LXP

Business Context and Reporting Period

Company: Lexington Realty Trust (LXP Industrial Trust)

Filing Type: Form 10-Q (Quarterly Report)

Period Ended: March 31, 2007

Business Overview: A self-managed REIT owning a geographically diversified portfolio of net-leased office, industrial, and retail properties. As of March 31, 2007, the Company held interests in approximately 365 properties across 44 states and the Netherlands.

Key Event: The reporting period reflects the first full quarter following the merger with Newkirk Realty Trust, Inc., completed on December 31, 2006. This merger significantly expanded the Company's asset base and operations.

Key Financial Metrics

*Note: Q1 2006 debt figures are not directly comparable due to the Newkirk merger occurring in late 2006. Q1 2007 debt includes $450M in new Exchangeable Notes and $200M in Trust Preferred Notes.

Material Changes vs. Prior Period

• Revenue Growth: Total gross revenues increased by $43.5 million (84%) year-over-year. This was driven primarily by a $42.7 million increase in rental revenue resulting from the Newkirk merger.
• Expense Increases:
  • Depreciation and amortization rose by $34.8 million due to the expanded portfolio.
  • Interest and amortization expense increased by $15.6 million.
  • General and administrative expenses increased by $3.2 million, attributed to higher trustee fees, personnel costs, and professional fees post-merger.
• Profitability: While Net Income decreased by $3.9 million, the Company reported a net loss allocable to common shareholders of $3.4 million compared to a profit of $2.0 million in the prior year. This shift was caused by increased preferred dividends ($1.5 million increase) and higher operating costs associated with the merger.
• Discontinued Operations: Income from discontinued operations decreased by $2.1 million, primarily due to a $2.7 million reduction in gains on sales of properties.

Guidance, Outlook, and Risks

Capital Markets and Liquidity

• Debt Refinancing: The Company issued $450 million in 5.45% Exchangeable Guaranteed Notes (due 2027) and $200 million in Trust Preferred Notes (due 2037). Proceeds were used to fully repay the MLP borrowing facility ($547.2 million) and the line of credit.
• Equity Issuance: Completed an offering of 6.2 million Series D Preferred Shares, raising net proceeds of $149.8 million.
• Share Repurchases: Repurchased approximately 4.1 million common shares/OP Units at an average price of $20.40, totaling $84.9 million. The Board authorized up to 10.0 million shares for repurchase.
• Dividends: Declared a common dividend of $0.375 per share (annualized $1.50). Preferred dividends were declared for Series B, C, and D.

Outlook and Risks

• Integration Risk: Management highlights the risk of failing to integrate operations and properties with Newkirk Realty Trust effectively.
• Interest Rate Risk: As of March 31, 2007, 100% of long-term debt was fixed-rate. A 100 basis point increase in fixed rates would have reduced net income by approximately $5.2 million for the quarter.
• Acquisition Strategy: Future net income growth is closely tied to the level of acquisitions. Without acquisitions, growth is limited to index-adjusted rents and cost controls.
• Subsequent Events: Post-quarter, the Company purchased a 70% interest in a non-consolidated entity for $82.6 million cash and assumed $156.6 million in debt, and repurchased an additional 443,000 shares.

Investor Verification Checklist

• Merger Impact: Verify the extent to which Q1 2007 results are driven by the Newkirk merger versus organic growth, noting that prior year comparisons are materially affected by the acquisition.
• Preferred Dividend Burden: Confirm the impact of the new Series D Preferred Stock issuance on future cash flow available to common shareholders.
• Debt Structure: Review the terms of the new $450M Exchangeable Notes and $200M Trust Preferred Notes, specifically regarding conversion features and redemption dates.
• Share Count: Monitor the reduction in common shares outstanding due to the active repurchase program and its effect on future EPS.
• Discontinued Operations: Assess the remaining portfolio of properties held for sale and the likelihood of future gains or losses on these dispositions.