Good day, and welcome to the Lexington Realty Trust Second Quarter Earnings 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 of Investor Relations. Please go ahead.

Thank you, operator. Welcome to the Lexington Realty Trust second quarter 2018 conference call and webcast. The earnings release was distributed this morning, and both the release and quarterly supplemental are available on our website 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 call, Will Eglin, CEO; Pat Carroll, CFO; and Executive Vice Presidents, Brendan Mullinix, Lara Johnson, and James Dudley will provide commentary around our second quarter results. I will now turn the call over to Will.

Thanks, Heather, and good morning everyone. We were pleased with our second quarter results. Same-store NOI increased approximately 1% year-over-year and our portfolio lease at June 30 remained high at 97.3%. While we posted a slight net loss of $0.01 per diluted common share, we generated $0.25 of adjusted company FFO per diluted common share. Solid investment activity resulted in the purchase of $137 million of high quality industrial assets, raising revenue from our industrial properties to nearly 49% of our total portfolio revenue up from 41% just a year ago. We continue working diligently to reposition our portfolio so that it consists primarily of single tenant net leased industrial assets. Our current pipeline includes a number of assets that fit our desired investment criteria of well located Class A industrial facilities in primary and secondary industrial markets. Demand continues to be strong for industrial products and while bidding can be competitive for these types of assets. We are finding opportunities that we believe will benefit the Company's longer-term growth profile. Today we are more than halfway through our announced $250 million to $300 million disposition plan with $175 million of dispositions completed. As discussed on our first conference call, we would expect this figure to increase as we accelerate our efforts to sell our office properties. We remain committed to reducing our office and non-industrial exposure in a meaningful way and continue to work through how to achieve this most effectively. In contemplating a potentially shorter holding period for our non-industrial property assets, during the quarter we conducted a detailed impairment analysis of these properties which resulted in $35 million of impairment charges. Pat will discuss these in more detail shortly. We will continue to keep you updated on our progress as we accelerate the transitions of our portfolio. Our balance sheet remains in good shape with leverage at 6.2 times net debt to adjusted EBITDA at quarter end, unsecured debt to unsecured NOI leverage at 5.9 times and unencumbered NOI of 73%. We utilized our credit facility during the quarter to help fund our recent industrial purchases. Additionally, we financed a Cold Storage facility in Warren, Michigan which generated approximately $26 million in gross proceeds. While we are still in favor of asset sales over financings, we will selectively finance certain properties if we believe it is the right business strategy for that asset. I will now turn the call over to Brendan to discuss investments.

Thanks Will. Investment activity for the quarter included the purchase of 2.9 million square feet of industrial product for $137 million at GAAP and cash cap rates of 7.3% and 5.8% respectively. This included the two property industrial transaction, we highlighted on our first quarter call. These properties located in two different parks and in core industrial submarket in Memphis are net leased to Sephora and Hamilton Beach for a weighted average lease term of approximately seven years. Additionally, we purchased a 1 million square foot Class A industrial facility in Edwardsville, Illinois net leased to Spectrum Brands Pet Group for approximately 12 years. As we think about future investments, we continue to be interested in good quality, well located industrial assets in primary and secondary markets, but we remain disciplined in our underwriting. Our pipeline includes a number of new industrial investments we are currently reviewing for purchase. Regarding our [Adnet] Ohio joint venture, the infrastructure buildout is still in process. The Columbus [indiscernible] distribution market continues to attract interest from large users, looking at the market for potential build-to-suit and we believe our project is well positioned to compete in the Columbus market. I'll turn the call over to Lara to discuss dispositions.

Thanks Brendan. During the quarter, we sold $66 million of assets at average GAAP and cash cap rates of 7.2% and 6.2% respectively. Consistent with our strategy of disposing of non-core assets, these sales included an office asset and two retail assets one of which was taken. Year-to-date, we've sold approximately $175 million of properties at average GAAP and cash cap rates of 7.7% and 7.2% respectively. We have good visibility on dispositions that will potentially close in the next few months pending further bio due diligence and customary closing conditions that would place us at the high end of our announced $250 million to $300 million disposition plan for the year. The market remains favorable for sales and we continue to work on other transactions that would allow us to surpass our dispositions guidance for the year. These dispositions are expected to include the sale of both short and long-term lease office properties. We believe that by significantly reducing our office exposure and focusing on high quality industrial investments, we are positioning the portfolio for improved total returns to shareholders over the long-term. As we gain more certainty on future transactions we will provide updates to you. With that, I will turn the call over to James, who will provide an update on leasing.

