Exhibit 99.3
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Final Transcript
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Thomson StreetEvents
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Conference Call Transcript
LXP - Q2 2006 Lexington Corporate Properties Trust Earnings Conference Call
Event Date/Time: Jul. 27. 2006 / 2:00PM ET
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FINAL TRANSCRIPT
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Jul. 27. 2006 / 2:00PM ET, LXP - Q2 2006 Lexington Corporate Properties Trust
Earnings Conference Call
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CORPORATE PARTICIPANTS
Chris Ann Casaburri
Lexington Corporate Properties Trust - IR
Will Eglin
Lexington Corporate Properties Trust - President, CEO
Pat Carroll
Lexington Corporate Properties Trust - CFO
John Vander Swaag
Lexington Corporate Properties Trust - EVP
CONFERENCE CALL PARTICIPANTS
John Guinee
Stifel Nicolaus - Analyst
Ken Avalos
Raymond James - Analyst
Philip Martin
Canto Fitzgerald - Analyst
Tony Paolone
JP Morgan - Analyst
PRESENTATION
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Operator
Good day, ladies and gentlemen, and welcome to the Lexington Corporate
Properties second quarter 2006 conference call. The press release and
supplemental disclosure package were distributed this morning and will be
furnished on form 8-K to provide to access to the widest possible audience. In
the press release, and supplemental disclosure packages we have reconciled all
non-GAAP financial measures to the most directly comparable GAAP measure in
accordance with regular G requirements.
If you did not receive a copy these documents are available on our website at
www.lxp.com in the investor relations section. Additional we will host a live
webcast of today's call, which you can access in the same section. At this time,
management would like me 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 we believe that the expectations reflected in any forward-looking
statements are based on reasonable assumptions, Lexington can give no assurance
that it's expectations will be attained. Factors and risks that could 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. We do not undertake a duty to update any
forward-looking statements.
With us today from management include Will Eglin, CEO and President; Robert
Roskind, Chairman, Dick Rouse, Vice Chairman and Chief Investment Officer;
Patrick Carroll, Chief Financial Officer; John Vander Zwaag; Executive Vice
President and other members of management. I would like to turn the call over to
Will for his opening remarks.
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Will Eglin - Lexington Corporate Properties Trust - President, CEO
Thanks, Chris. And welcome to all of you, thank you for attending our second
quarter conference call. Earlier today Lexington announced funds from operations
of $0.60 per share for the second quarter of 2006. We had a variety of one-time
items that add about $0.13 to FFO per share and
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FINAL TRANSCRIPT
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Jul. 27. 2006 / 2:00PM ET, LXP - Q2 2006 Lexington Corporate Properties Trust
Earnings Conference Call
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is detailed in the press release. These items consist; one 7.1 million in debt
satisfaction gains relating primarily to the foreclosure of our Milpitas,
California mortgage and also the satisfaction of one of our mortgages at
discount.
Secondly, 5.4 million of charges relating to two lease rejections,on properties
formally leased to Dana Corporation and 3. 6.9 million of gains realized from
selling our bankruptcy claims relating to such lease rejection for $7.1 million
or about $0.75 on the dollar, which we view as a very high recovery rate for a
bankruptcy claim. Adjusted for these items FFO per share was $0.47 about the
same as in first quarter of 2006 and in line with your expectations. The
dividend [past] ratio for the quarter was 77.6%. In the second quarter, we
acquired 5 properties for an aggregate price of 66 million and a GAAP cap rate
of 8.2% after acquisition volume in the first quarter of 44.1 million.
Also during the quarter we invested 11.1 million to purchase a mortgage note on
a property we do not own but which is leased to one of our current tenants and
we also invested $9 million to satisfy one of our own mortgages which resulted
in a gain.
We also obtained approximately 46.2 million of non-recourse mortgage financing
at a weighted average fixed rate of approximately 6.3%. Three of the properties
were acquired by Lexington strategic asset Corp., which brings the LSAC
portfolio to about 111 million. The main thing we talked about last quarter was
the competitive state of the acquisition market and the acquisition market
continues to be competitive with low cap rates and narrow spreads but we are
seeing some slightly more attractive cap rates on the properties targeted to
LSAC, relative to last quarter and we did have more volume in second quarter
than we had in first. We have also been able to take advantage of disposition
opportunities.
We sold 4 properties during the quarter for approximately $44.8 million which
generated gains of approximately $13.7 million. One of the properties sold was
part of the site of the former Bank One operation facility in Phoenix, which has
been vacant for sometime and has been a drag on operating results due to the
carry cost. John Vander Zwaag will go into detail on the leasing front, we
continue to make good progress on leases this year we had our first tenant in
our vacant Dallas, Texas property. We put our second tenant in place in Hebron,
Kentucky property and we also signed a new lease with a tenant at the Antioch,
Tennessee property which was formerly leased to Dana. That tenant was formally a
subtenant there.
