Good morning and welcome to the Lexington Realty Trust second quarter 2017 conference 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 second quarter 2017 conference call and webcast. 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 a 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 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 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 unitholders 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. Joining me on today's conference call to discuss Lexington's second quarter 2017 results are Will Eglin, Chief Executive Officer, and Pat Carroll, Chief Financial Officer. Will, Pat, and other executive members of management, including our transactions group, will be available answer questions following our prepared remarks. I will now turn the call over to Will.

Thanks, Heather. Good morning, everyone. And thank you for joining our second quarter 2017 earnings call and webcast. During the second quarter, we continued to make progress on multiple fronts, including high-quality industrial investment activity, portfolio simplification through asset sales, continued headway on addressing lease expirations, and maintaining a strong and flexible balance sheet. These are larger themes you will continue to see in the coming quarters as we actively improve and reposition our existing portfolio. During the quarter, acquisition and build-to-suit activity progressed and we had the opportunity to sell a good portion of non-core low revenue generating assets. Our portfolio was 98.1% leased quarter on strong leasing volume of 1.4 million square feet and our balance sheet remains in excellent shape with leverage at 5.4 times and nothing drawn on our credit line at June 30. We generated net income of $0.02 per diluted common share and adjusted company FFO of $0.23 per diluted common share for the quarter. And we are reaffirming our 2017 adjusted company FFO guidance, within the range of $0.94 to $.98 per diluted common share. Now, let's take a closer look at the quarter and how we are positioned moving into the second half of the year. Starting with dispositions, we sold $60 million of property during the quarter at GAAP and cash cap rates of 5.2% and 5.3% respectively. These asset sales, which included a mix of short-term leased, multi-tenanted and vacant properties further simplified our portfolio and helped to improve our overall portfolio lease term. Additionally, the sales created liquidity to accretively redeploy into new investments as the sold properties were generating low revenue in relation to the sales price. Total disposition volume of approximately $247 million through June 30 included $152 million of wholly-owned properties at average GAAP and cash…

Thanks, Will. Good morning, everyone. Gross revenues in the second quarter were $96 million compared with gross revenues of $117 million for the same time period in 2016. The year-over-year change is attributable to 2016 and 2017 property sales, mainly the New York City land investments that we sold in 2016, a lease termination payment we received in 2016, and lease expirations, which were offset by revenues generated from acquisitions and new leases. Net income attributable to common shareholders for the second quarter was $0.02 per diluted common share or approximately $6 million compared to net income attributable to common shareholders of $0.23 per diluted common share or $54 million for the same time period in 2016. Impairment charge of $14 million were recognized during the quarter compared to $10 million of gains related to property sales. These impairment charges were primarily attributable to our Fishers, Indiana office property, which is currently being marketed for sale. For the first half of the year, gains on sales totaled approximately $44 million compared to impairment charges $22 million. In addition, during the second quarter of 2017, we took a $3.5 million impairment charge on our joint venture investment that owns the Gander Mountain retail property in Palm Beach Gardens, Florida. We estimate our 2017 guidance for net income attributable to common shareholders in the expected range of $0.65 to $0.69 per fully diluted common share. This estimate is sensitive to the timing and composition of acquisitions and sales, among other factors. Adjusted company FFO for the quarter was approximately $57 million or $0.23 per diluted common share compared to $79 million or $0.32 per diluted common share for the same time period in 2016. This decrease was primarily the result of the sale of the New York City land investments in 2016,…

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.

[Operator Instructions]. And our first question will come from Craig Mailman of KeyBanc. Please go ahead.

Hi, everyone. This is Laura Dickson here with Craig. Will, on the last call, you noted the competitive bidding environment for industrial. Can you just talk a bit about the industrial assets you acquired this quarter and subsequent to quarter-end and then like range of cap rates you’ve got on the assets?

Sure. It has been a competitive environment. And I think everyone in our line of business has probably said the same thing for several years. But that said, nobody either has so much capital or so much low-cost capital that they're crowding us out. So, everybody's been able to continue to be satisfied with the opportunities that they've been able to uncover. In our case, we added a couple of distribution purchases in second quarter that weren't in our initial guidance for the year. And cap rates have ranged sort of between 6% and 7% for some of the new transactions that have come into the portfolio. We have $124 million of transactions that are scheduled to come into the portfolio in third quarter. And I think earlier this year, we had indicated that we hoped to deploy capital at an average going-in cap rate of around 6.5%. And with larger volume than anticipated, I think at least right now that we would be about 20 basis points above that target, at about 6.7%. And we've been able to add quite good credit quality and asset quality to the portfolio. So, so far, so good.