Thanks Lara. We released approximately 330,000 square feet of space during the quarter, which included two office extensions and three new office leases. Our portfolio was 97.3% lease to quarter end with a weighted-average lease term of 8.8 years. On the extensions, GAAP rents increased by $53,000 and cash rents were down $117,000. This reduction in cash rents as a result of our negotiation for an 11.5 year extension with Versum Materials in our Tempe, Arizona property and exchange for a slightly lower rent. We also signed a five-year office lease extension Huntington Ingalls in Pascagoula, Mississippi, in which GAAP and cash rents stayed the same. No TI dollars were given on either lease extension. During the quarter, we signed a new lease with Nissan for the additional office space in Irving, Texas office property. Nissan now occupies the full 268,000 square feet of space. We also signed a new 10-year lease to commence in February 2019 with Consumer Cellular at our Redmond, Oregon office property. The space is currently leased to T-Mobile through January 2019. There will be a step down in both GAAP and cash rents of approximately $500,000 and $900,000 respectively, when Consumer Cellular takes over the space in February 2019. Subsequent to quarter end, Honeywell exercised the five-year extension for their lease expiring in 2019 in our 252,000 square foot office space in Glendale, Arizona. This extension included a 2% increase in cash rent with no TIs leasing or other transaction costs. Now that we have resolved majority of the 2018 lease expirations, we are proactively addressing both office and industrial lease expirations in 2019 and beyond, while working to lease other properties where we have no move outs. On the office side, we continue to market for sale or lease our recently vacated property in…

Thanks James. For the second quarter gross revenues were approximately $105 million compared with gross revenues of $96 million for the same time period in 2017. The increase in revenue was primarily result of revenue generated from 2017 and 2018 property acquisitions, new leases and $3.5 million due to the acceleration of below market leases for certain properties in which the tenants renewal option expired offset by sales. We had a net loss attributable to common shareholders for the second quarter of approximately $3 million or $0.01 per diluted common share compared to net income attributable to common shareholders of approximately $6 million or $0.02 pre diluted common share for the same time period in 2017. The difference relates primarily to the timing of gains on sales and impairment charges recognized on properties. We expect the net income attributable to common shareholders guidance range to be $0.24 to $0.27 per diluted common share in 2018, this range is always subject to change. Adjusted company FFO for the quarter was approximately $62 million or $0.25 per diluted common share compared to $57 million or $0.23 per diluted common share for the same time period in 2017. The increase relates to new property acquisitions and new leases. At quarter end our adjusted company FFO payout ratio was 71%. Same-store NOI for the six months ended June 30, 2018 was approximately $148 million, up 0.6% when compared to the first six months of 2017. Same-store percentage lease at the end of the quarter was 96.4% compared to 98.7% for the same time period in 2017. The decrease in a percentage lease was primarily the result of the vacancy of our 780,000 square foot Memphis industrial facility. Dispositions during the quarter resulted in a gain on sale of approximately $14 million. As well discussed…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Craig Mailman of KeyBanc Capital Markets. Please go ahead.

Good morning, guys. I just want to start on the three industrial acquisitions this quarter. Just curious if you could give us kind of a breakdown of the cash cap rates for the two longer term assets versus the one with three years of term on it, and maybe just more broadly provide us some thoughts on how you guys look at industrial acquisitions and what the price differential maybe should be for deals with term on it versus maybe something with a shorter fuse?

Sure. The two assets in the Memphis market that we acquired earlier in the year, unfortunately the contract terms requires confidentiality from us. But I can speak more specifically to the Spectrum Brands property in Edwardsville, which was a 6.12% going in cap rate. And then in terms of the longer term versus shorter term, it's really kind of hard to generalize. I guess I'd say that cap rate is not our sole investment consideration, when we see other opportunities for better long-term investment returns, we'll consider it such as in the Hamilton Beach investment.

