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Section 1: 10-Q (10-Q)

Document

 
 
 
 
 
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2018.
or
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _________________ to ________________
Commission File Number
1-12386 (Lexington Realty Trust)
33-04215 (Lepercq Corporate Income Fund L.P.)
 LEXINGTON REALTY TRUST
LEPERCQ CORPORATE INCOME FUND L.P.
(Exact name of registrant as specified in its charter)
Maryland (Lexington Realty Trust)
13-3717318 (Lexington Realty Trust)
Delaware (Lepercq Corporate Income Fund L.P.)
13-3779859 (Lepercq Corporate Income Fund L.P.)
(State or other jurisdiction of
incorporation of organization)
(I.R.S. Employer
Identification No.)
One Penn Plaza, Suite 4015, New York, NY 10119-4015
(Address of principal executive offices) (zip code)
(212) 692-7200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Lexington Realty Trust
 Yes x   No ¨
Lepercq Corporate Income Fund L.P.
 Yes x   No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
Lexington Realty Trust
 Yes x   No ¨
Lepercq Corporate Income Fund L.P.
 Yes x   No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Lexington Realty Trust:
 
 
 
 
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
Emerging growth
 
 
(Do not check if a smaller reporting company)
 
company ¨
Lepercq Corporate Income Fund L.P.:
 
 
 
 
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer x
Smaller reporting company ¨
Emerging growth
 
 
(Do not check if a smaller reporting company)
 
company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     
Lexington Realty Trust
 Yes ¨   No x
Lepercq Corporate Income Fund L.P.
 Yes ¨   No x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Lexington Realty Trust
 Yes ¨   No x
Lepercq Corporate Income Fund L.P.
 Yes ¨   No x
Indicate the number of shares outstanding of each of Lexington Realty Trust's classes of common stock, as of the latest practicable date: 239,983,245 common shares of beneficial interest, par value $0.0001 per share, as of May 4, 2018.
 
 
 
 
 
 
 
 
 
 



EXPLANATORY NOTE

This report combines the Quarterly Reports on Form 10-Q for the period ended March 31, 2018, which we refer to as this Quarterly Report, of (1) Lexington Realty Trust and its subsidiaries and (2) Lepercq Corporate Income Fund L.P. and subsidiaries. Unless stated otherwise or the context otherwise requires, (1) the “Company,” the “Trust,” “Lexington,” “we,” “our,” and “us” refer collectively to Lexington Realty Trust and its consolidated subsidiaries, including Lepercq Corporate Income Fund L.P. and its consolidated subsidiaries, and (2) “LCIF” or the “Partnership” refer to Lepercq Corporate Income Fund L.P. and its consolidated subsidiaries. All of the Company's and LCIF's interests in properties are held, and all property operating activities are conducted, through special purpose entities, which we refer to as property owner subsidiaries or lender subsidiaries, which are separate and distinct legal entities, but in some instances are consolidated for financial statement purposes and/or disregarded for income tax purposes.

The Company is the sole equity owner of (1) Lex GP-1 Trust, or Lex GP, a Delaware statutory trust, and (2) Lex LP-1 Trust, or Lex LP, a Delaware statutory trust.  The Company, through Lex GP and Lex LP, holds, as of March 31, 2018, approximately 96.0% of LCIF's outstanding units of limited partner interest, which we refer to as OP units. The remaining OP units are beneficially owned by E. Robert Roskind, Chairman of the Trust, and certain non-affiliated investors. As the sole equity owner of LCIF’s general partner, the Company has the ability to control all of LCIF’s day-to-day operations subject to the terms of LCIF’s partnership agreement.

OP units not owned by Lexington are accounted for as partners’ capital in LCIF’s unaudited condensed consolidated financial statements and as noncontrolling interests in the Trust’s unaudited condensed consolidated financial statements.

We believe it is important to understand the differences between the Trust and LCIF in the context of how the Trust and LCIF operate as an interrelated, consolidated company. The Trust’s and LCIF’s businesses are substantially the same, except that LCIF is dependent on the Trust for management of LCIF’s operations and future investments as LCIF does not have any employees, executive officers or a board of directors.  

The Trust also invests in assets and conducts business directly and through other subsidiaries.  The Trust allocates investments to itself and its other subsidiaries or LCIF as it deems appropriate and in accordance with certain obligations under LCIF’s partnership agreement with respect to allocations of non-recourse liabilities. The Trust and LCIF are co-borrowers under the Trust’s unsecured revolving credit facility and unsecured term loans.  LCIF is a guarantor of the Trust’s publicly-traded debt securities.  

We believe combining the quarterly reports on Form 10-Q of the Trust and LCIF into this single report results in the following benefits:

combined reports better reflect how management and the analyst community view the business as a single operating unit;
combined reports enhance investor understanding of the Trust and LCIF by enabling investors to view the business as a whole and in the same manner as management;
combined reports are more efficient for the Trust and LCIF to prepare, resulting in savings in time, effort and expense; and
combined reports are more efficient for investors to review, as they reduce duplicative disclosure and provide a single document for their review.

To help investors understand the significant differences between the Trust and LCIF, this Quarterly Report separately presents the following for each of the Trust and LCIF: (1) the unaudited condensed consolidated financial statements and the notes thereto, (2) Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, (3) Part I, Item 4. Controls and Procedures, and (4) Exhibit 31 and Exhibit 32 certifications.


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TABLE OF CONTENTS

PART I. — FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II — OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 

WHERE YOU CAN FIND MORE INFORMATION:
We file and furnish annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission, which we refer to as the SEC. You may read and copy any materials that we file or furnish with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We file and furnish information electronically with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file or furnish electronically with the SEC. The address of the SEC's Internet site is http://www.sec.gov. We also maintain a web site at http://www.lxp.com through which you can obtain copies of documents that we file or furnish with the SEC. The contents of that web site are not incorporated by reference in or otherwise a part of this Quarterly Report on Form 10-Q or any other document that we file or furnish with the SEC.


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Table of Contents


PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands, except share and per share data)
 
March 31, 2018
 
December 31, 2017
Assets:
 
 
 
Real estate, at cost
$
3,792,977

 
$
3,936,459

Real estate - intangible assets
564,947

 
599,091

 
4,357,924

 
4,535,550

Less: accumulated depreciation and amortization
1,179,078

 
1,225,650

Real estate, net
3,178,846

 
3,309,900

Assets held for sale

 
2,827

Cash and cash equivalents
90,214

 
107,762

Restricted cash
7,479

 
4,394

Investment in and advances to non-consolidated entities
17,485

 
17,476

Deferred expenses, net
30,098

 
31,693

Rent receivable – current
5,878

 
5,450

Rent receivable – deferred
56,038

 
52,769

Other assets
25,958

 
20,749

Total assets
$
3,411,996

 
$
3,553,020

 
 
 
 
Liabilities and Equity:
 

 
 

Liabilities:
 

 
 

Mortgages and notes payable, net
$
682,994

 
$
689,810

Revolving credit facility borrowings
100,000

 
160,000

Term loans payable, net
596,957

 
596,663

Senior notes payable, net
495,407

 
495,198

Trust preferred securities, net
127,221

 
127,196

Dividends payable
48,438

 
49,504

Accounts payable and other liabilities
27,284

 
38,644

Accrued interest payable
11,051

 
5,378

Deferred revenue - including below market leases, net
32,130

 
33,182

Prepaid rent
16,130

 
16,610

Total liabilities
2,137,612

 
2,212,185

 
 
 
 
Commitments and contingencies


 


Equity:
 

 
 

Preferred shares, par value $0.0001 per share; authorized 100,000,000 shares:
 

 
 

Series C Cumulative Convertible Preferred, liquidation preference $96,770; 1,935,400 shares issued and outstanding
94,016

 
94,016

Common shares, par value $0.0001 per share; authorized 400,000,000 shares, 239,972,103 and 240,689,081 shares issued and outstanding in 2018 and 2017, respectively
24

 
24

Additional paid-in-capital
2,811,213

 
2,818,520

Accumulated distributions in excess of net income
(1,647,804
)
 
(1,589,724
)
Accumulated other comprehensive income
1,311

 
1,065

Total shareholders’ equity
1,258,760

 
1,323,901

Noncontrolling interests
15,624

 
16,934

Total equity
1,274,384

 
1,340,835

Total liabilities and equity
$
3,411,996

 
$
3,553,020

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except share and per share data)
 
Three months ended March 31,
 
2018
 
2017
Gross revenues:
 
 
 
Rental
$
94,522

 
$
88,654

Tenant reimbursements
8,115

 
7,445

Total gross revenues
102,637

 
96,099

Expense applicable to revenues:
 

 
 

Depreciation and amortization
(46,537
)
 
(42,891
)
Property operating
(11,477
)
 
(12,116
)
General and administrative
(8,996
)
 
(9,457
)
Non-operating income
546

 
2,621

Interest and amortization expense
(20,331
)
 
(19,725
)
Impairment charges and loan loss
(53,049
)
 
(7,992
)
Gains on sales of properties
22,774

 
34,193

Income (loss) before provision for income taxes and equity in earnings of non-consolidated entities
(14,433
)
 
40,732

Provision for income taxes
(503
)
 
(422
)
Equity in earnings of non-consolidated entities
113

 
1,910

Net income (loss)
(14,823
)
 
42,220

Less net (income) loss attributable to noncontrolling interests
508

 
(180
)
Net income (loss) attributable to Lexington Realty Trust shareholders
(14,315
)
 
42,040

Dividends attributable to preferred shares – Series C
(1,572
)
 
(1,572
)
Allocation to participating securities
(70
)
 
(71
)
Net income (loss) attributable to common shareholders
$
(15,957
)
 
$
40,397

 
 

 
 

Net income (loss) attributable to common shareholders - per common share basic
$
(0.07
)
 
$
0.17

Weighted-average common shares outstanding – basic
238,072,081

 
237,179,526

 
 
 
 
Net income (loss) attributable to common shareholders - per common share diluted
$
(0.07
)
 
$
0.17

Weighted-average common shares outstanding – diluted
238,072,081

 
241,088,049

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited and in thousands)
 
Three months ended March 31,
 
2018
 
2017
Net income (loss)
$
(14,823
)
 
$
42,220

Other comprehensive income (loss):
 

 
 

Change in unrealized gain on interest rate swaps, net
246

 
1,292

Other comprehensive income
246

 
1,292

Comprehensive income (loss)
(14,577
)
 
43,512

Comprehensive (income) loss attributable to noncontrolling interests
508

 
(180
)
Comprehensive income (loss) attributable to Lexington Realty Trust shareholders
$
(14,069
)
 
$
43,332

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited and in thousands)

Three Months ended March 31, 2018
 
Lexington Realty Trust Shareholders
 
 
 
Total
 
Preferred Shares
 
Common Shares
 
Additional Paid-in-Capital
 
Accumulated Distributions in Excess of Net Income
 
Accumulated Other Comprehensive Income
 
Noncontrolling Interests
Balance December 31, 2017
$
1,340,835

 
$
94,016

 
$
24

 
$
2,818,520

 
$
(1,589,724
)
 
$
1,065

 
$
16,934

Issuance of common shares and deferred compensation amortization, net
1,660

 

 

 
1,660

 

 

 

Repurchase of common shares
(6,336
)
 

 

 
(6,336
)
 

 

 

Repurchase of common shares to settle tax obligations
(2,544
)
 

 

 
(2,544
)
 

 

 

Forfeiture of employee common shares
(78
)
 

 

 
(87
)
 
9

 

 

Dividends/distributions
(44,576
)
 

 

 

 
(43,774
)
 

 
(802
)
Net loss
(14,823
)
 

 

 

 
(14,315
)
 

 
(508
)
Other comprehensive income
246

 

 

 

 

 
246

 

Balance March 31, 2018
$
1,274,384

 
$
94,016

 
$
24

 
$
2,811,213

 
$
(1,647,804
)
 
$
1,311

 
$
15,624



Three Months ended March 31, 2017
 
Lexington Realty Trust Shareholders
 
 
 
Total
 
Preferred Shares
 
Common Shares
 
Additional Paid-in-Capital
 
Accumulated Distributions in Excess of Net Income
 
Accumulated Other Comprehensive Income (Loss)
 
Noncontrolling Interests
Balance December 31, 2016
$
1,412,491

 
$
94,016

 
$
24

 
$
2,800,736

 
$
(1,500,966
)
 
$
(1,033
)
 
$
19,714

Issuance of common shares and deferred compensation amortization, net
18,322

 

 

 
18,322

 

 

 

Dividends/distributions
(44,331
)
 

 

 

 
(43,291
)
 

