Lexington Restructures, Acquires JV Properties Worth $895M

June 05, 2007 By Gail Kalinoski, Contributing Editor

Six months after it completed a merger with Newkirk Realty Trust Inc., Lexington Realty Trust has announced a strategic restructuring plan that will enable it to focus primarily on its portfolios of core office and warehouse/distribution assets. The New York City-based firm said it bought the remaining interests in two joint venture programs, acquiring 26 assets worth nearly $900 million and planning to acquire seven more worth about $210 million.

Lexington, a REIT focusing on single-tenant net lease investments, will be disposing of its retail properties, company officials said in a release issued late Monday night. In all, it plans to sell 140 non-core assets for more than $1 billion.

The restructuring, which is expected to be implemented by the end of the year, will enable Lexington to focus on five key areas: a wholly owned portfolio of core office assets; wholly owned portfolio of core warehouse/distribution assets; a continuing 50 percent interest in a joint venture that invests in senior and subordinated debt interests secured by net-leased and multi-tenant real estate; a minority interest in a new joint venture that will invest in specialty single-tenant real estate assets; and equity securities in other net lease companies owned either individually or through JVs.

The new joint venture is to be started with approximately 50 assets owned or soon to be owned by Lexington. It will be owned 80 percent by the institutional funding source and 20 percent by The Lexington Master Limited Partnership. The assets, which will include manufacturing facilities, call centers and other specialty properties, are expected to be worth $1 billion at inception of the JV, according to the Lexington release.

Michael Ashner, Lexington executive chairman & director of strategic acquisitions, said in the release that the restructuring plan would “provide Lexington with a more focused and understandable business model together with increased financial transparency. In so doing, we believe that both near and long term shareholder value will be enhanced.”

CEO T. Wilson Eglin stated that selling the retail portfolio, much of which was acquired in the Newkirk merger, and other non-core properties were “expected to create substantial liquidity from our portfolio.”He noted that the acquisitions announced Monday night were a good use of the REIT’s capital in “what continues to be a highly competitive market.” Eglin added that during the second quarter Lexington had invested $360.1 million and obtained full ownership of 41 properties it previously had a minority interest in.

Lexington said it acquired all of the outstanding interests in Lexington Acquiport Co. and Lexington Acquiport Co. II, its two largest JVs. The deal called for Lexington to become the sole owner of 26 primarily single-tenant, net-leased office and warehouse/distribution assets, which are estimated to generate about $72.3 million in net cash revenue this year. The REIT paid $277.4 million in cash and assumed approximately $515 million of non-recourse first mortgage financing. The properties, valued at approximately $895.2 million, are located in New Jersey, California, Texas, Kansas, Michigan, Ohio, Indiana, Florida, Washington, Missouri, Colorado, North Carolina, Georgia, Maine, Idaho, South Carolina and Virginia and include tenants such as Kraft Foods North America Inc.; L’Oreal USA Inc.; Aventis Pharmaceuticals Inc.; Bank of America; GE Insurance Solutions and Verizon Wireless.

The REIT also agreed with its partner in Lexington/Lion Venture L.P. to distribute the joint venture’s 17 properties. Lexington is expected to get seven of those properties, which are estimated to generate about $16.2 million of net cash revenue this year. Lexington will pay the JV partner $6.5 million for its 10 properties. The seven properties Lexington will retain are worth about $210 million. The assets are five office properties located in Illinois, Virginia, Texas and North Carolina. There are two industrial properties in Michigan and New Jersey.

Lexington financed the acquisitions with cash balances, a draw on its unsecured revolving credit facility and a $225 million term loan secured by equity interests.

Eglin hinted at the restructuring in early May when the REIT announced its first quarter results. In a May 3 release he stated, “With our restructured balance sheet and high occupancy levels in the portfolio, we believe we are well-positioned to implement our business plan over the balance of the year. In the current market where asset values remain high, we expect to be a more active seller of non-core properties, including our retail assets.”For the quarter ended March 31, 2007, total gross revenues increased 84.3 percent to $95.2 million, compared with total gross revenues of $51.6 million for the quarter ended March 31, 2006. The increase was primarily a result of the year- end merger with Newkirk.

Company Funds From Operations was $48.7 million, compared with company FFO for the quarter ended March 31, 2006 of $28.7 million, which included $1 million in debt satisfaction charges.

Lexington also recently bought out another JV partner in Triple Net Investment Co., a joint venture investment partnership with an institutional investor advised by AEW Capital Management L.P. According to a May 2 CPN report, Lexington acquired its partner’s 70 percent interest for approximately $82.7 million in cash and the assumption of approximately $156.6 million in non-recourse first mortgage financing. The 15 properties were worth more than $277 million and included retail and industrial properties.

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