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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 September 30, 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, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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: 236,274,338 common shares of beneficial interest, par value $0.0001 per share, as of November 2, 2018.
 
 
 
 
 
 
 
 
 
 



EXPLANATORY NOTE

This report combines the Quarterly Reports on Form 10-Q for the period ended September 30, 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 September 30, 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)
 
September 30, 2018
 
December 31, 2017
Assets:
 
 
 
Real estate, at cost
$
3,005,959

 
$
3,936,459

Real estate - intangible assets
418,268

 
599,091

 
3,424,227

 
4,535,550

Less: accumulated depreciation and amortization
934,096

 
1,225,650

Real estate, net
2,490,131

 
3,309,900

Assets held for sale
134,744

 
2,827

Cash and cash equivalents
128,444

 
107,762

Restricted cash
263,543

 
4,394

Investment in and advances to non-consolidated entities
70,879

 
17,476

Deferred expenses, net
15,211

 
31,693

Rent receivable – current
3,584

 
5,450

Rent receivable – deferred
54,551

 
52,769

Other assets
10,853

 
20,749

Total assets
$
3,171,940

 
$
3,553,020

 
 
 
 
Liabilities and Equity:
 

 
 

Liabilities:
 

 
 

Mortgages and notes payable, net
$
585,369

 
$
689,810

Revolving credit facility borrowings

 
160,000

Term loans payable, net
447,099

 
596,663

Senior notes payable, net
495,825

 
495,198

Trust preferred securities, net
127,271

 
127,196

Dividends payable
48,384

 
49,504

Liabilities held for sale
1,446

 

Accounts payable and other liabilities
29,239

 
38,644

Accrued interest payable
10,234

 
5,378

Deferred revenue - including below market leases, net
19,163

 
33,182

Prepaid rent
10,909

 
16,610

Total liabilities
1,774,939

 
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, 238,946,145 and 240,689,081 shares issued and outstanding in 2018 and 2017, respectively
24

 
24

Additional paid-in-capital
2,803,581

 
2,818,520

Accumulated distributions in excess of net income
(1,518,669
)
 
(1,589,724
)
Accumulated other comprehensive income
652

 
1,065

Total shareholders’ equity
1,379,604

 
1,323,901

Noncontrolling interests
17,397

 
16,934

Total equity
1,397,001

 
1,340,835

Total liabilities and equity
$
3,171,940

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Gross revenues:
 
 
 
 
 
 
 
Rental
$
91,815

 
$
89,704

 
$
283,986

 
$
265,923

Tenant reimbursements
8,143

 
7,985

 
24,102

 
23,549

Total gross revenues
99,958

 
97,689

 
308,088

 
289,472

Expense applicable to revenues:
 

 
 

 
 

 
 

Depreciation and amortization
(37,716
)
 
(43,495
)
 
(129,693
)
 
(128,706
)
Property operating
(10,678
)
 
(11,694
)
 
(33,061
)
 
(36,784
)
General and administrative
(7,482
)
 
(7,963
)
 
(23,899
)
 
(25,561
)
Litigation reserve

 
(2,050
)
 

 
(2,050
)
Non-operating income
766

 
1,005

 
1,666

 
4,997

Interest and amortization expense
(21,159
)
 
(18,887
)
 
(63,224
)
 
(57,828
)
Debt satisfaction gains (charges), net
(2,228
)
 
2,424

 
(2,228
)
 
2,378

Impairment charges and loan loss
(2,542
)
 
(21,986
)
 
(90,860
)
 
(43,577
)
Gains on sales of properties
202,371

 
10,645

 
239,577

 
55,078

Income before provision for income taxes and equity in earnings (losses) of non-consolidated entities
221,290

 
5,688

 
206,366

 
57,419

Provision for income taxes
(444
)
 
(375
)
 
(1,326
)
 
(1,174
)
Equity in earnings (losses) of non-consolidated entities
4

 
283

 
192

 
(1,064
)
Net income
220,850

 
5,596

 
205,232

 
55,181

Less net income attributable to noncontrolling interests
(2,834
)
 
(55
)
 
(3,225
)
 
(448
)
Net income attributable to Lexington Realty Trust shareholders
218,016

 
5,541

 
202,007

 
54,733

Dividends attributable to preferred shares – Series C
(1,573
)
 
(1,573
)
 
(4,718
)
 
(4,718
)
Allocation to participating securities
(253
)
 
(52
)
 
(279
)
 
(183
)
Net income attributable to common shareholders
$
216,190

 
$
3,916

 
$
197,010

 
$
49,832

 
 

 
 

 
 

 
 

Net income attributable to common shareholders - per common share basic
$
0.91

 
$
0.02

 
$
0.83

 
$
0.21

Weighted-average common shares outstanding – basic
237,354,669

 
237,989,098

 
237,577,198

 
237,632,572

 
 
 
 
 
 
 
 