I would like to turn the call over to Pat Carroll our CFO to discuss our
financial results and balance sheet.
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Pat Carroll - Lexington Corporate Properties Trust - CFO
Thanks, Will. First, looking at the income statement, during the quarter the
company's gross revenues of $51.6 million, fee income was approximately $1.3
million compared to $2.6 million in the same quarter this last year. This
decrease relates primarily to LSAC acquisition we made in the second quarter of
2005. Fee income for this quarter was comprised of about $230,000 in acquisition
fees and the remainder about $1.1 million in asset management fee.
Quarterly G&A was relatively flat quarter-to-quarter. As Will mentioned earlier
there were a few unusual items reflected in the P&L for the quarter. What I
would like to do now is go through them in a little more detail and tell you
where they are, in the income statement. 7.1 million in aggregate debt
satisfaction gains related primarily to, as Will said the foreclosure of the
Milpitas property and the repayment at a discount to mortgage on our federal
mobile property in Michigan. 5.4 million in impairment charges in the
accelerated amortization above market leases, related to the 2 properties
formally released to Dana Corporation.
Of that 5.4 million, 2.3 million is reflected on the income statement as
reduction of rental revenue. 1.1 million is an impairment which is right on the
face of the income statement and 2 million is reflected in the line item called
equity and earnings from joint ventures. 6.9 million in aggregate gains realized
on the sale of the Dana corporation bankruptcy claims, 5.3 of that amount
including in the income statement in non-operating income and 1.6 million is in
the JV line as the claim was sold by one of our joint ventures. Interest
coverage for the quarter was about 2.3 times.
Now turning to the balance sheet, we believe the balance sheet continues to be
in good shape at quarter end we had about 1.2 billion of debt outstanding
including debt on properties held for sale which had a weighted average interest
rate of about 6% and all of our debt as of June 30th is fixed rate. Our mortgage
debt amortized over time by about $305 million so our balance sheet does
significantly deleverage. We had about 54.3 million of cash at quarter end and
no borrowings outstanding on our $200 million line of credit.
Although we did have about 32 million in letters of credit outstanding a
majority of which relates to a future acquisition which we have under contract.
Cash balances due to property sales, mortgage refinancing about 9 million is
related to cash balances related to prepaid rents to rents we collected in
advance. Balance sheet debt was about 44% of total capitalization and we are
comfortable operating the company within a rage of 45 to 50, 14 million of debt
is expected to amortize over the rest of this year.
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FINAL TRANSCRIPT
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Jul. 27. 2006 / 2:00PM ET, LXP - Q2 2006 Lexington Corporate Properties Trust
Earnings Conference Call
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Looking at more detail at the balance sheet included in the intangible line item
is the allocation of the purchase price of properties to in-place leases,
customer relationships and above or below market leases in accordance with
FASB141. The impact of above or below market lease have an FFO was approximately
a net negative of $400,000 for the quarter. Included in properties held for sale
is the cost of 2 properties, 1, in Henderson, North Carolina and 1, in Phoenix,
Arizona, which meet the definition of held for sale in accordance with FASB 144.
Turning now to the other assets line item, the main components of others assets
are loan escrows of about $20.7 million. Also new for the quarter is including
other assets is investment in [breach] securities. At June end we had about $4.2
million invested in AFR currently about 508,000 shares of AFR with a price of
about-- our average cost is about $9.89. Continuing other assets, there's
construction in progress about 15.4 million, real estate deposits of about 5.3
million, notes receivable of about 33.8 million, 14 million of which relates to
notes we took back on sales of properties, 8 million relates to an advance we
made to one of our joint ventures and 11 million relates to the mortgage
investment Will previously mentioned and finally, the last significant component
of other assets is prepaid and deferred tax-- deferred tax assets of about $4.8
million. Liabilities from discontinued operations on the mortgages and those
properties that are classified as held for sale and significant components of
other liabilities are accrued interest of 5.9 million, deferred revenue of about
6.1 million and most of that is below market leases payables on construction in
progress of about 6.9 million, a subordinated notes payable is about 2.9 million
and the prepaid rent I mentioned earlier of about $9 million.
Now, I would like for John Vander Zwaag the Executive Vice President and the
Head of our Portfolio Management to discuss our capital recycling plan and
leasing activities. John?
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John Vander Swaag - Lexington Corporate Properties Trust - EVP
We feel very good about the progress we have made on the portfolio this year.
