Dan Wieman

Lexington Realty Trust: High-Yield Opportunity, Ready for 2009

Mr. Rufus

Thanks for your comments. I have to admit, my first reaction is that I'm wrong and you have found a flaw in my analysis. This is what is great about this forum. If people approach these articles with intellectual integrity, a great deal of learning can occur.

So let's step through the numbers and see where we end up...

I see where you get $376MM. You take reported gross rental revenue in the 3Q of $94,166M and multiply by 4. Fair enough. This represents gross revenue for the third quarter less vacancy. My cash flow analysis is equal to $442MM on this basis.

I will point toward the annualized cash rent in their consolidated portfolio of $387,868M on page 23 of their supplemental report. I then added $48,256M from their strategic asset portfolio. This looks like a mistake, because Lexington only owns a portion of this entity. I couldn't find the exact ownership interest, but their claim after preferred returns is 35%.

So gross revenue (assuming properties are fully leased) is as follows:

$388MM + 16.8MM = $404.8MM in Gross Potential Rent
Less Vacancy (6.4%) = ($25.9MM)
EGI= $379MM

So we're not too far off here. $376MM was based on annualized rental revenue, and $379MM is based on grossed up rents less vacancy. I want to do this so I have an accurate vacancy factor in my stressed cash flow.

Keep in mind that we have both excluded tenant reimbursements to this point. This would be about $44 million annualized. I left it out initially to be conservative. They get about half of their operating expenses back in reimbursements. Add this back and you get:

$451.6MM GPR
($28.9MM) Vacancy
$422.7 EGI

This looks pretty accurate. The expenses aren't really disputed. You did manage to apply vacancy to operating income, which already included vacancy. I assume you took 7% vacancy against $304MM, which already included vacancy, to get your $278MM in operating income. The rest of my income statement looks like this:

Operating Costs: ($81 million)
Management and Admin: ($34 million)

Net Operating Income: $307 million
Debt Service: ($149 million)
Net Cash Flow After DS: $158 million, FFO/Shr = $1.44

DSCR: 2.07x
Implied value at 8.0% = $3,838MM. LTV~66%.

Stressed:
$452MM GPR
($90MM) Vacancy
$362MM EGI
($115MM) op costs
$247MM NOI
($149MM Debt)
DSCR=1.66, FFO=$98MM, $0.90/shr

I still feel pretty good about my analysis. No doubt the market looks difficult this year, but I do not believe that the numbers look as dire as you indicate.

Thanks for your comments!

Dan