Net income attributable to common shareholders - per common share diluted
$
0.90

 
$
0.02

 
$
0.83

 
$
0.21

Weighted-average common shares outstanding – diluted
246,058,298

 
241,702,715

 
241,660,588

 
241,442,227

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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
220,850

 
$
5,596

 
$
205,232

 
$
55,181

Other comprehensive income (loss):
 

 
 

 
 

 
 

Change in unrealized gain (loss) on interest rate swaps, net
(446
)
 
67

 
(413
)
 
1,543

Other comprehensive income (loss)
(446
)
 
67

 
(413
)
 
1,543

Comprehensive income
220,404

 
5,663

 
204,819

 
56,724

Comprehensive income attributable to noncontrolling interests
(2,834
)
 
(55
)
 
(3,225
)
 
(448
)
Comprehensive income attributable to Lexington Realty Trust shareholders
$
217,570

 
$
5,608

 
$
201,594

 
$
56,276

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)

Nine Months Ended September 30, 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

Redemption of noncontrolling OP units for common shares

 

 

 
63

 

 

 
(63
)
Issuance of common shares and deferred compensation amortization, net
5,016

 

 

 
5,016

 

 

 

Repurchase of common shares
(17,387
)
 

 

 
(17,387
)
 

 

 

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

 

 
(2,544
)
 

 

 

Forfeiture of employee common shares
(71
)
 

 

 
(87
)
 
16

 

 

Dividends/distributions
(133,667
)
 

 

 

 
(130,968
)
 

 
(2,699
)
Net income
205,232

 

 

 

 
202,007

 

 
3,225

Other comprehensive loss
(413
)
 

 

 

 

 
(413
)
 

Balance September 30, 2018
$
1,397,001

 
$
94,016

 
$
24

 
$
2,803,581

 
$
(1,518,669
)
 
$
652

 
$
17,397



Nine Months Ended September 30, 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

Redemption of noncontrolling OP units for common shares

 

 

 
574

 

 

 
(574
)
Issuance of common shares and deferred compensation amortization, net
23,069

 

 

 
23,069

 

 

 

Dividends/distributions
(132,789
)
 

 

 

 
(130,226
)
 

 
(2,563
)
Net income
55,181

 

 

 

 
54,733

 

 
448

Other comprehensive income
1,543

 

 

 

 

 
1,543

 

Balance September 30, 2017
$
1,359,495

 
$
94,016

 
$
24

 
$
2,824,379

 
$
(1,576,459
)
 
$
510

 
$
17,025


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)
 
Nine Months Ended September 30,
 
2018
 
2017
Net cash provided by operating activities:
$
169,656

 
$
172,407

Cash flows from investing activities:
 

 
 

Acquisition of real estate, including intangible assets
(207,791
)
 
(418,574
)
Investment in real estate under construction

 
(81,364
)
Capital expenditures
(11,349
)
 
(13,367
)
Net proceeds from sale of properties
807,739

 
186,499

Net proceeds from sale of non-consolidated investment

 
6,127

Principal payments received on loans receivable

 
89,670

Investments in and advances to non-consolidated entities
(8,580
)
 
(4,068
)
Distributions from non-consolidated entities in excess of accumulated earnings
590

 
477

Increase in deferred leasing costs
(3,074
)
 
(5,284
)
Change in real estate deposits, net
(85
)
 
10,938

Net cash provided by (used in) investing activities
577,450

 
(228,946
)
Cash flows from financing activities:
 

 
 

Dividends to common and preferred shareholders
(132,088
)
 
(128,996
)
Principal amortization payments
(22,622
)
 
(23,243
)
Principal payments on debt, excluding normal amortization
(6,708
)
 
(41,488
)
Proceeds from term loans

 
95,000

Term loan payments
(151,000
)
 

Revolving credit facility borrowings
150,000

 
270,000

Revolving credit facility payments
(310,000
)
 
(70,000
)
Deferred financing costs
(667
)
 
(1,252
)
Payment of early extinguishment of debt charges

 
(55
)
Proceeds of mortgages and notes payable
26,350

 

Cash distributions to noncontrolling interests
(2,699
)
 
(2,563
)
Issuance of common shares, net of costs and repurchases to settle tax obligations
(2,818
)
 
16,848

Repurchase of common shares
(15,023
)
 

Net cash provided by (used in) financing activities
(467,275
)
 
114,251

Change in cash, cash equivalents and restricted cash
279,831

 
57,712

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

 
117,779

Cash, cash equivalents and restricted cash, at end of period
$
391,987

 
$
175,491

 
 
 
 
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
$
128,444

 
$
140,545

Restricted cash at end of period
263,543

 
34,946

Cash, cash equivalents and restricted cash at end of period
$
391,987

 
$
175,491

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
September 30, 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 September 30, 2018, the Company had ownership interests in approximately 145 consolidated real estate properties, located in 35 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 and nine months ended September 30, 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
September 30, 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 September 30, 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 September 30, 2018 and December 31, 2017:
 