We entered 2006 with vacancy or substantial vacancy of 4 properties. Those 4
properties were I-17 Center, Phoenix, approximately 180,000 square feet in 3
buildings. 1301 California Circle in Milpitas, California. Approximately,
100,000 square feet. Airport Center West in Hepburn, Kentucky, approximately,
80,000 square feet and 1600 Viceroy in Dallas, Texas, approximately, 250,000
[inaudible]
[inaudible] Strides in addressing the challenges of each of these properties,
I-17 Center has been on our list of properties targeted for sale. Last year we
acquired adjacent land parcel that allowed us to enter into agreements to split
the property and sell it in separate transactions to corporate users. The first
of these sales closed in June on the 3 story approximately 100,000 square foot
building and the approximately 20,000 square foot vault building at a price of
4.6 million and the sale of the remaining 60,000 square foot building at a price
of 3 million is expected to occur in August. 1301 California Circle has been
substantially vacant for years, several years, languishing in a difficult
Silicon Valley leasing market.
After working diligently to retenant the building over this time, we reached an
agreement with our lender to allow them to foreclose on the property . The
property was sold in foreclosure in June. This was effectively the sale of the
property for the mortgage balance of approximately, 11.8 million versus a market
value of approximately 6.25 million and as its an example of benefits of our
strategy of utilizing non-recourse mortgage financing. We continue to make
strides on retenating Airport Center West. This quarter we entered into a lease
for approximately 9,000 square feet bring occupancy to approximately, 40%. In
spite of, somewhat soft leasing conditions in this market, we are getting
traffic on the remaining space in the building.
In addition, we have developed a plan to add an additional 70 to 100,000 square
feet of office or industrial space to this site and are beginning to process of
marketing this on a build to suit basis. We are very pleased with the leasing
activity at 1600 Viceroy in Dallas. Last quarter we announced our first lease in
this vacant building of 48,000 square feet for a term of 10-years, rent
commenced on this lease in June. This quarter we've reached a non-binding
agreement on a 12-year lease for 100,000 square feet and we are working through
the documentation process which would provide for a lease commencement date of
January 1. This lease will bring us to 60% occupancy at this property.
We also have a site currently devoted to surface parking for the building on
which we can pursue development in the future. We currently have 5 tenants
operating in bankruptcy. Dana continues to meet their post petition obligations
on 9 of the 11 leases we had with them at the time they entered bankruptcy. We
believe there's a high probability that each of these 9 leases will be affirmed.
The leases in Antioch, Tennessee, which is the suburban national market and
Farmington Hills, Michigan have been rejected. In Antioch we entered into a 15
year lease for 50% of the 665,000 square foot building with a previous subtenant
the balance of the space is being actively marketed and we feel good about the
leasing prospects for the space. As mentioned previously we sold our bankruptcy
claim with respect to the Antioch lease obligation for a little over 5.6 million
and these funds are being reserved for tenant improvements and leasing
commissions.
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Jul. 27. 2006 / 2:00PM ET, LXP - Q2 2006 Lexington Corporate Properties Trust
Earnings Conference Call
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In Farmington Hills, we have a more challenging property in terms of the the
difficult market conditions in Detroit and the special purchase nature of some
of the building improvements, specifically the lab space. We are in the process
of evaluating the market for the building and possible physical changes to
enhance it's marketability.
We are engaging an agent to market the building and have had several inquiries
from users regarding portions of the building. Ultimately, though, we think the
property is best suited to a single user, and we will explore this alternative
fully before considering a more costly multi-tenant solution. As with the
Antioch claim, we have sold the bankruptcy claim with respect to the [inaudible]
for 5.375 million and these funds are reserved for tenant improvements and
leasing commissions.
Our lease with Allied holdings on our office building in Decanter, Georgia has
been affirmed this lease runs through December 2007. In the course of affirming
the lease Allied also fulfilled their responsible for payment of the replacement
of the roof at a cost of approximately $160,000 which we had commenced during
the post petition period. Lexington will be making some discretionary capital
improvements to the 112,000 square foot building prior to the expiration of the
Allied lease with the expectation that we will be able to recapture greater
rents in this tight submarket of Atlanta. We are also continuing our evaluation
of property to construct additional improvements at this site.
Our lease with Federal-Mogul on their headquarters in Southfield, Michigan was
affirmed prior to our acquisition of this property. Federal-Mogul continues to
fully utilize this building and an attached building, which is owned by another
party. In June, we purchased the mortgages on our building and the attached
building at substantial discounts to their face values. We retired the mortgage
on our building and will remain as the first mortgage lean holder on the
attached building.
Owens Corning seems poised to emerge from bankruptcy this year. They have
previously affirmed their lease on our Chester, South Carolina property, which
we expanded for them and extended to a 20-year lease. They also have leased 2
distribution buildings from us in Hebron, Ohio, which is the [Columbus] market.
