Heather Gentry - IR Will Eglin - CEO Pat Carroll - CFO Brendan Mullinix - EVP Lara Johnson - EVP James Dudley - EVP.

Sheila McGrath - Evercore ISI Laura Dickson - KeyBanc Capital Markets John Guinee - Stifel Nicolaus John Massocca - Ladenburg Thalmann Jon Petersen - Jefferies.

Good morning, and welcome to the Lexington Realty Trust First Quarter Earnings Call and Webcast. 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 Heather Gentry, Investor Relations. Please go ahead..

Thank you, Operator. Welcome to the Lexington Realty Trust first quarter 2018 conference call and webcast. The earnings release was distributed this morning, and both the release and quarterly supplemental disclosure package are available on our Web site at www.lxp.com in the Investors section, and will be furnished to the SEC on Form 8-K.

Certain statements made during this conference call regarding future 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 risks, including those included in today's earnings press release, and those described in the reports that Lexington files with the SEC from time-to-time could cause Lexington's actual results to differ materially from those expressed or implied by such statements.

Except as required by law, Lexington does not undertake a duty to update any forward-looking statements. In the earnings press release and quarterly 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 flow.

On today's conference call, Will Eglin, CEO; Pat Carroll, CFO; and Executive Vice Presidents, Brendan Mullinix, Lara Johnson, and James Dudley will provide commentary around first quarter results. I will now turn the call over to Will..

Thanks, Heather, and good morning everyone. Our first quarter 2018 results were solid as we continue to execute on our business plan. Both GAAP and cash rents increased on leased renewals during the quarter. Our portfolio lease percentage remains high, and same-store NOI was slightly up.

Revenue from our industrial properties increased to 48% of total revenue during the quarter, and now exceeds office revenue. This percentage is up significantly from 25% at the end of 2013. During the quarter, we disposed of approximately $63 million of primarily office assets.

We remain highly motivated to reduce our exposure to suburban office and continue to explore various ways to accomplish this most efficiently. Our objective is to best maximize the value of our office portfolio while investor demand for yield-producing product continues to be strong.

Despite some dilution to current cash flow, we believe that having a more favorable risk-adjusted longer-term growth profile is worth the tradeoff as we continue to add more industrial product to our portfolio and dispose of non-core assets.

We intend to use disposition proceeds to fund new industrial investments, retire debt, and fund share repurchases when appropriate. During the quarter, we took the opportunity to repurchase approximately 800,000 common shares. And as of March 31, we have approximately 5.8 million shares available for repurchase under our current authorization.

Subsequent to the quarter, we acquired two industrial assets located in an industrial submarket of Memphis for $93 million. While the investment environment remains competitive for industrial assets, we are currently reviewing a number of investments that are consistent with our strategy.

We continue to favor Class A easily-repurposed facilities in secondary industrial markets that are located close to highways and main transportation hubs, as well as properties subject to below market leases. Our balance sheet remains strong.

Leverage was 6.1 times net debt to adjusted EBITDA at the end of the quarter, and over 74% of the portfolio is now unencumbered, bringing our unsecured debt to unsecured NOI leverage to just 5.6 times.

I mentioned on our last call that we may finance some of our office properties with secured debt, but we currently favor dispositions as an alternative to encumbering assets. I will now turn the call over to Brendan to discuss investments..

Thanks, Will. During the first quarter, we continue to pursue industrial investments, and are currently reviewing several hundred million dollars of potential new opportunities. As we highlighted on last quarter's call, build-to-suits are becoming more active again, although our current pipeline predominantly consists of direct purchases.

Subsequent to the quarter, in the beginning of April, we closed on a two-property industrial transaction in an industrial submarket of Memphis for approximately $93 million. The properties which reside in two different industrial parks in Olive Branch, Mississippi, have a weighted average lease term of approximately seven years.

The first property which was completed in early 2017 is a 716,000 square foot Class A distribution warehouse net leased for 11 years to Sephora. The property is expandable by 176,000 square feet and contain sufficient land area for added employee and trailer parking as needed.

The second property is a 1.2 million square foot distribution center net leased to Hamilton Beach for three years. While we have not historically acquired properties with lease of under five years, the asset is a very functional generic distribution warehouse in a well-located industrial submarket.

