Greetings and welcome to Lexington Realty Trust Third Quarter 2015 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded. With no further ado I would like to turn the conference to your host, Ms. Gaby Reyes. Thank you Ms. Reyes, you may begin.

Hello, and welcome to the Lexington Realty Trust Third Quarter 2015 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 Investors 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 that 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 and include the successful confirmation of any lease, acquisition, build-to-suit, financing, disposition or other transaction, or the final term of any such transaction. Except as required by law 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; Patrick Carroll, Chief Financial Officer; Beth Boulerice, Chief Accounting Officer and other members of management. Now I will turn the call over to Will.

Thanks, Gaby and welcome everyone and thank you for joining the call today. I'd like to begin by discussing our operating results and accomplishments for the quarter. For the third quarter of 2015, company funds from operations were $0.27 per share. During the quarter, we continued to make good progress in the key areas of our business, and as a result, we raised our company FFO guidance range for 2015. The increase reflects better than expected results across the board in leasing, finance and investment activities, compared to our expectations at the start of the year. On the investment front, in the third quarter, we invested approximately $25.5 million in ongoing build-to-suit projects, and $3.7 million to complete an industrial build-to-suit, costing approximately $22.1 million. We sold three properties for approximately $135.7 million, consistent with our portfolio management and capital recycling objectives. These objectives include reducing our exposure to suburban office properties in certain markets, monetizing multitenant properties upon stabilization of occupancy, and transitioning the portfolio so that more revenue is derived from long-term leases. We also had a good quarter of leasing, executing leases and lease extensions totaling approximately 800,000 square feet and ending the quarter with 96.5% of our square footage leased, excluding properties with mortgage loans that are in default, totaling 342,000 square feet. We believe that occupancy is likely to stay strong over the balance of the year and are comfortable with the portfolio percentage lease target for yearend of approximately 96% to 97%. Annual renewal rents declined $57,000 on a GAAP basis and $145,000 on a cash basis, and rents on formerly vacant space will add $600,000 of cash rent. We had no single tenant leases which expired during the quarter. While office fundamentals continue to be a concern in some markets, as of quarter…

Thanks, Will. During the quarter, Lexington had gross revenues of $105.4 million, comprised primarily of lease rents and tenant reimbursements. The decrease compared to third quarter of 2014 of $1.1 million, relates primarily to the sales of properties and changes in occupancy and lease terms, offset in part by acquisition and build-to-suit projects coming on line. For the quarter ended September 30, 2015, GAAP rents were in excess of cash rents by approximately $12.4 million and for the nine months ended September 30, 2015, GAAP rents were in excess of cash rents by about $34.3 million. On page 18 of the supplement, we have included our estimates of both cash and GAAP rents for the remainder of 2015 and 2016, for leases in place at September 30, 2015. This disclosure does not assume any tenant releasing of vacant space or tenant lease extension on properties with scheduled lease expirations. We also have included same-store data and the weighted average lease term of our portfolio as of September 30, 2015 and 2014, on page 18 of the supplement. In comparing the operating results for the three months ended September 30, 2015 to 2014, property operating costs increased $2 million, primarily due to the sale of multi-tenanted properties. Interest expense decreased 2.4 million, primarily due to the lowering borrowing cost on outstanding debt. During the third quarter of 2015, we incurred an impairment charge on the sale of Blyth Street, of approximately 32.8 million and recorded gains on sales of properties of 1.7 million. On page 43 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 net non-cash interest recognized for the nine months ended September 30, 2015 on page 44 of the supplement. For…

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.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Craig Mailman of KeyBanc Capital Markets. Craig please proceed with your question.

Can you guys hear me?

Yes. Now we can.

Okay, hi guys. So I was just asking Will, in the press release, the two substantial build-to-suits that you’re referring to, could you give a little bit of color on that?