 
(1,040
)
Net income
42,220

 

 

 

 
42,040

 

 
180

Other comprehensive income
1,292

 

 

 

 

 
1,292

 

Balance March 31, 2017
$
1,429,994

 
$
94,016

 
$
24

 
$
2,819,058

 
$
(1,502,217
)
 
$
259

 
$
18,854


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
 
Three Months ended March 31,
 
2018
 
2017
Net cash provided by operating activities:
$
56,221

 
$
57,438

Cash flows from investing activities:
 

 
 

Acquisition of real estate, including intangible assets

 
(48,250
)
Investment in real estate under construction

 
(42,298
)
Capital expenditures
(6,727
)
 
(3,330
)
Net proceeds from sale of properties
61,518

 
90,823

Net proceeds from sale of non-consolidated investment

 
6,127

Principal payments received on loans receivable

 
88,556

Investments in and advances to non-consolidated entities

 
(1,293
)
Distributions from non-consolidated entities in excess of accumulated earnings
157

 
371

Increase in deferred leasing costs
(609
)
 
(1,671
)
Change in real estate deposits, net
(3,102
)
 
12,229

Net cash provided by investing activities
51,237

 
101,264

Cash flows from financing activities:
 

 
 

Dividends to common and preferred shareholders
(44,840
)
 
(42,836
)
Principal amortization payments
(7,494
)
 
(7,913
)
Change in revolving credit facility borrowings, net
(60,000
)
 

Deferred financing costs
(32
)
 
(11
)
Proceeds of mortgages and notes payable
500

 

Cash distributions to noncontrolling interests
(802
)
 
(1,040
)
Issuance of common shares, net of costs and repurchases to settle tax obligations
(2,917
)
 
16,168

Repurchase of common shares
(6,336
)
 

Net cash used in financing activities
(121,921
)
 
(35,632
)
Change in cash, cash equivalents and restricted cash
(14,463
)
 
123,070

Cash, cash equivalents and restricted cash, at beginning of period
112,156

 
117,779

Cash, cash equivalents and restricted cash, at end of period
$
97,693

 
$
240,849

 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash:
 
 
 
Cash and cash equivalents at beginning of period
$
107,762

 
$
86,637

Restricted cash at beginning of period
4,394

 
31,142

Cash, cash equivalents and restricted cash at beginning of period
$
112,156

 
$
117,779

 
 
 
 
Cash and cash equivalents at end of period
$
90,214

 
$
177,301

Restricted cash at end of period
7,479

 
63,548

Cash, cash equivalents and restricted cash at end of period
$
97,693

 
$
240,849


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit and per share/unit data)


(1)
The Company and Financial Statement Presentation
Lexington Realty Trust (together with its consolidated subsidiaries, except when the context only applies to the parent entity, the “Company”) is a Maryland real estate investment trust (“REIT”) that owns a diversified portfolio of equity investments in single-tenant commercial properties.
As of March 31, 2018, the Company had ownership interests in approximately 170 consolidated real estate properties, located in 37 states. The properties in which the Company has an interest are primarily net leased to tenants in various industries.
The Company believes that it continues to be operated in a manner that enables it to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). Accordingly, the Company will not be subject to federal income tax, provided that distributions to its shareholders equal at least the amount of its REIT taxable income as defined under the Code. The Company is permitted to participate in certain activities from which it was previously precluded in order to maintain its qualification as a REIT, so long as these activities are conducted in entities which elect to be treated as taxable REIT subsidiaries (“TRS”) under the Code. As such, the TRS are subject to federal income taxes on the income from these activities.
The Company conducts its operations either directly or indirectly through (1) property owner subsidiaries and lender subsidiaries, which are single purpose entities, (2) an operating partnership, Lepercq Corporate Income Fund L.P. (“LCIF”), in which the Company is the sole unit holder of the general partner and the sole unit holder of the limited partner that holds a majority of the limited partner interests, (3) a wholly-owned TRS, and (4) investments in joint ventures. References to “OP units” refer to units of limited partner interests in LCIF. Property owner subsidiaries are landlords under leases for properties in which the Company has an interest and/or borrowers under loan agreements secured by properties in which the Company has an interest, but in all cases are separate and distinct legal entities. Each property owner subsidiary is a separate and distinct legal entity that maintains separate books and records. The assets and credit of each property owner subsidiary with a property subject to a mortgage loan are not available to creditors to satisfy the debt and other obligations of any other person, including any other property owner subsidiary or any other affiliate. Consolidated entities that are not property owner subsidiaries do not directly own any of the assets of a property owner subsidiary (or the general partner, member or managing member of such property owner subsidiary), but merely hold partnership, membership or beneficial interests therein, which interests are subordinate to the claims of such property owner subsidiary's (or its general partner's, member's or managing member's) creditors.
The financial statements contained in this Quarterly Report on Form 10-Q (this “Quarterly Report”) for the three months ended March 31, 2018 have been prepared by the Company in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, the interim financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results of the periods presented. Interim results are not necessarily indicative of the results that may be expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on February 27, 2018 (“Annual Report”).
Basis of Presentation and Consolidation. The Company's unaudited condensed consolidated financial statements are prepared on the accrual basis of accounting in accordance with GAAP. The financial statements reflect the accounts of the Company and its consolidated subsidiaries. The Company consolidates the wholly-owned subsidiaries, partnerships and joint ventures which it controls (i) through voting rights or similar rights or (ii) by means other than voting rights if the Company is the primary beneficiary of a variable interest entity ("VIE"). Entities which the Company does not control and entities which are VIEs in which the Company is not a primary beneficiary are accounted for under appropriate GAAP.

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit and per share/unit data)

The Company is the primary beneficiary of certain VIEs as it has a controlling financial interest in these entities. LCIF, which is consolidated and in which the Company has an approximate 96% interest, is a VIE. See the unaudited condensed consolidated financial statements of LCIF included within this Quarterly Report.
The assets of each VIE are only available to satisfy such VIE's respective liabilities. As of March 31, 2018 and December 31, 2017, the VIEs' mortgages and notes payable were non-recourse to the Company. Below is a summary of selected financial data of consolidated VIEs for which the Company is the primary beneficiary included in the unaudited condensed consolidated balance sheets as of March 31, 2018 and December 31, 2017:
 
March 31, 2018
 
December 31, 2017
Real estate, net
$
650,084

 
$
682,587

Total assets
$
698,201

 
$
766,025

Mortgages and notes payable, net
$
212,965

 
$
212,792

Total liabilities
$
220,940

 
$
226,331

Use of Estimates. Management has made a number of significant estimates and assumptions to prepare these unaudited condensed consolidated financial statements in conformity with GAAP, including, among others, those relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. These estimates and assumptions are based on management's best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors. Management adjusts such estimates when facts and circumstances dictate. The most significant estimates made include the recoverability of accounts receivable, the allocation of property purchase price to tangible and intangible assets acquired and liabilities assumed, the determination of VIEs and which entities should be consolidated, the determination of impairment of long-lived assets, loans receivable and equity method investments, the valuation of derivative financial instruments, the valuation of compensation plans and the useful lives of long-lived assets. Actual results could differ materially from those estimates.
Fair Value Measurements. The Company follows the guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, as amended (“Topic 820”), to determine the fair value of financial and non-financial instruments. Topic 820 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. Topic 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 - quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 - observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and Level 3 - unobservable inputs, which are used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as considering counterparty credit risk. The Company has formally elected to apply the portfolio exception within Topic 820 with respect to measuring counterparty risk for all of its derivative transactions subject to master netting arrangements.
Acquisition, Development and Construction Arrangements. The Company evaluates loans receivable where the Company participates in residual profits through loan provisions or other contracts to ascertain whether the Company has the same risks and rewards as an owner or a joint venture partner. Where the Company concludes that such arrangements are more appropriately treated as an investment in real estate, the Company reflects such loan receivable as an equity investment in real estate under construction in the unaudited condensed consolidated balance sheets. In these cases, no interest income is recorded on the loan receivable and the Company capitalizes interest during the construction period. In arrangements where the Company engages a developer to construct a property or provides funds to a tenant to develop a property, the Company will capitalize the funds provided to the developer/tenant and internal costs of interest and real estate taxes, if applicable, during the construction period.

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit and per share/unit data)

Reclassifications. Certain amounts included in the 2017 unaudited condensed consolidated financial statements have been reclassified to conform to the 2018 presentation.
New Accounting Standards Adopted in 2018. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows. In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which clarifies guidance on the classification and presentation of changes in restricted cash. Restricted cash balances are now included along with cash and cash equivalents as of the end of the period and beginning of period, respectively, in the Company's consolidated statement of cash flows for all periods presented. Restricted cash is comprised primarily of cash balances held in escrow by lenders. In addition, separate line items showing changes in restricted cash balances are now eliminated from the Company's consolidated statement of cash flows. These ASUs were effective for fiscal years beginning after December 15, 2017, including interim periods within those years. Entities must apply the guidance retrospectively to all periods presented but may apply it prospectively if retrospective application would be impracticable. The Company adopted these ASUs effective January 1, 2018 on a retrospective basis. The effect of the adoption resulted in a $33,978 increase in cash provided by investing activities and an increase in cash used in financing activities of $1,572 for the three months ended March 31, 2017.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU was effective for reporting periods beginning after December 15, 2017. The Company expects that acquisitions of real estate or in-substance real estate will not meet the revised definition of a business and thus will be treated as asset acquisitions. Acquisition costs for those acquisitions that are not businesses will be capitalized rather than expensed. The Company adopted this guidance effective January 1, 2018 on a prospective basis. The Company's adoption of this guidance did not have a material impact on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), as subsequently amended, which amends the guidance for revenue recognition to eliminate the industry-specific revenue recognition guidance and replace it with a principle based approach for determining revenue recognition. The new guidance was effective for reporting periods beginning after December 15, 2017. The Company’s revenue-producing contracts are primarily leases that are not within the scope of this standard as leases are excluded from ASU 2014-09. The Company expects that it may be impacted in its recognition of non-lease revenue, non-lease components of revenue from lease agreements (upon adoption of ASU 2016-02) and the timing of its recognition of real estate sale transactions. Under ASU 2014-09, revenue recognition for real estate sales is largely based on the transfer of control and the buyer having the ability to direct the use of, or obtain substantially all of the remaining benefit from, the asset (which generally will occur on the closing date); the factor of continuing involvement is no longer a specific consideration for the timing of recognition. As a result, the Company generally expects that the new guidance may result in transactions qualifying as sales of real estate at an earlier date than under previous GAAP. The Company adopted ASU 2014-09 effective January 1, 2018 using the modified retrospective approach. As the majority of the Company’s revenue is from rental income related to leases, the adoption of the ASU did not have a material impact on its consolidated financial statements.
In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Topic 610-20), which requires that all entities account for the derecognition of a business in accordance with ASC 810, including instances in which the business is considered in-substance real estate.  The ASU requires the Company to measure at fair value any retained interest in a partial sale of real estate. The ASU was effective for annual periods, and interim periods therein, beginning after December 15, 2017. The Company adopted ASU 2017-05 effective January 1, 2018 using the modified retrospective approach. The Company's adoption of this guidance did not have a material impact on its consolidated financial statements.

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit and per share/unit data)

Recently Issued Accounting Guidance. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize a right of use asset and related lease liability for those leases classified as operating leases at the commencement date that have lease terms of more than 12 months and amends certain lessor guidance. The Company expects the ASU to result in the recognition of a right-to-use asset and related liability to account for the Company's future obligations under its ground lease arrangements for which the Company is the lessee. From a lessor perspective, the Company expects that lease components will primarily be recognized on a straight-line basis over the lease term. ASU 2016-02 originally stated that companies would be required to bifurcate certain lease revenues between lease and non-lease components; however, the FASB issued an exposure draft in January 2018 (2018 Exposure Draft) which, if adopted as written, would allow lessors a practical expedient by class of underlying assets to account for lease and non-lease components as a single lease component if certain criteria are met. Additionally, ASU 2016-02 will require that the Company capitalize, as initial direct costs, only those costs that are incurred due to the execution of a lease. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018, and interim periods within those years. ASU 2016-02 originally required a modified retrospective method of adoption; however, the 2018 Exposure Draft indicates that companies may be permitted to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The pronouncement allows some optional practical expedients. The Company expects to adopt this new guidance on January 1, 2019 and continues to evaluate the impact that this guidance will have on its consolidated financial statements.
In August 2017, the FASB issued ASU-2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends the hedge accounting recognition and presentation requirements in Topic 815. The ASU is effective for reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of the new guidance on its consolidated financial statements.

