LXP Industrial Trust (LXP) 2014 Q4 法說會逐字稿

Greetings, and welcome to the Lexington Realty Trust fourth quarter 2014 earnings conference call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn conference over to your host, Ms. Gabriella Reyes, Investor Relations for Lexington Realty Trust. You may begin.

Welcome to the Lexington Realty Trust fourth quarter and year end 2014 conference call. The earnings press release was distributed over the wire this morning and the release and supplemental disclosure package will be furnished on a Form 8-K. In the press release and supplemental disclosure package Lexington has reconciled all historical non-GAAP financial pressures to the most directly comparable GAAP measures in accordance with Reg G requirements.

If you did not receive a copy these documents are available on Lexington's web site at www.lxp.com in the Investors section. Additionally, we are hosting a live webcast of today's call which you can access in the same section. At this time we would like to inform you that certain statements made during this conference which are not historical may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Lexington believes expectations reflected in any forward-looking statements are based on reasonable assumptions, Lexington can give no assurance that its expectations will be obtained.

Factors and risks that could cause actual 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 and includes the successful confirmation of any leads, acquisitions, built to suit financing or other transaction, or the final terms of any such transaction. Lexington does not undertake a duty to update any forward-looking statements.

Joining me today from management are Will Eglin, Chief Executive Officer, Robert Roskind, Chairman, Richard Rouse, Vice Chairman and Chief Investment Officer, and Patrick Carroll, CFO. Now, I will turn the call over to Will.

Thanks, Gabby, and welcome everyone and thank you for joining the call today. I would like to begin by discussing our operating results and accomplishments for the fourth quarter and for the full year. For the fourth quarter of 2014 our Company funds from operations were $0.27 per share, which brought Company FFO for 2014 to $1.11 per share, a 9% increase compared to 2013 when Company FFO per share was $1.02.

Growth in 2014 was primarily driven by investment activity during the past year and refinancing savings. In the fourth quarter, we invested approximately $25 million in ongoing build to suit projects and loan investments, made three acquisitions for approximately $70 million, and sold four properties for approximately $167 million consistent with our portfolio management and capital recycling objectives. Our strong and extending leasing work continued and we executed leases totaling approximately 1.9 million square feet, raising renewal rents by 4.6% and ending the quarter with a more balanced rollover schedule.

These accomplishments furthered our objectives to continually improve our portfolio and strengthen our cash flows while also reducing the risk associated with lease rollover. Our overall portfolio was 96.4% leased at year end which was down 120 basis points compared to third quarter but consistent with our previously communicated expectations. Overall, in 2014 we acquired six properties for approximately $122 million, invested approximately $32 million in three build to suits that were completed during the year and invested approximately $90 million in build to suit projects under construction.

Our single tenant investment pipeline is sizeable compared to a year ago and we are optimistic about our investment opportunities in 2015. Based on transactions closed or under contract we expect purchases to total approximately $200 million to $225 million in 2015, and we expect to fund approximately $125 million to $150 million in underway build to suit projects.

In addition, we are very optimistic that our pipeline will grow considerably as the year progresses. Cap rates on our forward build to suit and purchase pipeline average about 7% on a cash basis and 8.2% on a GAAP basis. Although the market is competitive, we believe investment opportunities are plentiful and yields are attractive to us when compared to our financing costs. While build to suits do not generate cash flow or funds from operations until construction is completed we believe this strategy creates significant value for shareholders by adding modern buildings with long-term leases to our portfolio and capturing stabilized yields well above current cap rates in the acquisition market.

In addition, we believe the long-term leases with escalating rents we have been adding to the portfolio are strengthening our future cash flows by extending our weighted average lease term, balancing our lease expiration schedule, reducing the average age of our portfolio and supporting our dividend growth objectives. We also continue to execute our disposition strategy and in the fourth quarter we made good progress on our capital recycling efforts selling approximately $167 million of non-core assets from the portfolio consisting of two vacant office properties and two suburban office properties. Overall, during 2014 we completed 16 sales for approximately $282 million at a cap rate of approximately 7% with 77% occupancy taking advantage of market demand and pricing to meaningfully upgrade our portfolio and reduce our exposure to office properties.

We continue to focus our efforts on dispositions from a strategic perspective augmenting the transformation of our portfolio and providing cost-effective timely capital to support investment activity while executing a strategy that will reduce our office market exposure so that our portfolio is concentrated in fewer larger markets. On page 21 of the supplemental we have included a table showing the markets where we derive most of our single tenant office revenue.