One is the Gateway Plaza transaction in Richmond, where McGuire Woods is the main tenant and that’s one that we’ve been funding construction on and the other one is the Preferred Freezer transaction, which should close shortly. So that’s roughly 260 million or so of projects that are coming on line to revenue producing status. So for us, that’s a big event. So that should have a good contribution to weighted average lease term and long-term revenue growth, et cetera. So those are two very good transactions for us. The Preferred Freezer transaction is especially notable, because of the great financing that we’re going to close on in connection with the transaction, which is, as I mentioned in my comments, $110 million of 10-year fixed rate financing at 4%. So we’ll be earning a current return in year one on our equity investment of about 15 and we think on Gateway Plaza, we’ll do very well on the financing as well.

Got you. Apologies, I thought those were incremental to what you guys had in the pipeline. And then just on the disposed, the 900 million plus that you guys are kind of talking about, could you guys give us some sense of the breakdown of property type on that and maybe a realistic expectation on potential timing?

I would say the Manhattan ground lease portfolio might be around 40% of that total and that would be something since we're just starting to wade into that, that's something that would take some time to the extent we do want to move forward and do something with that position. The balance of what we're looking at selling is single-tenant suburban office and a few vacant buildings and a couple of multitenant buildings as well. So I would say that anything with the ground lease portfolio would be sort of toward the end of the process, to the extent we could execute on the whole project.

Okay, that's helpful, then just two cleanup ones. I guess the TIs in the quarter are a bit elevated, compared to what you guys have done in the past. Any specific transaction that's driving that?

They're in line with what we disclosed in last quarter's call for the remainder of 2015, so we really haven't changed that. So it is elevated compared to the prior quarter, but it's one of the leases that we did earlier. I think it was the end of last year, the beginning of this year on a lease extension. That was the large part of it. But we definitely on the last call disclosed that that was going to be part of our remaining six months of 2015 obligations.

Okay then just lastly, the two leases 1460 Tobias and 10300 Kinkaid, was the $3.5 million of lease term fees included in the Q3 results?

No, those get spread over the remaining lease term. So no, the whole amount had not been included.

Were those expected, the terminations?

Expected is an interesting question. It happened after six months' quarter end, so we disclosed it in last quarter's supplement. It was disclosed there that they had terminated, so from that standpoint, yes.

Our next question comes from the line of Jamie Feldman of Bank of America Merrill Lynch, please proceed with your question.

So I guess just thinking through expirations through year end 2016, can you walk us through? I think you said 65% of your expirations will either be renewed or sold. Can you just talk us through what to think about the NOI stream going through the end of next year?

The 65% also represents square footage that we have vacant today.

What are the known move-outs for next year, at this point?

Going through the known move-outs in the industrial portfolio, as I think we said before, Michelin is leaving, in Temperance, Michigan. We've been showing that property extensively and there's quite a bit of tenant interest. We have a small office building in October in Memphis, where the tenant is likely to move out and that's one where we have a nonrecourse loan that's at a very, very high value on a per-foot basis. In Farmers Branch, Texas, we have a six-story office building. We expect that we will keep a subtenant in two floors and we'll be able to re-lease the balance at higher rates. Raytheon in Garland, Texas, we expect will be a vacancy; that's at the end of May. We expect that that property will be sold empty. Kraft, in Winchester, Virginia, we think that they'll stay for a few years. In Bremerton, Washington, we have a July expiration, where we have a subtenant in for 70% of the space, so there is a tenant that would like to rent it with us. In Rockford, Illinois, Pierce Packaging, we're in discussions with on an extension. We're expecting Bay Valley Foods in Plymouth, Indiana to want to extend their lease. And we're inching closer to having a 10-year renewal with Siemens in Milford, Ohio. So overall, we've got about $2.8 million fee in negotiation right now, so things are quite active.

And then just thinking about next year and your investment pipeline, do you think you'll be a net buyer or seller?

Well, right now, if we execute on everything possible in the disposition program, we would end up being a net seller. We would end up long a couple of hundred million dollars of cash. So, it's hard to say what will be the most attractive use of cash, if we fully execute on that program. There may be good acquisition opportunities, there may be good opportunities to repurchase shares, there may be opportunities to retire debt. We'll have to see what happens as we move through that process.

Then how do you think about the yields on what you'll be selling versus what you'll be buying or investing in?