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit and per share/unit data)

(2)
Earnings Per Share
A portion of the Company's non-vested share-based payment awards are considered participating securities and as such, the Company is required to use the two-class method for the computation of basic and diluted earnings per share. Under the two-class computation method, net losses are not allocated to participating securities unless the holder of the security has a contractual obligation to share in the losses. The non-vested share-based payment awards are not allocated losses as the awards do not have a contractual obligation to share in losses of the Company.
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the three months ended March 31, 2018 and 2017:
 
Three Months ended March 31,
 
2018
 
2017
BASIC
 
 
 
Net income (loss) attributable to common shareholders
$
(15,957
)
 
$
40,397

Weighted-average number of common shares outstanding - basic
238,072,081

 
237,179,526


 

 
 
Net income (loss) attributable to common shareholders - per common share basic
$
(0.07
)
 
$
0.17

 
 
 
 
DILUTED
 
 
 
Net income (loss) attributable to common shareholders - basic
$
(15,957
)
 
$
40,397

Impact of assumed conversions

 
(19
)
Net income (loss) attributable to common shareholders
$
(15,957
)
 
$
40,378

 
 
 
 
Weighted-average common shares outstanding - basic
238,072,081

 
237,179,526

Effect of dilutive securities:
 
 
 
Share options

 
136,881

OP Units

 
3,771,642

Weighted-average common shares outstanding - diluted
238,072,081

 
241,088,049

 
 
 
 
Net income (loss) attributable to common shareholders - per common share diluted
$
(0.07
)
 
$
0.17

For per common share amounts, all incremental shares are considered anti-dilutive for periods that have a loss from continuing operations attributable to common shareholders. In addition, other common share equivalents may be anti-dilutive in certain periods.

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit and per share/unit data)

(3)
Dispositions and Impairment
During the three months ended March 31, 2018 and 2017, the Company disposed of its interests in various properties for an aggregate gross sale price of $62,675 and $92,756, respectively, and recognized aggregate gains on sales of properties of $22,774 and $34,193, respectively.
As of March 31, 2018, the Company had no properties classified as held for sale. At December 31, 2017, the Company had one retail property classified as held for sale. Assets held for sale as of December 31, 2017 consisted of $2,827 of real estate, at cost.
The Company assesses on a regular basis whether there are any indicators that the carrying value of its real estate assets may be impaired. Potential indicators may include an increase in vacancy at a property, tenant financial instability, change in the estimated holding period of the asset and the potential sale or transfer of the property in the near future. An asset is determined to be impaired if the asset's carrying value is in excess of its estimated fair value and the Company estimates that its cost will not be recovered. During the three months ended March 31, 2018 and 2017, the Company recognized aggregate impairment charges on real estate properties of $53,049 and $2,698, respectively. Included in the impairment charges recognized during the three months ended March 31, 2018, are impairment charges of $17,906 recognized on an office property in Overland Park, Kansas, and $25,433 on an unencumbered office property in Memphis, Tennessee. The Overland Park, Kansas property is encumbered at March 31, 2018 by a $32,591 non-recourse mortgage loan, which is $19,366 in excess of the property's estimated fair value.
In February 2017, the Company recognized a $5,294 loan loss on the assignment of a loan receivable secured by a hospital in Kennewick, Washington.
(4)    Fair Value Measurements
The following tables present the Company's assets and liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2018 and December 31, 2017, aggregated by the level in the fair value hierarchy within which those measurements fall:
 
Balance
 
Fair Value Measurements Using
Description
March 31, 2018
 
(Level 1)
 
(Level 2)
 
(Level 3)
Interest rate swap assets
$
1,311

 
$

 
$
1,311

 
$

Impaired real estate assets*
$
75,207

 
$

 
$

 
$
75,207

 
Balance
 
Fair Value Measurements Using
Description
December 31, 2017
 
(Level 1)
 
(Level 2)
 
(Level 3)
Interest rate swap assets
$
1,065

 
$

 
$
1,065

 
$

Impaired real estate assets*
$
7,829

 
$

 
$

 
$
7,829

*Represents a non-recurring fair value measurement, including assets held for sale. Fair value as of the date of impairment.

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit and per share/unit data)

The table below sets forth the carrying amounts and estimated fair values of the Company's financial instruments as of March 31, 2018 and December 31, 2017.
 
As of March 31, 2018
 
As of December 31, 2017
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Liabilities
 

 
 

 
 

 
 

Debt
$
2,002,579

 
$
1,945,604

 
$
2,068,867

 
$
2,013,226

The majority of the inputs used to value the Company's interest rate swaps fall within Level 2 of the fair value hierarchy, such as observable market interest rate curves; however, the credit valuation associated with the interest rate swaps utilizes Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of March 31, 2018 and December 31, 2017, the Company determined that the credit valuation adjustment relative to the overall fair value of the interest rate swaps was not significant. As a result, the interest rate swaps have been classified in Level 2 of the fair value hierarchy.
The Company estimates the fair value of its real estate assets, including non-consolidated real estate assets, by using income and market valuation techniques. The Company may estimate fair values using market information such as broker opinions of value, recent sale offers or discounted cash flow models, which primarily rely on Level 3 inputs. The cash flow models include estimated cash inflows and outflows over a specified holding period. These cash flows may include contractual rental revenues, projected future rental revenues and expenses and forecasted tenant improvements and lease commissions based upon market conditions determined through discussion with local real estate professionals, experience the Company has with its other owned properties in such markets and expectations for growth. Capitalization rates and discount rates utilized in these models are estimated by management based upon rates that management believes to be within a reasonable range of current market rates for the respective properties based upon an analysis of factors such as property and tenant quality, geographical location and local supply and demand observations. To the extent the Company under estimates forecasted cash outflows (tenant improvements, lease commissions and operating costs) or over estimates forecasted cash inflows (rental revenue rates), the estimated fair value of its real estate assets could be overstated.
The fair value of the Company's debt is primarily estimated utilizing Level 3 inputs by using a discounted cash flow analysis, based upon estimates of market interest rates, except for the Company's senior notes payable. The Company determines the fair value of its senior notes payable using market prices. The inputs used in determining the fair value of these notes are categorized as Level 1 due to the fact that the Company uses quoted market rates to value these instruments. However, the inputs used in determining the fair value could be categorized as Level 2 if trading volumes are low.
Fair values cannot be determined with precision, may not be substantiated by comparison to quoted prices in active markets and may not be realized upon sale. Additionally, there are inherent uncertainties in any fair value measurement technique, and changes in the underlying assumptions used, including discount rates, liquidity risks and estimates of future cash flows, could significantly affect the fair value measurement amounts.
Cash Equivalents, Restricted Cash, Accounts Receivable and Accounts Payable. The Company estimates that the fair value of cash equivalents, restricted cash, accounts receivable and accounts payable approximates carrying value due to the relatively short maturity of the instruments.

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit and per share/unit data)

(5)
Investment in and Advances to Non-Consolidated Entities
As of March 31, 2018, the Company had ownership interests ranging from 15% to 25% in certain non-consolidated entities, which primarily own single-tenant net-leased assets. The acquisitions of these assets by the non-consolidated entities were partially funded through non-recourse mortgage debt with an aggregate balance of $96,299 at March 31, 2018 (the Company's proportionate share was $20,816). In addition, in 2017, the Company formed a non-consolidated joint venture with a developer to pursue industrial build-to-suit opportunities. The Company's initial contribution to this joint venture of $5,831 was used to acquire a 151-acre parcel of developable land.
In February 2017, the Company sold its 40% tenant-in-common interest in its Oklahoma City, Oklahoma office property for $6,198. The Company recognized a gain of $1,452 in connection with the sale, which is included in equity in earnings of non-consolidated entities. In addition, in February 2017, the Company collected $8,420 in full satisfaction of a loan to the other tenant-in-common.
In November 2014, the Company formed a joint venture to construct a private school in Houston, Texas. As of March 31, 2018, the Company had a 25% equity interest in the joint venture. The joint venture completed the project during 2016 for a total construction cost of $79,964. The Company was contractually obligated to provide construction financing to the joint venture up to $56,686. During 2017, the Company received $49,085 in full satisfaction of the construction financing from the proceeds of a $50,000 third-party financing.
(6)
Debt
The Company had the following mortgages and notes payable outstanding as of March 31, 2018 and December 31, 2017:
 
March 31, 2018
 
December 31, 2017
Mortgages and notes payable
$
690,074

 
$
697,068

Unamortized debt issuance costs
(7,080
)
 
(7,258
)
 
$
682,994

 
$
689,810

Interest rates, including imputed rates on mortgages and notes payable, ranged from 2.2% to 7.8% at March 31, 2018 and December 31, 2017 and all mortgages and notes payables mature between 2018 and 2036 as of March 31, 2018. The weighted-average interest rate was 4.6% at March 31, 2018 and December 31, 2017.
The Company had the following senior notes outstanding as of March 31, 2018 and December 31, 2017:
Issue Date
 
March 31, 2018
 
December 31, 2017
 
Interest Rate
 
Maturity Date
 
Issue Price
May 2014
 
$
250,000

 
$
250,000

 
4.40
%
 
June 2024
 
99.883
%
June 2013
 
250,000

 
250,000

 
4.25
%
 
June 2023
 
99.026
%
 
 
500,000

 
500,000

 
 
 
 
 
 
Unamortized discount
 
(1,439
)
 
(1,507
)
 
 
 
 
 
 
Unamortized debt issuance cost
 
(3,154
)
 
(3,295
)
 
 
 
 
 
 
 
 
$
495,407

 
$
495,198

 
 
 
 
 
 
Each series of the senior notes is unsecured and requires payment of interest semi-annually in arrears. The Company may redeem the notes at its option at any time prior to maturity in whole or in part by paying the principal amount of the notes being redeemed plus a premium.

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit and per share/unit data)

The Company has a $1,105,000 unsecured credit agreement with KeyBank National Association, as agent. With lender approval, the Company can increase the size of the amended facility to an aggregate of $2,010,000. A summary of the significant terms are as follows:
 

Maturity Date
 
Current
Interest Rate
$505,000 Revolving Credit Facility(1)
August 2019
 
LIBOR + 1.00%
$300,000 Term Loan(2)(4)
August 2020
 
LIBOR + 1.10%
$300,000 Term Loan(3)(4)
January 2021
 
LIBOR + 1.10%
(1)
Maturity date can be extended to August 2020 at the Company's option. The interest rate ranges from LIBOR plus 0.85% to 1.55%. At March 31, 2018, the revolving credit facility had $100,000 borrowings outstanding and availability of $405,000, subject to covenant compliance.
(2)
The interest rate ranges from LIBOR plus 0.90% to 1.75%. The Company previously entered into aggregate interest-rate swap agreements to fix the LIBOR component at a weighted-average rate of 1.09% through February 2018 on $250,000 of outstanding LIBOR-based borrowings.
(3)
The interest rate ranges from LIBOR plus 0.90% to 1.75%. The Company previously entered into aggregate interest-rate swap agreements to fix the LIBOR component at a weighted-average rate of 1.42% through January 2019 on $255,000 of outstanding LIBOR-based borrowings.
(4)
The aggregate unamortized debt issuance costs for the term loans were $3,043 and $3,337 as of March 31, 2018 and December 31, 2017, respectively.

The Company was in compliance with all applicable financial covenants contained in its corporate level debt agreements at March 31, 2018.
During 2007, the Company issued $200,000 original principal amount of Trust Preferred Securities. The Trust Preferred Securities, which are classified as debt, are due in 2037, are open for redemption at the Company's option, bore interest at a fixed rate of 6.804% through April 2017 and bear interest at a variable rate of three month LIBOR plus 170 basis points through maturity. The interest rate at March 31, 2018 was 3.5%. As of March 31, 2018 and December 31, 2017, there was $129,120 original principal amount of Trust Preferred Securities outstanding and $1,899 and $1,924, respectively, of unamortized debt issuance costs.

(7)
Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives. The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the type, amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company's derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company's known or expected cash receipts and its known or expected cash payments principally related to the Company's investments and borrowings.
Cash Flow Hedges of Interest Rate Risk. The Company's objectives in using interest rate derivatives are to add stability to interest expense, to manage its exposure to interest rate movements and therefore manage its cash outflows as it relates to the underlying debt instruments. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy relating to certain of its variable-rate debt instruments. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company did not incur any ineffectiveness during the three months ended March 31, 2018 and 2017.

