 28,689 29,387
Other assets of discontinued operations 45 2,290
----------- -----------
Total Assets $ 1,393,934 $ 1,476,623
=========== ===========
LIABILITIES, MINORITY INTERESTS AND PARTNERS' EQUITY
Liabilities:
Mortgage notes and accrued interest payable $ 671,810 $ 717,968
Note payable 201,155 221,650
Contract right mortgage notes and accrued interest payable 424,543 425,441
Accounts payable and accrued expenses 9,900 10,467
Liabilities of discontinued operations 711 105,500
----------- -----------
Total Liabilities 1,308,119 1,481,026
Contingencies
Minority interests (26,152) (29,096)
Partners' equity (6,319,391 and 6,116,578 limited partnership units outstanding) 111,967 24,693
----------- -----------
Total Liabilities, Minority Interests and Partners' Equity $ 1,393,934 $ 1,476,623
=========== ===========
See notes to consolidated financial statements.
3 of 34
THE NEWKIRK MASTER LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(In thousands, except unit and per unit data)
(Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenue:
Rental income $ 69,350 $ 68,471 $ 139,285 $ 138,717
Interest income 720 797 1,654 1,707
Management fees 134 221 307 398
----------- ----------- ----------- -----------
Total revenue 70,204 69,489 141,246 140,822
----------- ----------- ----------- -----------
Expenses:
Interest 25,665 31,565 48,033 62,751
Depreciation 7,728 7,602 14,963 15,202
General and administrative 2,444 973 4,017 4,671
Amortization 1,014 1,085 2,028 2,044
Ground rent 791 792 1,616 1,584
State income taxes 270 230 477 335
----------- ----------- ----------- -----------
Total expenses 37,912 42,247 71,134 86,587
----------- ----------- ----------- -----------
Income from continuing operations before equity in income
from investments in limited partnerships and minority interest 32,292 27,242 70,112 54,235
Equity in income from investments in limited partnerships 749 -- 1,677 --
Minority interest (3,680) (2,696) (7,174) (4,779)
----------- ----------- ----------- -----------
Income from continuing operations 29,361 24,546 64,615 49,456
----------- ----------- ----------- -----------
Discontinued operations:
Income from discontinued operations 297 4,352 6,894 8,256
Gain from disposal of real estate 6,238 -- 32,325 --
----------- ----------- ----------- -----------
Net income from discontinued operations 6,535 4,352 39,219 8,256
----------- ----------- ----------- -----------
Net income $ 35,896 $ 28,898 $ 103,834 $ 57,712
=========== =========== =========== ===========
Income from continuing operations per
limited partnership unit $ 4.65 $ 4.01 $ 10.19 $ 8.08
Income from discontinued operations per
limited partnership unit 1.03 0.71 6.19 1.35
----------- ----------- ----------- -----------
Net income per limited partnership unit $ 5.68 $ 4.72 $ 16.38 $ 9.43
=========== =========== =========== ===========
Distributions per limited partnership unit $ 3.02 $ 0.50 $ 3.77 $ 30.81
=========== =========== =========== ===========
Weighted average limited partnership units 6,319,391 6,122,019 6,339,134 6,122,028
=========== =========== =========== ===========
See notes to consolidated financial statements.
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THE NEWKIRK MASTER LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF PARTNERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(In thousands, except unit data)
(Unaudited)
Limited
Partnership Partners'
Units Equity
---------- ----------
Balance at December 31, 2002 6,116,578 $ 24,693
Equity contributions 317,813 11,049
Distributions -- (23,672)
Limited partner buyouts (115,000) (3,937)
Net income -- 103,834
---------- ----------
Balance at June 30, 2003 6,319,391 $ 111,967
========== ==========
See notes to consolidated financial statements.
5 of 34
THE NEWKIRK MASTER LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(In thousands)
(Unaudited)
For the Six Months Ended June 30,
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 103,834 $ 57,712
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred costs and land estates 5,328 4,726
Depreciation expense 15,411 17,337
Net gain from early extinguishment of debt (8,698) (782)
Gain from disposal of real estate (32,325) --
Minority interest expense 7,174 4,779
Equity in income from investments in limited partnerships (1,677) --
Changes in operating assets and liabilities:
Receivables and deferred rental income (6,245) (4,814)
Other assets 1,010 1,546
Accounts payable and accrued expenses (2,147) (14,101)
Accrued interest-mortgages and contract rights (5,853) (3,308)
--------- ---------
Net cash provided by operating activities 75,812 63,095
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from disposal of real estate or other assets 56,107 --
Land additions (2,494) (640)
Cash related to formation of partnership -- 10,776
Cash related to previously unconsolidated limited partnerships 284 --
Investments in limited partnership interests (711) --
--------- ---------
Net cash provided by investing activities 53,186 10,136
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Satisfaction of mortgage notes payable (37,745) (21,256)
Satisfaction of contract right mortgage notes payable (2,057) --
Principal payments of mortgage notes payable (56,860) (73,768)
Principal payments of note payable (20,495) (563)
Principal payments of contract right mortgage notes payable (631) --
Proceeds from new debt 21,950 240,041
Mortgage prepayment penalities (400) --
Distributions to partners (23,672) (188,624)
Limited partner buyouts (3,937) (30)
Distributions to minority interests (31) (1,030)
Deferred costs (370) (8,527)
--------- ---------
Net cash used in financing activities (124,248) (53,757)
--------- ---------
Net increase in cash and cash equivalents 4,750 19,474
Cash and Cash Equivalents at Beginning of Period 33,452 --
--------- ---------
Cash and Cash Equivalents at End of Period $ 38,202 $ 19,474
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for state income taxes $ 733 $ 337
========= =========
Cash paid for interest $ 59,623 $ 68,868
========= =========
See notes to consolidated financial statements.
6 of 34
THE NEWKIRK MASTER LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2003
(In thousands)
(Unaudited)
Supplemental Information
In January 2003, balances related to the issuance of 317,813 Units in the
Partnership for the various assets contributed to the Partnership were as
follows:
Real estate, net $ 18,260
Cash and cash equivalents 14
Receivables 3,228
Deferred costs, net 944
Equity investments in limited partnership 7,665
Mortgage notes payable (26,374)
Accrued interest (985)
Accounts payable and accrued expenses (34)
Minority interest 8,331
--------
Partners' equity $ 11,049
========
In connection with the disposal of real estate, the purchaser of a property
assumed $94,818 of the Partnership's debt.
See notes to consolidated financial statements.
7 of 34
THE NEWKIRK MASTER LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
1. General
The Newkirk Master Limited Partnership (the "Partnership"), commenced
operations on January 1, 2002 following the completion of a transaction
(the "Exchange") involving the merger into wholly-owned subsidiaries of
the Partnership of 90 limited partnerships (the "Newkirk Partnerships"),
each of which owned commercial properties (the "Newkirk properties"), and
the acquisition by the Partnership of various assets, including those
related to the management or capital structure of the Newkirk
Partnerships.