September 30, 2018
 
December 31, 2017
Real estate, net
$
519,443

 
$
682,587

Total assets
$
674,523

 
$
766,025

Mortgages and notes payable, net
$
193,050

 
$
212,792

Total liabilities
$
204,072

 
$
226,331

In addition, the Company acquires, from time to time, properties using a reverse like-kind exchange structure pursuant to Section 1031 of the Internal Revenue Code (a "reverse 1031 exchange") and, as such, the properties are in the possession of an Exchange Accommodation Titleholder ("EAT") until the reverse 1031 exchange is completed. The EAT is classified as a VIE as it is a “thinly capitalized” entity. The Company consolidates the EAT because it is the primary beneficiary as it has the ability to control the activities that most significantly impact the EAT's economic performance and can collapse the 1031 exchange structure at any time. The assets of the EAT primarily consist of leased property (net real estate and intangibles).
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.

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit and per share/unit data)

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.
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 Section 1031 exchange agents and 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 (1) a $174 decrease in cash provided by operating activities for the nine months ended September 30, 2017 due partly to the reclassification of debt satisfaction payments to financing activities, (2) a $5,605 increase in cash provided by investing activities and (3) a decrease in cash used in financing activities of $1,627 for the nine months ended September 30, 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 property acquisitions in 2018 were accounted for as asset acquisitions. 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.

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit and per share/unit data)

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 Company adopted ASU 2017-05 effective January 1, 2018 using the modified retrospective approach, however there was no impact to prior balances as there were no open contracts at the date of adoption. During the nine months ended September 30, 2018, the Company entered into a transaction in which it contributed consolidated properties to a newly-formed joint venture and acquired a 20% interest in the joint venture. See note 6.
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 ASU 2018-11, Leases (Topic 842): Targeted Improvements in July 2018, which allows 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, under ASU 2018-11 companies may elect to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company expects to adopt this new guidance on January 1, 2019 utilizing the cumulative-effect adjustment outlined in ASU 2018-11 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 does not believe the adoption of the new guidance will 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
September 30, 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 and nine months ended September 30, 2018 and 2017:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
BASIC
 
 
 
 
 
 
 
Net income attributable to common shareholders
$
216,190

 
$
3,916

 
$
197,010

 
$
49,832

Weighted-average number of common shares outstanding - basic
237,354,669

 
237,989,098

 
237,577,198

 
237,632,572


 

 
 
 
 

 
 

Net income attributable to common shareholders - per common share basic
$
0.91

 
$
0.02

 
$
0.83

 
$
0.21

 
 
 
 
 
 
 
 
DILUTED
 
 
 
 
 
 
 
Net income attributable to common shareholders - basic
$
216,190

 
$
3,916

 
$
197,010

 
$
49,832

Impact of assumed conversions
4,159

 
(173
)
 
2,505

 
(192
)
Net income attributable to common shareholders
$
220,349

 
$
3,743

 
$
199,515

 
$
49,640

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding - basic
237,354,669

 
237,989,098

 
237,577,198

 
237,632,572

Effect of dilutive securities:
 
 
 
 
 
 
 
Unvested share-based payment awards and options
382,956

 
66,748

 
463,922

 
95,788

Preferred shares - Series C
4,710,570

 

 

 

OP Units
3,610,103

 
3,646,869

 
3,619,468

 
3,713,867

Weighted-average common shares outstanding - diluted
246,058,298

 
241,702,715

 
241,660,588

 
241,442,227

 
 
 
 
 
 
 
 
Net income attributable to common shareholders - per common share diluted
$
0.90

 
$
0.02

 
$
0.83

 
$
0.21

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
September 30, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit and per share/unit data)

(3)
Investments in Real Estate
The Company completed the following acquisition transactions during the nine months ended September 30, 2018:
Property Type
Location
Acquisition Date
Initial
Cost
Basis
Lease Expiration
Land and Land Estate
 
Building and Improvements
 
Lease in-place Value Intangible
 
Below-Market Lease Intangible
Industrial
Olive Branch, MS
April 2018
$
44,090

07/2029
$
1,958

 
$
38,687

 
$
3,445

 
$

Industrial
Olive Branch, MS
April 2018
48,575

06/2021
2,500

 
42,538

 
5,151

 
(1,614
)
Industrial
Edwardsville, IL
June 2018
44,178

05/2030
3,649

 
41,292

 
3,467

 
(4,230
)
Industrial
Spartanburg, SC
August 2018
27,632

07/2024
1,447

 
23,744

 
2,441

 

Industrial
Pasadena, TX
August 2018
23,868

08/2023
4,057

 
17,810

 
2,001

 

Industrial
Carrollton, TX
September 2018
19,564

03/2025
3,228

 
15,766

 
1,247

 
(677
)
 
 
 
$
207,907

 
$
16,839

 
$
179,837

 
$
17,752

 
$
(6,521
)