The larger of these 2 buildings is approximately 400,000 square feet and leased
through May of 2009. We expect this lease to be affirmed. The smaller building
is approximately 250,000 square feet leased through February 2010. We expect
Owens Corning to reject this lease before emerging from bankruptcy. Power
Automotive leases an industrial building in Plymouth, Michigan, which continues
to operate at a high utilization rate. We own a 30% interest in this property.
The tenant is making significant capital expenditures to expand their production
capacity at this site and we expect that the lease will be affirmed.
Looking at our lease expirations for 2006 and 2007, we have 3 buildings where
tenants have vacated or substantially reduced their operations. On lease with
Lear on a 183,000 square foot industrial building in Auburn Hills, Michigan
expires this month. We are marketing the property for leases and manufacturing
facility, which is its highest and best use. We have some users looking at the
building but nothing seems eminent.
We have a 179,000 square foot warehouse in Harrisburg, Pennsylvania with a lease
to Exel logistics that expires in November of this year. Exel is utilizing the
space for overflow requirements in this market. We do not expect them to renew
but we are optimistic about the prospects for leasing this building to another
user. We have a 68,000 square foot office building held in a joint venture in
the Richmond, Virginia market which was occupied by Capital One with a lease
guarantee from Highwood properties that expires in November 2007.
We have only recently begun marketing this 3-story building for lease on a
multi-tenant basis, and we have a proposal out for full-floor lease and we are
seeing good activity in this market. As for our other 2006 renewals, our lease
on an office and R&D facility in Glendale, Arizona with Honeywell expired this
month. HoneyWell is continuing to operate under the terms of this lease while we
document a 5-year extension, which provides for a rent increase of approximately
20%.
We are also beginning the process of releasing 6.5 of the 14 acres of excess
land from the lease, which we will either sell or develop. The balance of the
excess land is required to remain subject to the lease to meet the security
requirements of the U.S. government related to the work performed by Honeywell
at this location. We have a 330,000 square foot warehouse in the Harrisburg area
leased to Exel Logistics which expires in November.
We were talking to them about an extension on this lease while they seek to
extend the contract that they service in this building. In the meantime, we have
engaged a leasing agent to market the building to make sure we are fully in the
market in case we are unable retain Exel. We also have a small lease on
approximately 18,400 square feet at our West Palm Beach, Florida office
property.
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FINAL TRANSCRIPT
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Jul. 27. 2006 / 2:00PM ET, LXP - Q2 2006 Lexington Corporate Properties Trust
Earnings Conference Call
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We've proposed a 5-year extension of this lease to the existing tenants at a
rent increase of approximately 20%. Finally, for 2006, we have 2 leases with
Johnson controls that expire in December, 1, is a 111,000 square foot industrial
building in Overland, Ohio and the other is a 134,000 square foot industrial
building in Plymouth, Michigan. We have very little clarity from Johnson
controls with respect to their plans for these buildings and their renewal
notice is opened through September.
We are in the process of engaging brokers to market these properties, with
respect to 2007 renewals, we have a 252,000 square foot warehouse leased to Exel
through November 2007 in the Harrisburg market. We have agreed to 5-year
extension of this lease subject to Excel's formal approval process. We have
148,000 square foot industrial building leased to Dana through August 2007in
Gordonsville, Tennessee, where we are optimistic about a lease affirmation
followed by an extension. The lease on our large K-mart distribution center in
Warren, Ohio, expires in September 2007.
We are in the appraisal process for determine the value of their purchase option
for the property as the tenant as requested. As we discussed previously our
lease with Allied holdings on 112,000 square foot office building in Decanter
expires in December 2007. We're beginning discussions with Allied regarding a
new lease on 50% of the building. The building is already 25% occupied by
subtenant who we expect to retain beyond the expiration of the Allied lease. A
couple of these subtenant have recently approached us about expansions and lease
extensions and we like this leasing market. Over the past couple of quarters in
our calls, we have talked about disposition plans.
Year-to-date we have sold 6 properties for approximately 74.75 million. We have
1 property under contract for 3 million and 1 joint venture property [other
intent] for $1.5 million over an existing mortgage balance of approximately 1.75
million, which will be assumed by the purchaser. We are actively marketing 1
wholly owned property and 1 joint venture property . Several of the properties
that we intended to market as of the last quarterly call have been withheld from
the market while we consider positive changes in tenant requirements and local
market conditions that might cause us to prefer to continue to holds the
properties for the foreseeable future.