The consolidated financial statements of the Partnership included herein
have been prepared by the Partnership, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted
pursuant to such rules and regulations, although the Partnership believes
that the disclosures contained herein are adequate to make the information
presented not misleading. These consolidated financial statements should
be read in conjunction with the consolidated financial statements and the
notes thereto included in the Partnership's Registration Statement on Form
10, as filed with the Securities and Exchange Commission on April 30,
2003.
The consolidated financial statements reflect, in the opinion of the
Partnership, all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the consolidated financial position and
results of operations for the respective periods in conformity with
accounting principles generally accepted in the United States of America
consistently applied.
In February 2003, the Partnership acquired from its limited partners
115,000 of its units of limited partnership interest at a purchase price
of $35 per unit, less the per unit distribution payable by the Partnership
to holders of record on and after the offering date.
2. Mortgage Notes and Contract Right Mortgage Notes Payable
In January 2003, the Partnership acquired a second mortgage loan that
encumbered the Partnership's property in Morris Township, New Jersey. The
outstanding mortgage principal and accrued interest was $28.1 million at
December 31, 2002. It was acquired for $22.1 million, $9.3 million of
which was paid in January 2003 and $12.8 million of which was payable on
or before September 30, 2003. The deferred portion of the purchase price
bore interest at a rate of 6.0% per annum. The Partnership acquired this
mortgage in connection with an extension of the lease on the property and
obtained new first mortgage financing in June 2003 to satisfy the balance
of the purchase price.
The new first mortgage has a principal balance of $21.0 million and bears
interest at LIBOR plus 2.875% per annum (4.1% at June 30, 2003), and has
an initial term of three years, which may be extended for two additional
one-year periods. Interest payments are due monthly beginning August 1,
2003. Principal payments of $25,000 are due monthly beginning February 1,
2005. After payment of closing costs, $6.7
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THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q JUNE 30, 2003
2. Mortgage Notes and Contract Right Mortgage Notes Payable (continued)
million of proceeds were used to satisfy the existing first mortgage and
the balance of the net proceeds was used to satisfy the deferred portion
of the second mortgage purchase price. In connection with the loan, the
Partnership purchased an interest rate cap on the loan so that the
interest rate is capped at 8.175%.
In connection with the Partnership's refinancings, real estate sales and
repayments of mortgage debt during the six months ended June 30, 2003, the
Partnership has recognized a net gain from early extinguishment of debt
(net of mortgage prepayment penalties of $0.4 million) of $8.7 million,
$6.8 million of which is included in interest expense and $1.9 million of
which is included in discontinued operations.
3. Related Party Transactions
Winthrop Financial Associates, A Limited Partnership ("WFA"), an affiliate
of the general partner, performs asset management services for the
Partnership and received a fee of $0.9 million for the six months ended
June 30, 2003 and 2002.
The Partnership provides certain asset management, investor and
administrative services to the partnerships that are controlled by the
Partnership and were not merged into the Partnership ("Other
Partnerships"). The Partnership earned $0.3 million and $0.4 million of
management fees for these services for the six months ended June 30, 2003
and 2002, respectively. The Partnership had receivables for management
fees of $1.0 million due from Other Partnerships at June 30, 2003. In
addition, the Partnership had a receivable of $0.6 million at June 30,
2003 for a non-interest bearing advance made to one of these partnerships.
The Partnership had a loan receivable and accrued interest receivable of
$0.2 million at December 31, 2002 due from Cenland Associates Limited
Partnership, one of the Other Partnerships. In February 2003, the
Partnership received the remaining balance due on this loan.
The Partnership has an ownership interest in the three most junior
tranches of a securitized pool of first mortgages with respect to 39 first
mortgage loans encumbering 115 Partnership properties and four other
properties controlled by affiliates of the general partner. The
Partnership had a loan receivable, net of discount, of $9.6 million at
June 30, 2003 and earned interest income of $0.7 million for the six
months ended June 30, 2003 and 2002 related to this ownership interest.
Mortgage loans receivable and the property's mortgage loan payable are not
eliminated in consolidation when the Partnership does not have a legal
right of offset.
Affiliates of the general partner own $17.3 million of $156.7 million of
interests in a real estate mortgage investment conduit ("REMIC") that
holds debt obligations secured by subordinate mortgages on properties
owned by the Partnership and other partnerships, the general partners of
which are affiliates of the general partner. The affiliates earned $1.2
million of interest income on their REMIC interests during the six months
ended June 30, 2003 and 2002. Additionally, affiliates of the general
partner own the
9 of 34
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q JUNE 30, 2003
3. Related Party Transactions (continued)
residual interests in the debt obligations in which the REMIC holds the
current interests. The Partnership has a right to acquire these residual
interests in January 2008 in exchange for units. The affiliates have the
right to require the Partnership to purchase these residual interests in
December 2007 in exchange for units. The acquisition and purchase will be
completed at fair value at the time of any transaction.
In December 2002, an affiliate of the general partner purchased a portion
of the second mortgage indebtedness of a property in which the Partnership
has an interest. The second mortgage payable and accrued interest owned by
the affiliate aggregated $14.2 million at June 30, 2003. The mortgage note
bears interest at the rate of 4.86% per annum. Included in interest
expense is $0.3 million related to this second mortgage payable for the
six months ended June 30, 2003.
Mortgage notes and contract right mortgage notes and accrued interest
payable includes $180.4 million due to related parties at June 30, 2003.
Interest expense to related parties totaled $6.6 million and $6.1 million
during the six months ended June 30, 2003 and 2002, respectively.
As part of the Exchange, affiliates of the general partner of the
Partnership received 4.7 million units for their contribution of certain
assets to the Partnership. See the Partnership's Registration Statement on
Form 10 for additional information.
Also see the first two paragraphs of Note 5 to this Form 10-Q.
4. Contingencies
Legal
In July 2002, an action was commenced in the Connecticut Superior Court
against, among others, the Partnership's general partner and various
affiliates of the Partnership's general partner. Plaintiffs are six
limited partners of five of the Newkirk Partnerships. The action alleges,
among other things, that the price paid to non-accredited investors in
connection with the Exchange was unfair and did not fairly compensate them
for the value of their partnership interests. The complaint also alleges
that the Exchange values assigned in the Exchange to certain assets
contributed by affiliates of the Partnership's general partner were too
high in comparison to the Exchange values assigned to the Newkirk
Partnerships, that the option arrangement relating to the Partnership's
potential acquisition in the future of the T-2 Certificate, which
represents an interest in a grantor trust, the mortgage assets of which
consist of subordinate mortgage notes secured by the Partnership's real
properties as well as other properties owned by other partnerships that
are controlled by affiliates of the Partnership's general partner, was
unfair to limited partners and that the disclosure document used in
connection with the Exchange contained various misrepresentations and/or
omissions of material facts. The complaint seeks to have the action
classified as a class action as well as compensatory and punitive damages
in an unspecified amount. Class action discovery and briefing is underway,
and there has not yet been discovery on the merits.