(4)
Dispositions and Impairment
During the nine months ended September 30, 2018 and 2017, the Company disposed of its interests in various properties for an aggregate gross disposition price of $967,799 and $190,368, respectively, and recognized aggregate gains on sales of properties of $239,577 and $55,078, respectively, including in 2018 the disposition of 21 office assets to a newly-formed joint venture with an unaffiliated third-party, NNN Office JV L.P. (“NNN JV”). See note 6. As of September 30, 2018, $256,808 of the sales proceeds, including interest thereon, were held with an EAT and are included in restricted cash on the Company's consolidated balance sheet.
During the nine months ended 2018 and 2017, the Company recognized debt satisfaction gains (charges), net of $(1,698) and $2,381, respectively, relating to sold properties. In addition, during the nine months ended September 30, 2017, the Company conveyed a vacant office property, along with its escrow deposits, in satisfaction of a $3,496 non-recourse mortgage loan.
As of September 30, 2018, the Company had six properties classified as held for sale. As of December 31, 2017, the Company had one retail property classified as held for sale. The properties were classified as held for sale because the properties were either under contract for sale and/or a sale of the property to a third party within the next 12 months was probable.
Assets and liabilities of held for sale properties as of September 30, 2018 and December 31, 2017 consisted of the following:
 
September 30, 2018
 
December 31, 2017
Assets:
 
 
 
Real estate, at cost
$
125,878

 
$
2,827

Real estate, intangible assets
15,352

 

Accumulated depreciation and amortization
(13,881
)
 

Rent receivable - deferred
4,897

 

Other
2,498

 

 
$
134,744

 
$
2,827

 
 
 
 
Liabilities:
 
 
 
Accounts payable and other liabilities
$
162

 
$

Prepaid rent
546

 

Deferred rent - below market lease, net
738

 

 
$
1,446

 
$


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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit and per share/unit data)

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 nine months ended September 30, 2018 and 2017, the Company recognized aggregate impairment charges on real estate properties of $90,860 and $38,283, respectively. Included in the impairment charges recognized during the nine months ended September 30, 2018, are impairment charges of $17,906 recognized on an office property in Overland Park, Kansas, $5,591 recognized on an office property in Kansas City, Missouri and $25,585 on an unencumbered office property in Memphis, Tennessee. The Overland Park, Kansas and Kansas City, Missouri properties are encumbered at September 30, 2018 by an aggregate of $47,685 of non-recourse mortgage loans, which are $25,060 in excess of the properties' estimated impairment date fair value. The Memphis, Tennessee property was classified as held for sale at September 30, 2018.
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.
(5)
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 September 30, 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
September 30, 2018
 
(Level 1)
 
(Level 2)
 
(Level 3)
Interest rate swap assets
$
652

 
$

 
$
652

 
$

Impaired real estate assets*
$
41,519

 
$

 
$

 
$
41,519

Impaired properties held for sale*
$
67,930

 
$

 
$
15,605

 
$
52,325

 
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. Fair value as of the date of impairment.
The table below sets forth the carrying amounts and estimated fair values of the Company's financial instruments as of September 30, 2018 and December 31, 2017.
 
As of September 30, 2018
 
As of December 31, 2017
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Liabilities
 

 
 

 
 

 
 

Debt
$
1,655,564

 
$
1,606,142

 
$
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 September 30, 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.

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit and per share/unit data)

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 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.
(6)
Investment in and Advances to Non-Consolidated Entities
Below is a schedule of the Company's investments in and advances to non-consolidated entities:
 
 
Percentage Ownership at
 
Investment Balance as of
Investment
 
September 30, 2018
 
September 30, 2018
 
December 31, 2017
NNN JV
(1)
20%
 
$
53,571

 
$

Etna Park 70 LLC
(2)
90%
 
6,288

 
5,831

Other
(3)
15% to 25%
 
11,020

 
11,645

 
 
 
 
$
70,879

 
$
17,476

(1)
During the nine months ended September 30, 2018, the Company disposed of 21 office assets to NNN JV for an aggregate gross disposition price of $725,800 and acquired a 20% interest in NNN JV. Two of the 21 properties, with a combined estimated fair value of $45,653, were contributed to NNN JV along with cash of $8,053. The Company recognized a gain of $14,645 in connection with the contribution of the two office assets to NNN JV, and in addition, NNN JV assumed an aggregate of $103,400 of non-recourse mortgage debt in the transaction. NNN JV obtained an aggregate of $362,800 of non-recourse mortgage financing which bears interest at LIBOR plus 200 basis points and has an initial term of three years but can be extended for two additional terms of one-year each. There is a rate increase of 15 basis points upon each extension. NNN JV entered into interest rate agreements which cap the LIBOR component of the $362,800 mortgage financing at 4.0% for two years. As of September 30, 2018, NNN JV had total assets of $758,307 and total liabilities of $490,451. The properties are encumbered by an aggregate of $466,200 of non-recourse mortgage debt.
(2)
Joint venture formed in 2017 with a developer entity to pursue industrial build-to-suit opportunities. The developer entity has substantive participation rights. The Company's initial investment of $5,831 was used to acquire a 151-acre parcel of developable land.
(3)
Represents three joint venture investments, which own single-tenant, net-leased assets. During 2017, the Company received $49,085 in full satisfaction of a construction financing arrangement that the Company previously provided to one of the investments.

