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Lexington Realty Trust (NYSE:LXP)

Q1 2013 Earnings Call

May 2, 2013 11:00 AM ET

Executives

Gabriela Reyes – IR

Will Eglin – President and CEO

Robert Roskind – Chairman

Rick Rouse – Vice Chairman and Chief Investment Officer

Patrick Carroll – EVP, CFO and Treasurer

Analysts

Sheila McGrath – Evercore

Anthony Paolone – JP Morgan

Omotayo Okusanya – Jefferies

John Guinee – Stifel, Nicolaus

Todd Stender – Wells Fargo

Craig Mailman – Keybanc Capital Markets

Operator

Please standby we are about to begin. Good day and welcome to the Lexington Realty Trust First Quarter 2013 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation.

Today’s conference is being recorded. It is now my pleasure to turn the floor over to your host Gabby Reyes, Investor Relations for Lexington Realty Trust. Please go ahead, ma’am.

Gabriela Reyes

Hello, and welcome to the Lexington Realty Trust first quarter conference call. The earnings press release was distributed over the wire this morning and the release and supplemental disclosure package will be furnished on a Form 8-K. In the press release and supplemental disclosure package, Lexington has reconciled all historical non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. If you did not receive a copy, these documents are available on Lexington’s website at www.lxp.com in the Investor Relations section. Additionally, we are hosting a live webcast of today’s call, which you can access in the same section.

At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Although Lexington believes expectations reflected in any forward-looking statements are based on reasonable assumptions, Lexington can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in today’s press release and from time-to-time in Lexington’s filings with the SEC. Lexington does not undertake a duty to update any forward-looking statements.

Joining me today from management are Will Eglin, Chief Executive Officer; Robert Roskind, Chairman; Rick Rouse, Chief Investment Officer; Patrick Carroll, Chief Financial Officer and other members of management.

Will Eglin

Thank you Gabby, and welcome everyone and thank you for joining the call today. As always, I would like to begin by discussing our operating results and accomplishments for the quarter.

For the first quarter, our company funds from operations as adjusted were $0.25 per share, and we executed very well in all areas that impact our business. Our results were modestly impacted by a capital raise in March and our company FFO per share guidance for 2013 remains unchanged at a range of $1.01 to $1.04 per share.

The quarter was characterized by leasing activity of 427,000 square feet of new and renewal leases signed, leading to an overall portfolio occupancy rate of approximately 97.4% at quarter end, and reducing our 2013 rollover to just 2.1% of rent. In addition, we had good execution on the investment front with property investments closed totaling $123.3 million.

We funded an additional $11.2 million in our current build-to-suit projects, placed one new build-to-suit project under contract for $20.8 million and entered into an agreement to purchase a property when construction is completed for $39.1 million. We believe our pipeline of similar opportunities remains robust and we expect investment activity to exceed $375 million in 2013.

We also continued to focus on capital recycling trimming $25.2 million of non-core assets from the portfolio and subsequent to quarter end; we sold our retail store and garage in Honolulu, Hawaii formerly occupied by Macy’s for $25.9 million while retaining an adjacent parcel for redevelopment.

Turning to leasing, our accomplishments in the first quarter of 2013 consisted 427,000 square feet of new leases and lease extensions, 144,000 square feet of which were related to suburban office properties. And we had 164,000 square feet of leases that expired and were not renewed.

Overall, in the quarter, we extended eight leases with annual GAAP rents of $2.2 million, a decreased $300.000, compared to the previous rent. Currently we have just 2.1% of single tenant rent expiring in 2013 to this area of investor concern has been substantially mitigated.

As of March 31, 2013, we had 1.9 million square feet of space subject to leases that expire in 2013 or which are currently vacant. We believe that over the balance of 2013, we can address roughly half of such expiring or vacant square footage through extensions and dispositions.

We expect our year-end occupancy to stay at a high level and we believe we can address approximately 3.5 million square feet of our 2014 into 2015 lease rollovers prior to the end of this year.

