Lexington Realty Trust: The Wall Street Analyst Forum Presentation Transcript

| About: Lexington Realty (LXP)
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Lexington Realty Trust (NYSE:LXP) The Wall Street Analyst Forum August 16, 2007 9:10 AM ET



Gerry Scott - President, Wall Street Analyst Forum

Wil Eglin - CEO

Gerry Scott

Good morning, ladies and gentlemen. Good morning and welcome to The Wall Street Analyst Forum, August Institutional Investor Conference. My name is Gerry Scott. I am President of the Forum, and I will be the host for today's program. We are welcoming those that are physically here. I was going out of my way to welcome those attending via webcast. The webcast is live. It's retrievable for 30 days. It's both the audio and the PowerPoint presentation as well.

For those of you that are here, that want to re-attend the meeting or attend the meeting that you have missed, the easiest place to find the webcast, you can -- companies generally link to their own individual webcasts, you can go there. Or if you want to find all the webcasts in the aggregate, you can go to analysts-conference.com.

One of the things, strategically I guess, the conference sponsors that we have recognized is the real leverage in the year 2007 as opposed to 1997 is not necessarily driving yourself crazy trying to get every single analyst portfolio manager that every company cares about, the specifics of a particular city, on a particularly day, in a particular hour. The real value-add in 2007 is the leverage of the use of new media. So, one of the new media undertakings we have initiated just in the last couple of conferences -- we don't know what the other investment banking conference is doing this. So we do have the website, seekingalpha.com. It's an institutional investor blog. It's becoming more and more prominent every day.

They are doing a transcript which we are using, verbalization is being done in Israel and they do a transcript from the webcast word-for-word of the presentation and the Q&A session. It's made available six hours after this presentation. So, this is another place you can go to get the presentation. And the good news about the transcript is you can probably get everything you need in seven minutes and not hang around for the whole 40 minutes for a webcast. I don't think I've stayed around for the whole 40 minutes of any webcast here. I am on the 23-minute mark, then I am distracted by something.

So Seeking Alpha is doing this transcript of the presentation and Q&A. The best part is its web searchable in Yahoo! Finance, Google Finance, AOL Finance. So, if you go and look up this presenting company in 12 hours particularly on Yahoo! Finance, it is always one of the top two or three things you will find. And Yahoo! Finance is the number one search engine for financial investors.

So, you will find all the presentations there. And so, we liked the idea of reaching an investor in Bangkok or Thailand or Zurich, Switzerland, who has no relationship to our conference, who wouldn't have come anyhow because it's too far away and it wasn’t convenient, who can cherry pick the meeting by accessing it on Yahoo! Finance, or attend the webcast if they actually have 40 minutes, like I usually don't.

In any case, I would like to introduce the first company in this morning's program; each company will be doing a 40-minute presentation and Q&A session in this room. But a little or probably two-thirds of the company stick around for the management/investor lunch that takes place from 12:25 until 1:15. The luncheon is really a breakout session so to speak for management and investors. So, many of the managements will go on to do some other meetings when they leave here. But some will stay on for lunch as well.

So, in any case, I would like to introduce the first company in this morning's program, Lexington Realty Trust. They are a real estate investment trust that invest in, own and manage commercial properties, net-leased to major corporations throughout the United States. Under the net-lease, all property operating expenses such as insurance, real estate taxes, utilities, maintenance and repairs are generally paid by their tenants.

Accordingly, their cash flows during the lease term are highly predictable. They We encourage investors to view Lexington as an investment which provides an attractive risk-adjusted total return, a significant portion of which comes from quarterly cash dividends.

Dividends per share have increased every year since their shares were listed on the New York Stock Exchange in 1993. Their portfolio is well-diversified by property type, geographic location, lease term and tenant industry concentration.

So, without any further introduction, I would like to introduce Wil Eglin, Chief Executive Officer of the company, and he is accompanied by Carol Merriman, Vice President of Investor Relations.


The Wall Street Analyst Forum, a leading conference host for public corporations to address analysts/portfolio managers and professional investors, sponsors four annual conferences in NYC for large, mid and small-cap companies. Seeking Alpha readers may attend Wall Street Analyst Forum conferences free of charge if you pre-register. See the full conference schedule and attendance information.

Read all Wall Street Analyst Forum conference presentation transcripts here.

To learn more about sponsoring investor conference presentation transcripts see here.

Wil Eglin

Thank you, and good morning everyone. Thanks for coming to our presentation today. We very much appreciate your interest in the company. We do have a short presentation today, and then we will be happy to answer any questions that you have at the end.

If you look at our company, I think, the first thing to understand is that of the publicly-traded REITs, we are the largest and certainly most dominant in this space that we've defined for ourselves. This space being single-tenant commercial real estate, mainly in the office and industrial sector.