10 of 34
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q JUNE 30, 2003
4. Contingencies (continued)
Legal (continued)
On December 31, 2002, a derivative action was commenced in the Dallas
County Texas District Court by a limited partner of Eastgar Associates,
L.P. ("Eastgar") against, among others, the general partners of Eastgar
and affiliates of the Newkirk Partnerships. The Partnership owns a 60.5%
limited partnership interest in Eastgar and also controls the general
partner of that partnership. The complaint alleges that the defendants
have charged Eastgar excessive management fees and have unfairly prevented
Eastgar from prepaying and refinancing its mortgage indebtedness. The
complaint seeks compensatory and punitive damages in an unspecified
amount, attorneys' fees and expenses, an accounting, and a declaration of
the parties' future rights and obligations regarding management fees and
the refinancing of mortgage indebtedness. In order to avoid the expenses,
distraction, and uncertainties of litigation, and without conceding their
view that the allegations of the complaint are without merit, the
defendants have executed an agreement in principal to settle the
litigation for a payment by the defendants other than Eastgar of $137,500
to Eastgar for distribution to Eastgar's limited partners other than the
Partnership or its affiliates, after payment from said amount of
plaintiffs' attorneys' fees and expenses. The settlement also sets the
management fees to be charged to Eastgar, subject to any changes that
Eastgar may approve in the future consistent with its fiduciary duty. The
settlement is subject to the approval of the court after notice to the
limited partners of Eastgar.
Property Matters
In January 2002, Kmart Corporation ("Kmart"), a tenant at twelve of the
Partnership's properties, filed for protection under Chapter 11 of the
United States Bankruptcy Code. Kmart had the right to either accept or
reject the leases. Kmart elected to reject the leases, which caused an
immediate termination of such leases. The Partnership re-leased nine of
the properties to Furr's Restaurant Group ("Furr's") for 10-year lease
terms, one of the properties to Lithia Motors for a 10-year lease term and
another property for use as a Chinese food restaurant for a five-year
lease term. The remaining property is vacant. The Partnership is pursuing
a claim against Kmart in the Bankruptcy Court. In January 2003, Furr's
filed for protection under Chapter 11 of the Bankruptcy Code and
subsequently rejected the lease on three sites. The remaining sites
continue to be leased to Furr's through 2012 and the Partnership is
pursuing a claim against Furr's in the Bankruptcy Court for the three
rejected sites. Furr's also has the right to reject the lease that now
covers the remaining sites. The aggregate rent for the eight sites that
are presently leased is significantly less than the amount that was
scheduled to be received from Kmart during its renewal term which would
have begun in February 2003. The Partnership is responsible for the
payment of insurance, real estate taxes and mortgage debt on the vacant
properties. The Partnership has purchased the land underlying all twelve
properties for $0.25 million. The Partnership is attempting to either sell
or re-let the four vacant properties.
11 of 34
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q JUNE 30, 2003
5. Acquisitions
On January 1, 2003, the Partnership acquired from an affiliate of the
general partner limited partnership, interests in nine limited
partnerships that own net-leased commercial properties. The limited
partnership interests acquired by the Partnership ranged between 4.9% and
57.75% of each partnership and were acquired in exchange for 317,813
limited partnership units of the Partnership valued at $22.7 million. In
addition, the Partnership has an option to purchase additional limited
partnership interests for approximately 21,000 partnership units subject
to adjustment based upon the assets of the Partnerships at the time of
exercise. The values of the net-leased real estate partnerships and the
Partnership units were determined without arms-length negotiations.
Independent appraisals were obtained on the value of the properties owned
by the limited partnerships. The Partnership has accounted for the
acquisition on a historical cost basis. Three of the limited partnerships
have been consolidated into the Partnership's financial statements and six
of the limited partnerships are being accounted for under the equity
method of accounting.
In January 2003, the Partnership acquired the land underlying the property
owned by one of the net-leased partnerships referred to immediately above.
The land was acquired from a company affiliated with the general partner
for $1.0 million, $50,000 of which was paid in cash and the balance in the
form of a $950,000 note due September 8, 2008. The note bears interest at
the rate of 6.0% per annum, compounded annually, and is payable
interest-only until maturity, at which time the full balance of the note
is due. The purchase price for the land sale was determined without
arms-length negotiations. An independent appraisal was obtained on the
value of the land that was acquired.
In April and June 2003, the Partnership acquired 30.6% and 46.1%,
respectively, of the outstanding limited partnership interests in two
Other Partnerships. The partnership interests were acquired for an
aggregate cash purchase price of $711,250. The Partnership previously
owned 1.5% and 3.8%, respectively, of the outstanding limited partnership
interests in these two partnerships. The Partnership controls the general
partners of each of these partnerships. The Partnership has consolidated
these partnerships in accordance with the guidance provided by Statement
of Position 78-9 "Accounting for Investments in Real Estate Ventures."
In May and June 2003, the Partnership purchased the remainder interest in
the land underlying 25 properties for an aggregate purchase price of $1.2
million and, as a result, now owns a fee interest in the underlying land.
The improvements on 23 of the properties are owned by the Partnership and
the improvements on the two other properties are owned by one of the Other
Partnerships in which the Partnership owns limited partnership interests
and controls the general partner.
12 of 34
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q JUNE 30, 2003
6. Discontinued Operations and Sales of Real Estate
During the six months ended June 30, 2003, the Partnership sold nine
properties for a combined net sales price of $150.9 million. The
Partnership recognized a net gain on sale of these properties of $32.3
million. The sale and operations of these properties for all periods
presented have been recorded as discontinued operations in accordance with
the provisions of Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." In
addition, the Partnership has classified one property as real estate held
for sale in the accompanying consolidated balance sheet and has classified
the operations of the property and the sold properties as discontinued
operations in the accompanying consolidated statement of operations.
Discontinued operations for the six months ended June 30, 2003 and 2002
are summarized as follows:
2003 2002
-------- --------
Revenue $ 7,531 $ 16,817
Expenses (637) (8,561)
Gain from disposal of real estate 32,325 --
-------- --------
Net income from discontinued
operations $ 39,219 $ 8,256
======== ========
Other assets of discontinued operations at June 30, 2003 and December 31,
2002 are summarized as follows:
2003 2002
------ ------
Receivables $ 21 $2,164
Other assets 24 126
------ ------
$ 45 $2,290
====== ======
Liabilities of discontinued operations at June 30, 2003 and December 31,
2002 are summarized as follows:
2003 2002
-------- --------
Mortgage notes and accrued interest payable $ 280 $ 44,999
Contract right mortgage notes and accrued
interest payable 430 59,707
Accounts payable and accrued expenses 1 794
-------- --------
$ 711 $105,500
======== ========
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THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q JUNE 30, 2003
7. Contract to Sell Property
During June 2003, the Partnership entered into a contract with a potential
purchaser for one of its properties. The sale is contingent upon the
purchaser completing its due diligence and if consummated, is expected to
occur in October 2003. This property has been classified as real estate
held for sale in the accompanying consolidated balance sheet at June 30,
2003 and is included as part of discontinued operations in the
accompanying consolidated statements of operations for June 30, 2003 and
2002.