Our current expectation for 2015 is that dispositions will be approximately $300 million to $350 million, an increase from our prior guidance of $200 million to $300 million of dispositions. Of this total, multi-tenant dispositions could total $150 million to $180 million, conveyances to mortgage lenders of vacant buildings could total approximately $62 million and other dispositions could total up to $100 million. Asset values continue to be strong and dispositions continue to be an attractive option for us especially as we look at monetizing certain formerly vacant or under occupied properties that we have now leased up to high levels of occupancy.

We are currently marketing Sea Harbor Center in Orlando, Florida and Transamerica Tower in Baltimore, Maryland and would expect to market our Palm Beach Gardens Florida property later this year as we continue to monetize, stabilize non single tenant properties. Such capital recycling will allow us to create liquidity to redeploy into our investment pipeline including our build to suit projects. Although this approach can have a near term dilutive impact on funds from operations, it should result in the creation of long-term value for shareholders.

One of our strategic objectives with respect to our disposition activity is to achieve a better balance between office and industrial revenue in the part of our portfolio that has lease terms shorter than 10 years. The office to industrial revenue mix in this part of our portfolio historically had been running about 3:1, but for 2014 was 2.7:1 and we continue to be focused on managing the ratio down to 2:1 over the next several years. The continued targeted sale of certain office buildings will speed this transition and make our portfolio less capital intensive to manage over time.

With regard to our leasing, we have continued to achieve a steady pace of activity. In the fourth quarter of 2014, we executed approximately 1.9 million square feet of new leases and lease extensions bringing our total for the year to 5.1 million square feet and our 2015 expirations now represent just about 3.2% of our GAAP revenue.

During the quarter, as expected and as detailed on page 17 of the supplemental, we had leases totaling 681,000 square feet on single tenant buildings which expired and were not renewed or were terminated. Four of these properties which generated funds from operations of approximately $4 million in 2014 may be conveyed to mortgage lenders in full satisfaction of approximately $62 million of non recourse debt. Overall, during the quarter we extended six leases with annual GAAP rents of $5.7 million which is 4.6% greater than the previous rents, and cash rents also increased by 4.6% on renewals.

Our same store cash NOI increased 0.6% for 2014 and decreased 1.3% during the fourth quarter of 2014 compared to the fourth quarter of 2013 primarily reflecting the impact of negative leasing spreads on renewals. Looking forward, as previously disclosed, although the impact is not material at this point, renewal rents are likely to be under pressure through 2015 before improving in 2016. We currently have 2.8 million square feet of space which is vacant or subject to leases that expire through 2015.

We believe that by the end of this year we can address roughly half of such expiring or vacant square footage primarily through dispositions, and, secondarily, through leasing. After extending the lease on our Westerville, Ohio property we now have eight single tenant buildings with expiring leases in 2015, five of which are office buildings. Together, these eight properties generate approximately $9.3 million of annual rental revenue in 2014 and we are expecting five of these properties to become vacant representing about $7 million of annual rental revenue. The bulk of which is in the three office properties located in Southfield, Michigan, Lakewood, Colorado, and Foxborough, Massachusetts that we have discussed on previous calls.

In our guidance, we assume that these properties will be vacant through the end of 2015. Beginning in the second half of 2015, we expect tenant retention to improve and, as mentioned above, we just extended one lease with inventive communications for over ten years, starting to put this concentrated period of tenant move outs behind us as we move forward with the portfolio with a substantially lower risk profile.

Beyond this, as we execute our acquisition and capital recycling strategy, we expect that our portfolio is likely to include a greater number of leases with annual or other rent increases which we ultimately expect to support a sustained healthy growth rate in net operating income. As a result of our leasing activity and new investments, as of December 31, 2014, approximately 41% of our rental revenue for the year ended December 31, 2014 came from leases of 10 years or longer and we are well on our way to achieving our interim goal of deriving at least half of our revenue from leases 10 years or longer.

Once this target is achieved we expect to raise the target further and continue building a diversified portfolio of long-term net leases with stable growing cash flow. With the weighted average lease term in our acquisition pipeline of approximately 18 years, reaching these goals will become more visible as we add new assets to our portfolio. Our single tenant lease rollover through 2019 has now been reduced to 29.1% of revenue from 38.5% of revenue one year ago and we no longer have concentrated risk of lease rollover in any one year.

By any measure we have made very good progress in managing down our shorter term leases and extending our weighted average lease term which is now approximately 12.1 years on a cash basis. Each of these metrics is an important measure of cash flow stability and we will continue to be focused on further improvement. The composition of our balance sheet continued to improve this past year and we have included details in our supplemental disclosure package on page 24 showing our credit metrics. We continue to pursue our goal of having 65% to 75% of our assets unencumbered and have reduced our secured debt to less than 20% of gross assets which is a target we have been working towards for a considerable time.