Our company has grown a lot and currently has an enterprise value of close to $6 billion. Had a recent share price of about $20, our dividend yields is about 7.5. And the most important thing about our dividend is that it's grown every year since we went public. And with the things that we are doing inside the company right now, we are in the process of improving our dividend coverage even further.

We bought a company called Newkirk Realty Trust at the end of last year. And as a result we added about $2 billion of assets to our balance sheet. We are in the process right now of restructuring the company to I think take out some of what I think is a complexity discount in the company after the merger. The company has been a little bit more difficult to understand, but I think all the steps that we are going to talk about today, specifically later in our presentation, I think will give everyone in the room and anyone attending the webcast a clear idea of where we are heading with the company.

If you look at our business, we are mainly an office and industrial company, and we are in the process right now of selling out of our retail properties, and also we've signed an agreement to create a joint venture to hold the properties that we own that have more special use characteristics.

So, we are in the process of really refining our portfolio to mainly consist of general purpose, office and industrial buildings, most of which have a single-tenant in them and almost all of which have a net-lease in place that, as you heard during the introduction, is a lease structure that requires the tenants to pay all operating costs. That creates highly predictable cash flow that is almost bond-like in its quality.

One of the things that I am most proud of is the very strong credit strength that we have in the company. Right now our percentage of revenue from investment grade tenants is about 54%, that's the highest it’s been in several years. And even when we go beyond that, our underwriting record as far as credit strength is concerned in the non-investment grade and unrated area is also very strong. We've only had a few monetary lease costs in the portfolio since we went public almost 14 years ago.

The other thing that I liked about our portfolio is that it's very diversified in terms of where we own property. This is I think important from a diversification standpoint, because we protect ourselves against regional recession. Also it's very important from the standpoint of how we grow our business.

A lot of our transactions arise in sale/leaseback transactions with corporations, and it's important to our corporate customers that we have the ability to underwrite sale/leaseback transactions all over the US. Another important market that we serve is the merchant builder market, where developers are building on behalf of corporations. And again, it's important to have a partner in those transactions that can underwrite and finance real estate all over the country.

So what do I think our core strengths are? I think certainly the fact that we have been in the single-tenant real estate business for 34 years gives us a great depth of experience and advantage relative to our competitors. Sometimes that makes it challenging for us. For example, during the last two years, prices have been very high and growing, but yields on transactions have been very low.

We felt for the most part that other players in this industry have been, I guess, overvaluing the opportunity at the end of the lease, or not necessarily underwriting risks properly. That's created an environment for us that’s been very difficult to grow in, because we have had the experience of buildings coming off lease or credits going bad. And I think, as an organization, we have a very conservative orientation towards how we underwrite our investments.

I think that's paying off right now, given the difficulties that we have seen in the capital markets and I think that’s sure to create greater opportunity for us, as we go forward. So, right now my expectation is that our business, which is more oriented towards current cash flow and stability of revenue, that's inherent in the net lease concept, I am hopeful it will become more popular with investors if they look at real estate investment trusts.

In terms of investment opportunities, I mentioned our focus on corporate users. We've been very active in the sale/leaseback market with corporations, that's been a highly competitive market in the last few years given the easy availability of credits for all kinds of companies. So, I am hopeful that to the extent it becomes more difficult for some companies to access the capital markets, they will increasingly look at the real estate that they have on their balance sheet as a source of capital for the business, and that will create more supply in the sale/leaseback market, which could create more favorable opportunities for us to grow.

Other markets that we target are oriented towards merchant builders. There, we are looking at transactions where buildings are being specifically built for use by corporations, and we make a forward commitment to purchase the building upon completion of construction. And for taking a little bit of forward risk like that, typically we get a premium yield.

When we completed our merger with Newkirk, we also became an investor in its debt platform, Concord Debt Holdings. And I think that, I mean, that's a small investment for us, but I think there is going to be a very unique opportunity in that part of the business. Our capital markets in general have been characterized by extreme exuberance over the last couple of years; the fact that there is difficulty now for sure means that there is going to be better opportunity for those of us who've been disciplined enough to have laid out the credit cycle.

What does the typical investment look like from our standpoint? Every building that we buy has a tenant in place for 100% occupancy. So, it's cash flow fully day one. Usually, we buy buildings where the tenant has made a long-term lease commitment of typically 10 or 15 years. And why is that important? Obviously, being able to predict your cash flow for 10 or 15 years is an attribute of this kind of investing.

But the 10 or 15 year lease commitment also tells us that the corporation views this asset as being important to its operations. That gives you a higher degree of confidence that they will want to renew the lease at the end of lease term and it's always better to renew a lease when a tenant is in the building then to go out to look for another one.

