Heather Gentry - IR Pat Carroll - CFO Will Eglin - CEO.

Craig Mailman - KeyBank Capital Markets John Guinee - Stifel Sheila McGrath - Evercore Jon Petersen - Jefferies Joshua Dennerlein - Bank of America/Merrill Lynch.

Good morning and welcome to the Lexington Realty Trust First Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Ms. Heather Gentry, Investor Relations. Please go ahead..

Thank you, operator. Welcome to the Lexington Realty Trust first quarter 2017 conference call.

The earnings release was distributed this morning and both the release and supplemental disclosure package that detail this quarter’s results are available on our website at www.lxp.com in the Investors section and will be furnished to the SEC on our Form 8-K.

Certain statements made during this conference call regarding feature events and expected results may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Lexington believes that these statements are based on reasonable assumptions; however certain factors and risk including those included in today’s earnings press release and those described and report that Lexington’s filings with the SEC from time-to-time could cause Lexington’s actual results to differ materially from those expressed or implied by such statement.

Except as required by law, Lexington does not undertake a duty to update any forward-looking statements. In the earnings press release and supplemental disclosure package Lexington has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure.

Any references in these documents to adjusted company FFO refer to adjusted company funds from operations available to all equity holders and unit holders on a fully diluted basis.

Operating performance measures of an individual investment are not intended to be viewed as presenting a numerical measure of Lexington’s historical or future financial performance, financial position or cash flows.

Joining me on today’s call to discuss Lexington’s first quarter 2017 results are Will Eglin, Chief Executive Officer; Pat Carroll, Chief Financial Officer and other executive members of management. I will now turn the call over to Will..

Thanks, Heather and good morning everyone. Welcome to our first quarter 2017 earnings call and webcast. Our first quarter was fairly active particularly on the disposition front with the bulk of disposition and acquisition activity occurring in the first two months of the year.

We generated net income of $0.17 per diluted common share and adjusted company FFO of $0.23 per diluted common share for the quarter. Leasing volume was relatively light given our proactive work last year on 2017.lease expirations and our expectation that much of our vacancy will be resolved through dispositions we are currently working on.

I believe our balance sheet is in the best shape it has ever been in with leverage at 4.9 times net debt to adjusted EBITDA and a weighted average debt maturity of eight years. With our balance sheet flexibility and cash on hand, we are well positioned to fund our investment commitments and to take advantage of new opportunities.

Disposition volume was heavy in the first quarter as we completed nearly $100 million of our announced 2017 property disposition plan. This included $93 million of wholly owned assets sold at GAAP and cash cap rates of 9.1% and 9.4% respectively with the balance from a non-consolidated property.

Our continued focus is on portfolio simplification through the sale of vacancy, certain short term lease office properties and assets we consider to be non-core to our business. All eight properties we sold during the quarter fell into one of these three categories.

We further simplified the portfolio during the quarter through the sale of our Kennewick, Washington mortgage loan for approximately $80 million which generated an attractive return and considerably reduced our loan portfolio.

While there is still work to be done we have made meaningful improvements to our portfolio and are moving towards a better revenue balance between single tenant office and industrial assets with less of our revenue coming from multi tenant and other property types.

Turning to investments, during the quarter we invested approximately $18 million in ongoing build-to-suit projects and completed the last building in our Dow Chemical office build-to-suit in Lake Jackson, Texas for $70 million.

Notable purchases included the acquisition of two industrial assets totalling 1.2 million square feet during the quarter for approximately $48 million, both of which we talked about on our fourth quarter earnings call.

As a reminder, this included a distribution facility in the sub market of Kansas City, Kansas leased to Amazon for ten years and the distribution facility in the sub market of Indianapolis leased for seven years to Continental tire.

We currently have investment commitments of approximately $205 million at average GAAP and cash cap rates of 8.5% and 7.4% respectively and a large pipeline of industrial and office opportunities under review.

Subsequent to quarter end, rents commenced on our two built-to-suit projects in Charlotte, North Carolina and Opelika Alabama, both projects are expected to be completed in the second quarter of 2017.