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit and per share/unit data)

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.
During the nine months ended September 30, 2017, the Company recognized an impairment charge of $3,512 on its investment in a retail property in Palm Beach Gardens, Florida due to the bankruptcy of its tenant. This impairment charge reduced the Company's investment balance to zero. During the nine months ended September 30, 2018, the property was sold in a foreclosure sale.
(7)
Debt
The Company had the following mortgages and notes payable outstanding as of September 30, 2018 and December 31, 2017:
 
September 30, 2018
 
December 31, 2017
Mortgages and notes payable
$
590,635

 
$
697,068

Unamortized debt issuance costs
(5,266
)
 
(7,258
)
 
$
585,369

 
$
689,810

Interest rates, including imputed rates on mortgages and notes payable, ranged from 2.2% to 6.5% at September 30, 2018 and 2.2% to 7.8% at December 31, 2017 and all mortgages and notes payables mature between 2019 and 2036 as of September 30, 2018. The weighted-average interest rate was 4.5% and 4.6% at September 30, 2018 and December 31, 2017, respectively.
The Company had the following senior notes outstanding as of September 30, 2018 and December 31, 2017:
Issue Date
 
September 30, 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
 
(1,303
)
 
(1,507
)
 
 
 
 
 
 
Unamortized debt issuance cost
 
(2,872
)
 
(3,295
)
 
 
 
 
 
 
 
 
$
495,825

 
$
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
September 30, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit and per share/unit data)

The Company has an unsecured credit agreement with KeyBank National Association, as agent. In September 2018, the Company repaid $151,000 of the term loan that matures in 2020, reducing the current capacity of the facility to $954,000. 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%
$149,000 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 September 30, 2018, the revolving credit facility had no borrowings outstanding and availability of $505,000, subject to covenant compliance.
(2)
Initial balance was $300,000. 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 the then $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 $1,901 and $3,337 as of September 30, 2018 and December 31, 2017, respectively.

The Company was in compliance with all applicable financial covenants contained in its corporate level debt agreements at September 30, 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 September 30, 2018 was 4.0%. As of September 30, 2018 and December 31, 2017, there was $129,120 original principal amount of Trust Preferred Securities outstanding and $1,849 and $1,924, respectively, of unamortized debt issuance costs.

During the nine months ended September 30, 2018 and 2017, the Company incurred debt satisfaction charges, net of $530 and $3, respectively, on the retirement of various debt instruments, other than those disclosed elsewhere in the Company's condensed consolidated financial statements.

(8)
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.

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit and per share/unit data)

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 nine months ended September 30, 2018 and 2017.
As of September 30, 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 $652 will be reclassified as a decrease to interest expense.
As of September 30, 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 September 30, 2018 and December 31, 2017.
 
As of September 30, 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
 
$
652

 
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 nine months ended September 30, 2018 and 2017.
Derivatives in Cash Flow
 
 
Amount of Income
Recognized in OCI on Derivatives (Effective Portion)
September 30,
 
Location of (Income) Loss
Reclassified from
Accumulated OCI into Income (Effective Portion)
 
Amount of (Income) Loss Reclassified from Accumulated OCI into Income
(Effective Portion)
September 30,
Hedging Relationships
 
 
2018
 
2017
 
 
2018
 
2017
Interest Rate Swaps
 
 
$
600

 
$
581

 
Interest expense
 
$
(1,013
)
 
$
962

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 September 30, 2018, the Company had not posted any collateral related to the agreements.

19

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit and per share/unit data)

(9)
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 nine months ended September 30, 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.
(10)
Equity
Shareholders' Equity. During the nine months ended September 30, 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 nine months ended September 30, 2018 and 2017, the Company granted common shares to certain employees as follows:
 
Nine Months Ended September 30,
 
2018
 
2017
Performance Shares(1)
 
 
 
Shares granted:
 
 
 
Index - 1Q
331,025

 
106,706

Peer - 1Q
331,019

 
106,705

Index - 2Q


 
163,466

Peer - 2Q


 
163,463

 
 
 
 
Grant date fair value per share:(2)
 
 
 
Index - 1Q
$
5.81

 
$
6.82

Peer - 1Q
$
5.37

 
$
6.34

Index - 2Q


 
$
4.05

Peer - 2Q


 
$
4.27

 
 
 
 
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 nine months ended September 30, 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 nine months ended September 30, 2018 and 2017, the Company issued 57,055 and 44,238, respectively, of fully vested common shares to non-management members of the Company's Board of Trustees with a fair value of $518 and $463, respectively.