Although leasing results and tenant retention have been solid, we remained cautious with respect to suburban office fundamentals in what continues to be slow and uneven economic recovery.

Supplementing our leasing and refinancing success was ongoing progress on adding value through accretive acquisitions of properties subject to long-term net leases. We closed on two industrial investments in the first quarter for $123.3 million at an average going in cap rate of 7.3% and we now have four build-to-suit projects underway and one forward purchase under contract for a total commitment of $150.4 million, of which $48.2 million has been invested through March 31, 2013.

The property investments underlying these five projects have an initial yield of 8.2% and 9.4% on a GAAP basis. And our supplemental reporting package contains an estimated funding schedule for these projects.

Based on our investment pipeline of good prospects, we anticipate 50% greater volume compared to last year. We believe that this increased investment activity will contribute meaningfully to our company’s funds from operations in 2014 and beyond. The opportunities we are currently working on are supported by long-term net leases at going in cap rates of between 6.5% and 9%, typically with annual escalations of 2% to 3%.

However, we can give no assurance that these expectations will be realized. Currently, we expect the build-to-suits will have the largest allocation of capital in 2013, but we believe there are attractive opportunities in sale/leaseback and in first mortgage lending on single-tenant properties.

The addition to our portfolio of long-term leases with escalating rents continues to be a priority for us in order to further strengthen our cash flows, extend our weighted average lease term, reduce the average age of our portfolio and support our dividend and growth objectives.

As a result of our leasing activity and new investments, we now generate approximately 24.3% of our revenue from leases of 10 years or longer compared to 16% a year ago. Over time, our goal is to derive at least half of our revenue from leases of ten years or longer.

Further, our single-tenant lease rollover through 2017 has been reduced from 46.8% of revenue a year ago to 36.5% currently. By any measure, we believe we are making good progress and managing down our exposure to shorter term leases and expanding our weighted average lease term which is now 7.5 years compared to 6.3 years a year ago.

Our successful asset recycling program has helped drive down our cost of capital as it has continued to generate proceeds for accretive acquisitions and debt repayments. We expect to continue to recycle capital with a focus on capturing the value of our multi-tenant and retail properties.

In the first quarter, we disposed $25.2 million of non-core assets and capital recycling will continue to be a focus of the company and our efforts to further transform our portfolio.

We have completed over $50 million of dispositions so far this year and continue to target $100 million to $150 million of disposition activity in 2013 with the net proceeds invested in new acquisitions.

Our balance sheet changed significantly in the first quarter and what we believe is a positive way and we’ve included in the supplemental disclosure package on page 41, additional information showing our credit metrics both at quarter end and adjusted for certain events on a pro forma basis.

We are very pleased with the progress we have made in this area and are optimistic that these improvements will allow us to access the unsecured debt market on favorable terms.

Furthermore, our efforts to drive down our cost of capital are succeeding as we continue to take advantage of the significant refinancing opportunities in our portfolio while reducing leverage considerably.

In the first quarter of 2013, we refinanced our revolving credit facility and obtained an unsecured term loan facility of $250 million. We have dramatically improved our financial flexibility given that all our bank facilities are now unsecured, including the seven year term loan closed last year.

We also closed on one 15 year mortgage financing of $40 million at an initial blended fixed rate of 3.7% on our Lenexa, Kansas property and one of our joint ventures obtained $15.3 million of five year financing at a fixed rate of 3.7%. Subsequent to quarter end, we drew $64 million on our term loan facility and swapped a LIBOR component into a five year current fixed rate of 2.43%.

During the quarter, we retired $168.6 million of secured debt which had a weighted average interest rate of 5.5% and subsequent to quarter end, we’ve retired an additional $177 million of secured debt at a weighted average interest rate of 6% and we retired our 7.55% Series D preferred.