Yes. Craig, it's really situation specific. On a shorter lease, we have rents below market, the cap rate maybe comparable to longer lease assets. So very, very hard to draw a general conclusion.

Right. The Hamilton Beach transaction, the rent was $2.55 – it increased in July by 4% and it increases in next July by about 6% and about 9% in the following years. So that shorter term lease in addition to an attractive going in basis at very substantial annual escalations.

What do you think market rent is in that market for that asset?

I would say that it's closer to $3 or low 3s.

Okay. That's helpful. And I guess just bigger picture, Will I know we’ve talked in the past about the accelerated sales and maybe looking to rip the band aid off and selling a substantial portfolio of your longer term leased office assets. I'm just curious kind of where you guys are in that thinking and more broadly kind of just accelerating the total repositioning and maybe doing a review of the dividend at the same time.

Well, as we said, we are working on transitioning the portfolio toward being close to a pure play on single-tenant industrial net lease real estate. Our disclosure policies are simply based on what we have visibility on in contracts on to sell. So we're going to be cautious and conservative until we have transactions under contract. But we are working very hard on accelerating the volume of office dispositions and assume as we have more clarity on that will update everyone. Clearly selling out of office and either deleveraging or reinvesting in industrial is dilutive. And so far by proceeding cautiously, we've been able to manage that dilution, but transitioning more quickly is not just a function of wanting to transition all the way to one asset class. But it also recognizes that right now it happens to be a very good seller's market and there is a public to private arbitrage it's being driven by the financing available to private buyers. So you're right to point out the dilutive effects that transition, but let’s face that we traded a multiple of nine times and that lease industrial REIT should probably trade somewhere in the mid-teens and we think that there's value and taking that dilution for the multiple expansion.

No, I agree and that's kind of my point is why not just rip the band-aid off quicker, due to the dividend cut, you guys are already trading at a substantial discount. I don't know what the market reaction to the downside would be from here. I'm just curious as have you guys kind of hired someone to market a bigger package? Have you guys kind of formally gone down that road or is it just you're evaluating the market? Let us know if we get there. I’m just kind of curious where you guys are in the process and how – what the probability is of a bigger transaction coming to fruition?

We have assets in the market right now that are well in excess of the guidance that we've given and we agree with what you said about the strategy and the value of accelerating the transition. But again we want to deal with absolutes and as soon as we have transactions that are disposable, we’ll disclose.

Great, thank you.

Our next question comes from Sheila McGrath of Evercore.

Yes, well for the quarter I mean we're pretty active on lease extensions and longer new leases, five to eleven years. I imagine that's pretty value enhancing for office sales are – all those assets that you had lease extensions on? Are they part of the portfolio that you're marketing for sale?

No there was – if we were looking at those particular properties, sometimes getting a lease extension is a gating item for putting it a property on the market for sale. One of the challenge is for us in terms of monetizing the value and are shorter lease portfolio is that if you have a three or four-year lease and you think you might get a renewal, you shouldn't sell the building to an investor who's going to think you have a vacancy in four years. So you're right, as we work through the process on the shorter lease stuff when we get a renewal that might as I say gating item two or marketing an asset for disposition a one off basis.

Okay, that's helpful. Just you’d mentioned in your prepared remarks some of the office buildings you may just refinance some rather than sell them, what drives that decision? Is it pricing, tax situation or when does it make more sense to refinance the building?

We did one standalone mortgage in the quarter on a cold storage facility in our industrial portfolio. So we really used secured financing when we have an asset where the basis is high on a per foot basis and where - in that case where we could get 15-year match funded financing against the lease term. Earlier this year, we were in the market to look at financing some office buildings, and we essentially changed their strategy. We thought that - were so good that it would support greater disposition activity as opposed to just finance the assets and continuing to hold. So we've only done three office investments in the last few years, two of them were 15-year leases where we did match funded financing. We think that that likely supports higher asset valuation on the disposition side. And then the third one was the Dow Chemical transaction where we were in the asset for also $166 million roughly in finance that with a 20-year mortgage of $197 million. So that's an asset now that you know next year some point we will help that asset for two years. So there may an opportunity to sell that and drive a lot of leverage of the balance sheet.