Well, overall, if we execute on the whole plan, I think probably if we’re looking back on it a year from now and we do everything, we’ve probably transacted in the mid-7s on a cap rate basis. Obviously there is a wide disparity. Empty buildings have negative cap rates, some single tenant office buildings on shorter lease terms, may very well have double-digit capital rates. The Manhattan ground portfolio, one would think would be clearly a sub-5% capital rate disposition. So overall, I would think in the mid-7s is a good assumption, but there are a variety of outcomes.

So you sell in mid-7 and you buy and develop it 7.5 you 8.5?

I would think to the extent we were looking at forward commitments, deliverable sort of more in like the 2017 window, I think there will be cases where we can put the money back out at above 8%. But nearer term, who knows obviously capital rates in the auction market are substantially lower than that and of considerably less interest to us.

Okay. So you think higher or lower that 7-8 is still about right or not?

That’s about right. The big transaction that would come on line for us next year is the Dow Chemical built-to-suit, which is a fourth quarter delivery at about a 7.30 going in, so that right now is the largest project that’s in the pipeline.

Okay. And then can you talk more about the New York land sales? I don’t think you’ve been in that business that long and it sounded like you were going to grow it. Now it sounds like you’re getting out. What’s the latest thought process there?

Well, we may get out, Jamie. We’re starting to explore what we can do with the position to optimize the value for shareholders. We really like the investments from a long-term IRR standpoint, but we understand that if we could put the capital to use in something that creates more yield and more AFFO, that might be a favorable outcome for us and it is a fairly highly leveraged position, throwing off a fairly modest amount of current yield. So having a high leveraged sub-5 capital assets on the balance sheet at a time when our own stock has been trading at a considerably higher capital rate, I think there may just be something that’s smarter for us to do with the capital. And we love the asset class, but it has been very difficult to find new opportunities to really try to build that platform up.

And then finally I think you cleared on FAD versus your dividend, you cleared by about a penny this quarter. I know your TIs were high. How should we think about dividend coverage for next year, based on your current business plan?

We think we’ll still have healthy coverage AFFO, relative to the dividend. You’re right, we had heavy capital expenditures this quarter, but since they sort of peaked in 2013 and 2014 and they will have trended down overall this year, and we think probably for next year they end up being about half of what they were in 2013 and 2014. So the trend for capital expenditures is going to continue to be down. And we’re having some success, obviously transitioning the company to a less capital intensive business model.

Do you think you'll be in the position to bump it next year?

Yes. I mean, I would think that we would want to consider increasing the dividend. We obviously forewent a dividend increase this year, simply to retain capital and perhaps put it to use buying stock or investing in new transactions or deleveraging, all of which are beneficial to shareholders. So I would think, getting back onto the path of growing the dividend on a regular basis, is something that would happen next year.

Our next question comes from the line of Jon Petersen of Jefferies. Please proceed with your question Mr. Petersen.

I just wanted to get a little more clarity on guidance. I know generally, you talked about it was driven by having a strong quarter and a good outlook for the rest of the year. I’m curious, the $0.02 increase at the midpoint, I mean how much of that it seems like a good chunk of that could be attributed to the lower interest rates on the credit facility and then also, I mean did you buy back more shares than you thought you were going to at the last quarter’s guidance?

From a share buyback standpoint, I think we’re on target of where we expected, but yes, the interest savings on the refinancing of the line the two term loans, excuse me is a big part of that.

Okay. Do you think the majority of the guidance increase is probably related to that?

Well it’s that, it’s the timing of sales, it’s acquisitions coming on line, there are a lot of moving parts in guidance. But the one thing that is definitely known, is the savings on the interest, but [indiscernible] re-capping of the facilities that happened on September 1st.

Okay, perfect. And then on the buyback, so you guys bought at an average price, I think it was $8.34, at $9.07 right now, I'm just curious what your thoughts are on your current discount to NAV and I guess continuing to use proceeds from asset sales to buy back stock?

Our view on the buyback is that we are not here to provide liquidity to market participants every day, but we are here to take advantage of opportunities when volatility creates meaningful disconnects between the share price and NAV. So, it's safe to say that we were more interested in retiring stock at less than $8.50 a share. That doesn't mean we're not interested at $9.00 but we're not in the market buying stock every day. And the truth is that we try to make capital allocations decisions on a daily basis that optimize the outcome for shareholders. So time will tell. We're hopeful that the shares continue to perform well. We're hopeful that the equity market continues to be favorable for REITs and if we have, like I say, market situations where our shares are extremely, extremely cheap, we're going to act on those.