We believe the rent to be bellow market and that there is a high likelihood that the Hamilton Beach renews.

We still favor properties with longer lease terms as part of our larger overall investment strategy, but if we find a property that we believe will be a good fit for our portfolio, we will make an exception like in this case where the price per square foot is a good value and the property is fungible for use.

I'll now turn the call over to Lara to discuss dispositions..

Thanks, Brendan. We disposed a $63 million of assets during the first quarter at average GAAP and cash cap rates of 8.6% and 8.4% respectively. This included four office buildings with leases under 10 years, recently vacated retail store and a small industrial asset.

Our current disposition program of $250 million to $300 million which includes a mix of office and other non-core asset with a heavy emphasis on office sales is well under way. We are currently marketing or in an active discussions with buyers for dispositions that would potentially allow us to exceed our dispositions guidance for the year.

Timing of sales will vary, but we would expect the majority of the sales close in the later part of the year. As we intensify our efforts to reduce our office exposure, we have expanded our focus to include sales of both short and long term leased office assets.

We are committed to extracting value from the office portion of our portfolio by accessing buyer capital sources best suited to the various property profiles within the portfolio. We look forward to providing more details as this endeavor progresses. With that, I will turn the call over to James who will provide an updates on leasing..

Thanks, Lara. During the quarter, we leased approximately 210,000 square feet of space increasing both GAAP and cash rent 4% and 3% respectively on 134,000 square feet of lease extensions. We have just 4.2% of leases expiring in 2018 after the progress we made in 2017 and year-to-date.

Our portfolio is 97.2% leased at quarter-end with the weighted average lease term of 8.9 years. The decrease in our lease portfolio and weighted average lease term compared to last quarter was driven mostly by the Sears vacancy in our 780,000 square foot Memphis, Tennessee warehouse.

Subsequent to quarter-end, Nissan signed a lease for 43,000 square feet of space in our Irving, Texas office property which they now occupy a 100% of the building. This was a positive outcome for the property as it didn't require any downtime, the net rent increased and the property became a single tenant asset again.

Regarding 2018 office expirations, we are in final negotiations with Huntington Ingalls in Pascagoula, Mississippi for a five-year extension. We continue to market for sale or lease our property leased to 3M through the end of June 2018 and our Overland Park, Kansas office property currently leased to Swiss Re through the end of 2018.

We still remain in negotiations with FedEx whose lease expires in June 2019 and now expect the mostly likely outcome for this asset will be a sale to FedEx.

On the industrial side, we continue to market for lease or sale our facilities in Duncan, South Carolina and Henderson, North Carolina, and Plymouth, Indiana, all whose leases expire in the latter part of this year.

We remain optimistic on favorable sales or leasing outcomes for these properties given the long lead time and strong demand for industrial properties. I will now turn the call over to Pat, who will discuss financial results..

Thanks, James. Gross revenues for the first quarter were $103 million compared with gross revenues of $96 million for the same time period in 2017. The increase in revenue was primarily the result of additional revenue generated from property acquisitions and new leases.

We had a net loss attributable to common shareholders for the quarter of $60 million or $0.07 per diluted common share compared to net income attributable to common shareholders of $40 million or $0.17 per diluted common share for the same time period in 2017.

The delta between quarters relate primarily to the timing of gains on sales and impairment charges taken on properties. Currently, the 2018 guidance for net income attributable to common shareholders is a range between $0.54 to $0.57 per diluted common share. This range is subject to change throughout the year.

During the quarter, we recognized $53 million of impairment charges and $23 million of gains related to property sales. The impairment charges were primarily attributable to two properties.

We took a $25 million impairment charge on our FedEx office facility in Memphis, Tennessee, and wrote the asset down to its estimated fair value of approximately $50 million. Additionally, we took $80 million impairment on our office property in Overland Park, Kansas, leased to Swiss Re through December, 2018.

The property is encumbered by a $33 million non-recourse mortgage which matures in May 2019. And we wrote the asset down to its estimated fair value of approximately $13 million.