Investment product is plentiful; however there has been little change in pricing due to steady investor demand particularly in the industrial sector supported by aggressive lending and a rally in the treasury market.

High quality industrial facilities located in secondary markets remain our primary acquisition focus and while we are mindful of the competitive bidding environment we are finding attractive opportunities mainly in the seven to ten year leased industrial purchase market.

The majority of higher yielding investments we are evaluating are in the 15 to 20 year leased build-to-suit market including both office and industrial properties. Our intent is to still be a net acquirer in 2017 although this will be largely dependent on market conditions and pricing. Moving onto occupancy.

We leased approximately 207,000 square feet and sold 363,000 square feet of vacancy during the first quarter. Renewals on GAAP and cash rents increased approximately 2.4% and 3.1% respectively. Occupancy edged up slightly to 96.2% at quarter end compared to the fourth quarter of 2016 and our weighted average lease term was 8.8 years at quarter end.

Current negotiations that are closed to completion represent 35% of our expiring 2017 revenue including extensions with both Arrow Electronics and New Cingular which comprised approximately 200,000 square feet.

During the quarter we signed five year lease extensions for an aggregate 46,000 square feet with Food Lion in both Staunton, Virginia and Lexington, North Carolina. Both of these properties are currently being marketed for sale.

We also leased approximately 54,000 square feet or about 35% of our Houston Texas property in which Transocean was the previous tenant. Our other properties which move us this year in Fishers, Indiana, Des Moines Iowa and High Point North Carolina are all being marketed for sale or lease.

We are encouraged by our sale and leasing prospects for these and other vacancies with continued progress expected in the coming months. Overall, vacant square footage to lease or sell represented approximately 4% of the overall portfolio at quarter end and we expect to resolve more of this vacancy through dispositions compared to re-tenanting.

Overall, our tenant credit quality improved considerably in the past year with investment grade tenancy accounting for 39% of our revenue in the first quarter compared to 32% this same time last year. Given recent news and what we believe will be continuing problems in the retail sector, I want to briefly touch on our retail exposure.

Retail is a very small component of our overall portfolio and continues to shrink, representing just about 1% of our current net operating income. We have minimal exposure to Gander Mountain who filed for bankruptcy during the quarter and intends to close 32 of their stores.

We currently own 46,000 square foot space in Albany, Georgia and 25% of a joint venture that owns a 120,000 square foot property in Palm Beach Garden, Florida, neither of which are on Gander’s list of announced store closings. Together, they generate 1.3 million in annual funds from operations which is about half a cent per share.

While we cannot be certain of the final outcome, the impact is not expected to be material to our operations and an acquirer of Gander would most likely want to continue to operate these stores although our rent concession should be expected.

In summary, during the quarter we completed approximately one third of our announced property disposition plan and closed to half when including the loans receivable.

Our heavy disposition volume and cash position weighed on first quarter earnings although I believe this pressure should ease over the rest of the year as new investments come online, capital is deployed and vacancy is addressed. We are maintaining our 2017 adjusted company FFO guidance in the range of $0.94 to $0.98 per diluted common share.

Investment activity for the balance of the year will be focussed primarily on industrial purchases and build-to-suits and we are reviewing some office build-to-suit investments although activity in the office sector is slow compared to industrial.

We believe a solid and growing investment pipeline combined with a strong cash position and available credit if needed positions us well as we seek to build our portfolio. As I mentioned earlier, we have done quite a bit of work to improve the balance sheet and overall quality of our portfolio.

As we look ahead to the next 12 months to 24 months, we expect our portfolio transformation will be complete as our concentrated period of elevated office lease rollover will end by mid 2019, the multiyear disposition program should be substantially completed this year with a relatively modest amount left to sell and new assets will continue to be added to the portfolio over this same time period.

These factors taken together should meaningfully improve our prospects for long term growth and a better valuation. With that, I will turn the call over to Pat who will review our financial results in more detail..