Okay. And then, regarding capital sources, I think I might have missed this part in Pat's closing remarks, are there any debt or equity assumption or additional equity baked into guidance?

None.

Okay. And then, for the update on – you guys are – have mostly covered 2017 expirations, and so I was looking at 2018. Are there any big chunks there, especially for like Swiss Re, which I think is set to expire at the end of 2018?

Yeah. What we typically do with third quarter is go into great detail about 2018. There's a lot of extension negotiations going on right now. So, we're hopeful that when we get to next quarter, we'll be able to give a clearer picture. But, yeah, looking at the office rollover next year, the Swiss Re building at the end of the year has been one that we've flagged before as a known vacancy that's coming at us. That one does have quite a large non-recourse mortgage on the building. So, it may be that we can eke out some equity value, but the real downside risk has been protected already.

Okay, thank you.

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

Yes. Will, on the two forward build-to-suits announced in the quarter, the same lease term, 15 years, both industrial, but much different cap rates and also price per square foot. I was just wondering if you could give us a little more detail. Is the one with the higher price per square foot special purpose or have TI? What exactly is the difference?

Yeah. The one higher basis and higher cap rate asset is a cold storage facility, Sheila.

Okay.

So, that's the principal reason why the cap rate is higher in that instance.

Okay, great. And then, Will, on the Arrow transaction, I think you mentioned that that was a very good outcome. But when you look in the supplemental, it kind of skewed the leasing spreads negative. Any idea if you kind of made the adjustment for the benefit of converting that to net, how the leasing spreads would've looked?

Yeah. I think cash rents, adjusted for comparability, would've been up about 29%.

That’s right.

So, it would take to minus 14% to plus 29?

On that asset, yeah. Right, on the net rents for that property, currently, when it was a growth lease, it was 13.06 and net rent is 18.50 after.

Okay. Okay. And then on W.P. Carey's call, they mentioned how competitive the environment was and that they were like looking towards forward build-to-suit. Have you noticed that market getting a lot more – the forward build-to-suit market getting a lot more competitive?

Not particularly. We've been able to continue to find good opportunity for ourselves. There have always been others active in that space as well. So, I think we're still finding a good mix of forward commitments and acquisitions to meet our investment objectives at least.

Okay. And then, last question, Pat, on net debt to EBITDA, I think you said it was 5.4 at quarter-end. What is the guidance for the year or year-end, if you could remind us?

We're comfortable with anything under 6, but mid-5 is where we would expect it to remain for the year.

Okay, thanks.

Hey, Sheila?

Yes.

The 29% was on a GAAP basis. It's a 2.7% on a cash basis adjusting for Arrow.

Okay, perfect. Thank you.

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

Great. A few little sort of curiosity questions. On Statesville, I guess you imply that you aren't really sure whether that'll re-lease or you'll get it back. Looks to me – and I might be off on this – that your net rent is about $3.30 a foot. If you sell something like that vacant, what would that trade for?

I have James Dudley here, who heads our asset management group, John. So, he may be able to give you some perspective on what that building would be worth empty versus lease.

First, John, I think that there's a very high probability we get that lease renewed and I think we'll do better than what we currently have with the in-place rents. So, we're pretty far along in that process. But, secondarily, I think it's probably around $40 a foot taken.

Okay, great. And then the second question, you did a short-term renewal on the US government. Can you talk a little bit – and I guess it was a big roll down. Talk about how they do business. Were they – was there any chance that they would leave? How did they negotiate it? Why a four-year renewal? Any cash involved in the – for TIs and re-leasing?

There were some base building improvements that needed to happen. So, it was an opportunity to provide them with some base building improvements and to get them to renew. Their lease rate at around $24 was well above market and $20 approximately lease rate that we have now is still above market. So, it was an effort to try to get some additional term out of them and also enhance the building.

Those are net numbers or are they gross numbers?

They are net numbers.