Our Company has few near term debt maturities. In 2015 we believe approximately $119 million of secured balloon debt will leave the balance sheet in connection with dispositions. And $110 million of balloon maturities are expected to be refinanced with unsecured debt or retired with cash. In addition, we will retire $30 million of secured debt through regular principle amortization. While we continue to unencumber assets, from time to time we may access secured financing when we believe it is advantageous to do so, particularly in connection with ground sale lease back transactions, or if financing for a term longer than 10 years is available, or we can effectively monetize the remaining revenue from the asset such as in a credit tenant lease financing.

In the first quarter we financed our ground investment on 45th street in Manhattan with a mortgage loan of $29.2 million representing a loan to value of 95% of our acquisition costs with a term to maturity of 10 years and a fixed interest rate of 4.1% which provides substantial positive leverage on this investment. We also locked rate on a $51.7 million first mortgage with a 13-year term to maturity and a fixed interest rate of 3.5% on our Fed Ex facility in Long Island City. This loan is at 100% of our acquisition cost and is expected to close in the first quarter of 2015. While we continue to unencumber assets we will finance fewer and fewer properties with mortgages.

But when we do, we will seek to maximize proceeds and take advantage of market opportunities when they are favorable. We believe the Company has substantial financial flexibility with approximately $385 million of current availability under its revolving credit facility and a stronger than usual cash position. We continue to find dispositions of multi-tenant properties attractive and are maintaining line capacity and cash in advance of what we expect to be a growing investment pipeline. Our forward funded commitments total approximately $550 million with about $440 million remaining to be funded. At the end of the quarter, our weighted average cost of debt was 4.5% and our weighted average term to maturity was seven years.

We continue to believe that current rates on long-term financing remain quite attractive and that there is great value in locking in fixed rates on long-term debt at this time. Turning to guidance, we provided a guidance range of Company funds from operations per diluted share of $1.00 to $1.05 per share for 2015, and we've added additional disclosure to our supplemental with respect to NAREIT defined FFO. As we have previously discussed, the main factors impacting our forecasted Company FFO per diluted share in 2015 include a reduction in occupancy that started with fourth quarter of 2014, several anticipated upcoming vacancies, the expected dilutive impact of disposition activity and the effect of carrying unusually high cash balances in advance of build to suit fundings and acquisitions.

While our guidance reflects several near term challenges with respect to occupancy, we continue to be extremely positive about our prospects and believe the year ahead will reflect additional growth and progress and we remain committed to our strategy of enhancing cash flow growth and stability, growing our portfolio in a disciplined manner with attractive long-term lease investments and maintaining a strong and flexible balance sheet to allow us to act on opportunities as they arise. Now, I'll turn the call over to Pat who will take you through our results in more detail.

Thanks, Will. During the quarter Lexington had gross revenues of $108 million comprised primarily of lease rents and tenant reimbursements. The increase compared to the fourth quarter of 2013 of $7.5 million relates primarily to the acquisition and build to suit projects coming online. For the quarter and year ended December 31, 2014, GAAP rents were in excess of cash rents by approximately $15.6 million, and $44.6 million, respectively. On page 19 of the supplement, we have included our estimates of both cash and GAAP rents for 2015 through and including 2019 for leases in place at December 31, 2014.

We also included same store NOI data and the weighted average lease term of our portfolio as of December 31, 2014 and 2013. Property operating expenses increased $2.6 million primarily due to the increased use in occupancy in multi-tenanted properties with a base year cost structure. The acquisition of properties with full recovery of operating expenses and the net impact of management of certain properties being transferred between us and the tenants. General and administrative expenses decreased $1.5 million primarily due to reduced personnel compensation. Non-operating income increased $1.1 million related primarily to interest earned on our loan portfolio.

Interest and amortization expense increased $1.8 million primarily due to the issuance of our 4.4% bonds and the $213.5 million mortgage on our New York City land deals. Gain on sales of financial assets relates to the sale of our property subject to a capital lease and the sale of certain marketable securities. Debt satisfaction charges net of $1.5 million relate to the retirement of $8.6 million of our 6% notes via the issuance of common shares and a cash payment of $171,000.