Thanks, Will, good morning everyone. Gross revenues in the first quarter were $96 million, compared with gross revenues of $111 million for the same time period in 2016.

The year-over-year change is primarily attributable to 2016 and 2017 property sales particularly the New York City land investments that we sold in 2016 offset by acquisitions and new leases.

Net income attributable to common shareholders for the first quarter was $0.17 per diluted common share or $40 million compared to net income attributable to common shareholders of $0.20 per diluted common share or $48 million for the same time period in 2016.

We recognized $34 million of gains during the quarter related to property sale and $8 million of impairment charges which were primarily related to a $5.3 million loan loss on the sale of our Kennewick mortgage receivable.

As Will mentioned earlier, the loan was sold for approximately $80 million and generated an IRR in excess of 7% at Lexington during the three year plus whole period. Our 2017 guidance for net income attributable to common shareholders is now expected to be within a range of $0.57 to $0.61 per fully diluted common share.

Adjusted company FFO for the quarter was approximately $58 million or $0.23 per diluted common share compared to $72 million or $0.29 per diluted common share for the same time period in 2016. The decrease was a result of 2016 and 2017 property sales particularly the New York City land investments.

GAAP rents were in excess of cash rents for the first quarter by almost $2 million. This relates primarily to the street lining of tenant rents. On page 19 of this supplement we have included both estimates of GAAP and cash rents for the remainder of 2017 and 2018 the lease is in place at March 31, 2017.

This does not assume any tenant re-leasing of vacant space, tenant lease extensions on properties with scheduled lease expirations, property sales or property acquisitions.

Same store net operating income was $72 million for the quarter compared to $74 million for the same time period in 2016 and same store percentage lease was 95.7% for the quarter compared to 98.1% for the same time period in 2016.

These decreases are mostly the result of three 2016 and two, 2017 office move outs and a tenant liquidation in Rock Hill, South Carolina. Our expectation is that much of this vacancy will be addressed this year through sales. Property operating expenses for the first quarter were inline at $12 million compared to the same time period in 2016.

G&A expenses were $9.5 million for the first quarter. The increase compares to the first quarter of 2016 is primarily attributable to $400,000 in cost relating to the collection of loan receivable and $1 million in cost associated with the guarantee claim by a mortgage vendor.

Please note that we do not add back these cost to net income when in calculating adjusted company FFO. We expect G&A to be approximately $24 million to $25 million in the aggregate over the next three quarters. Now talking about the balance sheet. We have strides to improve our balance sheet and the work has paid off.

At the end of the first quarter, we had $241 million of cash on the balance sheet including cash classified as restricted.

The cash balance is primarily the result of the timing of property sales while the restricted cash balance primarily relates to money held by 1031 exchange at intermediaries and lender escrows including to fund the close out course of the Dow Chemical build-to-suit project.

Our intent is to utilise the cash to fund current investment commitments and new investments. We had $1.9 billion of consolidated debt outstanding at the end of the first quarter which had a weighted average interest rate of 4.1% of which most is currently at fixed rates, including debt coverage currently by interest rate swap agreements.

Our $129.1 million of 6.8% trust preferred securities converted on May 1 with an attractive rate of three month LIBOR plus 170 basis points which is currently 2.87% and is expected to reduce our annual debt service by approximately $5 million based on this rate.

Fixed charge coverage at the end of the quarter was approximately 2.7 times and leverage for the first quarter decreased further to 4.9 times net debt to adjusted EBITDA compared to 5.2 times at the end of the fourth quarter 2016.

As of March 31, 2017, we have approximately $63 million of non-recourse balloon mortgage payments, with an average interest rate of 6% coming due in 2017, of which $22 million represents mortgages currently in default.

We retired $19 million of secured debt subsequent to the first quarter and our unencumbered asset base was approximately $3.2 billion representing approximately 72% of our NOI as of March 31, 2017 giving us significant financial flexibility.