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit and per share/unit data)

As of March 31, 2018, the Company has designated the interest-rate swap agreements with its counterparties as cash flow hedges of the risk of variability attributable to changes in the LIBOR swap rate on $255,000 of LIBOR-indexed variable-rate unsecured term loans. Accordingly, changes in the fair value of the swaps are recorded in other comprehensive income (loss) and reclassified to earnings as interest becomes receivable or payable.
Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the term loans. During the next 12 months, the Company estimates that an additional $1,311 will be reclassified as a decrease to interest expense.
As of March 31, 2018, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
Interest Rate Derivative
Number of Instruments
Notional
Interest Rate Swaps
5
$255,000
The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the unaudited condensed consolidated balance sheets as of March 31, 2018 and December 31, 2017.
 
As of March 31, 2018
 
As of December 31, 2017
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
Interest Rate Swap Asset
Other Assets
 
$
1,311

 
Other Assets
 
$
1,065

The tables below present the effect of the Company's derivative financial instruments on the unaudited condensed consolidated statements of operations for the three months ended March 31, 2018 and 2017.
Derivatives in Cash Flow
 
 
Amount of Income
Recognized in OCI on Derivatives (Effective Portion)
March 31,
 
Location of (Income) Loss
Reclassified from
Accumulated OCI into Income (Effective Portion)
 
Amount of (Income) Loss Reclassified from Accumulated OCI into Income
(Effective Portion)
March 31,
Hedging Relationships
 
 
2018
 
2017
 
 
2018
 
2017
Interest Rate Swaps
 
 
$
494

 
$
688

 
Interest expense
 
$
(248
)
 
$
604

The Company's agreements with swap derivative counterparties contain provisions whereby if the Company defaults on the underlying indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default of the swap derivative obligation. As of March 31, 2018, the Company had not posted any collateral related to the agreements.
(8)
Concentration of Risk
The Company seeks to reduce its operating and leasing risks through the geographic diversification of its properties, tenant industry diversification, avoidance of dependency on a single asset and the creditworthiness of its tenants. For the three months ended March 31, 2018 and 2017, no single tenant represented greater than 10% of rental revenues.
Cash and cash equivalent balances at certain institutions may exceed insurable amounts. The Company believes it mitigates this risk by investing in or through major financial institutions.

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit and per share/unit data)

(9)
Equity
Shareholders' Equity. During the three months ended March 31, 2017, the Company issued 1,593,603 common shares under its At-The-Market offering program and generated aggregate gross proceeds of $17,362.
During the three months ended March 31, 2018 and 2017, the Company granted common shares to certain employees as follows:
 
Three Months ended March 31,
 
2018
 
2017
Performance Shares(1)
 
 
 
Shares granted:
 
 
 
Index - 1Q
331,025
 
106,706
Peer - 1Q
331,019
 
106,705
 
 
 
 
Grant date fair value per share:(2)
 
 
 
Index - 1Q
$5.81
 
$6.82
Peer - 1Q
$5.37
 
$6.34
 
 
 
 
Non-Vested Common Shares:(3)
 
 
 
Shares issued
237,570
 
237,560
Grant date fair value
$2,190
 
$2,551
(1)
The shares vest based on the Company's total shareholder return growth after a three-year measurement period relative to an index and a group of Company peers. Dividends will not be paid on these grants until earned. Once the performance criteria are met and the actual number of shares earned is determined, such shares vest immediately. During the three months ended March 31, 2018, 116,926 of the 642,029 performance shares issued in 2015 vested.
(2)
The fair value of grants was determined at the grant date using a Monte Carlo simulation model.
(3)
The shares vest ratably over a three-year service period.

In addition, during the three months ended March 31, 2018 and 2017, the Company issued 35,581 and 30,070, respectively, of fully vested common shares to non-management members of the Company's Board of Trustees with a fair value of $337 and $318, respectively.

In July 2015, the Company's Board of Trustees authorized the repurchase of up to 10,000,000 common shares. During the three months ended March 31, 2018, the Company repurchased and retired 795,775 common shares, at an average price of $7.94 per common share. No repurchases occurred during the three months ended March 31, 2017.
A summary of the changes in accumulated other comprehensive income (loss) related to the Company's cash flow hedges is as follows:
 
 
Three Months ended March 31,
 
 
2018
 
2017
Balance at beginning of period
 
$
1,065

 
$
(1,033
)
Other comprehensive income before reclassifications
 
494

 
688

Amounts of (income) loss reclassified from accumulated other comprehensive income (loss) to interest expense
 
(248
)
 
604

Balance at end of period
 
$
1,311

 
$
259


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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit and per share/unit data)

Noncontrolling Interests. In conjunction with several of the Company's acquisitions in prior years, sellers were issued OP units as a form of consideration. All OP units, other than OP units owned by the Company, are redeemable for common shares at certain times, at the option of the holders, and are generally not otherwise mandatorily redeemable by the Company. The OP units are classified as a component of permanent equity as the Company has determined that the OP units are not redeemable securities as defined by GAAP. Each OP unit is currently redeemable at the holder's option for approximately 1.13 common shares, subject to future adjustments.
As of March 31, 2018, there were approximately 3,223,000 OP units outstanding other than OP units owned by the Company. All OP units receive distributions in accordance with the LCIF partnership agreement. To the extent that the Company's dividend per common share is less than the stated distribution per OP unit per the LCIF partnership agreement, the distributions per OP unit are reduced by the percentage reduction in the Company's dividend per common share. No OP units have a liquidation preference.
(10)
Related Party Transactions
In connection with efforts to procure non-recourse mezzanine financing from an affiliate of the Company's Chairman, pursuant to the terms of the EB-5 visa program administered by the United States Citizenship and Immigration Services (“USCIS”), for a joint venture in Houston, Texas, in which the Company has an investment, the Company executed a guaranty in favor of an affiliate of its Chairman. The guaranty provided that the Company would reimburse investors providing the funds for such financing if the following occurred: (1) the joint venture received such funds, (2) the USCIS denied the financing solely because the project was not permitted under the EB-5 visa program, and (3) the joint venture failed to return such funds.  During 2017, USCIS approved the project, and the guaranty terminated by its terms. The joint venture is still pursuing the mezzanine financing.
In addition, during 2017, the Company obtained non-recourse mezzanine financing in the initial amount of $8,000 from an affiliate of the Company's Chairman, pursuant to the terms of the EB-5 visa program administered by the USCIS, for an investment in Charlotte, North Carolina owned by LCIF. In January 2018, the Company obtained an additional $500 of financing proceeds. The Company reimbursed the Chairman's affiliate approximately $105 for its expenses and paid a $128 structuring fee to the Chairman's affiliate. The loan may be increased to $12,000 upon certain events.
There were no other related party transactions other than those disclosed elsewhere in this Quarterly Report and the audited consolidated financial statements in the Annual Report.
(11)
Commitments and Contingencies
In addition to the commitments and contingencies disclosed elsewhere and previously disclosed, the Company has the following commitments and contingencies.
The Company is obligated under certain tenant leases, including its proportionate share for leases for non-consolidated entities, to fund the expansion of the underlying leased properties. The Company, under certain circumstances, may guarantee to tenants the completion of base building improvements and the payment of tenant improvement allowances and lease commissions on behalf of its subsidiaries.
The Company and LCIF are parties to a funding agreement under which the Company may be required to fund distributions made on account of LCIF's OP units. Pursuant to the funding agreement, the parties agreed that, if LCIF does not have sufficient cash available to make a quarterly distribution to its limited partners in an amount in accordance with the partnership agreement, Lexington will fund the shortfall. Payments under the agreement will be made in the form of loans to LCIF and will bear interest at prevailing rates as determined by the Company in its discretion, but no less than the applicable federal rate. LCIF's right to receive these loans will expire if no OP units remain outstanding and all such loans are repaid. No amounts have been advanced under this agreement.

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit and per share/unit data)

From time to time, the Company is directly and indirectly involved in legal proceedings arising in the ordinary course of business. Management believes, based on currently available information, and after consultation with legal counsel, that although the outcomes of those normal course proceedings are uncertain, the results of such proceedings, in the aggregate, will not have a material adverse effect on the Company's business, financial condition and results of operations.
(12)
Supplemental Disclosure of Statement of Cash Flow Information
In addition to disclosures discussed elsewhere, during the three months ended March 31, 2018 and 2017, the Company paid $13,633 and $14,351, respectively, for interest and $195 and $548, respectively, for income taxes.
(13)
Subsequent Events
Subsequent to March 31, 2018 and in addition to disclosures elsewhere in the unaudited condensed consolidated financial statements, the Company:
acquired two industrial properties in Olive Branch, Mississippi for an aggregate cost of $92,512, which were fully financed with borrowings under the revolving credit facility; and
obtained $25,850 non-recourse mortgage financing with a fixed rate of 5.4%, which matures in November 2032 and is secured by an industrial property in Warren, Michigan.

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LEPERCQ CORPORATE INCOME FUND L.P. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands)

 
March 31, 2018
 
December 31, 2017
Assets:
 
 
 
Real estate, at cost
$
750,146

 
$
794,242

Real estate - intangible assets
108,126

 
116,861

 
858,272

 
911,103

Less: accumulated depreciation and amortization
212,793

 
233,121

Real estate, net
645,479

 
677,982

Cash and cash equivalents
12,077

 
50,900

Restricted cash
1,890

 
932

Investment in and advances to non-consolidated entities
5,941

 
6,477

Deferred expenses, net
6,076

 
6,326

Rent receivable - current
440

 
365

Rent receivable - deferred
24,372

 
22,529

Other assets
2,899

 
2,202

Total assets
$
699,174

 
$
767,713

 
 
 
 
Liabilities and Partners' Capital:
 
 
 
Liabilities:
 
 
 
Mortgages and notes payable, net
$
212,965

 
$
212,792

Co-borrower debt
147,692

 
157,789

Related party advances, net
2,476

 
2,422

Accounts payable and other liabilities
2,880

 
8,748

Accrued interest payable
680

 
691

Deferred revenue - including below market leases, net
740

 
804

Distributions payable
14,952

 
14,952

Prepaid rent
3,596

 
3,233

Total liabilities
385,981

 
401,431

 
 
 
 
Commitments and contingencies

 

Partners' capital
313,193

 
366,282

Total liabilities and partners' capital
$
699,174

 
$
767,713



The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


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LEPERCQ CORPORATE INCOME FUND L.P. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except unit data)

 
 
Three Months ended March 31,
 
 
2018
 
2017
Gross revenues:
 
 
 
 
Rental
 
$
19,943

 
$
17,308

Tenant reimbursements
 
2,164

 
1,973

Total gross revenues
 
22,107

 
19,281

Expense applicable to revenues:
 
 
 
 
Depreciation and amortization
 
(8,872
)
 
(9,172
)
Property operating
 
(3,114
)
 
(3,557
)
General and administrative
 
(1,785
)
 
(1,439
)
Non-operating income
 
2

 
229

Interest and amortization expense
 
(5,012
)
 
(3,407
)
Impairment charges
 
(22,730
)
 
(2,497
)
Gains on sales of properties
 
930

 

Loss before provision for income taxes and equity in earnings of non-consolidated entities
 
(18,474
)
 
(562
)
Provision for income taxes
 
(12
)
 
(8
)
Equity in earnings of non-consolidated entities
 
252

 
100

Net loss
 
$
(18,234
)
 
$
(470
)
Net loss per unit
 
$
(0.23
)
 
$
(0.01
)
Weighted-average units outstanding
 
80,565,611

 
83,241,396


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


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LEPERCQ CORPORATE INCOME FUND L.P. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(Unaudited and in thousands, except unit amounts)

Three Months ended March 31, 2018
 
Units
 
Partners' Capital
Balance December 31, 2017
 
80,565,611

 
$
366,282

Changes in co-borrower debt allocation
 

 
(19,903
)
Distributions
 

 
(14,952
)
Net loss
 

 
(18,234
)
Balance March 31, 2018
 
80,565,611

 
$
313,193

 
 
 
 
 
Three Months ended March 31, 2017
 
 
 
 
Balance December 31, 2016
 
83,241,396

 
$
387,623

Changes in co-borrower debt allocation
 

 
47,811

Distributions
 

 
(16,916
)
Net loss
 

 
(470
)
Balance March 31, 2017
 
83,241,396

 
$
418,048


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


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LEPERCQ CORPORATE INCOME FUND L.P. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
 
Three Months ended March 31,
 
2018
 
2017
Net cash provided by operating activities
$
8,549

 
$
9,887

Cash flows from investing activities:
 
 
 
Investments in real estate under construction

 
(8,761
)
Capital expenditures
(4,175
)
 
(638
)
Net proceeds from the sale of properties
2,101

 
3,889

Investment in and advances to non-consolidated entities

 
(175
)
Distributions from non-consolidated entities in excess of accumulated earnings
467

