Fitch Affirms Lexington Realty Trust’s IDR at ‘BBB’; Outlook Stable | Business Wire

NEW YORK–(BUSINESS WIRE)–Fitch Ratings has affirmed the credit ratings for Lexington Realty Trust

and Lepercq Corporate Income Fund L.P. (collectively, LXP, Lexington.

the company) as shown below.

Lexington Realty Trust

–Issuer Default Rating (IDR) at ‘BBB’;

–$500 million senior unsecured notes at ‘BBB’.

Lepercq Corporate Income Fund L.P.

–IDR at ‘BBB’;

–$500 million senior unsecured notes at ‘BBB’.

The Rating Outlook is Stable.

KEY RATING DRIVERS

The ‘BBB’. Rating reflects LXP’s granular portfolio of predominantly

single-tenant, triple-net leased assets that generates consistent cash

flow growth, growing unencumbered pool. Conservative financing

strategy. Fitch expects asset quality to improve over the next several

years as a result of Lexington’s capital recycling strategy of selling

non-core and under-performing retail, multi-tenant and vacant properties

while funding build-to-suit developments and forwards acquisition

commitments. Credit concerns centre on the company’s liquidity position

absent proceeds from asset sales and access to the unsecured bond

market. However, expected disposition proceeds in the near term should

materially improve corporate liquidity. LXP continues its evolution

towards a more unsecured funding model. To date has issued only two

series of unsecured notes.

Granular Portfolio

LXP owns a diversified portfolio across 40 states totalling 215

consolidated properties (mostly office and industrial assets), the vast

majority of which were single-tenant and triple-net leased as of March

31, 2015. The portfolio was 96.7% leased based upon net rentable square

feet as of March 31, 2015. LXP’s largest market, the greater New York

area, represented 15.7% of quarterly GAAP base rents in first-quarter

2015 (1Q15), followed by Dallas (6.5%) and Houston (5.5%).

LXP’s largest tenant, Baker Hughes, Inc., represented 6.0% of quarterly

cash base rent in 1Q15. The top 10 tenants totalled 27.8% of

quarterly cash base rent. Only three of the company’s top tenants are

rated investment grade by Fitch, indicative of heightened tenant credit

risk.

Growing Unencumbered Pool

LXP continues to increase the percentage of net operating income (NOI)

generated from unencumbered assets, from 22.9% in 2010 to 34.5% in 2012

to 59.9% in 2014 (68.4% in 1Q15). The company’s repayment of secured

debt with new unsecured bonds. Conversion of its revolver and term

loans to unsecured from secured in 2013 improved financial flexibility,

which Fitch views favorably.

Consistent Cash Flow

LXP’s fixed-charge coverage (FCC) was 2.9x for the trailing 12 months

(TTM) ended March 31, 2015 (3.2x in 1Q15), as compared to 2.7x in 2013

and 2.4x in 2012. FCC has improved due to EBITDA growth (approximately

half of the portfolio has annual rent escalators), lower interest

expense and reduced prefered dividends due in part to prefered stock

redemptions in 2013 and 2012. Fitch projects that fixed-charge coverage

will sustain in the 3.0x to 3.5x range over the next several years as

LXP refinances higher coupon debt and capital expenditures moderate as

the company looks to sell more capital-intensive assets.

In a stress case in which same-store NOI remains flat and the company

sells fewer assets than anticipated by Fitch to repay debt and fund

build-to-suits, FCC would remain around 3.0x, which would be

commensurate with a ‘BBB’. Rating. Fitch defines fixed-charge coverage as

recurring operating EBITDA including recurring cash distributions from

unconsolidated entities less straight-line rents and recurring capital

expenditures divided by total cash interest incurred and prefered stock

dividends.

Long-Term Lease Strategy

Fitch has a more favourable view towards triple-net leases than 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 on a cash basis to 12.4 years as of March 31, 2015

from 6.9 years as of Dec. 31, 2012, which further improves cash flow

predictability absent tenant bankruptcies. Lexington’s acquisition of

three parcels of land beneath hotels in New York, NY in October 2013,

leased to tenants under non-cancellable 99-year leases, was a main

driver of the increase in remaining lease duration.

Capital Recycling Improves Asset Quality

The office to industrial revenue mix in LXP’s portfolio historically had

been running about 3:1. The company is focused on managing the ratio

down to 2:1 over the next several years. The continued targeted sale of

certain office buildings will make the portfolio less capital intensive

to manage over time, which Fitch views positively.

The company sold interests in properties and/or conveyed in foreclosure

or via a deed-in-lieu of foreclosure properties totalling $35.2 million

in 1Q15 (including a vacant office building), $282.3 million at a

weighted average 6.5% cap rate in 2014 and $167.3 million at a weighted

average cap rate of 3.6% in 2013. LXP expects to dispose of

approximately $300 million-$350 million of assets in 2015, predominantly

multi-tenant and/or office assets.

LXP acquired $197.3 million in assets at an initial cash yield of 6.9%

and committed to $29.7 million build-to-suits in 1Q15 following $212.3

million of acquisitions/build-to-suits in 2014 and $590.4 million of

acquisitions/build-to-suits in 2013. The company currently has a pro

rata remaining build-to-suit pipeline and forwards commitment pipeline of

$385.6 million. Cost-to-complete developments represent 4.0% of

undepreciated assets as of March 31, 2015, a manageable level.