During the fourth quarter of 2014, we incurred impairment charges on our property and loan portfolio of $21.2 million and recorded gains on sales of properties of $35.5 million. During 2014 and 2013 lessening to incur impairment charges on properties that are owned as of December 31, 2014 which are encumbered by non recourse mortgages. We have written the basis of these properties down to $37.8 million and the corresponding non-recourse mortgage debt is $61.8 million. On page 41 of the supplement we have disclosed selected income statement data for our consolidated but non-wholly owned properties and our joint venture investments. We also have included net non-cash interest recognized in the year ended December 31, 2014 on page 42 of the supplement.

For the year ended December 31, 2014, our interest coverage was approximately 3.2 times and net debt to EBITDA was approximately 5.7 times. Now, turning to the balance sheet. We believe our balance sheet is strong as we have continued to increase our financial flexibility and capacity. We had $208.5 million of cash at quarter end including cash classified as restricted. Restricted cash balances relate to money primarily held with lenders as escrow deposits on mortgages.

We believe this cash position provides us with the financial flexibility needed in 2015. At year end we had about $2.1 billion of consolidated debt outstanding which had a weighted average interest rate of 4.5%, all of which is at fixed rates. We have entered into LIBOR swaps on both the $255 million outstanding on our term loan which matures in 2019, and the $250 million outstanding on our term loan which matures in 2018.

The current spread components on our 2019 term loan can range from 1.5% to 2.25% and is currently 1.75%, and on the 2018 term loan can range from 1.1% to 2.1%, and is currently 1.35%. A significant component of other assets and liabilities are included on page 42 of the supplement. During the quarter ended December 31, 2014 we paid approximately $2.1 million in lease costs and approximately $5.4 million in tenant improvements. For 2015 we project to spend approximately $23 million in these costs.

We have also included on page 14 of the supplement the funding projections for our current build to suit projects and our forward commitments along with the historical NOI recognized on build to suit projects that have come online. As it relates to build to suit projects since we fund the construction costs and on the take out upon completion we do not recognize interest income during the construction or any rental revenue until the project is complete and the tenant takes occupancy.

Our basis in the project upon completion is the actual cash we spend in the funding plus any capitalized cost we recognize in accordance with GAAP. We capitalize interest using our overall borrowing rate which is approximately 4.5%. In the current period we have expanded our disclosure surrounding funds from operations. Historically, we have shown our FFO on a fully diluted basis as if all our securities that are convertible to common shares are in fact converted. In the current period with prior periods restated to follow current year presentation we continue to show FFO fully diluted as before but have also added a sub total titled FFO available to common shareholders and unit holders-basic.

This shows our FFO impacted only for the conversion of OP units and is more in line with the NAREIT definition and other UPREITs that report in this manner. We still believe fully diluted is the most appropriate presentation and therefore we have continued to disclose this. Hwever, we have added this additional disclosure based upon requests of investors and analysts.

Now, I would like to turn the call back over to Will.

Thanks, Pat. As we look ahead this year we expect to continue to execute on our strategies to build an even better and stronger Company especially after dealing with the leasing challenges through the first half of 2015. The impact of our acquisition activity combined with our capital recycling is improving the composition of our portfolio and is driving long-term cash flows that are far more secure given our extended weighed average lease term and the number of leases we have with annual or other escalations.

We expect to continue to execute proactively on leasing opportunities in order to maintain high levels of occupancy and further address lease expirations, unlock values on noncore properties and certain fully valued properties with a bias towards reducing our suburban office and multi tenant exposure, capitalize on refinancing opportunities and invest in build to suit properties and other investment opportunities to drive cash flow growth and value for all of our shareholders.

We believe our Company remains well positioned with an attractive dividend yield, a modest FFO payout ratio and a strong cash position. We remain encouraged by the opportunity to continue to execute on our strategies to improve our cash flow, enhance our portfolio and provide ongoing value creation for our shareholders. Operator, I have no further comments at this time so we are ready for you to conduct the question and answer portion of the call.

(Operator Instructions). Our first question comes from the line of Sheila McGrath from Evercore ISI. Please proceed with your question.

Good morning, Will. I wondered if you could give us a little bit more detail on the 95% loan to value that you mentioned on the ground lease investment? Can you remind us, again, how you view these ground lease investments from an IRR unleveraged and leveraged basis versus other net lease investments? And also, if you see this as a trend that underwriting is going on loan to values much higher or was this just a unique circumstance?

Sure. Recall that we talked with this investment on the call last quarter. This was a 99 year ground lease in Manhattan. The going in cap rate was 4.93% with annual rent escalations and it was structured with a repurchase option so that our price at the end of 25 years would give us an unleveraged IRR of 7.5%. Which we think is very attractive for a very secure Manhattan ground parcel especially when you look at a suburban office investment where you might have vacancy or a lot of CapEx required to sustain occupancy and cash flow over a comparable holding period.