 
154

Increase in deferred leasing costs
(17
)
 
(1
)
Real estate deposits
(14
)
 
(2
)
Net cash used in investing activities
(1,638
)
 
(5,534
)
Cash flows from financing activities:
 
 
 
Distributions to partners
(14,952
)
 
(16,916
)
Principal amortization payments
(346
)
 
(323
)
Proceeds of mortgages and notes payable
500

 

Co-borrower debt payments
(30,000
)
 

Deferred financing costs
(32
)
 

Related party advances, net
54

 
7,877

Net cash used in financing activities
(44,776
)
 
(9,362
)
Change in cash, cash equivalents and restricted cash
(37,865
)
 
(5,009
)
Cash, cash equivalents and restricted cash, at beginning of period
51,832

 
53,576

Cash, cash equivalents and restricted cash, at end of period
$
13,967

 
$
48,567

 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash:
 
 
 
Cash and cash equivalents at beginning of period
$
50,900

 
$
52,031

Restricted cash at beginning of period
932

 
1,545

Cash, cash equivalents and restricted cash at beginning of period
$
51,832

 
$
53,576

 
 
 
 
Cash and cash equivalents at end of period
$
12,077

 
$
47,027

Restricted cash at end of period
1,890

 
1,540

Cash, cash equivalents and restricted cash at end of period
$
13,967

 
$
48,567


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


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LEPERCQ CORPORATE INCOME FUND L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit data)


(1)    The Partnership and Financial Statement Presentation

Lepercq Corporate Income Fund L.P. (together with its consolidated subsidiaries, except when the context only applies to the parent entity, the “Partnership”) was organized in 1986 as a limited partnership under the Delaware Revised Uniform Limited Partnership Act. The Partnership's sole general partner, Lex GP-1 Trust (the “General Partner”), is a wholly-owned subsidiary of Lexington Realty Trust (“Lexington”). The Partnership serves as an operating partnership subsidiary for Lexington. As of March 31, 2018, Lexington, through Lex LP-1 Trust, a wholly-owned subsidiary, and the General Partner, owned approximately 96% of the outstanding units of the Partnership.

As of March 31, 2018, the Partnership had ownership interests in 31 consolidated real estate properties, located in 20 states. The properties in which the Partnership has an interest are leased to tenants in various industries.

The assets and credit of each property owner subsidiary of the Partnership with a property subject to a mortgage loan are not available to creditors to satisfy the debt and the other obligations of any other person, including any other property owner subsidiary of the Partnership or any other affiliate. Consolidated entities that are not property owner subsidiaries do not directly own any of the assets of a property owner subsidiary (or the general partner, member or managing member of such property owner subsidiary), but merely hold partnership, membership or beneficial interests therein, which interests are subordinate to the claims of such property owner subsidiary's (or its general partner's, member's or managing member's) creditors.

The financial statements contained in this Quarterly Report on Form 10-Q (this “Quarterly Report”) for the three months ended March 31, 2018 have been prepared by the Partnership in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, the interim financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results of the periods presented. Interim results are not necessarily indicative of the results that may be expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the Partnership's audited consolidated financial statements and notes thereto included in the Partnership's Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on February 27, 2018 (“Annual Report”).

Basis of Presentation and Consolidation. The Partnership's unaudited condensed consolidated financial statements are prepared on the accrual basis of accounting in accordance with GAAP. The financial statements reflect the accounts of the Partnership and its consolidated subsidiaries. The Partnership consolidates its wholly-owned subsidiaries, partnerships and joint ventures which it controls (i) through voting rights or similar rights or (ii) by means other than voting rights if the Partnership is the primary beneficiary of a variable interest entity (“VIE”). Entities that the Partnership does not control and entities that are VIEs in which the Partnership is not the primary beneficiary are accounted for under appropriate GAAP.

Earnings Per Unit. Net income (loss) per unit is computed by dividing net income (loss) by the weighted-average number of operating partnership units, or OP units, outstanding during the period. There are no potential dilutive securities.

Unit Redemptions. The Partnership's limited partner units that are issued and outstanding, other than those held by Lexington, are currently redeemable at certain times, only at the option of the holders, for shares of beneficial interests classified as common stock of Lexington, par value $0.0001 per share ("common shares"), on a one to approximately 1.13 basis, subject to future adjustments. These units are not mandatorily redeemable by the Partnership. As of March 31, 2018, Lexington's common shares had a closing price of $7.87 per share. The estimated fair value of these units was $28,561, assuming all outstanding limited partner units not held by Lexington were redeemed on such date.
 
Allocation of Overhead Expenses. The Partnership does not pay a fee to the General Partner for the day-to-day management of the Partnership. Certain expenses incurred by the General Partner and its affiliates, including Lexington, such as corporate-level interest, amortization of deferred loan costs, payroll and general and administrative expenses are allocated to the Partnership and reimbursed to the General Partner in accordance with the Partnership's partnership agreement. The allocation is based upon gross rental revenues.

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LEPERCQ CORPORATE INCOME FUND L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit data)


Distributions; Allocations of Income and Loss. As provided in the Partnership's partnership agreement, distributions and income and loss for financial reporting purposes are allocated to the partners based on their ownership of units. Special allocation rules included in the partnership agreement affect the allocation of taxable income and loss. The Partnership paid or accrued gross distributions of $14,952 ($0.19 per weighted-average unit) and $16,916 ($0.20 per weighted-average unit) to its partners during the three months ended March 31, 2018 and 2017, respectively.
 
Use of Estimates. The Partnership has made a number of significant estimates and assumptions to prepare these unaudited condensed consolidated financial statements in conformity with GAAP, including, among others, relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. These estimates and assumptions are based on management's best estimates and judgment. The Partnership evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors. The Partnership adjusts such estimates when facts and circumstances dictate. The most significant estimates made include the recoverability of accounts receivable, allocation of property purchase price to tangible and intangible assets acquired and liabilities assumed, the determination of VIEs and which entities should be consolidated, the determination of impairment of long-lived assets and equity method investments and the useful lives of long-lived assets. Actual results could differ materially from those estimates.
 
Fair Value Measurements. The Partnership follows the guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“Topic 820”), to determine the fair value of financial and non-financial instruments. Topic 820 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. Topic 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 - quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 - observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and Level 3 - unobservable inputs, which are used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, the Partnership utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as considering counterparty credit risk.

Acquisition, Development and Construction Arrangements. The Partnership evaluates loans receivable where the Partnership participates in residual profits through loan provisions or other contracts to ascertain whether the Partnership has the same risks and rewards as an owner or a joint venture partner. Where the Partnership concludes that such arrangements are more appropriately treated as an investment in real estate, the Partnership reflects such loan receivable as an equity investment in real estate under construction in the unaudited condensed consolidated balance sheets. In these cases, no interest income is recorded on the loan receivable and the Partnership records capitalized interest during the construction period. In arrangements where the Partnership engages a developer to construct a property or provide funds to a tenant to develop a property, the Partnership will capitalize the funds provided to the developer/tenant and internal costs of interest and real estate taxes, if applicable, during the construction period.

Co-borrower Debt. The Partnership is subject to ASC 405-40, which requires recognition of such obligations as the sum of (a) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (b) any additional amount the reporting entity expects to pay on behalf of its co-obligors.
Reclassifications. Certain amounts included in the 2017 unaudited condensed consolidated financial statements have been reclassified to conform to the 2018 presentation.



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LEPERCQ CORPORATE INCOME FUND L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit data)

New Accounting Standards Adopted in 2018. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows. In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which clarifies guidance on the classification and presentation of changes in restricted cash. Restricted cash balances are now included along with cash and cash equivalents as of the end of the period and beginning of period, respectively, in the Partnership's consolidated statement of cash flows for all periods presented. Restricted cash is comprised primarily of cash balances held in escrows by lenders. In addition, separate line items showing changes in restricted cash balances are now eliminated from the Partnership's consolidated statement of cash flows. These ASUs were effective for fiscal years beginning after December 15, 2017, including interim periods within those years. Entities must apply the guidance retrospectively to all periods presented but may apply it prospectively if retrospective application would be impracticable. The Partnership adopted these ASUs effective January 1, 2018 on a retrospective basis. The Partnership's adoption of this guidance did not have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU was effective for reporting periods beginning after December 15, 2017. The Partnership expects that acquisitions of real estate or in-substance real estate will not meet the revised definition of a business and thus will be treated as asset acquisitions. Acquisition costs for those acquisitions that are not businesses will be capitalized rather than expensed. The Partnership adopted this guidance effective January 1, 2018 on a prospective basis. The Partnership's adoption of this guidance did not have a material impact on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), as subsequently amended, which amends the guidance for revenue recognition to eliminate the industry-specific revenue recognition guidance and replace it with a principle based approach for determining revenue recognition. The new guidance was effective for reporting periods beginning after December 15, 2017. The Partnership’s revenue-producing contracts are primarily leases that are not within the scope of this standard as leases are excluded from ASU 2014-09. The Partnership expects that it may be impacted in its recognition of non-lease revenue, non-lease components of revenue from lease agreements (upon adoption of ASU 2016-02) and the timing of its recognition of real estate sale transactions. Under ASU 2014-09, revenue recognition for real estate sales is largely based on the transfer of control and the buyer having the ability to direct the use of, or obtain substantially all of the remaining benefit from, the asset (which generally will occur on the closing date); the factor of continuing involvement is no longer a specific consideration for the timing of recognition. As a result, the Partnership generally expects that the new guidance may result in transactions qualifying as sales of real estate at an earlier date than under previous GAAP. The Partnership adopted ASU 2014-09 effective January 1, 2018 using the modified retrospective approach. As the majority of the Partnership’s revenue is from rental income related to leases, the adoption of the ASU did not have a material impact on its consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Topic 610-20), which requires that all entities account for the derecognition of a business in accordance with ASC 810, including instances in which the business is considered in-substance real estate. The ASU requires the Partnership to measure at fair value any retained interest in a partial sale of real estate. The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2017. The Partnership adopted ASU 2017-05 effective January 1, 2018 using the modified retrospective approach. The Partnership's adoption of this guidance did not have a material impact on its consolidated financial statements.

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LEPERCQ CORPORATE INCOME FUND L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit data)

Recently Issued Accounting Guidance. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize a right of use asset and related lease liability for those leases classified as operating leases at the commencement date that have lease terms of more than 12 months and amends certain lessor guidance. The ASU is expected to result in the recognition of a right-to-use asset and related liability to account for the Partnership's future obligations under its ground lease arrangements for which the Partnership is the lessee. From a lessor perspective, the Partnership expects that lease components will primarily be recognized on a straight-line basis over the lease term. ASU 2016-02 originally stated that companies would be required to bifurcate certain lease revenues between lease and non-lease components, however, the FASB issued an exposure draft in January 2018 (2018 Exposure Draft) which, if adopted as written, would allow lessors a practical expedient by class of underlying assets to account for lease and non-lease components as a single lease component if certain criteria are met. Additionally, ASU 2016-02 will require that the Partnership capitalize, as initial direct costs, only those costs that are incurred due to the execution of a lease. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018, and interim periods within those years. ASU 2016-02 originally required a modified retrospective method of adoption, however, the 2018 Exposure Draft indicates that companies may be permitted to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The pronouncement allows some optional practical expedients. The Partnership expects to adopt this new guidance on January 1, 2019 and continues to evaluate the impact that this guidance will have on its consolidated financial statements.

(2)     Dispositions and Impairment

During the three months ended March 31, 2018, the Partnership disposed of its interest in an industrial property for a gross sale price of $2,300 and recognized a gain on sale of $930. During the three months ended March 31, 2017, the Partnership sold its interest in a vacant office property for a gross sale price of $4,130 and recognized an impairment charge of $2,497.
The Partnership assesses on a regular basis whether there are any indicators that the carrying value of its real estate assets may be impaired. Potential indicators may include an increase in vacancy at a property, tenant financial instability, change in the estimated holding period of the asset and the potential sale or transfer of the property in the near future. An asset is determined to be impaired if the asset's carrying value is in excess of its estimated fair value and the Partnership estimates that its cost will not be recovered. During the three months ended March 31, 2018, the Partnership recognized aggregate impairment charges on real estate properties of $22,730. Included in the impairment charges recognized during the three months ended March 31, 2018, is an impairment charge of $17,906 recognized on an office property in Overland Park, Kansas. The office property is encumbered at March 31, 2018 by a $32,591 non-recourse mortgage loan, which is $19,366 in excess of the property's estimated fair value.
(3)    Investments in and Advances to Non-Consolidated Entities

In July 2014, the Partnership acquired a 1.0% interest in an office property in Philadelphia, Pennsylvania for $263. The Partnership accounts for this investment under the cost basis of accounting.
On September 1, 2012, the Partnership acquired a 2% equity interest in Net Lease Strategic Assets Fund L.P. (“NLS”) for cash of $189 and the issuance of 457,211 limited partner units to Lexington.
The Partnership's carrying value in NLS at March 31, 2018 and December 31, 2017 was $5,639 and $6,175, respectively. The Partnership recognized net income from NLS of $247 and $97 in equity in earnings from non-consolidated entities during the three months ended March 31, 2018 and 2017, respectively. The Partnership contributed $175 to NLS during the three months ended March 31, 2017. In addition, the Partnership received distributions of $783 and $250 from NLS during the three months ended March 31, 2018 and 2017, respectively.