Adjusted company FFO for the quarter was $62 million or $0.25 per diluted common share compared to $58 million or $0.23 per diluted common share for the same time period in 2017. The increase relates primarily to new acquisitions coming online as well as new leases. Our current adjusted company FFO payout ratio is 71%.

Same-store NOI for the quarter was approximately $75 million, up 0.2% when compared to the first quarter of 2017. Same-store percentage leased at the end of the quarter was 96.5%, compared to 98.7% for the same time period in 2017. The decrease was primarily the result of the vacancy in our Memphis warehouse which was previously leased to Sears.

Property operating expenses were $11.5 million slightly lower than for the same time period in 2017. Leasing costs and tenant improvements were approximately $6.5 million during the quarter. We are budgeting approximately $19 million for these costs in 2018, although this amount could change as we address future leasing expirations and dispositions.

G&A expenses were approximately $9 million for the quarter. G&A for the first quarter included modest severance changers in annual board fees which we always expense entirely in the first quarter. Our 2018 G&A budget is expected to be approximately $32 million.

We continue to work towards simplifying our operations with a focus on lowering operating costs. Moving on to the balance sheet, at quarter end, we had $98 million of cash including cash classified as restricted.

Additionally, our consolidated debt outstanding was approximately $2 billion with a weighted average interest rate of approximately 3.8% and a weighted average term of just under seven years.

Fixed charge coverage at the end of the quarter was approximately 2.8 times, and leverage decreased to 6.1 times net debt to adjusted EBITDA compared to 6.4 times net debt to adjusted EBITDA last quarter.

During the quarter, we repaid $60 million on our revolving credit facility to end the quarter with $100 million outstanding with a total of $405 million available. At quarter end we had outstanding mortgage debt of $690 million, with a weighted average interest rate of 4.6%, and a weighted average term of slightly over 10 years.

Our unencumbered asset base was approximately $3.4 billion at the end of the quarter, which represented approximately 74% of our NOI as of March 31, 2018. 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 the question-and-answer session. [Operator Instructions] The first question comes from Sheila McGrath of Evercore. Please go ahead..

Yes, good morning.

Will, I was wondering if you could give us your thoughts on accelerating the dispositions in office to more quickly moving the portfolio shift to industrial, and how should we think about disposition volumes and cap rates for the year?.

Sure. I think when we started the year we gave guidance to that $250 million to $300 million of dispositions in mainly in office. So with what we transacted in first quarter we were sort of right on schedule. And second quarter would be I think about the same.

With that said, we have good visibility on finishing our guidance earlier than we thought and in the context of the whole year. And as we said, we do have an interest in going above and beyond that, and speeding up the transition towards becoming more of a pure-play on industrial.

We don't have anything to say in terms of what dollar volume that may be as the year progresses, but we are working very hard on some transactions that could very well allow us to exceed guidance, and hopefully next quarter we'll have some clarification on that.

And in terms of overall cap rate, since we are moving beyond just trying to sell some of our shorter lease office assets and considering longer lease assets, I think the cap rate range will probably tighten as the year progresses.

We'd indicated that on a cash basis we'd be in sort of the 7.5 to 8.25 area, and for sure some of our office buildings can be transacted at sub 7.5..

Okay, thank you.

And as a follow-up, on the industrials that you purchased after the end of the quarter, I was wondering if you could give us a little bit more detail who was the seller, describe the expansion opportunity in a little more detail and the cap rates on that?.

One of the terms of the sale was that we agreed with the seller that we would not disclose the identity of the seller or the cap rates. So unfortunately we can't respond directly to those questions.

The Sephora property does have the expansion that was noted in my prepared remarks which would include an extension of the lease potentially depending on the remaining term of the lease, and also an opportunity to enhance the yield..

Brendan, maybe you could describe what the competition was, was it a little bit more limited because they wanted to sell the buildings together, and so it's a higher purchase price or just how was the competition for that purchase?.

Yes, that would be fair to say, it was not broadly marketed..

Okay. Thank you..

The next question is from Craig Mailman of KeyBanc. Please go ahead..

Hi, everyone. This is Laura Dickson here with Craig.

So follow-up on Sheila's question, can you give us the pro forma, like, percent of industrial annualized based rents following the acquisition of these two assets?.