And then on the asset sales, I assumed that the Manhattan ground leases would be sold as a portfolio. I don't think it would make sense to split those up. I'm curious on the remainder of it, which I think is majority suburban office; how much is that? It sounds like you're pretty far along in the marketing process. How much of that is being marketed as a portfolio and roughly what are the sizes of those portfolios or is it one large single portfolio? I'm just trying to figure out what we should be expecting when these sales do get finalized.

I would say about three-quarters of the pool, net of the ground positions, we think it's preferable to transact on a portfolio basis. But beyond that, and we have been working on this for quite some time, but beyond that, we're really not in a position to provide any specifics.

All right, that's fair, and then just and you kind of touched on it earlier, but I think you said about 20% of your leases were signed kind of before the recession, so we should still expect roll-downs as those roll over. Can you give us any sense, over the next four to six quarters, how we should expect leasing spreads to trend, especially for your suburban office portfolio, which was down 15%-ish this quarter? What should we be expecting over the next few quarters?

I think through the end of next year, it's probably about a push; some will be up, some will be down. You're right, we did have a roll-down in that office building, but at the same time, the tenant took another floor in the building, so if you really think about it, that was actually a good outcome for us. You're right, we discounted the rent some, but we got another floor of occupancy, so we sort of thought that was a good outcome. So that's our view about next year, that the noise around leasing spreads should sort of quiet down compared to what they've been the last few years.

Our next question comes from the line of Gene Losavin [ph] of JPMorgan, please proceed with your question.

What's your capacity to absorb gains, before needing to be at a special or increase the dividend?

Right now, we're distributing just a little bit above our taxable income. So, we think with the projections that we have, we're in--.

We're currently in line with the taxable income on a run rate, ordinary income run that excludes any capital transaction.

But we will affect 1031 exchange transactions to defer gain.

Okay, thank you and just what's your perspective on the most risk adjusted opportunities right now that you're looking at, given where some of your pricing, some of your asset sales and where you could possibly buy back stock?

The truth is, the shares have been a very good value. For us, as a public company, to retire equity, we want to retire stock at a very wide discount to NAV. There is a cost to decapitalizing the company, so we've been happy to have that opportunity. There will be acquisition opportunities that might compare well with retiring stock. Those would tend to be forward commitments where we can still achieve high going in cap rates and buy newly constructed buildings with long-term leases. So, it may be that there is a mix of both. It's hard to say with specificity, but to me, retiring stock is better than going into the auction market and buying something. But in all likelihood, there will be some build to suit opportunities for us that compare favorably, relative to share buyback.

Our next question comes from the line of Dan Collins of Ladenburg Thalmann, please proceed with your question.

I was hoping you could go back to the lease expirations. Just for modeling purposes, what percentage of square footage or maybe better on a rents basis, but what percentage of rents would you expect to retain if [indiscernible] you didn’t sell anything and then maybe what percentage of rent do you expect to retain, assuming the sales that you discussed?

Dan we look at it maybe a little differently. But we look at the rollovers next year, we think that about 65% of them will be handled through dispositions and releasing. We think that from a releasing standpoint, as Will said a little earlier, that it’s kind of a push at this point of time and we expect if it all rolls out exactly as planned, we would expect that the occupancy should be the lease level at the end of next year, would be comparable to where it is today.

Okay. So the other 35%, some of that’s going to go away, but also maybe some of it you could potentially re-lease, you just don’t have a good guess on it?

We just don’t have visibility on it right now.

Some of it is vacant today, it may stay vacant.

Okay, okay. Yes, I see what you’re saying the 35% includes what’s already vacant today.

Yes.

Okay. And then just kind of curious on the Manhattan, going back to that question as well. So is it more to do with the fact that you don’t think you’re getting credit for it in your portfolio in terms of you selling it, or is it more the fact that it’s just becoming hard to grow that area of the business?