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LEPERCQ CORPORATE INCOME FUND L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit data)

(4)    Fair Value Measurements

The following table presents the Partnership's assets measured at fair value as of March 31, 2018, aggregated by the level in the fair value hierarchy within which those measurements fall:
 
 
Balance
 
Fair Value Measurements Using
Description
 
March 31, 2018
 
(Level 1)
 
(Level 2)
 
(Level 3)
Impaired real estate assets*
 
$
17,594

 
$

 
$

 
$
17,594

* Represents a non-recurring fair value measurement as of the date of impairment.

The table below sets forth the carrying amounts and estimated fair values of the Partnership's financial instruments as of March 31, 2018 and December 31, 2017:
 
 
As of March 31, 2018
 
As of December 31, 2017
 
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Liabilities
 
 
 
 
 
 
 
 
Debt
 
$
360,657

 
$
342,989

 
$
370,581

 
$
352,806


The Partnership estimates the fair value of its real estate assets, including non-consolidated real estate assets, by using income and market valuation techniques. The Partnership may estimate fair values using market information such as broker opinions of value, recent sale offers or discounted cash flow models, which primarily rely on Level 3 inputs. The cash flow models include estimated cash inflows and outflows over a specified holding period. These cash flows may include contractual rental revenues, projected future rental revenues and expenses and forecasted tenant improvements and lease commissions based upon market conditions determined through discussion with local real estate professionals, experience the Partnership has with its other owned properties in such markets and expectations for growth. Capitalization rates and discount rates utilized in these models are estimated by management based upon rates that management believes to be within a reasonable range of current market rates for the respective properties based upon an analysis of factors such as property and tenant quality, geographical location and local supply and demand observations. To the extent the Partnership under-estimates forecasted cash outflows (tenant improvements, lease commissions and operating costs) or over-estimates forecasted cash inflows (rental revenue rates), the estimated fair value of its real estate assets could be overstated.
The fair value of the Partnership's debt is primarily estimated utilizing Level 3 inputs by using an estimated discounted cash flow analysis, based upon estimates of market interest rates.

Fair values cannot be determined with precision, may not be substantiated by comparison to quoted prices in active markets and may not be realized upon sale. Additionally, there are inherent uncertainties in any fair value measurement technique, and changes in the underlying assumptions used, including discount rates, liquidity risks and estimates of future cash flows, could significantly affect the fair value measurement amounts.
 
Cash Equivalents, Restricted Cash, Accounts Receivable and Accounts Payable. The Partnership estimates that the fair value of cash equivalents, restricted cash, accounts receivable and accounts payable approximates carrying value due to the relatively short maturity of the instruments.


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LEPERCQ CORPORATE INCOME FUND L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit data)

(5)    Mortgages and Notes Payable and Co-Borrower Debt

The Partnership had the following mortgages and notes payable outstanding as of March 31, 2018 and December 31, 2017:
 
March 31, 2018
 
December 31, 2017
Mortgages and notes payable
$
214,458

 
$
214,303

Unamortized debt issuance costs
(1,493
)
 
(1,511
)
 
$
212,965

 
$
212,792

Interest rates, including imputed rates, ranged from 4.0% to 6.5% at March 31, 2018 and December 31, 2017, and the mortgages and notes payable mature between 2019 and 2033. The weighted-average interest rate at March 31, 2018 and December 31, 2017 was approximately 4.8%.

Lexington, and the Partnership as co-borrower, have a $1,105,000 unsecured credit agreement with KeyBank National Association, as agent. With lender approval, Lexington can increase the size of the amended facility to an aggregate $2,010,000. A summary of the significant terms are as follows:
 
Maturity Date
 
Current
Interest Rate
$505,000 Revolving Credit Facility(1)
August 2019
 
LIBOR + 1.00%
$300,000 Term Loan(2)
August 2020
 
LIBOR + 1.10%
$300,000 Term Loan(3)
January 2021
 
LIBOR + 1.10%
(1)
Maturity date can be extended to August 2020 at Lexington's option. The interest rate ranges from LIBOR plus 0.85% to 1.55%. At March 31, 2018, the revolving credit facility had $100,000 of borrowings outstanding and availability of $405,000 subject to covenant compliance.
(2)
The interest rate ranges from LIBOR plus 0.90% to 1.75%. Interest-rate swap agreements were previously entered into to fix the LIBOR component at a weighted-average rate of 1.09% through February 2018 on $250,000 of outstanding LIBOR-based borrowings.
(3)
The interest rate ranges from LIBOR plus 0.90% to 1.75%. Interest-rate swap agreements were previously entered into to fix the LIBOR component at a weighted-average rate of 1.42% through January 2019 on $255,000 of outstanding LIBOR-based borrowings.

Lexington was in compliance with all applicable financial covenants contained in its corporate level debt agreements at March 31, 2018.
In accordance with the guidance of ASC 405-40, the Partnership, as it is a co-borrower with Lexington, recognizes a proportion of the outstanding amounts of the above-mentioned term loans and revolving credit facility as co-borrower debt in the accompanying unaudited condensed consolidated balances sheets. In accordance with the Partnership’s partnership agreement, the Partnership is allocated a portion of these debts based on gross rental revenues, which represents its agreed to obligation. The Partnership's allocated co-borrower debt was $147,692 and $157,789 as of March 31, 2018 and December 31, 2017, respectively. Non-cash changes in co-borrower debt are recognized in partners’ capital in the accompanying unaudited condensed consolidated statements of changes in partners’ capital.

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LEPERCQ CORPORATE INCOME FUND L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit data)

(6)    Concentration of Risk

Subject to the terms of the partnership agreement, the Partnership seeks to reduce its operating and leasing risks through the geographic diversification of its properties, tenant industry diversification, avoidance of dependency on a single asset and the creditworthiness of its tenants. For the three months ended March 31, 2018 and 2017, the following tenants represented greater than 10% of rental revenues:
 
 
2018
 
2017
Preferred Freezer Services of Richland, LLC
 
16.5
%
 
19.0
%

Cash and cash equivalent balances at certain institutions may exceed insurable amounts. The Partnership believes it mitigates this risk by investing in or through major financial institutions.

(7)    Related Party Transactions

The Partnership had the following related party transactions in addition to related party transactions discussed elsewhere in this Quarterly Report and the audited consolidated financial statements in the Annual Report.
The Partnership had outstanding net advances owed to Lexington of $2,476 and $2,422 as of March 31, 2018 and December 31, 2017, respectively. The advances are payable on demand.
Lexington earned distributions of $14,340 and $16,287 during the three months ended March 31, 2018 and 2017, respectively.
The Partnership was allocated interest expense by Lexington, in accordance with the partnership agreement, relating to certain lending facilities of $2,369 and $1,811 for the three months ended March 31, 2018 and 2017, respectively.
Lexington, on behalf of the General Partner, pays for certain general administrative and other costs on behalf of the Partnership from time to time. These costs are reimbursable by the Partnership. These costs were approximately $1,744 and $1,418 for the three months ended March 31, 2018 and 2017, respectively.
 A Lexington affiliate provides property management services for certain Partnership properties. The Partnership recognized property operating expenses of $156 and $170 for the three months ended March 31, 2018 and 2017, respectively, for aggregate fees charged by the affiliate.
In addition, during 2017, the Partnership obtained non-recourse mezzanine financing in the initial amount of $8,000 from an affiliate of Lexington's Chairman, who is also the holder of the most OP units other than Lexington, pursuant to the terms of the EB-5 visa program administered by the USCIS, for an investment in Charlotte, North Carolina. In January 2018, the Partnership obtained an additional $500 of financing proceeds. The Partnership reimbursed the Chairman's affiliate approximately $105 for its expenses and paid the Chairman's affiliate a $128 structuring fee. The loan may be increased to $12,000 upon certain events.
(8)    Commitments and Contingencies

In addition to the commitments and contingencies disclosed elsewhere, the Partnership has the following commitments and contingencies.
The Partnership is obligated under certain tenant leases, including its proportionate share for leases for non-consolidated entities, to fund the expansion of the underlying leased properties. The Partnership, under certain circumstances, may guarantee to tenants the completion of base building improvements and the payment of tenant improvement allowances and lease commissions on behalf of its subsidiaries.

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LEPERCQ CORPORATE INCOME FUND L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit data)

The Partnership and Lexington are parties to a funding agreement under which Lexington may be required to fund distributions made on account of OP units. Pursuant to the funding agreement, if the Partnership does not have sufficient cash available to make a quarterly distribution to its limited partners in an amount in accordance with the partnership agreement, Lexington is required to fund the shortfall. Payments under the agreement will be made in the form of loans to the Partnership and will bear interest at prevailing rates as determined by Lexington in its discretion, but no less than the applicable federal rate. The Partnership's right to receive these loans will expire if no OP units remain outstanding and all such loans are repaid. No amounts had been advanced under this funding agreement.
The Partnership has guaranteed $250,000 aggregate principal amount of 4.40% Senior Notes due 2024 (“2024 Senior Notes”) issued by Lexington at an issuance price of 99.883% of the principal amount and $250,000 aggregate principal amount of 4.25% Senior Notes due 2023 (“2023 Senior Notes”) issued by Lexington at an issuance price of 99.026% of the principal amount, collectively referred to as the Senior Notes. The Senior Notes are unsecured and pay interest semi-annually in arrears. Lexington may redeem the Senior Notes at its option at any time prior to maturity in whole or in part by paying the principal amount of the notes being redeemed plus a premium.
From time to time, the Partnership is directly or indirectly involved in legal proceedings arising in the ordinary course of the Partnership's business. The Partnership believes, based on currently available information, and after consultation with legal counsel, that although the outcomes of those normal course proceedings are uncertain, the results of such proceedings, in the aggregate, will not have a material adverse effect on the Partnership's business, financial condition and results of operations.
(9)    Supplemental Disclosure of Statement of Cash Flow Information

In addition to disclosures discussed elsewhere, during the three months ended March 31, 2018 and 2017, the Partnership paid $4,821 and $3,869, respectively, for interest and $27 and $45, respectively, for income taxes.
(10)    Subsequent Event

Subsequent to March 31, 2018, the Partnership obtained $25,850 non-recourse mortgage financing with a fixed rate of 5.4%, which matures in November 2032 and is secured by an industrial property in Warren, Michigan,


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction

When we use the terms “the Company,” “we,” “us” and “our,” we mean Lexington Realty Trust and all entities owned by us, including non-consolidated entities, except where it is clear that the term means only Lexington Realty Trust. When we use the terms the “Partnership” or “LCIF”, we mean Lepercq Corporate Income Fund L.P. and all entities owned by it, including non-consolidated entities, except where it is clear that the term means only LCIF. References herein to ‘‘this Quarterly Report” are to this Quarterly Report on Form 10-Q for the three months ended March 31, 2018. The results of operations contained herein for the three months ended March 31, 2018 and 2017 are not necessarily indicative of the results that may be expected for a full year.

The following is a discussion and analysis of the unaudited condensed consolidated financial condition and results of operations of Lexington Realty Trust and LCIF for the three months ended March 31, 2018 and 2017, and significant factors that could affect their prospective financial condition and results of operations. This discussion should be read together with the accompanying unaudited condensed consolidated financial statements of the Company and the Partnership included herein and notes thereto and with the consolidated financial statements and notes thereto included in the Company's and the Partnership's most recent Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission, or SEC, on February 27, 2018, which we refer to as the Annual Report. Historical results may not be indicative of future performance.

Forward-Looking Statements. This Quarterly Report, together with other statements and information publicly disseminated by us, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “believes,” “expects,” “intends,” “anticipates,” “estimates,” “projects,” “may,” “plans,” “predicts,” “will,” “will likely result” or similar expressions. Readers should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect actual results, performances or achievements. In particular, the factors that could cause actual results, performances or achievements to differ materially from current expectations, strategies or plans include, among others, any risks discussed below in the respective “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and under the headings “Risk Factors” in this Quarterly Report and “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report and other periodic reports filed by the Company or the Partnership with the SEC. Except as required by law, we undertake no obligation to publicly release any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Accordingly, there is no assurance that our expectations will be realized.