Appropriate Leverage

LXP’s leverage was 5.7x for the TTM ended March 31, 2015 (5.9x in 1Q15),

as compared to 5.9x and 6.2x for 2013 and 2012, respectively. Fitch

expects leverage to sustain between 5.0x and 5.5x 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 Fitch’s stress case, leverage would

remain in the 5.5x-6.0x range, which would remain consistent with the

rating. Fitch defines leverage as debt less readily available cash

divided by recurring operating EBITDA including recurring cash

distributions from unconsolidated entities.

Select Niche Assets

LXP has at times strayed from its industrial and office strategy into

investments that may be less liquid or financeable during periods of

market stress. For example, in 2013, the company formed a joint venture

(JV) (in which the company has a 15.0% interest) that acquired a

portfolio of veterinary hospitals. In 2014, the company formed a JV, in

which it's a 25.0% interest, which is constructing a private school in

Houston, Texas for a maximum commitment of $86.5 million, which, upon

completion, will be subject to a 20-year net lease. The company earns

management fees and promotes via these JV investments, which represent

less than 1% of asset value.

In addition, during 1Q15, 2014, 2013 and 2012, LXP incurred $1.1

million, $48.6 million, $34.6 million and $10.0 million, respectively,

of non-cash impairment charges. Impairment charges have primarily

related to sales or the possible sale or disposition, of assets at below

book value and the vacancies of certain assets.

Transition to Unsecured Funding Profile

To date, the company has only issued two series of unsecured bonds, $250

million of 4.25% 10-year senior notes in 2013 and $250 million of 4.40%

10-year senior notes in 2014. However, other unsecured borrowings

include the revolver, term loans, convertible bonds and trust prefered

securities. In 2013, LXP amended its two term loans totalling $505

million to unsecured from secured. Refinanced its $300 million

secured revolving credit facility with an unsecured revolving facility

and thereafter increased the availability to $400 million. This should

improve financial flexibility going forwards.

As of March 31, 2015, the company’s unencumbered assets (defined as

unencumbered NOI divided by a stressed 9% capitalisation rate) covered

net unsecured debt by 2.1x, which is adequate for the rating.

Unencumbered asset coverage has trended in the 2.0x-2.5x range over the

past several years.

Build-to-Suit Investments and Forwards Acquisition Commitments Impact

Liquidity Negatively. Dispositions Expected

For the period April 1, 2015 to Dec. 31, 2016, 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, amortisation, projected maintenance capital

expenditures, build-to-suits and forwards purchase commitments) result in

a coverage ratio of 0.7x. Total pro rata build-to-suit projects and

forwards commitments on acquisitions total $385.6 million as of March 31,

2015, with a negative impact on liquidity coverage. However, assuming

$325 million of proceeds from dispositions in 2015, liquidity coverage

improves to a good level of 1.2x. Such dispositions would

demonstrate continued liquidity for LXP’s assets.

The company’s organic liquidity is moderate as LXP’s AFFO payout ratio

was 67.9% in 1Q2015 following a payout of 73.6% in 2014 and 77.6% in

2013. Based on the current payout ratio, LXP retains approximately $50

million annually in organic 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), which Fitch views favorably.

KEY ASSUMPTIONS

Fitch’s key assumptions for LXP in Fitch’s base case include:

–1.5% same-store NOI growth through 2017;

–G&A to maintain historical margins relative to total revenues;

–$325 million of dispositions in 2015 followed by $100 million annually

in 2016-2017 at an 8% cap rate;

–Acquisitions of approximately $150 million in 2015, $30 million in

2016 ,and $50 million in 2017. Build-to-suits of approximately $50

million in 2015, $150 million in 2016 and $200 million in 2017 at

blended 7.5% stabilized yields;

–Debt repayment with the issuance of new unsecured bonds;

–Capex to maintain historical margins relative to recurring operating

EBITDA;

–AFFO payout ratio of approximately 65%-70% through 2017.

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 5.7x for the TTM ended March 31, 2015 and 5.9x in

1Q15);

–Fitch’s expectation of FCC sustaining above 3.0x for several quarters

(FCC was 2.9x for the TTM ended March 31, 2015 and 3.2x in 1Q15);

–Fitch’s expectation of unencumbered assets to net unsecured debt

sustaining above 3.0x (this ratio was 2.1x as of March 31, 2015).

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 FCC sustaining below 2.0x;

–Fitch’s expectation of unencumbered assets to net unsecured debt

sustaining below 2.5x;

–A sustained liquidity coverage ratio below 1.0x (this ratio is 0.7x

for the period April 1, 2015 to Dec. 31, 2016 and 1.2x assuming $325

million of proceeds from dispositions in 2015).

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

Applicable Criteria and Related Research:

–‘Lexington Realty Trust Ratings Navigator’. (Feb. 26, 2015);

–‘U.S. Equity REITs and REOCs Ratings Navigator Companion’. (Feb. 5,

2015);

–‘Treatment and Notching of Hybrids in Non-Financial Corporate and REIT

Credit Analysis’. (Nov. 25, 2014);

–‘Recovery Ratings and Notching Criteria for Equity REITs’. (Nov. 18,

2014);

–‘Corporate Rating Methodology’. (May 28, 2014).

Applicable Criteria and Related Research:

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

Credit Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=821568

U.S. Equity REITs and REOCs: Ratings Navigator Companion

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=861519

Recovery Ratings and Notching Criteria for Equity REITs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=813628

Lexington Realty Trust –. Ratings Navigator

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=862015

Corporate Rating Methodology –. Including Short-Term Ratings and Parent

and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984841

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