So, when we went to leverage the investment it was a great execution that reflected the fact that we had a very secure position and we ended up doing a 10 year financing at a fixed rate of 4.1% with roughly 95% loan to value and that is going to generate a very giant return on equity for us and a leveraged IRR of probably 18% to 20% depending on what the value is in 11 years.

So, we think it is a great outcome for us. Obviously it is not a leverage neutral transaction but it a case where we can use non-recourse financing to generate an attractive return on equity relative to the risk on the investment. So the emergence of higher loan to value financing is a theme in the marketplace this year. And it has driven down cap rates on other ground lease type investments that we have looked at. But it is also creating disposition opportunities for us to sell assets to buyers using higher leverage that are going to allow us to execute we think a little bit better on the disposition side of our business plan.

Okay. Thank you. And one other quick question. ARCP has arguably been sidelined from aggressively investing in net lease like they have in the past couple of years. I'm just wondering if you see any evidence of that in the market benefiting either pricing or competition on acquisitions?

We think it is a meaningful benefit to us that they are less active in the market. We think all told they were probably a $7 billion acquirer give or take last year. So to have such a large investor be on the sidelines, I suppose, should be meaningful for us from an opportunity standpoint. We are more optimistic about acquisition volume this year as a result. I guess cutting against that a little bit is that even with treasury yields having backed up in the last couple of weeks they are still probably low compared to a year ago. And the availability of pretty aggressive leverage for buyers is going to keep cap rates comparable, I suppose, adjusted for RPB outside of the market. I think for us it means that we will win more business this year than we would have last year. So from our standpoint that is a favorable development in our business.

Okay. Thank you.

Our next question comes from the line of Craig Melman from KeyBanc Capital markets. Please proceed with your question.

Hi, guys. Maybe staying on the LAN investments for a bit. I guess it was reported in the news that the LMN Times Square is potentially being put up for sale. Does that change at all the purchase options or any of the aspects of the deal that you guys have in place with the existing owners?

No.

Okay. And then just looking through the tenant list, you guys have Baker Hughes which I know is being back filled by Schlumberger. Does Schlumberger have any contraction or early expiration options that we need to worry about?

No.

And then maybe you could talk a little bit more about the private school investment. Is this an ongoing relationship you guys think you are going to have? How big could that segment become?

From a relationship standpoint that is our fourth joint venture with SEDCO Capital and when we do joint venture with SEDCO it sends to be in asset classes that are outside what we would think of core office or industrial. So we don't have any plans right now to expand in the education segment but that was a transaction that we were interested in principally from the standpoint of being able to build the joint venture relationship with SEDCO.

But we like the company, had a 20 year lease at a going in cap rate of about 7.5% is an attractive yield opportunity for us. And inside a joint venture where we are also earning fee income and the chance to promote, it is an important part of our strategy. It hasn't become that meaningful yet but we would certainly like to continue to build our joint venture relationship with SEDCO.

One last one on disposition guidance being accelerated. Is that just you guys taking advantage of the market or did you guys get an asset stabilized quicker than you thought? Curious on your thoughts there relative to the last call?

There is more visibility with respect to executing the plan this year. The two substantial sales that we are working on that could show up in second quarter would be Sea Harbor Center outside Orlando and Transamerica Tower in Baltimore. The two of those together could be a couple hundred million dollars and this is where the bulk of the cash coming in to the Company would come from at least in the first half of half of the year.

As we looked at getting those properties up to a high level of occupancy we view this as the time to monetize them and, candidly, have a few successes from properties that were under leased or even fully vacant a few years ago.

Great. Thank you.

Our next question comes from the line of John Guinee from Stifel. Please proceed with your question.

Hello. John Guinee, here. Great. I'm looking out the window now at 100 light Transamerica, there are a couple guys touring it just so you know.

Thank you, John.

Good. At page 11 when you guys have basic FFO and diluted FFO is that actually NAREIT defined? You don't really say what it is.

The line that says FFO available to common shareholders and unit holders basic, that is in line with NAREIT. However, we do show it as the OP units have converted because we treat them as common share equivalents. So that, to me, if you are looking at NAREIT definition for an up REIT, that is the line I would focus on.

So, is it safe to say that you got some religion and you have a NAREIT defined FFO now?

I have been religious my entire life. We wouldn't discern analysts and shareholders who asked us and so we have put it in.

Catholic guild, right?

I don't have that, John.

