Greetings and welcome to the Lexington Realty Trust Fourth 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] I’d now like to turn the conference over to your host, Heather Gentry, Vice President of Investor Relations for Lexington Realty Trust. Thank you. You may now begin.

Thank you, operator. Good morning and welcome to the Lexington Realty Trust Fourth 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 Investor Relations section. Additionally, we are hosting a live webcast of today’s call, which you can access in the same section of our website. 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 the expectations reflected in any forward-looking statements are based on reasonable assumptions, Lexington can give no assurance that its expectations will be attained. .: Joining me today from management are Will Eglin, Chief Executive Officer; Robert Roskind, Chairman; Dick Rouse, Vice Chairman and Chief Investment Officer; Pat Carroll, Chief Financial Officer; Beth Boulerice, Chief Accounting Officer, and other members of management. Now, I will turn the call over to Will.

Thanks, Heather, and welcome, everyone, and thank you for joining the call today. I’d like to begin by reviewing our operating results and accomplishments for the quarter and the full-year. For the fourth quarter of 2015, company funds from operations were $0.29 per share, which brought our total for the year to $1.10 per share. These were very strong results in relation to our guidance of $1.5 to a $1.7 per share as updated in November, and reflects better than expected execution in all aspects of our business, including the early closing of acquisitions, share repurchases, and lower general and administrative costs. We provided initial 2016 company FFO guidance this morning in the range of $1 to $1.10 per share. As you may recall from our third quarter 2015 call, we discussed the possibility of monetizing our New York City ground investments, which generate very high FFO, due to GAAP revenue recognition over the life of the 99-year leases. We have begun marketing these assets for sale and the mid range of guidance assumes that they’re sold as of June 30, 2016 at a sub 5% cap rate. While the 2016 company FFO guidance we initiated today represents the decrease compared to 2015 company FFO. We expect our underlying cash flows to remain strong in 2016, due to reduced capital expenditures, share repurchases, accretion from investment activity in 2015. The redeployment of sale proceeds from the potential New York City ground sale, scheduled rent escalation and refinancing statement. More details on our underlying guidance assumptions will be discussed later in the call. Overall, we had a good quarter of leasing and executed new leases and lease extensions of approximately 900,000 square feet, ending the quarter at 96.8 leased. Renewal rents during the quarter were essentially flat on both the cash…

Thanks, Will. Prior to discussing our quarterly and annual results, I just want to point out that a new FASB Rule went to effect in 2015, so property sales are no longer reclassified as discontinued operations on the income statement. So income statement fluctuations between periods generally relate to this new FASB requirement. During the quarter, we had gross revenues of $106.6 million comprised primarily of lease rents and tenant reimbursements. The decrease compared to the fourth quarter of 2014 of $1.2 million relates primarily to the sales of property and changes in occupancy and lease terms offset in part by acquisition and build-to-suit projects coming online. For the year, revenues increased to $430.8 million compared to $423.8 million in 2014. As Will mentioned earlier on the call, during the quarter, we generated company FFO of $69.6 million, or $0.29 per diluted common share, compared to $66.3 million, or $0.27 per diluted common share for the quarter ended December 31, 2014. For the year, we generated company FFO of $268 million, or $1.10 per diluted common share. Our company FFO 2016 guidance is in the range of $1 to $1.10 coming in lower than the 2015 company FFO due to the possible sale of our New York City land investments we are currently marketing. These investments generated $50.5 million of GAAP revenue and $16.7 million of cash revenue in 2015. The most significant assumptions for guidance include the timing and amount of property sales included in New York City land positions, coupled with the retirement of debt and common share purchases as described by Will in his commentary. We’re also projecting that we will complete the 10 million common share repurchase authorization during 2016. Keep in mind this guidance is forward-looking, excludes the impact of certain items, it is based…

Thanks, Pat. And operator, I have no further comments at this time. So we’re ready for you to conduct the question-and-answer portion of the call.