In July 2015, the Company's Board of Trustees authorized the repurchase of up to 10,000,000 common shares. During the nine months ended September 30, 2018, the Company repurchased and retired 1,871,655 common shares, at an average price of $8.01 per common share. No repurchases occurred during the nine months ended September 30, 2017. The Company records a liability for repurchases that have not yet been settled as of period end. There were $2,364 of unsettled repurchases as of September 30, 2018.

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit and per share/unit data)

A summary of the changes in accumulated other comprehensive income (loss) related to the Company's cash flow hedges is as follows:
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
Balance at beginning of period
 
$
1,065

 
$
(1,033
)
Other comprehensive income before reclassifications
 
600

 
581

Amounts of (income) loss reclassified from accumulated other comprehensive income (loss) to interest expense
 
(1,013
)
 
962

Balance at end of period
 
$
652

 
$
510

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 September 30, 2018, there were approximately 3,206,000 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.
(11)
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. 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 property was subsequently contributed to, and the financing assumed by, NNN JV. See note 6.
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.

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LEXINGTON REALTY TRUST AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit and per share/unit data)

(12)
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.
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, except for the following:
Cummins Inc. v. Lexington Columbus (Jackson Street) L.P. and Wells Fargo Bank, N.A. (State of Indiana, County of Bartholomew, in the Bartholomew Superior Court).  On October 25, 2018, Cummins Inc., the tenant in the Columbus, Indiana office building, filed a complaint for declaratory relief against Lexington Columbus (Jackson Street) L.P., the Company's property owner subsidiary, and Wells Fargo Bank, N.A., the trustee for the noteholders with a security interest in the office building.  Under the subject lease, Cummins Inc.’s tenancy extends through July 31, 2024, with options to further extend for additional time periods. Despite failing to timely exercise a purchase option for the office building that was expressly due by July 15, 2018, where time was of the essence, Cummins Inc. has asked the court for a declaration that it is entitled to purchase the building at the option price and to terminate the lease effective July 31, 2019. Cummins Inc. does not dispute that it failed to comply with the requirements of the purchase option, but alleges that it is entitled to relief under several equitable theories.  The Company believes that Indiana law supports the Company's right to retain ownership of the building and intends to vigorously defend this claim.
(13)
Supplemental Disclosure of Statement of Cash Flow Information
In addition to disclosures discussed elsewhere, during the nine months ended September 30, 2018 and 2017, the Company paid $55,033 and $50,691, respectively, for interest and $1,444 and $1,687, respectively, for income taxes.
(14)
Subsequent Events
Subsequent to September 30, 2018, the Company:
sold a property to an unrelated third party for a gross sales price of $16,000;
fully satisfied the remaining $149,000 of the term loan that was scheduled to mature in 2020; and
repurchased and retired 2,681,215 common shares at an average price of $8.06 per common share and increased repurchase authorization by 10,000,000 common shares.

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

 
September 30, 2018
 
December 31, 2017
Assets:
 
 
 
Real estate, at cost
$
616,242

 
$
794,242

Real estate - intangible assets
67,323

 
116,861

 
683,565

 
911,103

Less: accumulated depreciation and amortization
168,726

 
233,121

Real estate, net
514,839

 
677,982

Cash and cash equivalents
16,153

 
50,900

Restricted cash
83,198

 
932

Investment in and advances to non-consolidated entities
42,899

 
6,477

Deferred expenses, net
2,074

 
6,326

Rent receivable - current
302

 
365

Rent receivable - deferred
15,553

 
22,529

Other assets
667

 
2,202

Total assets
$
675,685

 
$
767,713

 
 
 
 
Liabilities and Partners' Capital:
 
 
 
Liabilities:
 
 
 
Mortgages and notes payable, net
$
193,050

 
$
212,792

Co-borrower debt
91,188

 
157,789

Related party advances, net
4,494

 
2,422

Accounts payable and other liabilities
4,403

 
8,748

Accrued interest payable
770

 
691

Deferred revenue - including below market leases, net
4,189

 
804

Distributions payable
14,953

 
14,952

Prepaid rent
1,576

 
3,233

Total liabilities
314,623

 
401,431

 
 
 
 
Commitments and contingencies

 

Partners' capital
361,062

 
366,282

Total liabilities and partners' capital
$
675,685

 
$
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 September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Gross revenues:
 
 
 
 
 
 
 
 
Rental
 
$
17,886

 
$
19,126

 
$
57,675

 
$
55,125

Tenant reimbursements
 
1,929

 
2,116

 
5,921

 
6,044

Total gross revenues
 
19,815

 
21,242

 
63,596

 
61,169

Expense applicable to revenues:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
(8,134
)
 
(10,114
)
 
(26,245
)
 
(28,495
)
Property operating
 
(2,537
)
 
(3,000
)
 
(7,967
)
 