We continue to be committed to un-encumbering assets and pursuing an unsecured financing strategy and we now derived more than half of our net operating income from unencumbered assets. In the quarter, our debt was further reduced by the conversion of $42.8 million of convertible notes into the underlying 6.2 million common shares.

While we continue to unencumbered assets from time-to-time, we expect to obtain secured financing when it is advantageous to do so and as we did in the case of the Lenexa Kansas financing. As a result of our efforts, our debt is now about 38.4% of our gross asset value on a pro forma basis.

At this point, $445 million of our mortgages mature through 2015 at a weighted average interest rate of 5.5% and we believe the company still has a significant opportunity to lower its financing costs and unencumbered assets which we expect will improve our cash flow and financial flexibility.

In our supplement, on pages 41 and 42, we have added financial disclosure which should be at interest to fixed income investors.

Now I’ll turn the call over to Pat who will take you through our results in more detail.

Patrick Carroll

Thanks, Will. During the quarter Lexington had gross revenues of $97.1 million, comprised primarily of lease rents and tenant reimbursements. The increase compared to the first quarter of 2012 of $18.8 million relates primarily to property acquisitions and build-to-suit projects coming online and the acquisition of NOS in September of last year.

In the quarter, cash rents were in excess of GAAP rents by approximately $6.5 million including the effect of above and below market leases. On page 43 of the supplement, we have included our estimates of both cash and GAAP rents for the remainder of 2013 through 2017, the leases in place at March 31 2013, our same-store NOI data and the weighted average lease term of our portfolio as of March 31 2013 and 2012.

Property operating expenses increased primarily due to the NOS acquisition, plus increased use in occupancy multi-tenanted properties with base year cost structures. In the first quarter of 2013, we recorded $9.8 million in impairments of properties, $10.5 million in debt satisfaction, gains on properties transferred by foreclosures and $11 million in debt satisfaction charges primarily relating to a non-cash charge required under GAAP relating to the retirement of our 6% notes.

On page 39 of the supplement, we have disclosed selected income statement data for our consolidated, but non-wholly owned properties and our joint venture investments. We also have included the net non-cash interest recognized in the three months ended March 31, 2013 on page 40 of the supplement.

In the first quarter of 2013, our interest coverage was approximately 3.1 times and our net debt-to-EBITDA of approximately 6.0 on a pro forma basis. Non-operating income decreased about $700,000 primarily due to the pay up of mortgages receivable in 2012 and the default of a borrower on one of our notes receivable.

Equity and earnings in joint ventures decreased by $7.3 million primarily due to the acquisition of our partners’ interest in NOS in September of last year.

Now turning to the balance sheet. We believe our balance sheet is the strongest as we’ve continued to increase our financial flexibility assay. We had $134.4 million of cash at quarter end including cash classified as restricted. Restricted cash balances relate to money primarily held with lenders as escrow deposits on mortgages.

At quarter end, we had about $1.7 billion of consolidated debt outstanding, which had a weighted average interest rate of 5.4%, almost all of which is at fixed rates. The significant components of other assets and liabilities are included on page 40 of the supplement.

During the quarter, March 31, 2013, we paid approximately $2.8 million lease costs and approximately $14.7 million in tenant improvements, including $2.3 million relating to the Wyndham lease in Orlando Florida and $10 million relating to lease extensions in our properties in Allen, Irving and Houston Texas and $2.4 million of Baltimore property.

In our press release, we have a reconciliation of company FFO to company FAD. For the remainder of 2013, we project expected tenant improvement in lease costs to be approximately $21 million or $0.09 per share.

Starting on pages 30 and page 34 of the supplement, we disclosed the details of all consolidated mortgages maturing through 2013, we have also included on page 16 of the supplement the funding projections for our four build-to-suit projects and one forward commitment that we have.

Now I will turn the call back over to Will.

