Fitch Assigns Initial 'BBB' IDR to Lexington Realty Trust; Outlook Stable

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has assigned initial credit ratings to Lexington Realty Trust LXP and Lepercq Corporate Income Fund L.P. (collectively, LXP or the company) as follows:

Lexington Realty Trust

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

--Senior unsecured notes at 'BBB'.

Lepercq Corporate Income Fund L.P.

--IDR at 'BBB';

--Senior unsecured notes at '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 Dec. 31, 2013. The portfolio encompasses 40.7 million sq. ft. across 41 states and was 97.6% leased based upon net rentable square feet as of year-end 2013. LXP's largest market, Dallas-Fort Worth-Arlington, represents only 8% of 2013 annual base rents and its top twenty markets represent 65% of total base rents. The tenants are diversified across industry sectors. No single industry represented more than 13.8% of annual base rent in 2013. LXP's largest tenant, Federal Express Corporation, represented 3.3% of annualized base rent in 2013, and the top 10 tenants totaled 22.2% of annualized base rent.

Appropriate Leverage

LXP's leverage was 6.3x for the year ended Dec. 31, 2013, as compared to 7.3x and 6.4x for 2012 and 2011, 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 2.4x for the year ended Dec. 31, 2013, as compared to 1.8x for the full years ended 2012 and 2011, 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 11.2 years as of Dec. 31, 2013 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 4Q2013, 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 4Q2013. 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 2013, the company issued $250 million of 4.25% 10-year senior unsecured notes, amended its $255 million term loan to unsecured from secured, and refinanced its $300 million secured revolving credit facility with an unsecured revolving facility and thereafter increased the availability to $400 million. Approximately 55.3% of the company's NOI was unencumbered in 2013, 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 2.8x at Dec. 31, 2013. Pro forma for a subsequent unsecured bond offering, this ratio would be weaker at 2.2x, but still adequate for the 'BBB' rating.

Portfolio Pruning Improves Asset Quality

LXP was active on the external growth front in 2013. The company purchased 10 properties for an aggregate cost of $440.4 million, completed four build-to-suits for $105.5 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 $117.8 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 10 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

In 2012 and 2013, LXP completed a total of 12 build-to-suit projects for an aggregate capitalized cost of $213 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.

Weak Liquidity

For the period Jan. 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 0.8x. Under a scenario whereby 80% of LXP's maturing pro-rata secured debt is refinanced with new secured debt, liquidity coverage improves to 1.4x.

LXP may choose to pre-pay some of its 2015 maturities in 2014. The company has demonstrated access to various forms of debt capital, mitigating near-term refinance risk. Debt maturities are modest in 2014 when 6% of debt matures but somewhat elevated in 2015 when 14.7% of debt matures. LXP's dividend payout ratio was 83% in 2013 as compared to 75% in 2012. 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 6.3x as of Dec. 31, 2013);

--Fitch's expectation of fixed-charge coverage sustaining above 3.0x for several quarters (coverage was 2.4x for the year ended Dec. 31, 2013);

--Fitch's expectation of UA/net UD sustaining above 3.0x (this ratio was 2.8x as of Dec. 31, 2013).

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 base case liquidity coverage ratio was 0.8x as of Dec. 31, 2013).

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:

Criteria for Rating U.S. Equity REITs and REOCs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700091

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

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