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Sheila McGrath from Evercore ISI.

Yes, good morning. Will, I was wondering if you could give us some insight on where you are in the sale of the ground lease process? What the guidance assumes in terms of timing? And what would make a JV more desirable outcome that you mentioned in your remarks?

We are marketing the positions as we speak and our guidance assumes that that we have a transaction that closes at June 30. So to the extent that, it takes longer to sell maybe that’s about a penny to FFO for every month that we hold onto the asset. So we’re exploring both the sale and a joint venture just to make sure that we have the most options to choose from. But that’s – the assumption is that there’s a transaction roughly in the middle of the year.

Okay. And is there – is the interest level and pricing does it compare favorably to what you purchased the ground lease positions at?

Yes. Our expectation is that, we’ll do well on price. Certainly, if you recall, we did the first three properties in one transaction and a fourth in a separate transaction a year later. And it’s possible that that fourth transaction would be sold separately and that we’ll sell them three together. But now our expectation is that, we’ll do well on the sale.

Okay. And then just quickly on buyback, Pat, I think you mentioned by year end you’ll be at net debt to EBITDA of 6.5. How much buyback is assumed in your guidance or how much is feasible given your – where you want to keep leverage?

Well, we have an authorization for 10, we bought back 3.2 roughly through today. So the model assumes the rest of that is acquired.

Okay. All right. Thank you.

Thank you. Our next question comes from Craig Mailman form KeyBanc.

Hey, guys, this is actually Laura in for Craig. Just a follow-up on the share buyback program. I guess, if you guys are assuming that and you completed in your guidance, what’s the potential for – what a bigger buyback program be in order once this one is complete?

It’s certainly possible or we’re focused on executing on the initial authorization, and we think the stock is very inexpensive and a great value. So management, which views themselves as long-term investors in the company view this honestly as a great opportunity to buy and stock at a very good level. So it’s certainly possible that after we work through the first authorization there would be more, but we’ll have to – the other year progresses.

Okay, great. Thanks. And then, I guess also on the Manhattan office ground portfolio sale, what percent – percentage of a disposition guidance would that represent?

Approximately half at the top end.

Okay, great. Thank you.

Thank you. Our next question comes from Anthony Paolone from JPMorgan.

Thanks. Good morning. Will, can you talk about just the competitive landscape for build-to-suits, given the volatility in the capital markets, and whether that competition has pulled back at all, or how those spreads have worked lately?

Sure, Tony. We definitely believe that there will be opportunity to look at 12 and 12 to 24 months forwards right now at higher cap rates. If you recall most of the things that we’ve closed recently were transactions we committed to a year or two ago when cap rates were attractive and spreads were wide. And as spreads compressed, we slowed down in terms of looking at our pipeline. But we do believe that the competition is less and we’re continuing to see some opportunities in the forward commitment space obviously competing with the share buyback given where the stock is right now is hard for build-to-suit to measure up, but we’re still seeing good transaction flow and for sure cap rates have inched up in that space.

Okay. I mean, can you put any brackets around where a forward yield may need to be to look more interesting than a share buyback?

Well, we committed to one transaction in fourth quarter, which is a 15-year lease at an 8.30% cap rate. And we had felt like, if that transaction was in the market a year ago, it probably would been a 100 basis points lower. So it’s not totally an apples-to-apples comparison growth comparing the acquisition of newly constructed properties with 15 and 20-year leases to buying and stocks. But in terms of this year, we’re not particularly interested in any acquisition activity. We find buyback much more attractive compared to purchasing property in the auction market. But at the same time, there’s a spread between where you can sell this year on a cap rate basis and where you might be able to redeploy capital a year or two out. So we are still looking at some forward commitments.

Okay. And can you remind me the South Carolina industrial asset is one of the lower yields in APAC. What’s the – whose tenant, what’s the story on that one?