Will Eglin

Thanks, Pat. In summary, we had a great quarter. Occupancies continued to be strong and we believe we had good prospects for early renewals of many leases expiring in 2014 and 2015. We believe acquisition activity is promising and favorable capital markets conditions have accelerated the company’s significant improvement and its financial flexibility and our efforts to drive down our cost to capital.

We expect to continue to execute proactively on leasing opportunities in order to maintain high levels of occupancy and address lease rollover risk, realize value to our non-core properties and certain fully-valued properties.

Capitalize on our substantial refinancing opportunities and invest in build-to-suit properties and other accretive investment opportunities. Today, we affirmed guidance for 2013, company funds from operations as adjusted within a range of $1.01 to $1.04 per share, reflecting good growth compared to 2012 and with the less leveraged balance sheet then we had when the year began.

Our guidance is forward-looking and reflects the comments that we have made on today’s call and a diluted share count of roughly $225 million which includes 5.9 million shares underlying what’s remaining of our 6% convertible guaranteed notes.

We believe the company remains well positioned and offers investors an attractive dividend yield combined with a conservative payout ratio in an environment where we can continue to improve cash flow, upgrade the quality of our portfolio and provide ongoing value creation for our shareholders.

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

Question-and-Answer-Session

Thank you. (Operator Instructions) And we will take our first question from Sheila McGrath with Evercore.

Sheila McGrath – Evercore

Yes, good morning. Well, you made a lot of changes to the balance sheet in the quarter, increasing the unencumbered asset pool. I am just wondering if you could help us understand are your ratios currently at the level that the rating agencies would target for an investment grade rating. And if not what else do you have to address to get there?

Will Eglin

Well, Sheila, we are in the process with the rating agency. So it would be a little bit premature to speculate on that outcome. But clearly, we’ve taken a lot of steps this year to position the company to access the bond market and we believe that all of our financial metrics would support a solid investment grade rating for the company. And so clearly that’s something that we’ve been working toward and the company is pretty well positioned for that.

Sheila McGrath – Evercore

So after paying off the secured debt in the quarter, is your unencumbered pool large enough?

Patrick Carroll

Yeah, more than half of our net operating income is now unencumbered. So that’s an important measure. And our secured debt has come down – if you look on page 41 and 42% of the supplemental we lay out, what’s happened with all of these important financial metrics not just this quarter, but over the last five years as well.

So, secured debt is down to less than 23% of gross assets. So that’s really come down considerably and I think the unencumbered NOI and asset pool and the secured debt metric have been the – that’s what we’ve been most focused on and we’ve made a quantum way forward and improving those measures this year.

Sheila McGrath – Evercore

Okay, also on the cap rate range that you mentioned in your comments was pretty wide acquiring assets 6.5% to 9%. I was just wondering if you could explain what would be the characteristics that would drive the big gap between those cap rates. Is it credit to the tenant lease term, but would change…

Will Eglin

It’s not necessarily any one thing. It would have to do with the type of asset, its residual value, the credit quality and the length of lease term. So there is a mix of those – a higher cap rate can either mean lower grade credit or it can mean an asset where you might have to invest more capital in it at the end of the lease term to sustain yield that that sort of thing.

Sheila McGrath – Evercore

Okay, and last question, your payout ratio is pretty conservative especially versus the sector. Can you remind us if you are targeting a payout ratio, net taxable income and how we should view potential growth prospects for LXP’s dividend?

Will Eglin

Well, we have tried to maintain the dividend in line with our taxable income, since we reinstated after the financial crisis taxable income has increased about 50%. We do think there will be upward pressure on taxable income next year and we have considerable room to grow the dividend, but that would be a likely decision that we would make next year as what the actual size of the increase would be.

Sheila McGrath – Evercore

Okay, thank you.

Operator

And we will now take our next question from Tony Paolone with JP Morgan.