(9,599
)
General and administrative
 
(1,558
)
 
(1,727
)
 
(5,231
)
 
(5,019
)
Non-operating income
 
168

 
3

 
335

 
235

Interest and amortization expense
 
(5,112
)
 
(4,099
)
 
(15,505
)
 
(11,438
)
Debt satisfaction charges, net
 
(832
)
 

 
(832
)
 

Impairment charges
 

 
(6,802
)
 
(23,938
)
 
(12,061
)
Gains on sales of properties
 
63,097

 

 
78,459

 

Income (loss) before provision for income taxes and equity in earnings of non-consolidated entities
 
64,907

 
(4,497
)
 
62,672

 
(5,208
)
Provision for income taxes
 
(4
)
 
(4
)
 
(41
)
 
(30
)
Equity in earnings of non-consolidated entities
 
82

 
79

 
406

 
338

Net income (loss)
 
$
64,985

 
$
(4,422
)
 
$
63,037

 
$
(4,900
)
Net income (loss) per unit
 
$
0.81

 
$
(0.05
)
 
$
0.78

 
$
(0.06
)
Weighted-average units outstanding
 
80,565,611

 
83,125,058

 
80,565,611

 
83,202,190


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)

Nine Months Ended September 30, 2018
 
Units
 
Partners' Capital
Balance December 31, 2017
 
80,565,611

 
$
366,282

Changes in co-borrower debt allocation
 

 
(23,399
)
Distributions
 

 
(44,858
)
Net income
 

 
63,037

Balance September 30, 2018
 
80,565,611

 
$
361,062

 
 
 
 
 
Nine Months Ended September 30, 2017
 
 
 
 
Balance December 31, 2016
 
83,241,396

 
$
387,623

Changes in co-borrower debt allocation
 

 
180,565

Redemption of OP units
 
(2,675,785
)
 
(129,990
)
Distributions
 

 
(48,573
)
Net loss
 

 
(4,900
)
Balance September 30, 2017
 
80,565,611

 
$
384,725


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)
 
Nine Months Ended September 30,
 
2018
 
2017
Net cash provided by operating activities
$
28,127

 
$
32,685

Cash flows from investing activities:
 
 
 
Acquisition of real estate, including intangible assets
(67,965
)
 
(24,317
)
Investments in real estate under construction

 
(20,894
)
Capital expenditures
(4,329
)
 
(3,925
)
Net proceeds from the sale of properties
206,929

 
7,106

Investment in and advances to non-consolidated entities
(8,085
)
 
(1,067
)
Distributions from non-consolidated entities in excess of accumulated earnings
477

 
855

Change in deferred leasing costs
(9
)
 
(2,157
)
Real estate deposits
(14
)
 
(24
)
Net cash provided by (used in) investing activities
127,004

 
(44,423
)
Cash flows from financing activities:
 
 
 
Distributions to partners
(44,857
)
 
(50,747
)
Principal amortization payments
(838
)
 
(785
)
Proceeds of mortgages and notes payable
26,350

 

Co-borrower debt borrowings (payments), net
(90,000
)
 
200,000

OP unit redemptions

 
(129,990
)
Deferred financing costs
(339
)
 
(13
)
Related party advances, net
2,072

 
8,124

Net cash provided by (used in) financing activities
(107,612
)
 
26,589

Change in cash, cash equivalents and restricted cash
47,519

 
14,851

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

 
53,576

Cash, cash equivalents and restricted cash, at end of period
$
99,351

 
$
68,427

 
 
 
 
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
$
16,153

 
$
66,887

Restricted cash at end of period
83,198

 
1,540

Cash, cash equivalents and restricted cash at end of period
$
99,351

 
$
68,427


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


26

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LEPERCQ CORPORATE INCOME FUND L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 September 30, 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 September 30, 2018, the Partnership had ownership interests in 26 consolidated real estate properties, located in 17 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 and nine months ended September 30, 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.

Exchange Accommodation Titleholder. The Partnership acquires, from time to time, properties using a reverse like-kind exchange structure pursuant to Section 1031 of the Internal Revenue Code (a "reverse 1031 exchange") and, as such, the properties are in the possession of an Exchange Accommodation Titleholder ("EAT") until the reverse 1031 exchange is completed. The EAT is classified as a VIE as it is a “thinly capitalized” entity. The Partnership consolidates the EAT because it is the primary beneficiary as it has the ability to control the activities that most significantly impact the EAT's economic performance and can collapse the 1031 exchange structure at any time. The assets of the EAT primarily consist of leased property (net real estate and intangibles).
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.


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Table of Contents
LEPERCQ CORPORATE INCOME FUND L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit data)

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 September 30, 2018, Lexington's common shares had a closing price of $8.30 per share. The estimated fair value of these units was $29,964, 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.

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 $44,858 ($0.56 per weighted-average unit) and $48,573 ($0.58 per weighted-average unit) to its partners during the nine months ended September 30, 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.