Yes, there was a lower yield transaction that we committed to quite a while ago. It’s a 20-year industrial lease at a price per foot of $52, which we thought was appealing from the standpoint of basis, and it has 20 years with annual escalations, but that 5.9 cap rate did represent in our minds the low point of capitalization rates on new construction.

Okay. Thank you.

Thank you. Our next question comes from Jon Petersen from Jefferies.

Okay, thank you. I think previously you guys just talked about selling a portfolio suburban office building. Can you give us an update on what your plans are in terms of selling things besides the ground lease in Manhattan and what we should expect going into this year?

Yes, the numbers that we put out on this year’s disposition program of $600 to $700 million represents the end result of our process that we went through looking at a bigger pool of assets inside the company. And our view is that we can capture the most value by transacting on a one-off basis. So there are some properties that might have been looked at in the context of a portfolio sale in the past, where our plan this year is to execute on the individual transaction. It doesn’t mean that there may not be portfolio transactions that are considered as we go through the year, but the plan put out today contemplates one-off disposition activity.

And then I guess along those same lines, clearly there has been volatility in the market, some of the economic indicators within somewhat weak. So I’m curious, I know you guys have been active sellers over the last few quarters. Have you seen anything changed from what buyers are willing to buy, if you’ve seen pricing compressed at all over the last couple of months versus what you were seeing a couple of quarters ago?

We haven’t. We’ve done an extensive valuation work on the assets that were interested in selling consulting with brokers and getting broker estimates in value that in many cases in our mind seems extremely strong. So we still view this as being a good market to sell into.

Okay, thanks. That’s helpful. And then just one more on the – the new build-to-suit that you guys announced this quarter Charlotte 8.3% going in cash yield obviously very high relative to the other properties you have. I’m just kind of curious, I know you mentioned being more selective in terms of doing more built-to-suit project. But what’s kind of your minimum yield return threshold, given your current cost of capital?

We’re not looking at anything, generally sort of 7% to 8.5% our transactions that we’re looking at. But that doesn’t mean we would be committing to anything towards the low end, if we were, it would probably be only for very, very high grade credit with high-quality industrial property.

Okay. All right. That’s helpful. Thank you.

Our next question comes from John Guinee from Stifel.

Great. Okay, thank you. A couple of questions just purely out of curiosity you did two big loans what Richmond Virginia in the state of Washington. What’s the amortization schedule on those loans, i.e., what’s the principal balance of the debt when the loans – when the lease matures?

Well, in the case of preferred freezer, it’s a 10-year financing five years of interest-only payments and five years of 30-year amortization. So there’s a little bit of amortization at the tail end. And in the case of McGuire Wood, it’s 10 years of interest-only payment and the last five years or…

30 year.

On a 30-year schedule. So a little bit of amortization, but not a huge amount.

And so basically if a lender is lending on the Freezer, they still got 10 years left on the lease term. And then with McGuire Wood, they also have what five years left on the lease term?

No.

It’s exactly match funded to the McGuire Wood lease.

Okay. So what sort of basis does the lender have on McGuire Wood building at the end of the lease. Are they and is it 250 or 300 bucks of foot still?

Well, they’re – where it is amortized unlike 55 million in the 15 years.

Yes, it’s a $57.5 million loan with a 30-year schedule on the backend. So it’s probably like mid-50, 55, 54.

Okay, okay.

And then on the other one, John, on Richland, Washington the balloon is $99.5 million.

Gotcha, okay. The lenders are back, wow, okay. And then the second question, if I’m doing the math right based on Sheila’s question, the falloff quarter-over-quarter with the sales of just the ground lease assets is about $0.03 a share, is that the right way to look at it?

Per quarter that’s about right. It might be $0.035 on a quarterly basis, John.

Okay.

John, in 2015, the poor land parcels generated about $0.16 of FFO.