Anthony Paolone – JP Morgan

Thanks. Can you just talk through and give us a bit more color on the build-to-suit pipeline? How big it is? How long it takes to get through these things and sort of hit rate and so forth? Actually, since I got through what you have on your plate now. It seems like most of it sort of wraps up again at the end of the year. Since you look at 2014 how far and advanced are you working on these things and how big does the pool need to be to hit your sort of investment goals if you will?

Will Eglin

Well, I would say, Tony that, in addition to what we specified as under contract and underway, we have about $290 million of properties that are under letter of intent that we have confidence on. So one of that could begin from funding over the balance of this year and it goes into 2014. And in some cases, there are office properties take long to come out of the ground. So there are some commitments that we are looking at making that actually go at 18 to 24 months right now.

But the volume number that we’ve put out for this year of roughly $375 million invested in projects since what we have high visibility on right now. So there is an opportunity for us to increase that number as the year progresses. That’s what we have – on now.

Anthony Paolone – JP Morgan

All right, but that 375 though that, I understand that includes the stuff you bought to you, right?

Will Eglin

Yes.

Anthony Paolone – JP Morgan

Okay. And on the Long Island City deal, I was just little confused, in the press you talked about just the additional capital that you guys are credited with. Can you just walk through, A, how that works and then B, just what you think on market cap rate for something like that might be?

Will Eglin

The actual cash that was spent into the project, Tony was $41.9 million. The way the partnership agreement works is the developer who is also our partner got credited with notional capital. So that you have a capital account as did we for taking on things like a completion guarantee.

We got credited with that capital account. So, from a GAAP standpoint you are not allowed to book that as cost of the asset. You can only book the hard cost which is the $41.9 million, but the deal was based upon that if you went out and bought it upon completion, it would have cost $55.5 million to buy this type of property at the time.

So, that’s the distinction between what we call the notional capital and what we are calling the hard cost. The notional capital is what we are based in the yield on, those that’s what in theory it would have cost to build those assets. And so that’s why when we talk about an 8.5% cap rate, 8.5% on the $55.5 million of notional capital.

Anthony Paolone – JP Morgan

And what’s your split with the partner in?

Will Eglin

Well, it did a waterfall, and we’ll disclose it more in the Q. But pretty much we get a priority return and our money back. But I think, again like a 6.3% IRR on return. We’ll have it more disclosed in the Q, but from a standpoint of operation, cash flow from the waterfall from a GAAP standpoint, right now we’d be taking up a 100% of the bottom-line income.

Anthony Paolone – JP Morgan

Got it and that 8.5% cap rate on the $55 million, I do think that’s market or what was a like that all done and leased up trade like?

Patrick Carroll

I think it’s probably mid to low sevens type of evaluation, Tony.

Anthony Paolone – JP Morgan

And then just last question, you mentioned looking at some first mortgage lending and so forth that was in the mix. Is that’s something that could be notable or is just along the lines of sort of the things you’ve done historically?

Patrick Carroll

Well, it could be a little bit heavier volume this year compared to last year. But I still think that it would be unusual if more than 5% of our assets were in first mortgage loans. So I don’t think it, from a total asset mix, I don’t think it moves the needle that much, but there are a handful of interesting opportunities that we are working on.

Anthony Paolone – JP Morgan

Okay, thanks.

Operator

And we will now take our next question from Omotayo Okusanya with Jefferies.

Omotayo Okusanya – Jefferies

Yes, good morning. In regards to just the mark-to-market trend during the quarter, I mean there are a couple of leases where it’s not fairly a large mark-to-market, downward mark-to-market, you don’t have lot of leases expiring in 2014, but you do have a fair amount in 2014. Just given your cautious comments about the state of the market right now, should we continue to expect fairly large mark-to-market – downwards mark-to-market even on the 2014 leases?

Patrick Carroll

Our forecast and thoughts about it are pretty much unchanged, compared to last quarter. We don’t view ourselves as having exposure to downward pressure on rents in retail or industrial, but if you look historically, we stop buying office buildings on ten year leases in the second or third quarter of 2005 and so where we have downward pressure on rents it’s in suburban office.