Lexington Realty Trust:

Overview

General. We are a Maryland real estate investment trust, or REIT, that owns a diversified portfolio of equity investments in single-tenant commercial properties.
As of March 31, 2018, we had ownership interests in approximately 170 consolidated real estate properties, located in 37 states and containing an aggregate of approximately 48.1 million square feet of space, approximately 97.2% of which was leased. The properties in which we have an interest are primarily net leased to tenants in various industries.
Our revenues and cash flows are generated predominantly from property rent receipts. As a result, growth in revenues and cash flows is directly correlated to our ability to (1) acquire income producing real estate investments and (2) re-lease properties that are vacant, or may become vacant, at favorable rental rates.
Our current business strategy is focused on enhancing our cash flow stability, growing our portfolio with attractive leased investments, reducing lease rollover risk and maintaining a strong and flexible balance sheet to allow us to act on opportunities as they arise. To that end, in the first quarter of 2018, we continued to be an active seller of non-core assets such as vacant properties and properties subject to short-term leases. In addition, we continue our efforts to increase the percentage of rents from industrial assets, which include sales of non-core assets and acquisitions of industrial assets.

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Leasing Activity. Re-leasing properties that are currently vacant or as leases expire at favorable effective rates is one of our primary areas of focus for asset management. We strive to manage down our shorter-term leases and extend our weighted-average lease term on a cash basis, which was approximately 8.9 years at March 31, 2018 and 8.8 years at March 31, 2017.
During the first quarter of 2018, we entered into new leases and lease extensions encompassing approximately 209 thousand square feet. The average U.S. generally accepted accounting principles, or GAAP, base rent on these extended leases was $5.92 per square foot compared to the average GAAP base rent on these leases before extension of $5.67 per square foot. The weighted-average cost of tenant improvements and lease commissions was $5.41 per square foot for new leases and $0.23 per square foot for extended leases on a GAAP basis.
First Quarter 2018 Transaction Summary.
The following summarizes our significant transactions during the three months ended March 31, 2018.
Investments:
Committed to acquire industrial properties in Olive Branch, MS for an aggregate cost of $92.5 million.
Capital Recycling:
Disposed of our interests in various consolidated properties for approximately $62.7 million.
Debt:
Obtained an additional $500 thousand in EB-5 financing on our AvidXchange Charlotte, NC property from an affiliate of Lexington's chairman.
Equity
Repurchased and retired 795,775 common shares at an average price of $7.94 per common share.
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. In preparing our unaudited condensed consolidated financial statements in accordance with GAAP and pursuant to the rules and regulations of the SEC, we make assumptions, judgments and estimates that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosures of contingent assets and liabilities. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates. Certain of our accounting policies are discussed under (1) Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report, (2) note 2 to our consolidated financial statements contained in our Annual Report and (3) note 1 to our unaudited condensed consolidated financial statements contained in this Quarterly Report. We believe there have been no material changes to the items that we disclosed as our critical accounting policies under Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report.

Liquidity and Capital Resources
Cash Flows. We believe that cash flows from operations will continue to provide adequate capital to fund our operating and administrative expenses, regular debt service obligations and all dividend payments in accordance with applicable REIT requirements in both the short-term and long-term. In addition, we anticipate that cash on hand, borrowings under our unsecured revolving credit facility, capital recycling proceeds, issuances of equity, mortgage proceeds and other debt, as well as other available alternatives, will provide the necessary capital required by our business.
At March 31, 2018, we had $6.6 million and $83.8 million of property specific mortgage balloon debt due in 2018 and 2019, respectively. We believe we have sufficient sources of liquidity to meet obligations we are required to meet through cash on hand ($90.2 million at March 31, 2018), property sale proceeds, borrowing capacity under our unsecured revolving credit facility ($405.0 million at March 31, 2018), which expires in 2019, but can be extended by us to 2020, and future cash flows from operations.
The mortgages encumbering the properties in which we have an interest are generally non-recourse to us, such that in situations where we believe it is beneficial to satisfy a mortgage obligation by transferring title of the property to the lender, including through a foreclosure, we may do so.

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Cash flows from operations were $56.2 million for the three months ended March 31, 2018 as compared to $57.4 million for the three months ended March 31, 2017. The decrease was primarily related to the impact of property sales and vacancies, a decrease in lease termination payments and a decrease in prepaid rent, offset by cash flows generated from acquired properties. The underlying drivers that impact our working capital, and therefore cash flows from operations, are the timing of collection of rents, including reimbursements from tenants, payment of interest on mortgage debt and payment of operating and general and administrative costs. We believe the net-lease structure of the leases encumbering a majority of the properties in which we have an interest mitigates the risks of the timing of cash flows from operations since the payment and timing of operating costs related to the properties are generally borne directly by the tenant. Collection and timing of tenant rents is closely monitored by management as part of our cash management program.
Net cash provided by investing activities totaled $51.2 million and $101.3 million during the three months ended March 31, 2018 and 2017, respectively. Cash provided by investing activities related primarily to proceeds from the sale of properties, collection of loans receivable and changes in real estate deposits, net. Cash used in investing activities related primarily to acquisitions of real estate and investments in real estate under construction, capital expenditures, lease costs, changes in real estate deposits, net, and investments in and advances to non-consolidated entities.
Net cash used in financing activities totaled $121.9 million and $35.6 million during the three months ended March 31, 2018 and 2017, respectively. Cash used in financing activities was primarily attributable to dividend and distribution payments, repayment of debt obligations and repurchases of common shares. Cash provided by financing activities related primarily to proceeds of mortgages and notes payable and the net proceeds from the issuance of common shares.
Dividends. Dividends paid to our common and preferred shareholders were $44.8 million and $42.8 million in the three months ended March 31, 2018 and 2017, respectively.
UPREIT Structure. As of March 31, 2018, 3.2 million units of limited partner interests, or OP units, in our operating partnership, LCIF, were outstanding not including OP units held by us. Assuming all outstanding OP units not held by us were redeemed on such date, the estimated fair value of such OP units was $28.6 million based on our closing price of $7.87 per common share as of March 31, 2018 and a redemption factor of approximately 1.13 common shares per OP unit.
Financings. The following senior notes were outstanding as of March 31, 2018:
Issue Date
 
Face Amount ($000)
 
Interest Rate
 
Maturity Date
 
Issue Price
May 2014
 
$
250,000

 
4.40
%
 
June 2024
 
99.883
%
June 2013
 
250,000

 
4.25
%
 
June 2023
 
99.026
%
 
 
$
500,000

 
 
 
 
 
 
The senior notes are unsecured and pay interest semi-annually in arrears. We may redeem the senior notes at our option at any time prior to maturity in whole or in part by paying the principal amount of the senior notes being redeemed plus a premium.
We have a $1.105 billion unsecured credit agreement with KeyBank National Association, as agent. With lender approval, we can increase the size of the amended facility to an aggregate $2.01 billion. A summary of the significant terms are as follows:
 

Maturity Date
 
Current
Interest Rate
$505.0 Million Revolving Credit Facility(1)
 August 2019
 
LIBOR + 1.00%
$300.0 Million Term Loan(2)
August 2020
 
LIBOR + 1.10%
$300.0 Million Term Loan(3)
January 2021
 
LIBOR + 1.10%
(1)
Maturity date can be extended to August 2020 at our option. The interest rate ranges from LIBOR plus 0.85% to 1.55%. At March 31, 2018, the unsecured revolving credit facility had $100.0 million of borrowings outstanding and availability of $405.0 million subject to covenant compliance.
(2)
The interest rate ranges from LIBOR plus 0.90% to 1.75%. We previously entered into aggregate interest-rate swap agreements to fix the LIBOR component at a weighted-average rate of 1.09% through February 2018 on $250.0 million of outstanding LIBOR-based borrowings.
(3)
The interest rate ranges from LIBOR plus 0.90% to 1.75%. We previously entered into aggregate interest-rate swap agreements to fix the LIBOR component at a weighted-average rate of 1.42% through January 2019 on $255.0 million of outstanding LIBOR-based borrowings.

As of March 31, 2018, we were in compliance with all applicable financial covenants contained in our corporate level debt agreements.

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Results of Operations
Three months ended March 31, 2018 compared with three months ended March 31, 2017. The decrease in net income attributable to common shareholders of $56.4 million was primarily due to the items discussed below.
The increase in total gross revenues during the three months ended March 31, 2018 of $6.5 million was primarily attributable to an increase in rental revenue. Rental revenue increased $5.9 million primarily due to new 2017 property acquisitions rental revenue of $11.6 million and changes in occupancy of $0.5 million, partially offset by a decrease in revenue from properties disposed of $4.9 million and a reduction in termination fee income of $1.6 million. In addition, there was an increase in tenant reimbursements of $0.7 million during the three months ended March 31, 2018.
The increase in depreciation and amortization expense of $3.6 million was primarily due to acquisitions of certain properties.
The decrease in property operating expense of $0.6 million was primarily due to a decrease in transaction costs and the net effect of purchases and sales of properties with operating expense responsibilities.
The decrease in non-operating income of $2.1 million was primarily due to the collection of loans receivable in 2017.
The increase in interest and amortization expense of $0.6 million related primarily to an overall increase in our debt outstanding.
The increase in impairment charges of $45.1 million related to the timing of impairment charges recognized on certain properties primarily due to potential sales, vacancies and lack of leasing prospects.
The decrease in gains on sales of properties of $11.4 million related to the timing of sales of properties.
The decrease in equity in earnings of non-consolidated entities of $1.8 million was primarily due to the sale of our interest in a non-consolidated entity in 2017.
The change in net (income) loss attributable to noncontrolling interests of $0.7 million related primarily to an increase in the net loss of LCIF in 2018 compared to 2017.
Any increase in net income in future periods will be closely tied to the level of acquisitions and dispositions and leasing activity. Without acquisitions and favorable leasing activity, the sources of growth in net income are limited to index-adjusted rents (such as the consumer price index), reduced interest expense on amortizing mortgages and debt refinancings and by controlling other variable overhead costs and, periodically, gains on sales of properties. However, there are many factors beyond management's control that could offset these items including, without limitation, increased interest rates, decreased occupancy rates, tenant monetary defaults, delayed acquisitions and the other risks described in our periodic reports filed with the SEC.
Same-Store Results
Same-store net operating income, or NOI, which is a non-GAAP measure, represents the NOI for consolidated properties that were owned and included in our portfolio for two comparable reporting periods, excluding properties encumbered by mortgage loans in default and the revenue associated with the expansion of properties, as applicable. We define NOI as operating revenues (rental income (less GAAP rent adjustments and lease termination income), tenant reimbursements and other property income) less property operating expenses. As same-store NOI excludes the change in NOI from acquired and disposed of properties and certain other properties, it highlights operating trends such as occupancy levels, rental rates and operating costs on properties. Other REITs may use different methodologies for calculating same-store NOI, and accordingly same-store NOI may not be comparable to other REITs. Management believes that same-store NOI is a useful supplemental measure of the Company's operating performance. However, same-store NOI should not be viewed as an alternative measure of the Company's financial performance since it does not reflect the operations of the Company's entire portfolio, nor does it reflect the impact of general and administrative expenses, acquisition-related expenses, interest expense, depreciation and amortization costs, other nonproperty income and losses, the level of capital expenditures and leasing costs necessary to maintain the operating performance of the Company's properties, or trends in development and construction activities which are significant economic costs and activities that could materially impact the Company's results from operations. Lexington believes that net income is the most directly comparable GAAP measure to same-store NOI.