Therefore, we think a reasonable expectation for full years sales to be 10 to 12
properties at a combined value of 90 to 100 million in growth related matters
other than those we discussed so far we are in the planning stages of an
expansion of our refrigerated warehouse facility in Danville, Illinois. We
decided to retain the excess land in our Kerry, North Carolina property and had
preliminary discussions with Investment grade tenant regarding a 100,000, to
150,000 office build to suit at this location. We are in preliminary [distages]
of discussing expansions with tenants at 3 other locations.
In summary, we continue to operate at high space utilization rates. We're
currently about 97.5% leased and assuming no positive developments in the
portfolio, we will probably begin 2007 at approximately 96.5% leased. Now, I
will turn it back over to Will.
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Will Eglin - Lexington Corporate Properties Trust - President, CEO
Thanks, John. Overall, It was a good quarter for Lexington but one that
reflects the impact of vacancy and rent roll down since the second quarter of
last year and also the impact of slower acquisition growth, although our
investment volume did increase relative to first quarter.
Our balance sheet remains in good shape and we clearly have the financial
flexibility to continue to execute our business plan over the balance of the
year. Although, we believe the leasing environment is improving we still expect
to lower rents on 2006 expirations with the one exception being the Honeywell
building in Glendale and we continue to have leasing challenges especially in
the automotive sector with Dana, Leer, and perhaps Johnson controls.
Before turning to the Q&A, I want to make a few additional comments about the
proposed Newkirk merger which we announced Monday, earlier this week. There has
been a fair amount of commentary about the value of the portfolio since then.
Based on the enterprise value when the transaction was announced, Newkirk
portfolio is being valued by the market at a value of about $100 per square
foot.
We view this as a very attractive basis relative to replacement costs and I
don't believe that when we look back on this transaction in the future that will
we will ever regret combining this portfolio with ours at this valuation.
Basically it equates to a cap rate in the low double-digits that would decline
overtime to somewhere in the low to mid-7s, depending on how we do on lease roll
over. I would note that many of these types of assets are valued by investors at
sub 7% cap rates, due to the predictability of the income stream that results
when lease renewals are at less than market levels and we note that the recent
Albertson's portfolio that was sold by Newkirk recently was sold at a cap rate
of about 6.5%. So I think there's a built in capital recycling opportunity in
this portfolio that will have a positive impact on cash flows over time. Newkirk
since their IPO has been doing a great job executing this strategy already, in
addition, to reworking many of their existing leases on variable terms. There's
also been quite a bit of commentary about Newkirks, above market rents and rent
roll-down and the impact on FFO going-forward and the 2007
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FINAL TRANSCRIPT
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Jul. 27. 2006 / 2:00PM ET, LXP - Q2 2006 Lexington Corporate Properties Trust
Earnings Conference Call
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guidance that we gave on our Monday conference call about the merger of $1.75 to
$1.85, per share in 2007, basically takes out the above-market lease component
of the transaction, and we note the top-end of our new 2007 guidance-range is
just a few cents less than our second quarter 2006 annualized number of $1.88.
The result of the future roll-down will not impact FFO, it's being taken into
account now, so we'll have a very steady and stable earnings with which to grow
on, and although those rents aren't going to be recognized in FFO, the cash
flows are valuable and shouldn't be ignored even though they are being ignored
under GAAP. When we look at Newkirk we think there's 3 reasons why the market as
had difficulty fully-valuing the Newkirk portfolio in the context of being a
public company, 1, is it's externally advised structure. 2, is it's
characteristics of declining funds from operations, and 3, is the issue of
dividend sustainability at its current level. The merger we are Lexington
removes each of the impediments to achieving a full valuation of this portfolio
in the public company context. Number 1, we're doing away this the advisory
agreement. 2, we're recognizing the impact of renewals now, and 3, the dividend
is being cut to a level that has ample coverage. So that will free up a lot of
very positive cash flow.
We at Newkirk have a shared vision of creating a company far greater than the
one either one of us could achieve alone and we look forward to the challenge
and opportunity associated with implementing that business plan. We also look
forward to following our proxy materials and meeting with your shareholders to
explain in detail the merits of the transaction. We believe that the near term
market reaction to the transaction doesn't reflect in our view of the potential
its combined companies to have to grow and creat shareholder value, and we note
that we have a 2 million share stock repurchase plan authorization, and we would
expect to be active in the market at today's price.
Lastly, there seems to be some concern in the market that Lexington Management
has not been accessible to discuss the transaction. Let me reiterate what I
often say which is that if you have any questions about Lexington or any aspect
of our business, including the Newkirk transaction, please feel free to call me
directly my phone number is 212-692-7242. We would be delighted to talk directly
with anybody who has any questions, and as I said we are in the process of
preparing detail proxy material about the transaction. We look forward to
getting it in the hands of our shareholders and meeting directly to explain the
transaction including the benefits that we expect to achieve over time. With
that operator we will turn it back to you for question and answer session.