14 of 34
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q JUNE 30, 2003
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained herein constitute forward-looking statements.
Forward-looking statements include information relating to the
Partnership's intent, belief or current expectations.
We identify forward-looking statements in this Form 10-Q by using words or
phrases such as "anticipate," "believe," "estimate," "expect," "intend,"
"may be," "objective," "plan," "predict," "project" and "will be" and
similar words or phrases (or the negative thereof).
The forward-looking information involves important risks and uncertainties
that could cause our actual results, performance or achievements to differ
materially from our anticipated results, performance or achievements
expressed or implied by such forward-looking statements. These risks and
uncertainties include, but are not limited to, those set forth in our
Registration Statement on Form 10 filed on April 30, 2003 under
"Forward-Looking Statements."
Although we believe the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, we cannot assure you
that such expectations will be attained or that any deviations will not be
material. We disclaim any obligation or undertaking to disseminate to you
any updates or revisions to any forward-looking statement contained in
this Form 10-Q to reflect any change in our expectations or any changes in
events, conditions or circumstances on which any statement is based.
Liquidity and Capital Resources
At June 30, 2003 the Partnership owned an interest in 230 Newkirk
properties, almost all of which are leased to one or more tenants pursuant
to net leases with original lease terms, subject to extensions, ranging
between approximately twenty and twenty-five years. Approximately 90% of
the original lease terms expire between 2005 and 2009. The Partnership
also holds subordinated interests in a securitized pool of notes
evidencing first mortgage indebtedness secured by certain of the
Partnership's properties as well as other properties, limited partnership
interests in various partnerships that own commercial net-leased
properties, an interest in a management company that provides services for
the Partnership as well as other real estate partnerships, ground leases,
remainder interests or the right to acquire remainder interests in various
properties and miscellaneous other assets. In addition, the Partnership,
or an affiliate of the general partner, controls the general partner of
the real estate limited partnerships in which the Partnership owns limited
partnership interests, and the Partnership has an option to acquire in
2008 second mortgage debt secured by a substantial number of the
Partnership's properties as well as the properties owned by eight other
partnerships.
15 of 34
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q JUNE 30, 2003
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Liquidity and Capital Resources (continued)
The Partnership receives rental income from its properties which is its
primary source of liquidity. Pursuant to the terms of the leases, the
tenants are responsible for substantially all of the operating expenses
with respect to the properties, including maintenance, capital
improvements, insurance and taxes. If a tenant fails to exercise its
renewal option or exercises its option to terminate its lease early, the
Partnership will be required to either sell the property or procure a new
tenant. If the Partnership attempts to procure a new tenant, it will be
competing for new tenants in the then current rental markets, which may
not be able to support terms as favorable as those contained in the
original lease options.
The level of liquidity based on cash and cash equivalents experienced a
$4,750,000 increase at June 30, 2003 as compared to December 31, 2002. The
increase was due to net cash provided by operating activities of
$75,812,000 and net cash provided by investing activities of $53,186,000,
which were substantially offset by net cash used in financing activities
of $124,248,000. Cash provided by investing activities included $284,000
of cash related to previously unconsolidated limited partnerships and
$56,107,000 of net proceeds from disposal of real estate, which were
partially offset by land acquisitions of $2,494,000 and investments in
limited partnership interests of $711,000. Cash used in financing
activities consisted primarily of mortgage loan and contract right
mortgage loan payoffs of $39,802,000, principal payments on mortgage,
contract right and notes payable of $77,986,000 and partner distributions
of $23,672,000, which were partially offset by loan proceeds of
$21,950,000. At June 30, 2003, the Partnership had $38,202,000, of which
$8,720,000 is restricted, in cash reserves which were invested primarily
in money market mutual funds.
Other Matters
On January 1, 2003, the Partnership acquired limited partnership interests
from an affiliate of the general partner in nine limited partnerships that
own net leased commercial properties. The limited partnership interests
acquired by the Partnership ranged between 4.9% and 57.75% of each
partnership and were acquired in exchange for 317,813 limited partnership
units of the Partnership. In addition, the Partnership has an option to
purchase additional limited partnership interests for approximately 21,000
partnership units subject to adjustment based upon the assets of the
partnerships at the time of exercise. The values of the net leased real
estate partnerships and the Partnership units were determined without arms
length negotiations. Independent appraisals were obtained to determine the
value of the properties owned by the limited partnerships.
In January 2003, the Partnership acquired the land underlying the property
owned by one of the net leased partnerships referred to immediately above.
The land was acquired from a company affiliated with the general partner
for $1,000,000, $50,000 of which was paid in cash and the balance in the
form of a $950,000 note due September 8, 2008. The note bears interest at
the rate of 6% per annum, compounded annually, and is payable
interest-only until maturity, at which time the full balance of the note
is due. The purchase price for the land sale was determined without
arms-length negotiations. An independent appraisal was obtained on the
value of the land that was acquired.
16 of 34
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q JUNE 30, 2003
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Liquidity and Capital Resources (continued)
Other Matters (continued)
In January 2003, the Partnership acquired a second mortgage loan that
encumbered the Partnership's property in Morris Township, New Jersey. The
outstanding mortgage principal and accrued interest was $28.1 million at
December 31, 2002. It was acquired for $22.1 million, $9.3 million of
which was paid in January 2003 and $12.8 million of which was payable on
or before September 30, 2003. The deferred portion of the purchase price
bore interest at a rate of 6.0% per annum. The Partnership acquired this
mortgage in connection with an extension of the lease on the property and
obtained new first mortgage financing in June 2003 to satisfy the balance
of the purchase price.
The new first mortgage has a principal balance of $21.0 million and bears
interest at LIBOR plus 2.875% per annum (4.1% at June 30, 2003), and has
an initial term of three years, which may be extended for two additional
one-year periods. Interest payments are due monthly beginning August 1,
2003. Principal payments of $25,000 are due monthly beginning February 1,
2005. After payment of closing costs, $6.7 million of proceeds were used
to satisfy the existing first mortgage and the balance of the net proceeds
was used to satisfy the deferred portion of the second mortgage purchase
price. In connection with the loan, the Partnership purchased an interest
rate cap on the loan so that the interest rate is capped at 8.175%.
In February 2003, the Partnership acquired from its limited partners
115,000 of its units of limited partnership interest at a purchase price
of $35 per unit, less the per unit distribution payable by the Partnership
to holders of record on and after the offering date.
In February 2003, the Partnership received a notice from Albertson's,
Inc., the tenant at the Partnership's Sioux Falls, South Dakota property,
exercising the economic discontinuance provisions of the lease. Under the
terms of the notice, Albertson's has proposed to terminate the lease
effective November 5, 2003 and has made a rejectable offer as required
under the lease to purchase the property for $1,551,000. The Partnership
has until October 2003 to accept or reject this offer.
