Lexington Realty Trust has disposed of a 21-office asset portfolio for $726 million at GAAP and cash capitalization rates of 8.6% and 8.1%, respectively to a joint venture between affiliates of Davidson Kempner Capital Management LP and Lexington. DKCM is a U.S.-registered investment firm based in New York with affiliate offices in London, Hong Kong and Dublin. Following the transaction, Lexington’s percentage of industrial assets based on consolidated revenue is expected to increase to 60% from 44% at year-end 2017.
Wilson Eglin, Chief Executive Officer of Lexington stated, “This transaction marks a major step forward as we execute on our strategy to efficiently recycle capital out of suburban office properties and concentrate our portfolio on single-tenant net-leased industrial properties. We intend to use transaction proceeds to continue to acquire high-quality industrial properties and repay our revolving credit facility and other debt, which we believe is the best path to create meaningful long-term shareholder value.”
Lexington received net cash proceeds of approximately $565 million at closing (with $38 million held in escrow for the Richmond, Virginia asset pending lender confirmation that it is a permitted transfer and $264 million held by a qualified section 1031 intermediary). The joint venture is 80% owned by affiliates of DKCM with Lexington retaining a 20% interest. Additionally, Lexington will collect asset management fees to manage the Properties and will participate in a promote structure created by the joint venture.
The properties are 98.6% leased and are comprised of approximately 3.8 million square feet with a weighted-average remaining lease term of approximately 9.5 years and a weighted-average age of 23 years. For the six months ended June 30, 2018, GAAP and cash net operating income and adjusted company funds from operations available to all equityholders and unitholders – diluted for the properties totaled approximately $30.7 million, $28.5 million and $27.9 million, respectively.
The joint venture is expected to assume approximately $57 million of non-recourse financing secured by the Richmond, Virginia asset. Additionally, the joint venture assumed approximately $46 million of non-recourse financing secured by the Charlotte, North Carolina asset and obtained a $363 million non-recourse mortgage loan secured by the remaining 19 assets, which provides for an additional $10 million of borrowings for future leasing activity. This new mortgage loan has an initial term of three years, but may be extended by the joint venture for two additional terms of one year each, and bears interest at a rate of one-month LIBOR plus 200 basis points, with an additional 15-basis points spread for each extension option. The joint venture purchased a two-year interest rate cap for the new mortgage, which caps one-month LIBOR at 4%.
As a result of the transaction, Lexington’s revised disposition guidance for 2018 is expected to be up to an estimated $1 billion at average GAAP and cash capitalization rates of 8.7% and 8.3%, respectively. Year-to-date, the company has completed $966 million of dispositions at average GAAP and cash capitalization rates of 8.5% and 8.1%, respectively.
Lexington now estimates that its net income attributable to common shareholders per diluted common share for the year ended December 31, 2018 will be within an expected range of $0.94 to $0.96.
Lexington Realty Trust is a publicly traded real estate investment trust that owns a diversified portfolio of real estate assets consisting primarily of equity investments in single-tenant net-leased industrial properties across the United States.