The other thing that we have noticed about the business, which we really like and it leads to high occupancy in the portfolio and high tenant retention, is that if a tenant signs a 10 or 15 year lease it's highly unusual that the actual need for the building actually matches the lease term itself. So, when you have a long-term lease like that you always have to ask yourself what's the probability of the tenant changing their mind exactly 10 or 15 years after they had made a decision to occupy a piece of real estate? And it's pretty remote that it actually matches perfectly.

So, we have had lots of situations where in a 15-year lease, after 7 years the tenant might not have renewed for the building, but they have still a long-term lease in place, and they have a huge economic incentive to help us find the next tenant for the building. Or alternatively business goes great and they want to expand the building so, we get to make another investment to get a new lease term in place.

So, as a result of not only how we underwrite, but the characteristics of the investment itself we've had more than 85% tenant retention in our 14 years as a public company. And occupancy has never been less than 97% and presently it’s 98%. We had a terrific year on the leasing front executing 50 new leases or lease extensions. So, leasing activity in the portfolio remains robust.

In terms of our tenant credit quality, it's very strong. You can see here a list of top 10 tenants, many of which are Fortune 1000 companies or otherwise considered to be investment grade.

I think our lease expiration schedule has gotten a fair degree of focus from the investment community this year. Post-Newkirk merger, we had a more frontload of lease rollover scheduled than we've had in the last few years which created some concern. But given the amount of leasing activity that we've had in the portfolio, we’ve done I think a great job of renewing 2007 leases and 2008 and 2009, which is sort of the biggest year in the next five years we are working actively on right now.

And again, where we want to get to is a very balanced rollover schedule. We might have typically 8% or 10% of our rents rolling in any one year. That will make our company act a little bit more like an office and industrial REIT versus being considered more of a bond that just has long-term leases in place.

I think this is something that we are most proud of; being able to increase our dividend every year since going public certainly means that we've been successful not only in growing our business, but growing it in a smart way that’s generated increasing cash distribution to shareholders.

Our approach to our business I think is inherently conservative. We do have leverage of about 55% right now, which for this asset class, our view is modest given the fact that it has such stable cash flows. For the most part we use fixed rate non-recourse mortgage debt to finance our growth, right now about 92% of our debt is fixed rate. And in the first quarter, our capital markets were very favorable for us, when we took that as an opportunity to raise a lot of capital and strengthen the balance sheet and reduce a lot of our near-term debt maturities. And as a result, we are in a very liquid position and have a lot of financial flexibility.

So, we have been very busy. If you look at what the company has done since we merged with Newkirk. I mentioned our capital markets activity, where we raised about $800 million, in a variety of transactions including exchangeable notes, trade preferred and also trust preferred. But we lowered the coupon on the financing from about 7% post merger to about 6%. And we also freed up $100 million to buy back earnings stock, which continues to be in our mind a very good use for our capital.

So, of our total market cap today of about $5.8 billion, our leverage is in the mid 50s. We have got plenty of financial flexibility. We have got a $200 million bank loan and have withdrawn about $40 million right now. And we are in the process right now of selling a lot of our non-core real estate. We use those proceeds to reduce debt by about $300 million and then buildup cash starting in fourth quarter.

I mentioned in my opening remarks, one of the things that we are trying to do this year is provide greater clarity to the investment community about what the company is and where its heading. I think we suffered a little bit post-merger, because until recently we had only one quarter of operating results.

So, having announced our operating results for second quarter now, I think there is starting to be greater earnings visibility, and I am excepting that our funds from operation per share grows further in the third quarter based on our second quarter activity.

In both quarters, one and two, we had some one-time expensive revenue items. So, the FFO per share shown here and it takes those numbers out of the analysis. But on sort of a normalized basis, we had $0.46 of funds from operations in second quarter, but up a couple of cents from the first quarter.

But the most important thing to me is that in fourth quarter last year before the merger we had about $0.45 in funds from operations per share. And one of the concerns that we heard, in connection with the merger, is that the transaction would be dilutive to our funds from operations per share. And so, I am very pleased, now that we are only six months past the merger really to have proven out that we are now in a phase where the company is actually putting, up earnings accretion relative to where it was before the merger.

In early June, we announced a restructuring plan for the company. And I would like to just spend a little bit of time here talking about what it is and why it's important to us. The big thing in my mind is that we have got to do a better job of cleaning up the store so people know exactly what the company is about given all the growth it has been through.

So, where we are taking the company right now is to sell out of our retail, move our special purpose real estate into a joint venture, and create a real estate portfolio that's really a pure play on office and industrial single kind of real estate. That will have the effect of reducing our portfolio complexity, reducing our leverage from present levels and creating a lot of liquidity, which we can use to continue repurchasing stock, look at new investments in an environment where I think yields are becoming more attractive or potentially make a special distribution to our shareholders.