With the exception of a $4.6 million letter of credit to secure our obligation to purchase a new industrial commitment we have no other borrowings outstanding on our $400 million revolving credit facility. We paid approximately $3.4 million in lease costs and tenant improvements during the quarter.

Our TIs and leasing budget for 2017 could be up to $26 million depending on leasing and releasing volume. Now, I’ll turn the call back over to Will..

Thanks, Pat. Operator, I have no further comments at this time. So we are ready for you to conduct the question and answer portion of the call..

We will now begin question and answer session. [Operator Instructions]. The first question comes from Craig Mailman of KeyBank Capital Markets. Please go ahead..

Hey, guys. Will, I know you guys have fund your kind of net acquisition guidance for the year, but your commentary seem like maybe on the margin.

You're less confident that this could happen because the environment holding up so well? Is that kind of fair way to look at it?.

Well, right now our outlook for volume in total on new investment activities about 300 million. I think it will slowly increase over the balance of the year. So, we are optimistic that we’ll be able to find additional opportunity both in purchase a big box warehouse and some new build to suite activity.

But it is competitive and we believe there is value and being patient and taking your time and we’re in a very strong position from a balance sheet standpoint and from a liquidity standpoint. So we’re not going to rush to change that position which is very, very good position to be in..

It’s helpful. And then, I know over the years you guys been trying to kind of bring out your average lease term, but some of the acquisitions in the industrial space you’re looking at that more 7 to 10.

When you're -- how do you guys evaluate kind of or how much more important is the real state now when you're looking at industrial leases that could roll within seven years versus a build to suite at 15 plus years from a pricing perspective and how much mix you kind of want in there?.

Very important, Craig, you know the shorter release industrial – right, all the real estate attributes are much more important.

What we’re trying to do from a big picture standpoint is we didn't want to keep extending our weighted average lease term overall in the company to longer than nine years and hopefully 10 years, so it may seem like adding some shorter release industrial is contrary to that strategy, but the other thing that we want to do is if we look at our rollover profile on our leases that are shorter than 10 years, right now, we still have about $2 of office revenue for every dollar of industrial and we want to change the lease rollover profile of the company so it's at least as much about industrial as office.

Right now, we have over 10 years of weighted average lease term in the industrial portfolio and we have about 7.6 years in office, so we can tolerate a little bit shorter term overall in industrial as we keep working on extending the weighted average lease term in the portfolio out to be as long as we have elsewhere in the portfolio..

Great. I think, Laura has a question..

Hey, everyone.

I just wanted to follow-up on the Arrow Electronics and New Cingular extensions, I was wondering if you could give any detail on that mark-to-market and the term on those leases?.

In the case of Arrow principally coming down modestly, when factoring in the TI investment and everything else, there we’re getting. I think we have a good chance of getting 18.50 [ph] in that rent which is we think a very good outcome.

How much term it is?.

For 15 years..

15-year extension is what we expect..

15 years..

New Cingular we think be a five-year renewal with rents increase modestly..

Okay. Thank you..

The next question comes from Sheila McGrath of Evercore. Please go ahead..

Yes. Good morning.

I was wondering if you could give us your CapEx outlook for this year in terms of TI, and how that metric looks over the next couple years with the increasing industrial exposure?.

Well, for the remainder -- for 2017 we think that the TIs and leasing commission could be up to $26 million, really just dependent upon how much releasing there is. As the portfolio has less and less rollover obviously those numbers we would expect to come down..

And then, Will, I think you highlighted much more focus on industrial, how do you think your own portfolio will look in terms of single-tenant long-term office leases industrial and the shorter-term leases by year-end and then what is the long-term goal for that mix over time?.

Well, the revenue mixes is shifting steadily towards a balance of office and industrial. Right now, it’s like 52% or so office and 41% or so industrial. We want to move that to a balance position and we want to keep shrinking that small stub portfolio of retail properties and multi-tenant and vacancy.

So, where we’re heading to in the short term is to try to have right balance between single tenant office and single tenant industrial, fewer and fewer retail and multi-tenant buildings and assets and transition.

