News Column

Fitch Rates Lexington Realty Trust's $250MM Sr. Notes Due 2024 'BBB'; Outlook Stable

May 14, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a credit rating of 'BBB' to the $250 million aggregate principal amount of 4.40% senior unsecured notes due 2024 issued by Lexington Realty Trust (NYSE: LXP). The notes were issued at 99.883% of par value to yield 4.414% or 180 basis points over the benchmark rate. The notes are guaranteed by Lepercq Corporate Income Fund L.P.

The company intends to use the net proceeds from the offering to repay and/or defease $144.4 million of secured indebtedness, pay down amounts outstanding under its revolving credit facility and for other general corporate purposes. Fitch currently rates LXP as follows:

Lexington Realty Trust

--Issuer Default Rating (IDR) 'BBB';

--Senior unsecured notes 'BBB';

Lepercq Corporate Income Fund L.P.

--IDR 'BBB';

-- Senior unsecured notes 'BBB'.

The Rating Outlook is Stable.

KEY RATING DRIVERS

The rating is based on LXP's stable portfolio of predominantly single-tenant, triple-net leased assets coupled with a conservative financing strategy. Fitch expects LXP to maintain credit metrics within a range appropriate for the 'BBB' IDR.

Granular Portfolio

LXP owns a diversified portfolio of 220 consolidated properties (mostly office and industrial assets), the vast majority of which were single-tenant and triple-net leased as of March 31, 2014. The portfolio encompasses 41.6 million square feet across 41 states and was 97.2% leased based upon net rentable square feet as of March 31, 2014. LXP's largest market, New York-Northern New Jersey-Long Island, represents 14.8% of 1Q'14 base rents and its top 20 markets represent 67.5% of total base rents. The tenants are diversified across industry sectors. Services, finance/insurance and technology are the three largest industry sectors representing 20.1%, 11.4% and 11.0%, respectively as measured by GAAP base rent in the first quarter of 2014. LXP's three largest tenants are associated with the company's fee simple interest in land located in NYC and collectively represented 11.1% of base rents in the first quarter of 2014. The company's top 10 tenants accounted for 27.1% of base rent in the same period.

Appropriate Leverage

LXP's leverage was 6.2x for the Trailing Twelve Months (TTM) ended March 31, 2014, as compared to 6.3x and 7.3x at year-end 2013 and 2012, respectively. Leverage in 2012 was artificially high due to the timing of LXP's acquisition of the remaining equity interest in Net Lease Strategic Fund L.P. from Inland American Sub, LLC. Fitch expects leverage to sustain between 5.5x and 6.0x as the company funds accretive acquisitions and build-to-suit development projects with proceeds from dispositions on lower yielding assets. This range is appropriate for the 'BBB' rating. In a stress case not anticipated by Fitch in which the company experiences same-store occupancy and NOI declines experienced during 2009 - 2010, leverage would surpass 6.5x, which would be consistent with a lower rating. Fitch defines leverage as net debt divided by recurring operating EBITDA.

Consistent Cash Flow

LXP's fixed-charge coverage was 2.7x for the TTM ended March 31, 2014, as compared to 2.4x and 1.8x for the full years ended 2013 and 2012, respectively. Fixed-charge coverage has improved due to EBITDA growth (approximately half of the portfolio has annual rent escalators), lower interest expense and reduced preferred dividends due in part to preferred stock redemptions in 2012 and 2013. This growth was somewhat offset by rising recurring capital expenditures. Fitch projects that fixed-charge coverage will sustain above 3.0x as the company refinances higher coupon debt and lowers recurring capital expenditures due to fewer lease rollovers and disposing of capital-intensive assets. In the above-mentioned stress case not anticipated by Fitch, fixed-charge coverage would sustain above 2.5x, which would remain commensurate with a 'BBB' rating. Fitch defines fixed-charge coverage as recurring operating EBITDA less straight-line rents and recurring capital expenditures divided by total cash interest incurred and preferred stock dividends.

Long-Term Lease Strategy

LXP's strategy centers on investing in single-tenant properties leased on a triple-net basis. Fitch has a more favorable view towards triple-net leases as opposed to gross leases as triple-net leases typically have longer durations and less cash flow volatility. While single-tenant assets contain an inherent binary exposure to tenant renewal decisions, LXP's granular and diversified portfolio mitigates the risk exposure to any single non-renewal or tenant bankruptcy. The company has extended its weighted average lease term to 11.1 years as of March 31, 2014 from 6.9 years as of Dec. 31, 2012, which further improves cash flow predictability absent tenant bankruptcies.

Select Niche Assets

LXP has at times strayed from its industrial and office focus into investments that may be less liquid or financeable during periods of market stress. For example, in 4Q'13, the company formed a joint venture that acquired a portfolio of veterinary hospitals. Separately, LXP also purchased New York City land under a 99-year lease in 4Q'13. Select mortgage investments have underperformed, based on the history of borrower defaults and recognition of loan loss reserves.

Transition to Unsecured Funding Profile

LXP has transitioned towards more of an unsecured funding model over the past few years. In addition to the 4.4% senior unsecured notes due 2024, the company was active in 2013, having issued $250 million of 4.25% ten-year senior unsecured notes and amended its $255 million term loan to unsecured from secured. In 2013, the company also refinanced its $300 million secured revolving credit facility with an unsecured revolving facility and thereafter increased the availability to $400 million.