From a pro forma basis, honestly I don't have it in front of me, but the cash rents were about, on an annual base, about $5 million..

For both of them? Okay, and then not sure I missed this, but given -- so with the acquisition activity do you have an assumption for 2018 investment activity and guidance?.

What we said in our guidance earlier was that basically the difference between the upper end of the range and the lower end of the range depended on whether we would be utilizing disposition proceeds for acquisitions or simply de-leveraging. So this acquisition is right, absorbs a piece of our disposition guidance.

There's one transaction that we're looking at of about $40 million that we think could make, but beyond that I don't have any further visibility on acquisition activity..

Okay, and then, just wanted to ask about the Cleco [ph] joint venture, an update on that..

On the Cleco joint venture, we're continuing to get started with the buildout of the infrastructure, looks like the demand in the market is still strong. There's about currently 16 users that are interested in build-to-suit opportunities of 250,000 or greater. And about nine of those are sizes of 500,000 or greater.

So we're currently responding to RFPs..

Okay, great. Thank you..

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

Great. Okay, first question, obviously dispositions can go to de-lever, they can go to asset acquisitions or they can go to share repurchases. Obviously very reluctant to do share repurchases.

But a related question on that, have you thought about just cutting the dividend, and if you've cut the dividend how far could you cut it?.

We haven't thought about cutting the dividend, but we are over-distributing right now in relation to our taxable income, if that's your question..

Well, it just seems as if you try to morph into becoming an industrial REIT you're just being restricted by a very, very large payout and very little retention of cash because of the dividend and I'm not sure the stock would go down if you cut it to the minimum..

Yes, I agree that in our trading price right now, we don't seem to be getting much value for the dividend that we're paying. And obviously, selling off is an investing and industrial has diluted the cash flow, although a lot of the CapEx comes out of our cash flow as well.

So we think that in spite of the dilution there is value for shareholders in continuing to make that shift, but I think it's premature right now to what the distribution might be in the context of transitioning all the way to industrial, which would be still a pretty time-consuming process..

And then second question, someone -- I didn't catch the name of the person who did this, but went through the '18 and '19 maturities, and if you could highlight those again and then also on FedEx if you essentially sell it to FedEx at $50 million, what's essentially the implied cap rate on that sale? If I'm doing the math right, it looks like you've got about $7.1 million of net income..

Yes, so in that calculation, that's right, a high cap rate, but a building that is of that age to be able to sell it for $100 a foot, we think, is good value for us, given the short-term nature of the building and its age..

Oh, no, I'm just thinking about this for modeling purposes. Okay.

So you mentioned that's a 14-cap going out the door when you sell it to FedEx, is that an '18 or a '19 event?.

Right now, we contemplate it being an '18 event..

And then Swiss Re goes back to the lender at $33 million at the end of this year?.

In all likelihood, yes..

And how about the other building in Kansas City, the other Swiss Re building?.

We believe the likely outcome there is similar and that it's a conveyance to the lender..

Okay.

And then did you mention Owens Corning in Ohio?.

Owens Corning has short-term lease extensions and we expect that they'll extend again like they've done previously..

Okay, great, thank you very much..

[Operator Instructions] The next question is from John Massocca of Ladenburg Thalmann. Please, go ahead..

Hi, guys, good morning..

Good morning..

Any update on the Sears situation? It seems like you were going to fight their definition of the lease that allowed them to vacate.

Has that changed at all?.

The answer is it hasn't changed. However, we took the conservative approach. We did take an impairment charge last year and we are now showing the property as vacant, because they have moved out..

But we are pursuing them in a legal action. .

Understood.

And then -- I know it's a bit smaller in the office, but the industrial assets where the tenants are not going to renew at the end of the year here in 2018, you know, what's the thought process there on selling versus trying to release those assets?.

Well, I think our experience has been that in some of these scenarios we have user buyers that come along and want to overpay us for industrial property or pay us a very competitive amount. So in those circumstances, we'd be inclined to sell the assets, but we're also open to leasing.

So I think it's going to be a mixed bag of outcomes for the asset that have the vacancies upcoming this year. We can see some leasing and some sales..