Okay. And last question – are there any metrics that you could give us and how that capital expenditure profile would change for Lexington. Shifting from mixed of office in international and then looking forward being more pure play industrial any like kind of data points that equal point to how that changes?

Yes, Sheila. It’s Pat. If you look - it when I look historically what we've done the first six months of the year, the cash outlay for TI’s in leasing commissions about 9 million of them relate to office and only about 187,000 relate to industrial. So this distinction between office and industrial is significant. And in my prepared remarks when I said $11 million again and it's exceedingly a matter of that money relates to our office assets. So the cost of re-tenanting and doing tenant improvements into the industrial portfolio is so much cheaper than the office.

Okay. Great. Thank you.

Our next question comes from Todd Stender of Wells Fargo. Please go ahead.

Hi, thanks. And it’s probably goes back to Brendan, with the Hamilton Beach asset can you go through those rents again it sounds like there were some above market rent bumps going into lease expiration - with the rents were and then with the market rent I'm sorry didn't catch that.

Sure when we initially acquire the asset in April the in place rents were $2.55 so far and beginning this July $0.10 increase, next July there is a 15 tenant increase and the following there is a $0.25 increase so that workout to be roughly 4%, 6% and 9% over those three years. So yes we would agree there are market escalation and that just had to do with the original structuring the lease, where they escalations were back ended. In terms of where we think market would be for a facility like that today. We would take it at some around three to low 3s.

Okay. Was that a shorter term lease that they resigned in the last couple years or this was a long-term lease that's just had these both back ended.

It was originally a longer-term lease that was signed in 2010 and we…

Thank you very much. And then the lease extension you had with Versum Materials that one wasn't coming due till 2022, but it looks like the cash rent roll down just want to see will win on there?

Yes, it was a slight rent roll down for the longer-term extension and it was also paired with their ability to expand the facility. So it was adding an expansion option and getting a longer-term lease on was somewhat of a specialized facility to have a lot of lab space there. So we thought to getting the longer-term lease with a minimal roll down was a good strategy just to solidify the asset.

Okay. Thanks. And just staying on that theme the Honeywell lease renewed, sounds like the rental rate stepped up how much more lease term did you get>

We got an additional five years.

And then Pat, what’s the LTV on the mortgage you put on the Warren, Michigan asset looks like a pretty good amount of proceeds in $26 million? How did that look?

Yes, it was not like 65, the balloon is about to close well right now about 100 also foot, but so sixty 65% LTV. All right so interest only first several years and then balloon okay. Thank you.

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

Great. Okay. So shifting from a finance rate to an industrial rate sort of ripping off the band aid, most likely takes you maybe you need to get to about 85% industrial, 15% other in order to claim victory. Is that a fair number or and when do you think you can get there?

That's a fair number, John. I think we would feel like it would be a success if we could be there by year end next year. I think we would feel like we had a lot of success in the transition. In the office portfolio about 60% of it is relatively long weighted average lease term and there is quite a liquid market for that asset type right now. The balance of the portfolio is where we have weighted average lease term of sort of roughly four years and that's where the binary outcome at the end of the lease term determines so much of the value. So like I say, monetizing the longer leased assets, I don't want to – it's relatively easy compared to maximizing value in the balance of the portfolio. So in that shorter lease portfolio that's where we still want to make sure that we're doing the work and proceeding in a way that maximizes the value of each of those assets. But we think we can accomplish a lot in that portfolio through year end next year.

Got it. Okay. So that's impressive, ripping off the band aid aggressively. So then to – kind of go to the – maybe this is a little bit early, but when do you become practically integrated with the development platform clearly if you're in the build to suit business. You want to also be in the development business. When do you – overall your board, so your board is much more industrial focused, when do you have a different location then maybe Penn Station which is a finance retype location versus a – or an industrial where it might be headquartered?