The Partnership has also received notice from Albertson's indicating that
it intended to exercise its right to terminate the lease for the
supermarket property located in Stuart, Florida. In accordance with the
economic discontinuance provision of its lease, Albertson's made a
rejectable offer to purchase the property for an amount stipulated in the
lease of approximately $630,797. The Partnership elected to reject the
offer. As a result of the rejection, the Partnership was required to
payoff the first mortgage encumbering the property, which had a balance of
approximately $531,000. The Partnership satisfied the first mortgage using
its cash reserves. The Partnership has entered into a contract to sell the
property, for a price in excess of the rejectable offer price. The sale,
which is contingent upon the purchaser completing its due diligence, is
expected to occur, if at all in October 2003.
17 of 34
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q JUNE 30, 2003
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Liquidity and Capital Resources (continued)
Other Matters (continued)
In February 2003, the Partnership received the remaining balance due on a
secured note from Cenland Associates Limited Partnership that it acquired
in the Exchange. The note had an outstanding balance of $1,434,000 at the
time of the Exchange that had been reduced to $158,416 as of December 31,
2002.
In April and June 2003 the Partnership acquired 30.6% and 46.1%,
respectively, of the outstanding limited partnership interests in two
partnerships that own commercial net-leased properties. The partnership
interests were acquired for an aggregate cash purchase price of $711,250.
The partnership previously owned 1.5% and 3.8%, respectively, of the
outstanding limited partnership interests in these two partnerships. The
Partnership controls the general partners of each of these partnerships.
Results of Operations
Comparison of the six months ended June 30, 2003
to the six months ended June 30, 2002.
Income from Continuing Operations
Income from continuing operations increased by $15,159,000 to $64,615,000
for the six months ended June 30, 2003 from $49,456,000 for the six months
ended June 30, 2002. As more fully described below, this increase is
attributable to an increase in total revenue of $424,000, a decrease in
total expenses of $15,453,000, and an increase in equity in income from
investments in limited partnerships of $1,677,000, which was partially
offset by an increase in minority interest expense of $2,395,000.
Rental Income
Rental income increased by $568,000 or approximately 0.4% to $139,285,000
for the six months ended June 30, 2003 from $138,717,000 for the six
months ended June 30, 2002. The increase was primarily due to five newly
acquired consolidated partnerships which contributed approximately $4.4
million in rental income. This increase was offset by lower rental income
received from properties previously leased by Kmart of $1.3 million and
lower rental income on lease renewals or renegotiations of $2.5 million.
Interest Income
Interest income decreased by $53,000 or approximately 3% to $1,654,000 for
the six months ended June 30, 2003 from $1,707,000 for the six months
ended June 30, 2002. The decrease was due to principal payments received
by the Partnership on loans receivable and overall lower interest rates on
the invested cash balances.
18 of 34
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q JUNE 30, 2003
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations (continued)
Management Fees
Management fees decreased by $91,000 or approximately 23% to $307,000 for
the six months ended June 30, 2003 from $398,000 for the six months ended
June 30, 2002. The decrease is attributable to fewer properties under
management.
Interest Expense
Interest expense decreased by $14,718,000 or approximately 23% to
$48,033,000 for the six months ended June 30, 2003 compared to $62,751,000
for the six months ended June 30, 2002. The decrease was primarily due to
a $6,829,000 net gain from the extinguishment of debt attributable to the
refinancing of debt and $7,427,000 of loan payoffs during the period and
normal scheduled principal payments.
Depreciation
Depreciation expense decreased by $239,000 or approximately 2% to
$14,963,000 for the six months ended June 30, 2003 compared to $15,202,000
for the six months ended June 30, 2002. The decrease is attributable to
the completion of the useful lives of various partnership assets while no
further additions to depreciable real estate were expended.
General and Administrative
General and administrative expenses decreased by $654,000 or approximately
14% to $4,017,000 for the six months ended June 30, 2003 compared to
$4,671,000 for the six months ended June 30, 2002. The decrease was
primarily the result of one-time organizational expenses relating to the
formation of the Partnership in 2002.
Amortization Expense
Amortization expense decreased by $16,000 or approximately 1% to
$2,028,000 for the six months ended June 30, 2003 compared to $2,044,000
for the six months ended June 30, 2002. The decrease is the result of
savings due to the purchase of land estates during 2002 and 2003.
Ground Rent
Ground rent expense increased by $32,000 or approximately 2% to $1,616,000
for the six months ended June 30, 2003 compared to $1,584,000 for the six
months ended June 30, 2002. The increase is the result of the five newly
consolidated partnerships which incurred $53,000 of ground rent. This
increase was partially offset by the acquisition of land previously leased
resulting in no rent expense for the property in 2003.
19 of 34
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q JUNE 30, 2003
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations (continued)
State Income Taxes
State income tax expense increased by $142,000 or approximately 42% to
$477,000 for the six months ended June 30, 2003 compared to $335,000 for
the six months ended June 30, 2002. The increase is the result of several
states commencing partnership income tax requirements.
Equity in Income from Investments in Limited Partnerships
Equity in income from investments in limited partnerships is the result of
the January 2003 purchase of equity positions in six new partnerships.
Minority Interest Expense
Minority interest expense increased by $2,395,000 or approximately 50% to
$7,174,000 for the six months ended June 30, 2003 compared to $4,779,000
for the six months ended June 30, 2002. The increase was the result of
minority interests in the amount of $1,378,000 related to the five newly
consolidated partnerships. The remaining increase of $1,017,000 related to
increased profitability at the previous partially owned partnerships.
Discontinued Operations
During the six months ended June 30, 2003, the Partnership sold nine
properties for a combined net sales price of $150.9 million. The
Partnership recognized a net gain on disposal of these properties of $32.3
million. The sale and operation of these properties for all periods
presented have been recorded as discontinued operations in compliance with
the provisions of Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long Lived Assets."
Comparison of the three months ended June 30, 2003 to the three months
ended June 30, 2002.
Income from Continuing Operations
Income from continuing operations increased by $4,815,000 to $29,361,000
for the three months ended June 30, 2003 from $24,546,000 for the three
months ended June 30, 2002. As more fully described below, this increase
is attributable to a decrease in total expenses of $4,335,000, an increase
in total revenue of $715,000 and an increase in equity in income from
investments in limited partnerships of $749,000, which was partially
offset by an increase in minority interest of $984,000.
20 of 34
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q JUNE 30, 2003
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations (continued)
Rental Income
Rental income increased by $879,000 or approximately 1% to $69,350,000 for
the three months ended June 30, 2003 from $68,471,000 for the three months
ended June 30, 2002. The increase was due to the five newly acquired
consolidated partnerships which was partially offset by lower income from
lease renewals and renegotiations.
Interest Income
Interest income decreased by $77,000 or approximately 10% to $720,000 for
the three months ended June 30, 2003 from $797,000 for the three months
ended June 30, 2002. The decrease was due to lower loan and advance
receivables. Additionally, lower earnings on invested cash resulted from
lower investment balances and lower rates.