And we’d like to have as much office and industrial, a balance of rollover both in the shorter lease portfolio which we define as 10 years or less and the longer lease portfolio.

We are more likely to sell – if we have an office building on a long-term lease that reaches a point where there's 10 years of lease term left we’re more likely to sell that building than to sell an industrial property.

And that's another way that that shorter lease portfolio is going to continue to change and evolve towards being more about industrial than office.

So, I think we’ll make significant progress in the next few quarters towards those goals and when we reach the balance at this point its probably more likely that the mix shifts even further in favor of industrial, because the preponderance of things that we’re looking at the forward pipeline are in the industrial area..

Okay. Thank you..

The next question comes from John Guinee of Stifel. Please go ahead..

John Guinee here.

Just Pat to clarify a little bit the question Sheila asked, $26 million for 2017 of releasing costs, how much of that was spent in the first quarter? And then how much of that could not occur if you decide to sell the vacancy versus our fortune up to lease up the vacancy?.

Well, I’ll answer the first part. The first quarter we spend about $1.8 million in TIs and about $1.7 million in lease course. As it relates to the breakdown a large portion of it could be in properties that we potentially could sell.

We don't give guidance on the breakout of that, John, but the model that we've given, the $26 million that we’ve given assumes the money that we spend on releasing during the including properties that we sell..

Okay. And then you sign the couple of five-year lease extensions Will in for Food Lion's. What does a 23,000 square foot Food Lion with a five-year lease? What kind of proceeds you get on a sale for something like that? Does that's held a seven cap or 17 cap? I've no idea..

Right. It doesn’t sale at a seven cap. It sales at something above that and then….

Thanks..

When we had won the contract to sell, we’ll let you know what the outcome is..

Is it double-digit?.

Time will tell..

I mean, it’s a material, its only 46,000 square meter, you can whisper if you want to? And then, the last question, Aaron [ph] also pointed out that it looks like you bought the Amazon building at a really low price per pound, but then when you add, you capitalized the ground lease at the six cap and you put in the 2.3 million square feet for future tenant allowances, you get up to that 36 – I’m sorry, $39 a foot.

Is it is 71 [ph] GAAP yield and a six cash yield on a total basis including the releasing cost but excluding the ground lease?.

The ground lease, we deduct the ground lease expense to calculate those numbers..

Got you. How about the TI's? Is there are the TIs.

Is the 716 GAAP and cap yield, cash yield on a $12 million basis or $14.3 million basis?.

14.4, that’s the total price including -- I think it was 2.3 million of potential TIs..

And just as curiosity, is it a recent built or is this building that's been around a while and what does someone do with $2.3 million.

Is it for the base building? Is it for FF&A?.

It’s an existing second generation building. So it was for the base building improvements to bring it at the Amazon..

Okay. Thank you..

The next question comes from Jean Nusensan of JPMorgan. Please go ahead..

Thank you.

On just deal flow economics, have you guys seen any shift in pricing in the private market since last quarter?.

None to speak up Jean..

And on your earlier 250 million to 300 million of dispositions plan for 2017, you think that number still doable?.

Yes. For sure. It's early in the year and if you count the loan sales obviously we’ve done close to $188 million. The loan sales weren’t included in our 250 to 300 of property dispositions, but we’re going to stay active through the balance of the year..

Got you.

So you’re saying the loan sales will now fall into that 250 to 300 guide?.

Over and above, Jean..

Okay. And then just….

If you count the loan sales in there you should be rethinking in the context of 250 plus the loan sales as the bottom range..

Got it.

And what’s the liquidity you like for just vacant office buildings now?.

To be honest, we’re finding it better to be a seller right now for some of that stuff compared to a year ago, its varies greatly by market and property type, but I'm optimistic that we can make some good sales of vacancy this year as opposed to holding the assets releasing an incurring all the capital costs..

Right.

And I guess does the buyers redeveloping these properties? Is it just land value and is it mostly just private equity that’s on other side?.