If I'm doing the quick math on this and I look at the fourth quarter of 2014 what I see is basically about a $20 million deduct from $66.3 million of FFO to $46.6 million to get to FAD. If I annualize that, that's $80 million that is about $0.33 a share. Is that a decent deduct or is that a good ballpark so that if we take your FFO guidance of $1.00 to $1.05 and subtract $0.33, we get to an implicit FAD guidance?

Not necessarily. If you look at the tenant improvement and the lease course that is $7 million in the fourth quarter. I think we said we expect that to be about $23 million. As you annualize that, it's about $4 million too much going out the door. And the straight line rent number which is $16.2 million, that can not be annualized because remember how some of our tenants pay it goes back, some quarters are much higher than others.

If you look at the full year of 2014 of $47 million I would use that as a guide more than annualizing the $16 million. Remember, we do have some tenants that pay a lot of cash rent in the first quarter, none in the second, none in the second and a little bit more in the third. If you go in the supplement later on --

Page 19.

Page 19. Cash and GAAP rents are projected to be going forward. I would use that as really my straight line rent adjustment.

Can you do the math for us and kind of come up with a FAD number for 2015?

Well, the straight line rent adjustment would be about $43 million. And as we disclosed the TI leasing commissions would be about $23 million and the other items are pretty much in line with what they were for the full year.

Okay. So basically say $75 million divided by 243 million shares gets you to about a $0.30 deduct from FFO to FAD is that fair?

That is reasonable, John.

So that is basically a $0.30 deduct gets you to about a $0.70 to $0.75 FAD against a $0.68 dividend. How many more years do you think you have a dividend increase in you?

Our expectation is that when we put our cash to work this year and begin to turn construction and progress into cash flowing assets that we will be comfortable increasing the dividend at the end of this year which is their typical policy. And we will have been through this heavy period of move outs at the same time and we will have a weighted average lease term of probably 12 plus years with most of our assets having annual rent escalations in them. So I think the prospects for regular dividend growth at that point in time are probably better than they have ever been.

Great. Great. And then the last question is, in today's environment is it better debt to borrow off these ground leases or to borrow unsecured?

The financing and ground lease positions is extremely favorable that is for sure. We are doing a little bit of both. But the execution that we got on 45th street was extraordinary. If you look at the first ground transaction we did, we did a 70% loan to value financing. So that debt market has strengthened considerably relative to the unsecured market.

And if you look at the environment out there right now you are doing a basically the vast majority of your investments are a combination of build to suit on industrial and ground lease positions. Is that essentially your primary or exclusive target for 2015?

Build to suit and ground transactions?

Yes, build to suit industrial and then ground lease transactions?

We are active in the build to suit office market as well as long as we can get a 15 or 20 year lease term. I would say we are principally focused on build to suit and ground transactions. But it wouldn't surprise me at all if we did $150 million or $200 million of purchases this year. Those are transactions that aren't under contract right now so they are not scheduled out in the supplement but we do think, and it wouldn't surprise me if the bulk of that acquisition activity was in long-term lease industrial.

Great. Thank you very much.

Our next question cops from the lines of Jamie Feldman from Bank of America. Please proceed with your question. Your line is live.

Good morning. I just want to make sure I understand the moving pieces in the guidance assumptions. It sounds like you guys are thinking $200 million to $225 million of acquisitions and then what is the yield on that?

That is about a little bit above 7. And the bulk of that is there is $155 million in the preferred freezer transaction which is a fourth quarter close, Jamie.

Okay.

If you look in the supplemental there is a schedule of anticipated fundings through the year on transactions that we are contractually committed to today.

Okay. And then the $150 million of funding you said for underway investments, that is separate?

Yes, that is build to suit projects that are under construction.

And when do you think most of those deliver?

The fundings are throughout the year. We disclose the press release when we anticipate the build to suits as well as range from second quarter all the way through 2015. The second and third quarter of 2015 and then there's some that go out to 2016.

Okay. That is based on the schedule in the supplemental?

That's correct. Page 14 in the supplemental.

Great. Okay. And then you are saying $300 million to $350 million of dispositions and what is the yield on that?

I think when we look at the year in the aggregate I would hope that it comes in less than six. Although, several of those buildings are conveyances to lenders of zero revenue assets.

Okay. And then is there a same store NOI assumption?

No. The impact of losing occupancy would mean that same store would likely be negative but we will have to see how long those assets stay in the same store portfolio to be able to give you a more accurate read.

Okay. All right. That's helpful. I appreciate your time.

Our next question comes from the line of Charles Grossen from Jefferies. Please proceed with your question.