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LEPERCQ CORPORATE INCOME FUND L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018 and 2017
(Unaudited and dollars in thousands, except 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 Partnership's consolidated statement of cash flows for all periods presented. Restricted cash is comprised primarily of cash balances held in escrows by section 1031 exchange agents and 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 property acquisitions in 2018 were accounted for as asset acquisitions. 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 Partnership adopted ASU 2017-05 effective January 1, 2018 using the modified retrospective approach, however there was no impact to prior balances as there were no open contracts at the date of adoption. During the nine months ended September 30, 2018, the Partnership entered into a transaction in which it contributed a consolidated property to a newly-formed joint venture and acquired a 13.74% interest in the joint venture. See note 3.

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LEPERCQ CORPORATE INCOME FUND L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 ASU 2018-11, Leases (Topic 842): Targeted Improvements in July 2018 which allows 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, under ASU 2018-11 companies may elect to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Partnership expects to adopt this new guidance on January 1, 2019 utilizing the cumulative effect adjustment as outlined in ASU 2018-11 and continues to evaluate the impact that this guidance will have on its consolidated financial statements.

(2)
Investment in Real Estate

The Partnership completed the following acquisitions during the nine months ended September 30, 2018:
Property Type
Location
Acquisition Date
Initial
Cost
Basis
Lease Expiration
Land and Land Estate
 
Building and Improvements
 
Lease
in-place Value Intangible
 
Below-Market Lease Intangible
Industrial
Edwardsville, IL
June 2018
$
44,178

05/2030
$
3,649

 
$
41,292

 
$
3,467

 
$
(4,230
)
Industrial
Pasadena, TX
August 2018
23,868

08/2023
4,057

 
17,810

 
2,001

 

 
 
 
$
68,046

 
$
7,706

 
$
59,102

 
$
5,468

 
$
(4,230
)
During the nine months ended September 30, 2018, the Partnership disposed of its interest in eight properties for a gross disposition price of $283,228, including the disposition of five properties to a newly-formed joint venture with an unaffiliated third-party, NNN Office JV L.P (“NNN JV”). See note 3. The Partnership recognized aggregate gains on sales of properties of $78,459 and $832 of debt satisfaction charges in connection with the dispositions. As of September 30, 2018, $80,137 of the 2018 sale proceeds, including interest thereon, were held in an EAT and are included in restricted cash on the Partnership's consolidated balance sheet. During the nine months ended September 30, 2017, the Partnership sold its interest in two vacant office properties for an aggregate gross sale price of $7,591. The Partnership had no properties classified as held for sale at September 30, 2018 and December 31, 2017.
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 nine months ended September 30, 2018 and 2017, the Partnership recognized aggregate impairment charges on real estate properties of $23,938 and $12,061, respectively. Included in the impairment charges recognized during the nine months ended September 30, 2018, is an impairment charge of $17,906 recognized on an office property in Overland Park, Kansas. The office property was encumbered at September 30, 2018 by a $32,297 non-recourse mortgage loan, which is $19,072 in excess of the property's estimated impairment date fair value.

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LEPERCQ CORPORATE INCOME FUND L.P. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018 and 2017
(Unaudited and dollars in thousands, except share/unit data)

(3)
Investments in and Advances to Non-Consolidated Entities

On September 1, 2012, the Partnership acquired a 2% equity interest in Net Lease Strategic Assets Fund L.P. (“NLS”). The Partnership's carrying value in NLS at September 30, 2018 and December 31, 2017 was $5,794 and $6,175, respectively. The Partnership recognized net income from NLS of $484 and $323 in equity in earnings from non-consolidated entities during the nine months ended September 30, 2018 and 2017, respectively. The Partnership contributed $68 and $1,067 to NLS during the nine months ended September 30, 2018 and 2017, respectively. In addition, the Partnership received distributions of $933 and $1,178 from NLS during the nine months ended September 30, 2018 and 2017, respectively.
During the nine months ended September 30, 2018, the Partnership contributed an office property with an estimated fair value of $28,879 and cash of $8,017 to NNN JV in exchange for a 13.74% interest in NNN JV. NLS also contributed an office property with an estimated fair value of $16,774 to NNN JV for a 6.26% interest in NNN JV. The Partnership recognized a gain of $9,638 in connection with the contribution of the office property to NNN JV. At September 30, 2018, NNN JV had total assets of $758,307 and total liabilities of $490,451. The properties are encumbered by an aggregate of $466,200 of non-recourse mortgage debt. For the nine months ended September 30, 2018, NNN JV generated gross revenues of $5,974 and a net loss of $676 of which the Partnership recognized a loss of $93 in equity in earnings (losses) from 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.
(4)
Fair Value Measurements

The following table presents the Partnership's assets measured at fair value as of September 30, 2018, aggregated by the level in the fair value hierarchy within which those measurements fall:
 
 
Balance
 
Fair Value Measurements Using
Description