QUESTION AND ANSWER
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Operator
[OPERATOR INSTRUCTIONS] Our first question comes from John Guinee with Stifel
Nicolaus.
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John Guinee - Stifel Nicolaus - Analyst
Well Will, congratulation because what you did in the last 5 minutes is
articulate the transaction about 100 times better than was done on Monday. Very,
very nice job. Can you talk through-- just so everyone understands-- sort of the
4 or 5 hot buttons when you evaluated the cash flows of LXP and combined them
with the cash flows of Newkirk? I mean my sense is what you did was you ran it
out 5 or 10 years and the additive was better than the LXP going forwarded.
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Will Eglin - Lexington Corporate Properties Trust - President, CEO
You are absolutely right, John. And there are lots of aspects to that one thing
is in the Newkirk portfolio you have very high credit quality and you have a
fairly large portfolio of free and clear assets so if we do and in many cases it
would be sort of the worse-case from a cash flow standpoint where you get
renewals exercises specified rents that are low, but given the securities of
those income streams they can be sold out to investors at very, very low cap
rates, and we can take that capital then and reinvest it in something different
and on a levered basis to enhance our ROE at that moment in time. That's
certainly one aspect. The added balance sheet flexibility that the combined
companies have to continue to grow. The fact that the Newkirk assets by and
enlarge are in better markets than the Lexington portfolio. So it's a different
portfolio. It is characterized by having those renewal rents at specified
levels, but that can lead to just very, very certain cash flows that can be sold
off to investors that want that kind of characteristic. So when we looked at our
model, and believe me first and foremost in our mind was will we if we look 3,
4, 5 years out will we have greater funds from operations per share and cash
flow to distribute to shareholders. I mean, that's ultimately, the most
important question to us.
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John Guinee - Stifel Nicolaus - Analyst
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FINAL TRANSCRIPT
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Jul. 27. 2006 / 2:00PM ET, LXP - Q2 2006 Lexington Corporate Properties Trust
Earnings Conference Call
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Good. Well done.
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Will Eglin - Lexington Corporate Properties Trust - President, CEO
And I apologize if we didn't do a good job of doing that on Monday, but you
know, it's not every day we announce a very, very significant merger transaction
like this, so--
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John Guinee - Stifel Nicolaus - Analyst
Let's just say the last 5 minutes was much better than the hour on Monday.
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Will Eglin - Lexington Corporate Properties Trust - President, CEO
Thanks, John.
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John Guinee - Stifel Nicolaus - Analyst
Well done.
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Operator
Our next question comes from Ken Avalos with Raymond James please go ahead.
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Ken Avalos - Raymond James - Analyst
Thanks, guys and we echo-those comments that was very helpful those comments at
the end. Can you help me understand, John hit the key question from our
perspective, but help me understand when you say your cash flows will be better
3, 4, 5 years out and maybe give us some examples of some of the leases that
Newkirk has worked on in the past couple of quarters and help us understand some
of the terms that you think you can -- some of the terms that you'll target on
blending and extending or whatever it is you are going to do to work on those
roll-downs, coming up in the next few years here, Thanks.
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Will Eglin - Lexington Corporate Properties Trust - President, CEO
One thing that I would point you to is Newkirk has put out a pretty detailed
press release, sort of recap-- recasting the activity that they have completed
recently. But inherent in a portfolio like this, where you have high rents now
and future rents that may go down is an opportunity, to have discussions
directly with tenants to, flatten that out and work with tenants. Maybe they
will want to have capital invested in the building in connection with recasting
a lease like that. So I think there will be-- and it's been a portfolio that's
been very actively worked since it's IPO and I think you are going to see those
characteristics going forward, and I also think it's a very, very [traconiun]
assumption to assume that every renewal gets exercised just because it maybe
viewed as below market that may very well be the case with respect to retail
properties but our experience has been with single tenant office buildings that
those companies don't necessarily want to stay in the real estate business just
if they think they can work an asset and spend money to retenant just to make a
couple dollar spread. Given the fact that the portfolio is largely office in
nature, I think there's much more an opportunity on the back end to work it,
relative to what people are giving us credit for at least right at this moment.
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Ken Avalos - Raymond James - Analyst
Do you have any sense as to when you are going to try to get the merger proxy
done or out?
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Will Eglin - Lexington Corporate Properties Trust - President, CEO
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FINAL TRANSCRIPT
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Jul. 27. 2006 / 2:00PM ET, LXP - Q2 2006 Lexington Corporate Properties Trust
Earnings Conference Call
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We are working on it right now, and we're targeting the middle of August.