So, we've made a decision to move out of the portfolio the assets that we think don't have the best return potential, and create a company that's mainly generally use office and industrial in larger markets, which will have better growth prospects and will be easier to re-tenant should we have vacancy.

So, I think we are doing well in the plan. One of the things that we felt was important to accomplish was buying out our joint venture partners. We have a variety of joint ventures to invest in this property type; I think that has created some confusion from the standpoint of investors.

So, part of what we did in second quarter, which is really our main transaction activity, was to buy-in that joint venture partner of equity in our sort of core office and industrial building portfolio. And in the third quarter, we've now established our joint venture to hold our special-use real estate. And we are looking at opportunities in the debt area, but I think right now given what's going on in the market, patience is what will be rewarded more than anything else.

So, we deployed a lot of capital in second quarter when we bought out our joint venture partners. This for us was a great opportunity not only to get control of many of our best assets, but to do it an attractive cap rate of about 8.6%. In those portfolios, we had very strong tenant credit quality and it contained many of our best assets in many of the better growth markets. And we only had that transaction in the second quarter for about a month. So we will have a fairly significant accretion from that in the third quarter.

So, in summary, when we started the year what did we want to do? Well obviously we wanted to continue to increase our dividend, because that's been part of our track record. We had a great opportunity after the merger to take advantage of our enhanced balance sheet, which we did. We hit the capital markets in hindsight, at the perfect time; not only did we lower our cost of financing a big chunk of our balance sheet, but we created a huge pool of free and clear assets so we can finance against in the future.

It was very important for us to continue executing on the leasing front, recognizing post-merger that we had a more frontloaded lease rollover schedule than we had historically. And I am really pleased with how our team has done with executing 50 leases through June 30.

The other thing that we needed to do was deploy capital accretively, but also to be disciplined, and not take advantage of overly optimistic debt markets, such as borrow a lot of money and use it to overpay for real estate. So, our focus has been on looking for opportunities to put our capital to work, it's really been away from the real estate auction market.

Part of that's been buying our own stock, but the biggest part of that was buying our joint venture partners that we negotiated off-market transactions that I think were very positive for us.

And the company has done well. If you look at its performance over a 14-year period our annualized total return has been about 17%. And I think that's really great in a business where the real estate level is for the most part being priced to internal rates of return to 10% to 12%. So, I think management has got a great long-term track record of adding value here. It was tough for us for the last couple of years, because we, to be quite frank, didn't want to pay the prices that the people wanted to pay for real estate.

So, I am hopeful that we are heading into a time right now where there is going to be more opportunity for us not less. And the discipline that we showed over the last couple of years is going to be rewarded with greater investment opportunities for us.

That ends my formal remarks. I will be delighted to answer any questions that you have.

Question-and-Answer Session

Unidentified Audience Member

[Question Inaudible]

Wil Eglin

At the mid-point of our guidance, our guidance from FFO per share is 1.75 to 1.85, so we're about 83% of that. And I would expect if today, if we were fully invested, I would expect that payout ratio to get driven down next year. Yes?

Unidentified Audience Member

[Question Inaudible]

Wil Eglin

The question is how many properties are in our watch-list in terms of occupancy? I think the two credit concerns in the portfolio have been one, Bally fitness, where we have a very small health club in Canton, Ohio. And the other is that we own the headquarters of Sirva, outside Chicago, which has been sort of badly hurt by what's happened in the housing market.

But beyond that, given our enhanced size and diversification, I don't look at one property where the tenant move out, as being just anything, that's going to be hugely significant event for us. I think leasing activity is strong; sure we are going to lose tenants, but I think with the exception of really Michigan and Ohio, most of the markets where we think we are going to have vacancy are doing quite well. And I think we will do well in our leasing.

Unidentified Audience Member

[Question Inaudible]

Wil Eglin

Question is, who is your largest tenant and what percent of the total revenue is it? It's Raytheon right now and for revenue period ended June 30, they represented about 6.3% per annum.

Unidentified Audience Member

[Question Inaudible]

Wil Eglin

That's multiple locations.

Well, it doesn't seem like there are further questions. Again, thank you all for attending today. If you do have any questions about the company, please don't hesitate to call me directly.


The Wall Street Analyst Forum, a leading conference host for public corporations to address analysts/portfolio managers and professional investors, sponsors four annual conferences in NYC for large, mid and small-cap companies. Seeking Alpha readers may attend Wall Street Analyst Forum conferences free of charge if you pre-register. See the full conference schedule and attendance information.

Read all Wall Street Analyst Forum conference presentation transcripts here.

To learn more about sponsoring investor conference presentation transcripts see here.

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