Good morning. Thanks for taking the questions. I'm filling in for Tayo this morning. Following up on the guidance question there, just trying to figure out what all of the elements are here because you guys were behind the street and it doesn't look like there was that much that changed from what you announced per your release earlier this year with the exception being the increased dispositions.

So I guess I'm just trying to figure out whether anything on an operational basis has changed. Whether you are seeing a little bit more of negative rental spread, whether there is more timing of the dispositions in the first half of this year as opposed to the back half. If you can tease that out a little bit more, I would appreciate that. Thank you.

Sure. After the disposition activity in fourth quarter we have more cash on balance sheet right now than we have had probably in, I'm guessing, five or six years. The disposition activity we think will be heavier and we think the bulk of it probably hits in second quarter. To the extent we complete transactions on Light Street and Sea Harbor Center.

The lower end of our guidance assumes that we run the Company with robust cash balances in the first part of the year. Improved earnings outcome would come if we are able to close some of these potential acquisitions in the first half of the year. The other thing I would point out is we have for the last few years generally run the Company with 97.5% to 98% occupancy and we have been pretty consistent about telling people that we think anything above 96% should be considered full so the higher occupancy was a luxury but sort of an easy thing to get used to.

And the other thing I would comment on, it is one thing to lose occupancy in industrial buildings where there is lots of square footage but the rent per square foot isn't that high, but losing in office impacts the results much more severely. And the other anything we would want to make sure of looking at everybody's models and assumptions is that we have got the negative carry on these empty buildings right. I don't think it is necessarily any one thing.

We tend to be fairly draconian when we look at our leasing projections for the year and in fact in our guidance we don't assume that we lease any of our vacant square footage. We do plan to sell some of this, principally through disposing of properties to lenders, but beyond that, we are assuming in our guidance that our vacant square footage stays vacant so hopefully there is room for some positive outcomes as the year progresses. With respect to leasing spreads, we don't think they are material on renewals at this point in either 2015 or 2016 so at least from that standpoint that shouldn't be part of the story here.

Okay. That is helpful. And just to follow up on that real quick, that portion of vacant buildings that are not up for disposition, do you have a sense of the impact that might be on towards an upside to guidance for 2015?

We will have to wait and see. Until we have very clear visibility on leasing activity we try not to get ahead of ourselves with respect to what its impact would be on guidance.

That is helpful and then just one last one for me. Just switching gears here towards oil and gas. Just wanted to see if you guys are hearing anything in terms of the leasing slowdown or difficulty in rents or in concessions and such and particularly the Houston market given the ongoing decline in oil prices? Thanks.

Well, as it relates to our portfolio in Houston, I mean our lease terms are very long. You know, 2021, 2025, 2033, 2038. So for the most part we are not really that impacted by it because we are not out there leasing up vacant space in the Houston market.

And one building that we have coming off lease in Houston where we would expect a vacancy that this year we have under contract for sale now and it is not a substantial asset. We are pretty well locked in with no rollover until 2018 so hopefully that is enough time to get through whatever near term softness there is in Houston.

Got you. Okay. Thanks for answering the questions.

Our next question comes from the line of Todd Stender from Wells Fargo Securities. Please proceed with your question.

Thanks, guys. Will, you just mentioned you have one asset in Houston under contract for sale. Looks like you sold a retail asset in Florida so far in Q1. What else do you have under contract? What kind of visibility do you have on dispositions in the near term?

Not very much under contract right now, Todd. But we are pretty far along in the marketing process on Sea Harbor Center and Transamerica Tower so we are optimistic that by the time we get to our next conference call we will have a clearer discussion of what the outcome will be for those assets.

Great.

In the first half of the year those are the most material potential dispositions.

Okay. Thank you. You were recently repaid on your Norwalk loan. Just looking at the other remaining office loans both of which come due this year. The Southfield, Michigan, the borrower's in default. On the Westmont, Illinois is due in October. If you could just kind of speak to the probability the Southfield loan being repaid and then any details on the probability of a timely payoff for Westmont?

We believe they will both be foreclosures. We will get the properties back.

Sure. And then can you walk through the strategy, your encumbering the Fed Ex facility in Long Island City, sounds like a great LTV, but also seems that you will be awash in cash this year. And you're also trying to increase the unencumbered portfolio. Can you go through the thought process with that facility?

Yes, absolutely. What we are doing, Todd, is every once in awhile we using secured financing where we can get high loan to value financing like we did essentially financing our Long Island City building at our acquisition cost and getting 95% loan to value on the ground lease transaction. What will happen is over time more and more of our assets will become unencumbered but when we encumber them we'll use higher loan to value financing. So we are doing two things.