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Ken Avalos - Raymond James - Analyst
Thanks.
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Operator
Our next question comes from Philip Martin with Cantor Fitzgerald, please go
ahead.
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Philip Martin - Canto Fitzgerald - Analyst
Good afternoon, everybody. A couple things, first of all, with your rent roll
downs in the Lexington portfolio, or rents in general, when do you expect those
to start to trend positive. As you start-- it sounds like '06 still rolling done
but as you look into '07, knowing the markets, knowing the leases, knowing the
assets, do you expect that to start trending up at some point in '07 or flat or
still down?
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Will Eglin - Lexington Corporate Properties Trust - President, CEO
Well it's all asset specific to some extent.
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Philip Martin - Canto Fitzgerald - Analyst
Yes.
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Will Eglin - Lexington Corporate Properties Trust - President, CEO
And obviously depends what you are rolling off of, but in general I think that
we're kind of approaching that water mark in many markets already, and I think--
so I think that over the course of the next 18, 24 months, we're expecting
particularly in some of these office markets to see some -- start to see some
trending towards the positive.
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Philip Martin - Canto Fitzgerald - Analyst
And my sense is you're declining are declining at a lower rate? On the rent
roll downs.
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Will Eglin - Lexington Corporate Properties Trust - President, CEO
Yes, we have fewer and fewer of those.
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Philip Martin - Canto Fitzgerald - Analyst
Exactly.
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Will Eglin - Lexington Corporate Properties Trust - President, CEO
But portfolio mature as we get into more and more market rate options where
options exist.
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Philip Martin - Canto Fitzgerald - Analyst
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FINAL TRANSCRIPT
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Jul. 27. 2006 / 2:00PM ET, LXP - Q2 2006 Lexington Corporate Properties Trust
Earnings Conference Call
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Okay then with some of the leasing challenges that you have here with the
Johnson Controls, with Lear, et cetera, does it make sense-- you have a nice
vehicle now in Lexington Strategic, does it make sense to put some of those
assets into Lexington Strategic because they are possibly viewed as more
opportunistic, more challenging for the read, per se?
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Will Eglin - Lexington Corporate Properties Trust - President, CEO
No, we view Lexington Strategic is really a separate platform we don't want to
have intercompany dealings with respect to valuing assets that might go back and
forth. Believe me the Lexington-- the mother ship, if you will, is fully capable
of releasing and managing the buildings as they come off lease.
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Philip Martin - Canto Fitzgerald - Analyst
Okay. Good and then with respect to Newkirk, when you look at the Newkirk
portfolio, can you talk a little bit about the, again going back to this-- you
expect cash flow to be better, funds from operation to be hire, slash better 3
to 5 years out, could you talk about potential asset sales that you might expect
in '07, '08, to possibly deal with some of the rent roll-down issues or
challenges and than secondarily can you talk about opportunities within that
portfolio in terms of expansion or under utilized land it's my sense that you
have kind of a high grade problem and you touched on it here-- is that you have
a high quality credit base, where you are probably going to get 80% renewal
rates but you are dealing with rent roll downs.
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Will Eglin - Lexington Corporate Properties Trust - President, CEO
Philip, there are opportunities we have spent a fair amount of work-- a lot of
work going around and looking at these properties and visiting with tenants. I
can't be specific about what we think are actual opportunities as it relates to
what we might, look at disposing. I would just point out that the Newkirk team
has been executing already.
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Philip Martin - Canto Fitzgerald - Analyst
Uh-huh.
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Will Eglin - Lexington Corporate Properties Trust - President, CEO
On an quite an aggressive disposition and recycling program. The one thing I
would say and I think this will be a clear advantage is, now we have a very
large portfolio of high quality single tenant real estate. Some of it, yes, is
characterized by rents higher now than they will be in a few years, but as we
work through and extend leases, we're going to be able to take this portfolio
and design, perhaps, specific joint venture portfolios to add additional
institutional capital to our company, and I think that being able to maximize
value in that way by having different opportunities to sort of tranche out our
portfolio and create programs with institutions, I think that's also going to be
an embedded, part of the transaction that's going to create, cash flow and
shareholder value over time.
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Philip Martin - Canto Fitzgerald - Analyst
Okay. Okay. That's-- that's helpful. Well very last question is-- I know on
Monday you had mentioned, Newkirk has estimated they rent roll-down issue at 100
million. You were at 150. Could you just briefly describe where the difference
is? Where-- were in your assumptions.
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Will Eglin - Lexington Corporate Properties Trust - President, CEO
We just, when we were calculating our sort of new FFO for New-co. We went out
and looked at what we think to really be the kind of conservative case out there
and it is market or there are cases where it's below market, but like I said,
there's no way that actuarially every below market renewal gets exercises in
that portfolio. Okay, so there's no expected positive from that built in to, the
guidance in terms of FFO. And like I said, if those renewals were to get
exercised we would look then to trade out of those properties to 10-31 investors
and redeploy capital into something that was more attractive from a yield
standpoint.