Okay. So essentially you’re talking about the first-half of the year maybe $1.10 to $1.15 run rate in the last-half of the year maybe $0.95 to $0.99 run rate for annualized FFO?

Well, we don’t give guidance on a quarterly basis, but obviously…

We’re asking you to?

I understand. But we walked through the FFO impact from the sales. And I think that we would encourage people to focus on the transaction from the standpoint of really looking at or after debt service cash flow, which is as Pat said $5.3 million on a position where we have $242 million of leverage. So we’re sure we can reinvest the money in a way that provides more current period accretion. And the key to deleveraging the balance sheet this year beyond the 6.5 times net debt to EBITDA that Pat mentioned would be a result of selling the land position.

Okay. And then the – if I’m looking at page 38 and all of your mortgage and notes payable, are we done with assets going back to the, or asset sales via conveyance back to the lender or there are more on this list that would be asset sale versus conveyance back to the lender?

There are still several that may be conveyed back to lenders, John, as we go forward.

John, on page 38, the footnotes O and footnote B are two loans that are currently in default, where obviously those are definitely candidates to get back to lenders.

Anymore that we expect to have footnotes O and the footnotes B in the future?

I mean, it’s always possible, John. There’s a property on Bremerton, Washington that I can think of that potentially could fall into that category.

Great. Okay. Thanks a lot. Thank you.

Thank you. Our next question comes from William Siegel from Development Associates, Inc.

Thank you, gentlemen. I’ve been an investor in your company for many years and it’s certainly an unusual time. And well, I appreciate you getting to what I think is the elephant in the room very quickly in your talk and then your words aren’t usually compelling the value of our own common stock is right now, vis-à-vis other ways you could deploy your capital. And I think you did a good job of covering it and some of the analyst that’s your – your answers on perhaps buying more than 10 million this year and that would be up for debate with your Board unusual times. Do you retire the stock or is a treasury stock?

It’s retired.

Okay, all right. Well, thank you very much for those answers. Number two, you – thanks for touching on Houston, any other areas that might be impacted by the fall in oil and hydrocarbons?

No, I mean, we discussed the area of the concern which is used and we can’t really see any other place where we are. I think we’re pretty well diversified by industry type and market. So we feel because of that diversification we have a level of safety.

Okay. And I noticed that was surprised when you went into Detroit and then here again that’s just part of this opportunistic diversification that you do and you had no hesitation about Detroit or the automobile industry et cetera?

No, in fact, automotive has been very, very strong and suburban Detroit has been doing extremely well. So there are areas in and around Detroit, where we think that automotive can be a good play.

[Multiple Speakers] First-in report on that the other night and I’m curious where is the plant – the Detroit property? In other words it’s in the outskirts or…?

No, it’s a few miles from their headquarters.

Very good. Gentlemen, thank you very much.

Thank you.

[Operator instructions] Our next question is a follow-up from Sheila McGrath with Evercore.

Hi, yes. I was wondering if you could tell us how the capital expenditures are looking in 2016 versus 2015, not on build-to-suit, but rather on leasing costs?

Yes, we came in at like 27.1 in 2015 to TIs and leasing costs, and we projected in 2016, we have about 25.

Okay, great. And then, Will, usually you pump the dividend later in the year. I’m just wondering what often when you announced third-quarter earnings, I’m just wondering how you view a dividend bump versus the stock buyback at this point?

Well, time will tell how things are looking when we get to that point later in the year. Right now we continue to view the buyback as the better use of capital.

Okay, great. Thank you.

Thank you. Our next question is a follow-up from John Guinee with Stifel.

I had the exact same question Sheila did. Thank you.

At this time we have no further questions. I will turn the call back over to our speakers for closing comments.

Great. Thanks to all of you again for joining us this morning. We think we’re going to have a terrific year and we’re looking forward to reporting our results here every quarter. Thanks again.

Thank you. This does conclude the teleconference. You may now disconnect your lines at this time. Thank you for your participation.