Management Fees
Management fees decreased by $87,000 or approximately 39% to $134,000 for
the three months ended June 30, 2003 from $221,000 for the three months
ended June 30, 2002. The decrease is attributable to the sale of
properties previously under management.
Interest Expense
Interest expense decreased by $5,900,000 or approximately 19% to
$25,665,000 for the three months ended June 30, 2003 compared to
$31,565,000 for the three months ended June 30, 2002. The decrease was a
result of $857,000 of net gain from the extinguishment of debt as well as
loan payoffs during the period and through scheduled principal payments.
Depreciation
Depreciation expense increased by $126,000 or approximately 2% to
$7,728,000 for the three months ended June 30, 2003 compared to $7,602,000
for the three months ended June 30, 2002. The increase is attributed to
depreciation expense on the newly acquired properties partially offset by
the completion of the useful lives of various partnership assets while no
further additions to depreciable real estate were expended.
General and Administrative
General and administrative expenses increased by $1,471,000 or
approximately 151% to $2,444,000 for the three months ended June 30, 2003
compared to $973,000 for the three months ended June 30, 2002.
21 of 34
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q JUNE 30, 2003
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations (continued)
General and Administrative (continued)
The increase is primarily the result of higher professional fees incurred
related to legal proceedings and filings with the Securities and Exchange
Commission.
Amortization Expense
Amortization expense decreased by $71,000 or approximately 7% to
$1,014,000 for the three months ended June 30, 2003 compared to $1,085,000
for the three months ended June 30, 2002. The decrease is the result of
the purchase of land estates during 2002 and 2003.
Ground Rent
Ground rent expense decreased by $1,000 to $791,000 for the three months
ended June 30, 2003 compared to $792,000 for the three months ended June
30, 2002. The decrease resulted from land purchases for which the
Partnership was previously paying ground rent, partially offset by new
ground lease obligations incurred in 2003.
State Income Taxes
State income tax expense increased by $40,000 or approximately 17% to
$270,000 for the three months ended June 30, 2003 compared to $230,000 for
the three months ended June 30, 2002. The increase is the result of
several states commencing partnership income tax requirements.
Equity in Income from Investments in Limited Partnerships
Equity in income from investments in limited partnerships is the result of
the January 2003 purchase of equity positions in six partnerships.
Minority Interest Expense
Minority interest expense increased by $984,000 or approximately 36% to
$3,680,000 for the three months ended June 30, 2003 compared to $2,696,000
for the three months ended June 30, 2002. The increase was the result of
minority interests in the amount of $783,000 related to the five newly
consolidated partnerships. The remaining increase of $201,000 related to
increased profitability at the previous partially owned partnerships.
Discontinued Operations
During the three months ended June 30, 2003, the Partnership sold two
properties for a combined net sales price of $19.7 million. The
Partnership recognized a net gain on sale of these properties of
$6,238,000. The sale and operation of these properties for all periods
presented have been recorded as discontinued
22 of 34
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q JUNE 30, 2003
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations (continued)
Discontinued Operations (continued)
operations in compliance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or
Disposal of Long Lived Assets."
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions in certain
circumstances that affect amounts reported in the accompanying
consolidated financial statements and related notes. In preparing these
consolidated financial statements, management has made its best estimates
and judgments of certain amounts included in the consolidated financial
statements, giving due consideration to materiality. The Partnership does
not believe there is a great likelihood that materially different amounts
would be reported related to the accounting policies described below.
However, application of these accounting policies involves the exercise of
judgment and use of assumptions as to future uncertainties and, as a
result, actual results could differ from these estimates.
Impairment of long-lived assets. At June 30, 2003, the Partnership had
$1,204,641,000 of real estate (net), accounting for approximately 86% of
the Partnership's total assets. Buildings and improvements are carried at
cost net of adjustments for depreciation and amortization. The fair values
of the Partnership's buildings and improvements are dependent on the
performance of the properties.
The Partnership evaluates recoverability of the net carrying value of its
real estate and related assets at least annually, and more often if
circumstances dictate. If there is an indication that the carrying value
of a property might not be recoverable, the Partnership prepares an
estimate of the future undiscounted cash flows expected to result from the
use of the property and its eventual disposition, generally over a
five-year holding period. In performing this review, management takes into
account, among other things, the existing occupancy, the expected leasing
prospects of the property and the economic situation in the region where
the property is located.
If the sum of the expected future undiscounted cash flows is less than the
carrying amount of the property, the Partnership recognizes an impairment
loss and reduces the carrying amount of the asset to its estimated fair
value. Fair value is the amount at which the asset could be bought or sold
in a current transaction between willing parties, that is, other than in a
forced or liquidation sale. Management estimates fair value using
discounted cash flows or market comparables, as most appropriate for each
property. Independent certified appraisers are utilized to assist
management when warranted.
23 of 34
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q JUNE 30, 2003
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Critical Accounting Policies (continued)
Because the cash flows used to evaluate the recoverability of the assets
and their fair values are based upon projections of future economic
events, such as property occupancy rates, rental rates, operating cost
inflation and market capitalization rates, which are inherently
subjective, the amounts ultimately realized at disposition may differ
materially from the net carrying values at the balance sheet dates. The
cash flows and market comparables used in this process are based on good
faith estimates and assumptions developed by management.
Unanticipated events and circumstances may occur, and some assumptions may
not materialize; therefore, actual results may vary from the estimates,
and variances may be material. The Partnership may provide additional
write-downs, which could be material in subsequent years if real estate
markets or local economic conditions change.
Useful lives of long-lived assets. Building and improvements and certain
other long-lived assets are depreciated or amortized over their useful
lives. Depreciation and amortization are computed using the straight-line
method over the useful life of the building and improvements. The cost of
properties represents the initial cost of the properties to the
Partnership plus acquisition and closing costs less impairment
adjustments.
Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") SFAS No. 142
"Goodwill and Other Intangible Assets." SFAS No. 142 addresses accounting
and reporting for intangible assets acquired, except for those acquired in
a business combination. SFAS No. 142 presumes that goodwill and certain
intangible assets have indefinite useful lives. Accordingly, goodwill and
certain intangibles are not be amortized but rather will be tested at
least annually for impairment. SFAS No. 142 also addresses accounting and
reporting for goodwill and other intangible assets subsequent to their
acquisition. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. This statement had no effect on the Partnership's
consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. This statement supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" and the accounting and reporting provisions of Accounting Principles
Board ("APB") Opinion No. 30, "Reporting the Results of Operations
-Reporting the Effects of a Disposal of a Business and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," for the
disposal of a segment of a business. This statement also amends Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," to
eliminate the exception to consolidation for a subsidiary for which
control is likely to be temporary. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001, and interim periods within those
fiscal years. The
24 of 34
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q JUNE 30, 2003
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Recently Issued Accounting Standards (continued)
provisions of this statement generally are to be applied prospectively. As
a result of this statement, the Partnership has classified the sale of
properties as discontinued operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and
Technical Corrections," which updates, clarifies and simplifies existing
accounting pronouncements. In part, this statement rescinds SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt." FASB No. 145 is
effective for fiscal years beginning after May 15, 2002. Upon adoption,
enterprises must reclassify prior period items that do not meet the
extraordinary item classification criteria in APB Opinion No. 30. The
Partnership adopted this statement in 2002 and has included $6.8 million
and $0.3 million in early extinguishment of debt gains in interest expense
for the six months ended June 30, 2003 and 2002, respectively.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit
or disposal plan. Examples of costs covered by the standard include lease
termination costs and certain employee severance costs that are associated
with a restructuring, discontinued operation, plant closing or other exit
or disposal activity. SFAS No. 146 is effective prospectively for exit and
disposal activities initiated after December 31, 2002, with earlier
adoption encouraged. This statement had no effect on the Partnership's
consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantors'
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". The Interpretation elaborates on
the disclosures to be made by a guarantor in its financial statements
about its obligations under certain guarantees that it has issued. It also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. This Interpretation does not prescribe a specific
approach for subsequently measuring the guarantor's recognized liability
over the term of the related guarantee. The disclosure provisions of this
Interpretation are effective for the Partnership's December 31, 2002
consolidated financial statements. The initial recognition and initial
measurement provisions of this Interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31,
2002. This Interpretation had no effect on the Partnership's consolidated
financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This Interpretation clarifies the application
of existing accounting pronouncements to certain entities in which equity
investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support
from other parties. The provisions of the Interpretation will be
immediately effective for all variable interests in variable interest
entities created after January 31, 2003, and the Partnership will need
25 of 34
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q JUNE 30, 2003
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Recently Issued Accounting Standards (continued)
to apply its provisions to any existing variable interests in variable
interest entities in 2003. This interpretation had no impact on the
Partnership's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation." In
particular, this statement (1) provides alternative methods of transition
for entities that voluntarily change to the fair value based method of
accounting for stock-based employee compensation, (2) amends the
disclosure provision of SFAS No. 123 to require prominent disclosure about
the effects on reported net income of an entity's accounting decisions
with respect to stock-based employee compensation and (3) amends APB No.
28," Interim Financial Reporting," to require disclosure about those
effects in interim financial information. The transition provisions of
this statement are effective for financial statements for fiscal years
ending after December 15, 2002. The disclosure provisions of this
statement are effective for financial reports containing condensed
financial statements for interim periods beginning after December 15,
2002. This statement had no effect on the Partnership's consolidated
financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The changes in this statement improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. In particular, this statement (1) clarifies under what
circumstances a contract with an initial net investment meets the
characteristic of a derivative discussed in SFAS No. 133, (2) clarifies
when a derivative contains a financing component, (3) amends the
definition of an underlying that is related to an asset, liability or
equity security to conform it to language used in FASB Interpretation No.
45, and (4) amends certain other existing pronouncements. Those changes
will result in more consistent reporting of contracts as either
derivatives or hybrid instruments. This statement is effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The guidance should be
applied prospectively. The provisions of this statement that relate to
SFAS No. 133 implementation issues that have been effective for fiscal
quarters that began prior to June 15, 2003, should continue to be applied
in accordance with their respective effective dates. In addition, certain
provisions relating to forward purchases or sales of when-issued
securities or other securities that do not yet exist, should be applied to
existing contracts as well as new contracts entered into after June 30,
2003. The Partnership does not expect that this statement will have a
material effect on the Partnership's consolidated financial statements.
26 of 34
THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q JUNE 30, 2003
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Recently Issued Accounting Standards (continued)
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." The statement improves the accounting for certain financial
instruments that under previous guidance, issuers could account for as
equity. The new statement requires that those instruments be classified as
liabilities in statements of financial position. SFAS No. 150 affects the
issuer's accounting for three types of freestanding financial instruments.
One type is mandatorily redeemable shares, which the issuing company is
obligated to buy back in exchange for cash or other assets. A second type,
which includes put options and forward purchase contracts, involves
instruments that do or may require the issuer to buy back some of its
shares in exchange for cash or other assets. The third type of instruments
that are liabilities under this statement is obligations that can be
settled with shares, the monetary value of which is fixed, tied solely or
predominantly to a variable such as a market index, or varies inversely
with the value of the issuers' shares. SFAS No. 150 does not apply to
features embedded in a financial instrument that is not a derivative in
its entirety. In addition to its requirements for the classification and
measurement of financial instruments in its scope, SFAS No. 150 also
requires disclosures about alternative ways of settling the instruments
and the capital structure of entities, all of whose shares are mandatorily
redeemable. Most of the guidance in SFAS No. 150 is effective for all
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Partnership does not expect this
statement to have any effect on the Partnership's consolidated financial
statements.
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THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q JUNE 30, 2003
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership has both fixed and variable rate debt, as well as two
interest rate caps. All financial instruments were entered into for other
than trading purposes. A change in interest rates on the fixed rate
portion of the debt portfolio or the interest rate caps impacts the net
financial position, but has no impact on interest incurred or cash flows.
A change in interest rates on the variable portion of the debt portfolio
impacts the interest incurred and cash flows, but does not impact the net
financial instrument position.
At December 31, 2002, the Partnership had one loan which had a variable
interest rate. The loan which had an outstanding balance of $201.2 million
at June 30, 2003, was obtained in January 2002 and has a three-year term.
Interest on the outstanding balance accrues at a rate equal to, at the
Partnership's option, either (i) 5.5% plus the greater of 3.0% or the
LIBOR rate (as defined) or (ii) 3.5% plus the greater of 5% or bank's
prime rate. As a result, the minimum interest rate on the loan is 8.5%.
The Partnership purchased an interest rate cap on the loan so that the
interest rate would be capped at 9.0%, 10.5% and 12.5% in years one, two
and three, respectively.
To date, the Partnership has elected to pay the loan based on the LIBOR
rate. The following table shows the effect of a change in the LIBOR rate
over the next two years based on an 8.5% minimum rate and a maximum based
on the interest rate cap.
Change in LIBOR
(In thousands)
-----------------------------------------------------------------------
<1.9% 2.9% 3.9% (1) 5.9% (2)
Additional interest expense -- $ 2,000 $ 4,000 $ 8,000
==== ======= ======= =======
(1) A 3.9% change in LIBOR brings the total interest rate to the 10.5%
interest rate cap in year two.
(2) A 5.9% change in LIBOR brings the total interest rate t the 12.5% interest
rate cap in year three.
As of June 30, 2003, the Partnership has obtained one additional loan
which had a variable interest rate. The loan had an outstanding balance of
$21.0 million at June 30, 2003, was obtained in June 2003 and has a
three-year term. Interest on the outstanding balance accrues at LIBOR plus
2.875%. The Partnership purchased an interest rate cap on the loan so that
the interest rate would be capped at 8.175%.
The following table shows the effect of increases in the LIBOR rate.
Change in LIBOR
(In thousands)
----------------------------------------------------------------------------
1% 2% 3% 4% (1)
Additional interest expense $ 200 $ 400 $ 600 $ 800
===== ===== ===== =====
(1) Maximum increase.