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FINAL TRANSCRIPT
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Jul. 27. 2006 / 2:00PM ET, LXP - Q2 2006 Lexington Corporate Properties Trust
Earnings Conference Call
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Philip Martin - Canto Fitzgerald - Analyst
Okay. That's helpful. And it expands your obviously capital sources so-- okay.
Fair enough. Thank you, again.
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Operator
Our next question come is a follow-up question from John Guinee with Stifel
Nicolaus.
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John Guinee - Stifel Nicolaus - Analyst
Please go ahead. Pardon me. John can you please press star 1 again. Please go
ahead with your question. Oh. It looks to me like when you did when you bout the
Newkirk portfolio is you effectively reduced the dividend paid to Newkirk
shareholders from a $1.60 on a $16 share price to A $1.50 dividend on a $20
share price. Is that a fair way to look at it?
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Will Eglin - Lexington Corporate Properties Trust - President, CEO
Yes, I mean I guess the steps are on a per Newkirk share today it's 1.60 to
1.20 and then grossed up for the exchange ratio that's where you get back to the
1.50 our indicated dividend level post.
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John Guinee - Stifel Nicolaus - Analyst
Okay. So the dividend yield for the Newkirk shareholders basically went from 10
to 7.5%?
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Will Eglin - Lexington Corporate Properties Trust - President, CEO
Yes.
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John Guinee - Stifel Nicolaus - Analyst
And so essentially what you did was you reunderwrote their IPO and told the
shareholders the 10% dividend wasn't sustainable.
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Will Eglin - Lexington Corporate Properties Trust - President, CEO
We didn't-- that's not what we did. But as a result of the transaction, the
effect would be to reduce that dividend; that's correct.
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John Guinee - Stifel Nicolaus - Analyst
How do you anticipate the Newkirk shareholders reacting and the overall
overhang on Newkirk shares given that they obviously just went from a 10 to a
7.5.
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Will Eglin - Lexington Corporate Properties Trust - President, CEO
It's really a question for Newkirk, but our sense has been that the shareholder
base there is more concentrated than ours, and generally has a long-term view
about how best to create value. And I think there was an assumption in the
transaction that there was a lot of work to do in the Newkirk portfolio to build
up cash flow to a sustainable level. And I think that was-- that's been
reflected in the trading price.
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John Guinee - Stifel Nicolaus - Analyst
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FINAL TRANSCRIPT
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Jul. 27. 2006 / 2:00PM ET, LXP - Q2 2006 Lexington Corporate Properties Trust
Earnings Conference Call
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Right. Okay. Thanks.
- --------------------------------------------------------------------------------
Operator
Ladies and gentlemen, if there are any additional questions please press the
star followed by 1 at this time. As a reminder if you are using speaker
equipment you may need to lift the handset before pressing the numbers. Our next
question comes from Tony Paolone with J.P. Morgan, please go ahead.
- --------------------------------------------------------------------------------
Tony Paolone - JP Morgan - Analyst
Thanks. With respect to your stock buyback are there any restrictions or
impediments given the merger to buying it back near term?
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Will Eglin - Lexington Corporate Properties Trust - President, CEO
There's no per se restrictions, but the 10B18 safe harbor is technically isn't
available us to. But any purchases we would make would be made in accordance
with the securities laws.
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Tony Paolone - JP Morgan - Analyst
Just so I understand-- because I'm not familiar with those. You are not locked
up or anything like that until the merger closed you could actually be any
market buying back stock under the normal ruling you would have in the merger
wasn't there.
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Will Eglin - Lexington Corporate Properties Trust - President, CEO
Right. There's just one safe harbor that wouldn't be available to us, but
otherwise we could buy back our stock similar to as if this wasn't going on.
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Tony Paolone - JP Morgan - Analyst
Okay.
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Operator
Management, at this time, there are no further questions.
- --------------------------------------------------------------------------------
Will Eglin - Lexington Corporate Properties Trust - President, CEO
Well, once again thanks to all of you for tuning into the call and again, like
I said we will look forward to completing our proxy material with respect to
Newkirk and being out on the road meeting with your shareholders. Thank you.
- --------------------------------------------------------------------------------
Operator
Ladies and gentlemen, this concludes today's teleconference. You may now
disconnect.
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FINAL TRANSCRIPT
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Jul. 27. 2006 / 2:00PM ET, LXP - Q2 2006 Lexington Corporate Properties Trust
Earnings Conference Call
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