I think it’s a combination of factors, and certainly, a little of both. The company’s cost of capital has changed in the two years since we did that transaction so that’s clearly a factor. And I think, it will, I believe it’s been a successful hold for us and one that we will have made some decent money on, but we are mindful of the fact that many shareholders, while liking the investment, would prefer us to put our capital to work in a way that creates more current yield.

Okay, understood. And then as far as the asset sales, 2016 could be another year of net sales activity. How should we think about that on a going forward basis? I mean do you think you can be essentially self-funding the asset sales for several years to come? How does that look from your standpoint?

Well look in a sort of regular environment, we like to think that we would try to recycle 3% to 5% of the gross assets of the company every year, just to try to continue to upgrade the portfolio. And also to be mindful of selling some buildings when there’s still 10 years of lease term left, that’s an important part of the company’s go-forward strategy. So that sometimes the optimal time to exit a single tenant net lease transaction is after a 5 or 10-year hold, while you still have 10 years of lease term. So going forward, as we get to that sort of 5-year hold mark, we’ll consider selling some of those buildings. So as I said, 150 to 250 is sort of a normal capital recycling target. This year, we’re at about 250 already and we’ll do a little bit more and next year is likely we’ll probably continue to be elevated, in view of market conditions.

So when you get to that 5-year hold, when does that start to kick in, in your view? When do those sales start to ramp up?

That piece of the strategy starts to ramp up right beginning with next year.

Our next question comes from the line of John Guinee of Stifel. Please proceed with your question.

Just sort of help us understand how amortization plays into some of these mortgages. For example, your Freezer building, I think you’re in it for about $152 million, you’ve got $110 million loan at 4%. What the lease duration on that lease is 20 years. What’s the term on the loan and what’s the amortization schedule on that loan?

The term on the loan is 10 years and the amortization is minimal, John. So what happens on a leverage basis, simply from 10 years of cash flow, we’ll have an internal rate of return of about 10%. And depending on what the value of the asset is in year 11 or IRR to be 15% or 18%. But it’s not a loan with heavy amortization, if that was your question.

Got you, okay. Is there amortization on the ground leases in Manhattan?

Yes, there’s a little amount of amortization. You can see in our disclosure and our supplement where we show the mortgages, we show the debt service by property for the next year and the balloon. So you can see the amount of amortization that comes into play in those, but it’s very small.

Well the overall problem here, appears to me is, we're all sitting in the same seats we've been sitting in for a lot of years and we've gotten a little bit smarter, maybe; maybe not. But 10 years ago, if you told investors that you were buying at a 9 cap and your cost of cap was a 7, people would be saying oh great, that's accretive to net asset value, that's accretive to earnings and I love this strategy. And nowadays, when you tell people you're buying at a 9, people say oh my God, what's wrong with that asset; it must be a depreciating asset. Have you put together anything that you can kind of walk through in detail as to why these deals really work, for example, the Freezer deal? What's it has to be worth in the 10th year to make these numbers look really good?

John, if it's only worth the mortgage balance in the 10th year, we will have made an IRR of 10%. So we made 10% and we got our money back just from the cash flow. So if the building sold at a 9 cap, going out, which is basically the undiscounted cash flow back by ConAgra for 10 years, your IRR is about 15. So we think it's a terrific investment, given the credit profile of the tenant. But you're right, residual value is a risk that's out there. But that one is going to work out very well for us.

If you look at back of the envelope, I think you paid maybe $332 million for these ground lease deals, levered them up; is your expected proceeds in the $360 million range; is that a good number to look at?

Time will tell, John. It's too soon to tell. But we have had a couple of years of rent growth and we bought them at a 4.93 cap rate going in and I would think that a cap rate going out would be somewhere below that. That's how we're approaching it.

So if you sell at a lower capital rate than you bought, that works?

Especially if your rent has grown.

There are no more question in the audio portion of this conference. With no further ado, I would like to turn the conference back over to our CEO and President, Will Eglin, for closing remarks.

Thanks again for joining us this morning. We continue to be very excited about our prospects for this year and beyond and as always, we appreciate your participation and support. If you 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. And in addition, as always, you may contact me or the other members of our senior management team with any questions. Thanks again.

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful rest of your day.