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Lexington Realty Trust Sells $726 Million Office Portfolio as Focus Shifts to Single-Tenant, Net-Leased Industrial Properties

Davidson Kempner Buys 80% Interest with Lexington Holding Remainder of Joint Venture
September 4, 2018
The 200,000-square-foot AvidExchange office building in Charlotte, North Carolina, was one of 21 Lexington Realty Trust sold to a new joint venture.

Lexington Realty Trust sold its majority ownership in a portfolio of 21 office buildings for $726 million to a joint venture with Davidson Kempner Capital Management LP as it transitions its focus to industrial property away from offices.

Lexington, which will retain a 20 percent interest in the new joint venture, will still manage and collect asset management fees under the new ownership arrangement.

Davidson Kempner is a U.S.-registered investment firm based in New York, with affiliate offices in London, Hong Kong and Dublin.

"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," T. Wilson Eglin, chief executive of Lexington, said in a statement on the portfolio sale.

Following the transaction, Lexington's percentage of industrial assets based on consolidated revenue is expected to increase to 60 percent from 44 percent at year-end 2017.

Lexington received net cash proceeds of about $565 million at closing, with $38 million held in escrow for a Richmond, Virginia, asset pending lender confirmation that it is a permitted transfer and $264 million held by a qualified section 1031 intermediary.

"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," Eglin said.

The 21 properties are spread across markets from Nevada to New Jersey and total 3.8 million square feet. The buildings are 98.6 percent leased with a weighted-average remaining lease term of about 9.5 years and a weighted-average age of 23 years.

For the six months ended June 30, cash net operating income for the properties totaled about $28.5 million.

The joint venture is expected to assume about$57 million of non-recourse financing secured by the Richmond asset. The joint venture assumed about $46 million of non-recourse financing secured by an asset in Charlotte, North Carolina, and obtained a $363 million non-recourse mortgage loan secured by the remaining 19 buildings, which provides for an additional $10 million of borrowings for future leasing activity.

This new mortgage loan has an initial term of three years and may be extended by the joint venture for two additional terms of one year each, and it bears interest at a rate of one-month LIBOR plus 200 basis points.

As a result of the transaction, Lexington's revised disposition guidance for 2018 is expected to be up to an estimated $1 billion. Year-to-date, the REIT has completed $966 million of dispositions.

For more information on thsi transaction, please refer to CoStar sale comp #4500000.

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