Okay. And then, I guess, while we've got you hear, your big rollover year is office in 2019. And you mentioned that Swiss Re in late 2018 was already a known vacancy. Any of these big tenants, FedEx, Swiss Re, Honeywell, Cummings, known move-outs already for 2019 or are they all in place paying rent?

Well, the other Swiss Re building in 2019 would be another one that we have flagged before on our watchlist for that year. The big one is Federal Express and we are in discussions with them about extending that lease. And Cummings, there is actually a put call at the end of that lease term where that building can either be – will end up being sold to them for about $5 million.

So, that's essential. So, they have the purchase option at 5 million bucks.

Essentially. And recall that we did a credit tenant lease financing earlier where we monetized that whole rent, John. So, that asset is actually not generating any free cash flow right now.

So, when you're talking about your difference between GAAP and cash is primarily the Cummings building?

Is for what? Going forward? Well, the answer is, GAAP and cash in that asset are probably very close. But even though we put full financing on it, we monetize the whole rental stream. We still have the asset, the debt and the revenue stream on our books.

Okay. So, what you're saying is it's still paying a $12 or so net rent, whether GAAP or cash, but there's no free cash flow because you're amortizing the debt fully.

[indiscernible] interest.

Because it's a debt service.

So, we should value that $4.6 million annual income stream at about $5 million value because that's the purchase option?

That is the purchase option, but member it's levered. So, if you're going to do that, you have to take off the mortgage also.

Got you. Okay, great. Thank you.

Thank you, John.

And the next question comes from Gene Nusinzon of J.P. Morgan. Please go ahead.

Hey, good morning, guys. Just two questions. One on dispositions. You talked about 1.9% of the portfolio being vacant and 2019 being the time for an end to heavy office lease rollover. Just big-picture-wise, is there a certain level of vacancy you're comfortable with running at? And generally, how long does it take to sell an average taken office building?

I think that we've always said that running the company up – until now at above 96% occupancy was sort of a good number. We made real progress, however, in addressing vacant buildings that would be, in our mind, very difficult to lease. It might require a lot of capital to lease and a multi-year lease-up period. So, that should be the trend. We are still going to be trying to move some vacancy out of the portfolio. And principally, that's going to involve disposition work, although there are several buildings in our multi-tenant portfolio that we're comfortable leasing up to high occupancy. There's others that we're going to focus on turning into cash. Some of the disposition activity, you'll see that may show up in fourth quarter this year will be a process that we've talked about before where we want to be disciplined about selling some properties when they reach that point where there's ten years of lease term left. That's a way of booking gains and generating high IRRs without holding every asset to the end of the lease term. So, there's really two things that are going on on the disposition program between here and, say, the end of next year. One is to try to shrink that stub portfolio that's not single tenant office or industrial down close to zero. And the other thing is to take advantage of opportunities to sell some buildings with ten years of term remaining. So, I would think that we should be able to sustain pretty high occupancy through the process.

Maybe looking back to 2016, is there a way you could put a number around average time on market for an average vacant office building before a transaction?

Every situation is different. It depends on how – one of the nice things about owning single tenant real estate is you know often – if you're going to have a vacancy, you're not surprised, so you can get a head start. And, in fact, some sales pretty quickly after they come off lease. But our general assumption with respect to leasing is that sometimes a big office building can take one to two years to lease up. And if we decide to make a sale, we should be able to turn that asset into cash more quickly.

Okay, great. Thank you. Last question on acquisitions, your message around just deal flow changes a little bit from quarter to quarter, can you talk about just how many build-to-suit opportunity you looked at in the first quarter, maybe some you placed under LOI and how many you expect to win going forward?

Gene, we tried to talk about our pipeline in terms of reality and we talk about transactions when they're actually under contract and committed to. We began the year thinking that we might have volume of $300 million or so, and now there have been transaction opportunities that have allowed us to go above and beyond that. It's a very large market. We could sit here and brag that we see billions and billions and billions of dollars of opportunity. But the real skill is to try to sift through it and find what meets our criteria and also where our skill set in the build-to-suit area can add some value. So, people talk about their pipeline and how many deals they look at, but the trick is to really try to focus in and use your time wisely.

Do you think your hit rate has improved from, I guess, in the first quarter?