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THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q JUNE 30, 2003
Item 4. CONTROLS AND PROCEDURES
The Partnership's management, with the participation of the Partnership's
Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Partnership's disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) as of the end of the period covered by
this report. Based on such evaluation, the Partnership's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of
such period, the Partnership's disclosure controls and procedures are
effective.
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THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q JUNE 30, 2003
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In July 2002, an action was commenced in the Connecticut Superior Court
against, among others, the Partnership's general partner and various
affiliates of the Partnership's general partner. Plaintiffs are six
limited partners of five of the Newkirk Partnerships. The action alleges,
among other things, that the price paid to non-accredited investors in
connection with the Exchange was unfair and did not fairly compensate them
for the value of their partnership interests. The complaint also alleges
that the exchange values assigned in the Exchange to certain assets
contributed by affiliates of the Partnership's general partner were too
high in comparison to the exchange values assigned to the Newkirk
partnerships, that the option arrangement relating to the Partnership's
potential acquisition in the future of the T-2 Certificate, which
represents an interest in a grantor trust, the mortgage assets of which
consist of subordinate mortgage notes secured by the Partnership's real
properties as well as other properties owned by other partnerships that
are controlled by affiliates of the Partnership's general partner, was
unfair to limited partners and that the disclosure document used in
connection with the Exchange contained various misrepresentations and/or
omissions of material facts. The complaint seeks to have the action
classified as a class action as well as compensatory and punitive damages
in an unspecified amount. Class action discovery and briefing is underway,
and there has not yet been discovery on the merits.
On December 31, 2002, a derivative action was commenced in the Dallas
County Texas District Court by a limited partner of Eastgar Associates,
L.P. ("Eastgar") against, among others, the general partners of Eastgar
and affiliates of the Newkirk Partnerships. The Partnership owns a 60.5%
limited partnership interest in Eastgar and also controls the general
partner of that partnership. The complaint alleges that the defendants
have charged Eastgar excessive management fees and have unfairly prevented
Eastgar from prepaying and refinancing its mortgage indebtedness. The
complaint seeks compensatory and punitive damages in an unspecified
amount, attorneys' fees and expenses, an accounting, and a declaration of
the parties' future rights and obligations regarding management fees and
the refinancing of mortgage indebtedness. In order to avoid the expenses,
distraction, and uncertainties of litigation, and without conceding their
view that the allegations of the complaint are without merit, the
defendants have executed an agreement in principal to settle the
litigation for a payment by the defendants other than Eastgar of $137,500
to Eastgar for distribution to Eastgar's limited partners other than the
Partnership or its affiliates, after payment from said amount of
plaintiffs' attorneys' fees and expenses. The settlement also sets the
management fees to be charged to Eastgar, subject to any changes that
Eastgar may approve in the future consistent with its fiduciary duty. The
settlement is subject to the approval of the court after notice to the
limited partners of Eastgar.
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THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q JUNE 30, 2003
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibits required by Item 601 of Regulation S-K are filed herewith
or incorporated herein by reference and are listed in the attached
Exhibit Index.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the period ended June 30,
2003.
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THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q JUNE 30, 2003
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE NEWKIRK MASTER LIMITED PARTNERSHIP
BY: MLP GP LLC
General Partner
BY: NEWKIRK MLP CORP
Manager
BY: /s/ Michael L. Ashner
---------------------------------
Michael L. Ashner
Chief Executive Officer
BY: /s/ Thomas C. Staples
---------------------------------
Thomas C. Staples
Chief Financial Officer
Dated: August 14, 2003
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THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q JUNE 30, 2003
Exhibit Index
Exhibit Description
- ------- -----------
2.1 Agreement and Plan of Merger between the Newkirk Master Limited
Partnership and each of the Merger Partnerships set forth on
Schedule A, dated December 6, 2001 (incorporated by reference to
exhibit 2.1 of the Partnership's Form 10 filed April 30, 2003).
2.2 Assignment and Assumption Agreement by and between Newkirk Stock
LLC, The Newkirk Master Limited Partnership, Newkirk NL Holdings LLC
and VNK Corp. dated as of December 26, 2001 (incorporated by
reference to exhibit 2.2 of the Partnership's Form 10 filed April
30, 2003).
2.3 Assignment and Assumption Agreement by and between Newkirk Eastgar
LLC, Newkirk Partner Interest LLC, The Newkirk Master Limited
Partnership and Newkirk MLP Unit LLC dated as of December 26, 2001
(incorporated by reference to exhibit 2.3 of the Partnership's Form
10 filed April 30, 2003).
2.4 Assignment and Assumption Agreement by and between Vornado Realty
L.P., Vornado Newkirk L.L.C., The Newkirk Master Limited
Partnership, and Newkirk MLP Unit LLC, dated as of December 26, 2001
(incorporated by reference to exhibit 2.4 of the Partnership's Form
10 filed April 30, 2003).
2.5 Assignment and Assumption Agreement between Newkirk RE Associates
LLC, The Newkirk Master Limited Partnership, Newkirk RE Holdings and
Vornado Newkirk LLC dated as of December 26, 2001 (incorporated by
reference to exhibit 2.5 of the Partnership's Form 10 filed April
30, 2003).
2.6 Assignment and Assumption Agreement by and between Newkirk
Associates LLC, The Newkirk Master Limited Partnership, Newkirk NL
Holdings LLC and Vornado Newkirk L.L.C. dated as of December 26,
2001 (incorporated by reference to exhibit 2.6 of the Partnership's
Form 10 filed April 30, 2003).
2.7 Agreement and Plan of Merger by and between The Newkirk Master
Limited Partnership, Lanmar Associates Limited Partnership and
Newkirk Lanmar L.P., dated as of December 6, 2001 (incorporated by
reference to exhibit 2.7 of the Partnership's Form 10 filed April
30, 2003).
3. Certificate of Limited Partnership of the Newkirk Master Limited
Partnership (incorporated by reference to exhibit 3 of the
Partnership's Form 10 filed April 30, 2003).
4.1 Agreement of Limited Partnership of The Newkirk Master Limited
Partnership, by and among MLP GP LLC, Newkirk Manager Corp. and all
other persons who shall, pursuant to the Exchange or otherwise
become limited partners of the Partnership, dated as of October 23,
2001 (incorporated by reference to exhibit 4.1 of the Partnership's
Form 10 filed April 30, 2003).
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THE NEWKIRK MASTER LIMITED PARTNERSHIP
FORM 10-Q JUNE 30, 2003
4.2 Additional provisions incorporated by reference into the Agreement
of Limited Partnership of the Newkirk Master Limited Partnership
(incorporated by reference to exhibit 4.2 of the Partnership's Form
10 filed April 30, 2003).
4.3 Limited Liability Agreement of MLP GP LLC (incorporated by reference
to exhibit 4.3 of the Partnership's Form 10 filed April 30, 2003).
31.1 Chief Executive Officer's Certificate, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer's Certificate, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32 Certificate of Chief Executive Officer and Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
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