Approximately 54.6% of the company's NOI was unencumbered in the first quarter of 2014 (59.8% pro forma for the bond offering), up from 34.5% and 25.9% in 2012 and 2011, respectively. The company plans on continuing to build its unencumbered pool. Unencumbered assets (defined as unencumbered NOI divided by a stressed 9% capitalization rate) covered net unsecured debt by 2.6x at March 31, 2014.

Portfolio Pruning Improves Asset Quality

LXP was active on the external growth front in 2013 and the first quarter of 2014. Over this time period the company purchased twelve properties for an aggregate cost of $478.7 million, completed five build-to-suits for $146.8 million, and invested $8.2 million in two joint ventures. Its largest acquisition was the $302 million purchase of a 99-year lease interest in three land parcels in NYC. LXP funded part of its acquisitions through equity issuance and also generated $118.1 million of gross proceeds through dispositions. LXP expects investment activity in 2014 to total approximately $300 - $400 million funded in part by asset sale proceeds. The property sales will target suburban office properties with less than ten years of lease term, multi-tenant properties and vacant properties, which should improve portfolio quality and reduce the office-to-industrial ratio to 2:1 from 3:1 over time.

Active Build-to-Suit Developments

Since 2012, LXP has completed a total of 13 build-to-suit projects for an aggregate capitalized cost of $254 million. The company expects to allocate $200 - $225 million of its investment dollars towards build-to-suit transactions in 2014. Major forward commitments include an industrial asset to be leased by Calsonic Kansei in Lewisburg, TN, an office building to be leased by Faurecia USA Holdings, Inc. in Auburn Hills, MI, and a four-building campus to be leased by The Dow Chemical Company in Lake Jackson, TX, which LXP announced in March 2014. Credit positives stemming from the build-to-suit program include a younger portfolio and committed tenants, while credit concerns include negative effects on corporate liquidity.

Improving but Still Low Liquidity

For the period April 1, 2014 to Dec. 31, 2015, LXP's sources of liquidity (unrestricted cash, availability under its unsecured revolving credit facility and projected retained cash flows from operating activities after dividends) as compared to its uses of liquidity (pro rata debt maturities, amortization, projected maintenance capital expenditures, build-to-suits and forward purchase commitments) result in a coverage ratio of 0.9x pro-forma for the May 2014 unsecured bond offering. Under a scenario whereby 80% of LXP's maturing pro-rata secured debt is refinanced with new secured debt, liquidity coverage improves to 1.5x.

The company is addressing a portion of upcoming maturities via the bond offering. As of March 31, 2014, debt maturities were modest in 2014 when 5.4% of debt matures followed by 15.0% in 2015. LXP's dividend payout ratio was 79% for the trailing twelve months ended March 31, 2014 as compared to 83% in 2013. These ratios demonstrate good internally generated liquidity.

Management Stability

Senior management has managed LXP through real estate cycles, tenant credit events (e.g., Circuit City, Linens N Things bankruptcies) and capital market dislocations and has formulated a more creditor-friendly strategy (e.g., right-sizing the dividend and growing the unencumbered pool), which Fitch views favorably.

Stable Outlook

The Stable Outlook is based on the predictable nature of net-lease assets coupled with Fitch's expectation that the company will continue to prune its portfolio while maintaining conservative financial policies.

RATING SENSITIVITIES

The following factors may have a positive impact on LXP's ratings and/or Outlook:

-- Fitch's expectation of leverage sustaining below 5.0x for several quarters (leverage was 6.2x as of March 31, 2014);

-- Fitch's expectation of fixed-charge coverage sustaining above 3.0x for several quarters (coverage was 2.7x for the TTM ended March 31, 2014;

-- Fitch's expectation of UA/net UD sustaining above 3.0x (this ratio was 2.6x as of March 31, 2014 and 2.2x pro forma).

The following factors may have a negative impact on LXP's ratings and/or Outlook:

-- Fitch's expectation of leverage sustaining above 6.5x;

-- Fitch's expectation of fixed-charge coverage sustaining below 2.0x;

-- Fitch's expectation of UA/net UD sustaining below 2.5x;

-- A sustained liquidity coverage ratio below 1.0x (the pro-forma liquidity coverage ratio was 0.9x as of March 31, 2014).

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating U.S. Equity REITs and REOCs: Sector Credit Factors,' (Feb. 26, 2014);

--'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis' (Dec.23, 2013);

--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 19, 2013);

--'Corporate Rating Methodology' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Rating U.S. Equity REITs and REOCs (Sector Credit Factors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=737957

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726863

Recovery Ratings and Notching Criteria for Equity REITs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722363

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Adam Jacobs

Associate Director

+1-212-908-0872

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Sean Pattap

Senior Director

+1-212-908-0642

or

Committee Chairperson

Steven Marks

Managing Director

+1-212-908-9161

or

Media Relations

Sandro Scenga, +1 212-908-0278

sandro.scenga@fitchratings.com


Source: Fitch Ratings


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