If we can put to that a lot of our 2015 rollovers early, then we can get that mark-to-market behind us and the real thing we need to focus on is refinancing the underlying debt as it matures. So we can sustain a widespread between rents and interest costs. So we do have an opportunity to offset a lot of the impact of marking those rents down.

Omotayo Okusanya – Jefferies

Okay, that’s helpful. Thank you.

Operator

And we will now take our next question from John Guinee with Stifel, Nicolaus.

John Guinee – Stifel, Nicolaus

Okay, hey wonderful quarter guys. Just a fewer clarifications here. I think you said we’ll talk about the dividend next year, usually you talk about it in October, November. Did you mean to say October, November?

Will Eglin

Yeah, I apologize for that John. We typically we do it with third quarter earnings.

John Guinee – Stifel, Nicolaus

Okay, and then give me a little more – just to make sure I understand, you say you have room in your room to move your dividend vis-à-vis taxable income. Can you either tell me exactly what that mean or give me some hard numbers there?

Patrick Carroll

We think the taxable income will be higher next year than it is this year. We believe that the free cash flow of the company that we pay dividends and that will be greater than taxable income. So, as we look at how our cash flow covers our dividend, there should be, I think very strong coverage next year.

John Guinee – Stifel, Nicolaus

Minimum amount of dividend increase that you can already forecast?

Patrick Carroll

No it’s still a little bit premature and early in the year for that.

John Guinee – Stifel, Nicolaus

Okay, then second, I know you know the answer Pat, okay, second, what’s the amount of non-cash income associated with the Xerox lease in this quarter?

Patrick Carroll

It would be disclosed, John in the supplements, let me turn to the page where it’s on. It is on page 20 of the supplement, the very first line. So small print to me and I don’t have my glasses, but it looks that cash rents are $875 and GAAP rents are $1.6 million for the quarter. That’s what it looks like on page 20.

John Guinee – Stifel, Nicolaus

Okay, gotcha, gotcha, gotcha. And then just about a theoretical question which I think Shiela was getting at, is when you are buying at a 5,6, 7 cap rate, most people expect there to be principal appreciation or not much principal risk in the asset, but when you are getting north of nine, people tend to think of it as principal deterioration or asset deterioration over time. Where do you think the inflection point is in terms of where you look at taking principal risk versus not taking principal risk in the spectrum of deals that you are doing?

Patrick Carroll

I would say that, if you are looking at rents of above 8%, you are probably expecting that some of those rents are going to amortize, it depends on the assets though. And the length of the lease and the credit.

John Guinee – Stifel, Nicolaus

Got it, so I am thinking long-term leases here, all right. But eight might be the threshold?

Patrick Carroll

Right, if you want to have to make an assumption, sure. But it’s really transaction-specific, John, it’s really hard to come up with one who looks on that’s applicable to every situation.

John Guinee – Stifel, Nicolaus

Okay, wonderful. Thank you very much.

Operator

And we will take our next question from Todd Stender with Wells Fargo.

Todd Stender – Wells Fargo

Hi, thanks guys. Just with the build-to-suit in Washington, it sounds like the tenant can terminate their commitment prior to breaking ground. Is this unusual when you make these commitments?

Will Eglin

Yeah, it’s unusual and it’s just – we haven’t really seen it.

Todd Stender – Wells Fargo

Is there any risk, is there any financial risk to you guys, or do you have a back up?

Patrick Carroll

Not at all, all the money back.

Will Eglin

We wouldn’t have entered into this deal with any risk at Washington.

Todd Stender – Wells Fargo

Okay, that’s helpful. And the sale of the Macy’s in Honolulu, it sounds like a real cool, this is unencumbered, isn’t it?

Patrick Carroll

It is unencumbered.

Will Eglin

It wasn’t sale to Macy’s it was a Macy’s store that they vacated.