I think our hit rate is usually pretty high. But like I say, we could say that we've looked at billions and billions of dollars of transactions and feel like we had a low hit rate. But where we're really trying to focus on is where we can find merchant builders that want to use our balance sheet to help their business. And I think we've done a good job focusing on those relationships where we're more likely to have a high hit rate and where it's worth us spending the time to underwrite new transactions.

Great. That's it from me. Thanks, guys.

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

Yes. Will, or Pat, I think you mentioned in the back half of the year, CapEx could be about $17 million. If you look at $17 million CapEx and then go forward to 2018, 2019, when do you think we will see the benefit of your portfolio shift and see that CapEx kind of trending lower?

As you get out of the office rollovers, that number should come down dramatically.

It's already about half of what it was a few years ago. So, we've had some of the benefit.

Okay, great. And then the AFFO payout ratio is reasonably conservative and looks better even next year. How should we think about your dividend policy as we look towards the end of this year and into next?

Well, we have the dividend right now roughly in line with our taxable income run rate. That’s sort of where we want to keep it. We do have a bias toward growing the dividend modestly every year. We have a shareholder constituency that values the income. And we'll be discussing dividend policy with the board and have an announcement later this year.

Okay. And last question, I think you said you have about $100 million of dispose for the balance of the year, but you'll continue to always prune the portfolio. What's like a good kind of recurring disposition volume that we should kind of think about as an ongoing kind of metric?

I would say once we're finished with the portfolio repositioning and we want to be finished with that by the end of next year, I always think, given our size of about $100 million in disposition is what we want to always do to keep upgrading the portfolio. And like I said earlier, there are times when we think the best time to get a good value for an asset is when there's tern years of term left. So, there's going to be some continual capital recycling, but that's probably in the out years. If you're modeling the company longer-term, that would be what I would assume right now. Next year, our disposition odds are a little bit heavier than $100 million because we still have some repositioning work left. But last year was the heaviest year. This year, less so. And next year, a little bit less so to get to our desired portfolio state.

Okay, thank you.

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

Hey, good morning, guys. Just wanted to follow up on Sheila's question. What's in $100 million of assets left to sell this year? Your assets and…

It's a combination of things, as I said. Some office buildings where we're marketing with ten years of term. Some assets in that small portfolio that has retail properties and some vacancy in it. So, it's a mix of assets. And there will be some assets marketed for sale over and above that that could potentially, right, come into the disposition plan toward the end of fourth quarter.

Got it, thanks.

The next question comes from Daniel Donlan of Ladenburg Thalmann. Please go ahead.

Hi. This is actually John Massocca on for Dan. First looking – I know it's a long way out and it's kind of a small portion of the portfolio. But I was curious, when you look at your Kmart retail exposure, you're in some of those buildings, those buildings are paying a pretty low rent per square foot. As those come offline or the leases expire on those, would you look to put CapEx on those maybe to reposition or is it something where you just – if Kmart doesn’t renew, you would just sell as is?

I think for the vast majority of them, they’ll be sales. We are looking to sell the users and we've had some activity on some of the assets already to potentially be user sales.

It's kind of a mixed bag, but what do you think you could sell those for on like a per square foot basis?

I think it's a pretty wide range because the locations are so different. We don't really know yet, I guess, would be the way I would put it. But it's going to be a wide range because the locations vary so dramatically.

Okay, makes sense. Thank you very much. That's it for me.

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

Yeah. Two questions. One is, essentially, Pat, you describe Cummings in a manner very similar to the Xerox deal in Palo Alto where it – the debt fully amortizes over the lease term and the building reverts back to somebody else. So, this really – it looks good on an NAV basis, but there's no residual, but you have to adjust for the debt also. Are there any other assets that have a similar structure of significance?

No. No, the Palo Alto is a ground lease, so we don't own the fee. That's why it reverts back. And Cummings, we monetize the rental stream with the balloon and the call put. But there is no others.

Okay. And then, 1701 Market keeps popping up as a very big multi-big building, what's your plan for that building? 1701 Market in Philadelphia.

We've initially started discussing a renewal with the tenant. So, we're hopeful that we're going to get Morgan Lewis renew.

Okay. Every building in Center City, Philadelphia – every B building in Center City, Philadelphia has traded in the last few years. Is that on the thought process?

Not right now. We have a happy tenant. We'd like to have them stay in the building longer-term.

Great, thanks.

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.

Well, thanks to all of you again for joining us this morning and 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 website 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 good day, everyone.

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