It's a mix. I would say most of its being bought for redevelopment, but we’re also see more user interest for both industrial and office, and where we can make that sale typically the value is probably doubled compared to selling into an investor wire..

Got it.

And final question just housekeeping, what was the GAAP lease termination income in the quarter?.

Hold on one second, we’ll look at it. Yes.

For the GAAP number or the cash number or both?.

The GAAP number..

The GAAP number for the quarter was $1,928,000..

Got it. Perfect. That’s it from me. Thank you, guys..

Thanks Jean..

The next question comes from Bill Siegel of Development Association. Please go ahead..

Will, thank you, you been at this while.

I’m just curious, have you seen the need for absorption in office space begin to diminish at a quicker rate across all segments and geographic regions than you might've even thought just a couple years ago?.

I wouldn't say -- no, I don’t think so.

I don’t – anything you want to add to that deck?.

No, I think many markets are continuing to grow..

So the need for office space is continuing to grow in many markets at your end?.

Yes..

Thank you very much..

Thank you..

The next question is a follow-up from Sheila McGrath of Evercore. Please go ahead..

Yes. Will, it seems like a lot of your competitors are also are peers and that lease are also focused in on industrial. I was wondering if you could talk to us about the competitive environment on acquiring industrial.

Is it heated up a lot more in recent quarters?.

It’s been pretty steady for a while, Sheila. I suppose the good news is – just from a new transaction there's a lot going on in the e-commerce area. So, there is a lot of transaction activity that we’re seeing. We won't win all the business we look at, but we’ll win enough of it.

But it is competitive and it is a highly desirable asset type compared to single tenant retail or single tenant office.

So, it is competitive, but we have excellent relationships in the built-to-suite area with merchant builders that we’ve done lots of business with over the years and we think that gives us a competitive advantage in many cases the last local transactions. So we’ll get our fair share..

So, do you think that the bulk of the industrial volume will still be in the forward built-to-suite market rather than just buying existing buildings?.

No. I think it shifted more towards a balance between the two. And the truth is for good bulk distribution and warehouse if we want to try to originate that and build the suite and insist on 15 and 20-year leases we won’t be able buy any of it right now. So that market shifted and our acquisition postures had shift with that as well..

Okay, great. Thank you..

The next question comes from Jon Petersen of Jefferies. Please go ahead..

Great. Thanks. Just one question from me, so the weighted average remaining lease term portfolio is 8.8 years, it’s up a little bit from last quarter. Its down from year ago, which I know it’s from the landfill.

Do you guys have had a number of pro forma if you were to take the land out while your weighted average remaining lease term was about a year ago? Just trying to figure how much is changed with all the non-core dispositions you’ve done?.

Yes. I don't have that right in front of me. I mean, we can get it you, I just don’t know, I mean, we based it upon 20-year life to the first purchase option, but I couldn’t tell you, right off of my head what it was pro forma – on a pro forma basis as of we did on them at that point in time..

Okay. We can follow-up offline. That’s all I have. Thanks..

The next question comes from Joshua Dennerlein of Bank of America/Merrill Lynch. Please go ahead..

Hey, guys. Good morning..

Good morning..

Just a follow-up on Sheila’s question. When you guys are competing for acquisitions or built-to-suite in industrial space, who is your competitors, you’re coming up against Stag, GPT, W.P.

Carey, kind of curious?.

It’s varies. We don’t compete with Stag very much. I think we’ve always run into W.P. Carey for sure. We run into the REIT and we run into GPT in the public space. I think those are all active participants in our market..

Okay. Thank you..

And this concludes our question and answer session. I would now like to turn the conference back over to Will Eglin for any closing remarks..

Hi. This is Pat. Just to follow-up on the question about what the pro from life would be if we didn’t have the hotels, the land investments last year was 85 years, so, an answer to that question..

Excellent. Well, it doesn’t look like there are any more questions, but once again thanks again for joining us this morning. If you have any questions please don't hesitate to reach out to me or any member of our senior management team. Thanks again..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day..