And relative to where you're able to acquire industrial in the market today, would that potentially be accretive or is that kind of going to be a wash, if you sell the assets?.

That's a wash. Again, there'd be different outcomes and different assets, but I view it as a wash..

Okay. And then you mentioned your focus for shifting away from putting mortgage debt on office assets and more towards the disposition front, and is that because you're seeing any pushback from lenders in terms of LTVs or is that market still….

If anything it's the other way that the financing is so good that we think it might support disposition activity at very good values for us..

So essentially because other people are getting such good LTVs you think you can sell at attractive rates?.

Yes, that was what made us shift our thinking about it..

Okay. That's it from me, thank you guys very much..

Okay..

The next question is from Jon Petersen of Jefferies..

Great, thanks. So I was just curious. As you shift towards industrial and we think about valuing your portfolio there's obviously been a couple large transactions recently, Gramercy, a couple of days ago. It looks like the cap rate there was a low 6% and then we saw DCT was obviously much lower than that.

So I was kind of curious as you think about the quality of your industrial portfolio versus some of these ones that is sold, maybe specifically thinking about Gramercy, how do you think your quality stacks up versus those comps?.

Yes, we view the Gramercy industrial portfolio as most comparable to ours. So our sort of quick math is that that piece of the transaction was valued at about 56 for Gramercy's industrial. Which I thought was a very good data point for us and for interested parties trying to underwrite NAV..

Do you see this rise in M&A activity moving over to the office side and -- as you think about shifting to industrial, is there an opportunity for a larger kind of onetime portfolio transaction to reduce your exposure to office?.

I think in this market there is the potential for that. Time will tell, but there's a lot of capital on the sidelines looking to be invested. And if we have a chance to take advantage of that opportunity, that's definitely something we'll be exploring..

Okay. Thank you for the color..

The next question is a follow-up from John Guinee of Stifel. Please go ahead..

Great.

Oh, just recite again which move outs you expect on the industrial portfolio?.

Sure. Well, there's actually been a little bit of a change. We thought that there was a certain move out for our property in Duncan, South Carolina, but we're back in discussions with the tenant. So it's unknown if for sure they're going to move out. Henderson and the Staples property, we know they're moving out.

And then the Plymouth, Indiana property, we also know they're moving out..

Okay.

And then the back of the envelope, it looked like Sears in Memphis was only paying $2 a foot, is that an annual number?.

That's $204 a foot..

And what do you think the market is for that particular asset or is it functionally challenged?.

It's functionally challenged and we're not exactly sure what it leads us towards at this point. We've just kind of started that process..

Our basis in the asset is $1.8 million..

But you don't know what it would lease for?.

-- of asset so we're trying to feel out the market for exactly what the value is for it..

Okay, thanks..

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

Yes.

I was wondering, Will, if you could give us how you think the portfolio distribution will be by yearend, not assuming any major unforeseen portfolio sales or acquisitions, but just kind of on the current plan what the mix might look like?.

I think if we just execute the guidance that we laid out earlier in the year and used the proceeds to purchase industrial, the NOI shifts more towards mid-50s from industrial and mid-40s-ish for office. We have our eye on transforming the portfolio more than that. But I think we'd just update market participants as we have visibility on that..

Okay.

And a second question is, the FFO payout ratio when looking versus the sector is reasonably conservative, I'm just wondering how -- what your thoughts are on dividend increases or -- given the portfolio shift if you'll just -- your thought is maintain that in the near term?.

Yes, I mean, given the fact that we're not getting much value for the current level of dividend; we don't have it in our mind to increase it. I think we're going to focus on changing the portfolio and improving its quality and changing the composition of the portfolio so there's not so much CapEx around sustaining occupancy in office..

Okay, thank you..

This concludes our question-and-answer session. I would like to turn the conference back over to Will Eglin for closing remarks..

Well, thanks again to all of you for joining us this morning. Now we appreciate your continued participation and support. If you would like to receive our quarterly supplemental package, please contact Heather Gentry or you can find additional information on the company on our Web site at www.lxp.com.

And in addition, as always you may contact me or the other members of our senior management team with any questions. Thanks again, and have a great day..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..