Todd Stender – Wells Fargo

Right. But there is no mortgage on it and you’ll get your lease proceeds?

Will Eglin

Yes.

Todd Stender – Wells Fargo

Okay.

Will Eglin

And it’s already closed, so we got the money already.

Todd Stender – Wells Fargo

Okay. Who is the buyer and how did you arrive at the cap rate of a 5.3?

Will Eglin

The buyer- no we are not disclosing the name of the buyer.

Patrick Carroll

I believe that was publicly announced by the buyer.

Will Eglin

A very large discount retailer. But what it came up to the cap rate, Todd, that is pretty much with the parking revenue associated with – on a 25 point, and so the vacant store, plus the attached parking garage. So, that’s just really the parking revenue.

Todd Stender – Wells Fargo

Okay, thanks and then just lastly, the current line balance, presently it’s 250?

Will Eglin

That is right.

Todd Stender – Wells Fargo

Okay, thanks guys.

Operator

And we will take our last question from Craig Mailman with Keybanc Capital Markets.

Craig Mailman – Keybanc Capital Markets

Hey guys, just want to make sure I heard this right. The $290 million of built-to-suit under LOI is that everything you guys have available right now?

Will Eglin

Yes.

Craig Mailman – Keybanc Capital Markets

And, apologies, the timing on that, is that all going to – is that going to be more fourth quarter, I mean, just trying to get the revenue recognition on this stuff. I mean, is it the 375 obviously it sounds like you guys raised your expectation from the previous guidance range but from sort of an income perspective, is it much higher, given once that going to hit?

Patrick Carroll

I think we’ve been – I don’t think we really did raise that. I think we’ve been consistent for the year at 375 in LOIs, nothing obviously be – we are not under contracts with them or that be tied. But those could be anywhere from 9 to 18 to 24 month developments.

Craig Mailman – Keybanc Capital Markets

Okay, and then just curious more broadly, I mean you guys do good visibility of the pipeline, but obviously triple that’s there is a lot more competition for these given the rate environment, just what’s the competitive landscape look like right now? It’s actually for the built-to-suit financing with maybe a little bit of leasing at some of the banks who you guys coming up against and are there any concerns about the ability to continue to source deals?

Will Eglin

Well, there is substantial competition and properties for immediate delivery, either purchase of property is under lease or sale/leasebacks. That market cap rates have continued to compress there. We saw a 20-year lease with a very high grade credit. We think traded 5.25 by way of example. Still to see – still it continues to be a good business for us.

We have been getting good visibility on volume increasing 50% this year. It’s a very big market of corporate owned and occupied real estate. And we think given where we are in the interest rate side both at monetizing assets, the sale/leasebacks should be something that CFOs are continuing to be interested in doing.

But it is competitive certainly in the immediate – like I said properties for immediate delivery. But the competition and forward commitments is still substantially less than the option market. So and it’s still good opportunity for us.

Craig Mailman – Keybanc Capital Markets

Okay, that’s helpful and then just a follow-up on the industrial assets in – the build-to-suit being – the initial cap rate on the ten years obviously is greater than the 20. So you guys have a fixed rent commitment and they can either stay for the extra ten years or not, but you guys get me hold, no matter what, and that’s today virtually in the initial yield differentials?

Will Eglin

Yes.

Craig Mailman – Keybanc Capital Markets

Okay, great. Thank you.

Operator

And that concludes today’s question-and-answer session. At this time, I’d like to turn the conference over to Mr. – to the speakers for additional closing remarks.

Will Eglin

So, thank you all again for joining us this morning. We continue be very excited about our prospects for the balance of this year and beyond and as always, we appreciate your participation and support. We would like to receive our quarterly supplemental package, please contact, Gabriela Reyes or you can find additional information on the company, on our website at www.lxp.com. In addition, you may contact me or the other members of senior management with any questions. Thanks again for joining today.

Operator

Ladies and gentlemen, this concludes today’s conference. We thank you for your participation.

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