Well we have an exceptional board, I must say with a wide variety of skill sets to help us implement our business strategy and support are overall objective. So I don't contemplate any change there for sure. We do have our asset management group located in Dallas, Texas. And we've been adding personnel there over the years and it maybe that we add more personnel there going forward. Having a New York footprint is expensive and we are mindful of trying to shrink our G&A and clearly New York is an expensive place to be headquartered. But it's also an important place to be headquartered certainly from a capital market standpoint and having a principal part of our deal team here is also important to us.

Great.

The transition, we're committed to it, John. We understand that everyone on the call would like us to come out and say we promise to do X, Y and Z, but we just prefer to have transactions under contract before speaking publicly about them.

I think you're looking for a role model, would it be Stag or Duke or Rexford or who do you think a good role model would be or you described to be in a couple years?

There are many good industrial companies out there, John. I wouldn’t want to pick one.

Okay, thanks.

[Operator Instructions] Our next question comes from William Segal of Development Association. Please go ahead.

Thank you, Will. Maybe to Brendan and James as you are moving to industrial, you've got some older industrial, newer and I guess built to suit. What trends are you seeing in the type of building and properties that you're building as opposed to maybe a 20-year old industrial building, higher ceiling – anything else that you're doing in the modern industrial world?

This is Brendan. Well, I mean I think one of the things that you can probably take from our recent acquisitions is that we continue to see a lot of demand from larger participation users. So we’re certainly seeing larger facilities and then in terms of building specs, there are many specs that go along with larger buildings as you referenced 36-foot clear height certainly. And then significant – it depends on the user e-commerce has high employee parking requirement. Really it's all over the board to another part, significant in the more trailer parking for certain types of users. So that there's variety of a Class A standard that are pretty well understood for modern Class A build distribution.

Thank you very much.

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

Yes, I just wanted to clarify that many of the other industrial REITs out there that John mentioned, do you – are multi-tenant and require much more intensive asset management and focus on the market. Is Lexington still going to be focused more on acquisition of the longer-term net lease industrial assets? I just want to confirm that strategy?

Yes, we're going to stick with our knitting. We're going to stay focused on the single tenant net lease industrial. Right now we have a weighted-average lease term in our portfolio of 10 years and industrial companies with weighted-average lease term trade better, but we're not going to meaningfully change our strategy from that standpoint. The question that John asked about, when do we become a developer? It is sort of an interesting one. I think the thing that we're primarily focused on is transition away from office to more single-tenant industrial and our clients are private merchant builders. So we would have to weigh the value of becoming a competitor with them versus continuing to execute our strategy, which then to provide capital to them. So no, Sheila, our focus is on just to be clear single-tenant net lease industrial we're not it may be that every once in a while we purchase a building with one tenant for 80% of the space and maybe a smaller tenant for another one. But no radical change away from our net lease orientation.

Okay. And one more question maybe this is for Pat. When you contemplate the office sales, how will it be determined if the proceeds will be mostly 1031 into industrial assets or will it be to pay down debt? Are there some tax considerations that you have to consider as well?

Well, we always consider the tax implications of anything that we do to the extent that we feel we need to 1031 the money. It will be 1031 to the extent that we don't. We will pay down the shorter term the revolver and then go from there. But it's on a case by case basis Sheila.

But would it – are you going to try to avoid having a special dividend I guess is a better way to ask it?

Well right now we’re not contemplating a special dividend.

Okay, all right. Thank you.

Our next question comes from John Massocca of Ladenburg Thalmann. Please go ahead.

Hi, this is Brandon Travis on for John. The expected [indiscernible] is still going to be $19 million, given one of the most spending or is that related to the $11 million update earlier?

Well, we have projected for the remainder of the year is $11 million, which will be $19 million in total.

Okay. And much of the comments on the One World Technologies asset [indiscernible] as long-term – long lease term industrial asset is that certainly a core investment for you guys?

It is a long-term industrial asset. It’s a large square footage asset. However, we've been in discussions at a price that we're very comfortable with it. So we put it as held for sale.

Thank you. End of Q&A

This concludes our question-and-answer session. I would like to turn the conference back over to Wil Eglin, CEO. Sir, any closing remarks.

Thank you, everyone for joining us this morning. Please visit our website or contact Heather Gentry if you would like to receive our quarterly materials. In addition, you may contact me or the other members of senior management with any questions. Thank you, and have a great day everyone.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.