We are financing fewer and fewer assets but when we do they are at higher loan to value. So there is two things going on as our mortgages come due. We are unencumberring assets and we don't plan on refinancing any mortgage maturities this year or next year with other mortgages. But that doesn't mean we are entirely out of the financing market especially when we can get max-funded financing or a term of longer than 10 years where we are getting maturities that are longer than what we might get in the bond market.

Thanks, Will. Finally, when you're looking at the increase in disposition assumptions for this year, any of the proceeds going to be used for 1031 exchanges or should we expect any gains that might result in a special dividend?

1031.

Great. Thanks.

Our next question comes from the line of Anthony Paolone, from JPMorgan. Please proceed with your question.

Thanks. And good morning. Will, can you just run through some of the bigger buckets like industrial versus office investment grade or not and where cap rates are in terms of what you are seeing out there?

If we look at the forward pipeline going in cap rates range from 6 to 7.75, and obviously the ConAgra and Dow Chemical transactions that we have underway or that we have committed to are investment grade and we have a couple of other transactions that we would hope to have under our control in the next 60 to 90 days that are 15 and 20 year investment grade lease transactions. And those tend to be toward right at the lower end of the cap rate range. But we continue to be active in the sub investment grade credit area as well. It is a little bit of a mix. In the build to suit area, that is generally where we have had, I suppose, the best luck getting long-term leases with high grade credit.

And we will continue to exploit those opportunities as they become available to us. I would say the mix of transactions that we are looking at right now is a little bit more skewed toward industrial than office. But given the rent and cost per square foot of office buildings if we got one or two office buildings in the pipeline that could skew things the other way from a value standpoint.

Make sure I understand that 6 to 7.75, that is for build to suit type transactions, or that is your whole pipeline?

That is the whole pipeline.

What is the spread like between similar assets that you commit to on a build to suit basis versus an existing up and running net lease property that you can just buy straight up? What kind of spread do you currently get for taking the forward risk?

It largely depends on how far forward it is. I think on certainly 50 to 75 basis points but if you are committing two years forward on an office transaction it is going to be wider than that. Maybe to 100 or 125. We would think, for example, the Dow Chemical transaction which we will have a 7.3% going in cap rate for, if that were coming to market today would probably trade at 6. But, when we committed to that it was a two year forward.

Okay. Got it. Thank you.

Our next question comes from the line of Bill Siegel from Development Associates. Please proceed with your question.

Thank you very much. I think that Key Bank touched on it, I see this Houston Texas private school, what kind of a private school is it?

Kindergarten through high school.

K through 12.

A local operator or is it a charter school sort of thing?

No, it is the British school so it is not a local operator and it is not charter.

Terrific from a small investor, I would love to see you stay away from the for profit colleges. This seems like a much better model.

Yes.

On the Sea Harbor disposition in Orlando, did you say it is under contract?

It is not under contract but at this point but we are pretty deep into the process of picking a buyer.

Terrific. And the only reason you are getting rid of it is it doesn't meet your single tenant criteria? Is it paying its way at the present?

It is paying its way. This building was empty a few years ago and part of what we do when we have an empty building is sometimes we convert it to multi-tenant and try to lease it up to a high level of occupancy and then sell it once it is stabilized so that is really what is driving it. We reached a high level of occupancy and it is not core to us so our view is once the value has been created we should turn it into cash and put the cash back into single tenant investments.

Wonderful.

So that is what we are in the process of doing there.

Thank you, gentlemen. Appreciate it.

Our next question comes from the line of Mel Cutler from Cutler Capital. Please proceed with your question.

A very simple question what do you see for share issuance during 2015?

We don't have any share issuance in our guidance. Our preferred strategy for freeing up capital to put to work in our acquisition pipeline is to utilize cash and disposition proceeds. As I mentioned earlier, we have got several multi-tenant buildings that we have now leased up that we can turn into a fair amount of cash during the year so that is what we are focused on right now, Mel.

Most of my other questions have been answered. Thank you.

Okay. Thanks.

There are no further questions in queue. I would like to hand the call back over to management for closing comments.

Once again, thank you for joining us this morning. We continue to be very excited about our prospects for this year and beyond and, as always, we appreciate your participation and support. If you would like to receive our quarterly supplemental package please contact Gabriella Reyes or you can find additional information on the Company on our website at www.lxp.com. And in addition, as always, you may contact me or the other members of our senior management team with any questions. Thanks again.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful day.