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The following presents our consolidated same-store NOI, for the three months ended March 31, 2018 and 2017 ($000's):
 
Three Months ended March 31,
 
2018
 
2017
Total cash base rent
$
78,590

 
$
78,604

Tenant reimbursements
7,590

 
6,933

Property operating expenses
(10,732
)
 
(10,226
)
Same-store NOI
$
75,448

 
$
75,311

Our reported same-store NOI increased from the first quarter of 2017 to the first quarter of 2018 by 0.2%. The increase in same-store NOI between periods primarily related to an increase in tenant reimbursement in certain of our properties. Our historical same-store square footage leased was 96.5% at March 31, 2018 and 98.7% at March 31, 2017.
Below is a reconciliation of net income to same-store NOI for periods presented ($000's):
 
Three Months ended March 31,
 
2018
 
2017
Net income (loss)
$
(14,823
)
 
$
42,220

 
 
 
 
Interest and amortization expense
20,331

 
19,725

Provision for income taxes
503

 
422

Depreciation and amortization
46,537

 
42,891

General and administrative
8,996

 
9,457

Transaction costs

 
186

Non-operating income
(546
)
 
(2,621
)
Gains on sales of properties
(22,774
)
 
(34,193
)
Impairment charges and loan loss
53,049

 
7,992

Equity in (earnings) of non-consolidated entities
(113
)
 
(1,910
)
Lease termination income
(308
)
 
(1,929
)
Straight-line adjustments
(4,866
)
 
(2,909
)
Lease incentives
536

 
431

Amortization of above/below market leases
(22
)
 
514

NOI
86,500

 
80,276

 
 
 
 
Less NOI:
 
 
 
Acquisitions and dispositions
(11,052
)
 
(4,965
)
Same-Store NOI
$
75,448

 
$
75,311


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Funds From Operations
We believe that Funds from Operations, or FFO, which is a non-GAAP measure, is a widely recognized and appropriate measure of the performance of an equity REIT. We believe FFO is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. FFO is intended to exclude GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. As a result, FFO provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities, interest costs and other matters without the inclusion of depreciation and amortization, providing perspective that may not necessarily be apparent from net income.
The National Association of Real Estate Investment Trusts, or NAREIT, defines FFO as “net income (or loss) computed in accordance with GAAP, excluding gains (or losses) from sales of property, plus real estate depreciation and amortization and after adjustments for non-consolidated partnerships and joint ventures.” NAREIT clarified its computation of FFO to exclude impairment charges on depreciable real estate owned directly or indirectly. FFO does not represent cash generated from operating activities in accordance with GAAP and is not indicative of cash available to fund cash needs.
We present FFO available to common shareholders and unitholders - basic and also present FFO available to all equityholders and unitholders - diluted on a company-wide basis as if all securities that are convertible, at the holder's option, into our common shares, are converted at the beginning of the period. We also present Adjusted Company FFO available to all equityholders and unitholders - diluted which adjusts FFO available to all equityholders and unitholders - diluted for certain items which we believe are not indicative of the operating results of our real estate portfolio. We believe this is an appropriate presentation as it is frequently requested by security analysts, investors and other interested parties. Since others do not calculate these measures in a similar fashion, these measures may not be comparable to similarly titled measures as reported by others. These measures should not be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flow as a measure of liquidity.

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The following presents a reconciliation of net income (loss) attributable to common shareholders to FFO available to common shareholders and unitholders and Adjusted Company FFO available to all equityholders and unitholders for the three and three months ended March 31, 2018 and 2017 (unaudited and dollars in thousands, except share and per share amounts):
 
 
 
Three Months ended March 31,
 
 
 
2018
 
2017
FUNDS FROM OPERATIONS:
 
 
Basic and Diluted:
 
 
 
 
Net income (loss) attributable to common shareholders
 
$
(15,957
)
 
$
40,397

Adjustments:
 


 
 
 
Depreciation and amortization
 
45,154

 
41,542

 
Impairment charges - real estate
 
53,049

 
2,698

 
Noncontrolling interests - OP units
 
(729
)
 
(19
)
 
Amortization of leasing commissions
 
1,383

 
1,349

 
Joint venture and noncontrolling interest adjustment
 
258

 
340

 
Gains on sales of properties, including non-consolidated entities
 
(22,774
)
 
(35,645
)
FFO available to common shareholders and unitholders - basic
 
60,384

 
50,662

 
Preferred dividends
 
1,572

 
1,572

 
Amount allocated to participating securities
 
70

 
71

FFO available to all equityholders and unitholders - diluted
 
62,026

 
52,305

 
Loan loss
 

 
5,294

 
Transaction costs
 

 
186

Adjusted Company FFO available to all equityholders and unitholders - diluted
 
$
62,026

 
$
57,785

Per Common Share and Unit Amounts
 
 
 
 
Basic:
 
 
 
 
FFO
 
$
0.25

 
$
0.21

 
 
 
 
 
Diluted:
 
 
 
 
FFO
 
$
0.25

 
$
0.21

Adjusted Company FFO
 
$
0.25

 
$
0.23

 
 
 
Three Months ended March 31,
 
 
2018
 
2017
Weighted-Average Common Shares:
 
 
 
 
Basic:
 
 
 
 
Weighted-average common shares outstanding - basic EPS
 
238,072,081

 
237,179,526

Operating partnership units(1)
 
3,629,195

 
3,771,642

Weighted-average common shares outstanding - basic FFO
 
241,701,276

 
240,951,168

 
 
 
 
 
Diluted:
 
 
 
 
Weighted-average common shares outstanding - diluted EPS
 
238,072,081

 
241,088,049

Operating partnership units(1)
 
3,629,195

 

Unvested share-based payment awards and options
 
562,084

 
691,936

Preferred shares - Series C
 
4,710,570

 
4,710,570

Weighted-average common shares outstanding - diluted FFO
 
246,973,930

 
246,490,555

(1) Includes all OP units other than OP units held by us.

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Off-Balance Sheet Arrangements
As of March 31, 2018, we had investments in various real estate entities with varying structures. The real estate investments owned by these entities are generally financed with non-recourse debt. Non-recourse debt is generally defined as debt whereby the lenders' sole recourse with respect to borrower defaults is limited to the value of the assets collateralized by the debt. The lender generally does not have recourse against any other assets owned by the borrower or any of the members or partners of the borrower, except for certain specified exceptions listed in the particular loan documents. These exceptions generally relate to "bad boy" acts, including fraud and breaches of material representations. We have guaranteed such obligations for certain of our non-consolidated entities.

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Lepercq Corporate Income Fund L.P.:
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of operations is based upon the Partnership's unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. In preparing the Partnership's unaudited condensed consolidated financial statements in accordance with GAAP and pursuant to the rules and regulations of the SEC, the Partnership makes assumptions, judgments and estimates that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosures of contingent assets and liabilities. The Partnership bases its assumptions, judgments and estimates on historical experience and various other factors that the Partnership believes to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, the Partnership evaluates its assumptions, judgments and estimates. Certain of the Partnership's accounting policies are discussed under (1) Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report, (2) note 2 to the consolidated financial statements contained in the Annual Report and (3) note 1 to the Partnership's unaudited condensed consolidated financial statements contained in this Quarterly Report. The Partnership believes there have been no material changes to the items that the Partnership disclosed as the Partnership's critical accounting policies under Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report. 
Liquidity 
Cash Flows. The Partnership believes that its cash flows from operations will continue to provide adequate capital to fund its operating and administrative expenses, regular debt service obligations, working capital needs and all distribution payments in accordance with partnership agreement requirements in both the short-term and long-term. However, without a capital event, which would most likely involve the Company, the Partnership does not have the ability to fund balloon payments on maturing mortgages or acquire new investments. 
Cash flows from operations totaled $8.5 million and $9.9 million during the three months ended March 31, 2018 and 2017, respectively. The decrease was primarily due to the impact of reduced cash flows attributable to sold properties and an increase in interest expense, offset by cash flow generated from acquired properties. The underlying drivers that impact working capital and therefore cash flows from operations are the timing of (1) the collection of rents and tenant reimbursements, (2) the payment of interest on mortgage debt and (3) operating and general and administrative costs. The Partnership believes the net-lease structure of the leases encumbering a majority of the properties in which the Partnership has an interest mitigates the risks of the timing of cash flows from operations since the payment and timing of operating costs related to the properties are generally borne directly by the tenant. Collection and timing of tenant rents is closely monitored by management as part of the Partnership cash management program.
Net cash used in investing activities totaled $1.6 million and $5.5 million during the three months ended March 31, 2018 and 2017, respectively. Cash used in investing activities related primarily to capital expenditures on real estate properties, investments in real estate under construction, investments in non-consolidated entities and an increase in deferred lease costs. Cash provided by investing activities related primarily to proceeds from the sale of properties and distributions from non-consolidated entities in excess of accumulated earnings.
Net cash used in financing activities totaled $44.8 million and $9.4 million during the three months ended March 31, 2018 and 2017, respectively. Cash used in financing activities was primarily attributable to distribution payments, an increase in deferred financing costs and debt payments. Cash provided by financing activities was primarily attributable to related party advances, net and proceeds of mortgages and notes payable.
Property Specific Debt. As of March 31, 2018, the Partnership had no property-specific debt maturing in 2018 and $31.8 million in 2019. However, if a mortgage loan is unable to be refinanced upon maturity, the Partnership will be dependent on the Company's liquidity resources to satisfy such mortgage loan to avoid transferring the underlying property to the lender or selling the underlying property to a third party.
 Capital Recycling. During the three months ended March 31, 2018 and 2017, the Partnership disposed of its interests in certain investments for an aggregate gross sales price of $2.3 million and $4.1 million, respectively.

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Results of Operations
Three months ended March 31, 2018 compared with the three months ended March 31, 2017The increase in net loss of $17.8 million was primarily due to the items discussed below.
The increase in total gross revenues of $2.8 million was primarily attributable to an increase in rental revenue. The increase in rental revenue of $2.6 million was primarily due to rental revenue from newly acquired properties of $2.9 million, partially offset by a reduction in rental revenue of $0.3 million due to a decrease in revenue from properties sold.
The increase in interest and amortization expense of $1.6 million was primarily due to an increase in interest due to the financing of a property in Charlotte, North Carolina and an increase in allocated co-borrower debt.
The increase in impairment charges of $20.2 million primarily related to the timing of impairment charges recognized on the sale or potential sale of properties or lack of leasing prospects.
The gains on sales of properties of $0.9 million in 2018 related to a gain on the sale of an industrial property in Marshall, Michigan.
Off-Balance Sheet Arrangements
The Partnership is a co-borrower or guarantor of corporate borrowing facilities and debt securities of the Company (see notes 5 and 8 to the Partnership's unaudited condensed consolidated financial statements with respect to debt securities). In addition, the Partnership, from time to time, guarantees certain tenant improvement allowances and lease commissions on behalf of its subsidiaries when required by the related tenant or lender. However, the Partnership does not believe these guarantees are material to it as the obligations under and risks associated with such guarantees are priced into the rent under the applicable lease or the value of the applicable property.

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ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk relates primarily to our variable-rate indebtedness not subject to interest rate swaps and our fixed-rate debt. Our consolidated aggregate principal variable-rate indebtedness was $574.1 million at March 31, 2018, which represented 28.4% of our aggregate principal consolidated indebtedness. We had no consolidated variable-rate indebtedness outstanding at March 31, 2017. During the three-month periods ended March 31, 2018, our variable-rate indebtedness had a weighted-average interest rate of 2.8%. Had the weighted-average interest rate been 100 basis points higher, our interest expense for the three months ended March 31, 2018 would have increased by $1.3 million. As of March 31, 2018 and 2017, our aggregate principal consolidated fixed-rate debt was $1.4 billion and $1.9 billion, respectively, which represented 71.6% and 100.0%, respectively, for our aggregate principal indebtedness.

For certain of our financial instruments, fair values are not readily available since there are no active trading markets as characterized by current exchanges between willing parties. Accordingly, we derive or estimate fair values using various valuation techniques, such as computing the present value of estimated future cash flows using discount rates commensurate with the risks involved. However, the determination of estimated cash flows may be subjective and imprecise. Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. The following fair value was determined using the interest rates that we believe our outstanding fixed-rate indebtedness would warrant as of March 31, 2018. We believe the fair value is indicative of the interest rate environment as of March 31, 2018, but this amount does not take into consideration the effects of subsequent interest rate fluctuations. Accordingly, we estimate that the fair value of our fixed-rate indebtedness was $1.4 billion as of March 31, 2018.

Our interest rate risk objectives are to limit the impact of interest rate fluctuations on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, we manage our exposure to fluctuations in market interest rates through the use of fixed-rate debt instruments to the extent that reasonably favorable rates are obtainable with such arrangements. We may enter into derivative financial instruments such as interest rate swaps or caps to mitigate our interest rate risk on a related financial instrument or to effectively lock the interest rate on a portion of our variable-rate debt. As of March 31, 2018, we had five interest rate swap agreements (see note 7 to our unaudited condensed consolidated financial statements contained in this Quarterly Report).

The Partnership has similar exposure to market risk and interest rate risk relating to its variable-rate indebtedness because the Partnership is a co-borrower of certain of the Company's variable-rate debt.

ITEM 4. CONTROLS AND PROCEDURES

Lexington Realty Trust:

Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as such terms are defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report to determine if such controls and procedures were effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specifi