Aug 23, 2008
Executives
Lisa Soares – IR Will Eglin – President CEO & COO Patrick Carroll – EVP, CFO & Treasurer Natasha Roberts – EVP & Director, Real Estate Operations
Analysts
John Guinee – Stifel Nicolaus Sabina Bhatia – Basso Capital Anthony Paolone – JP Morgan Chase Bob Hodakowski – Beacon Hill Advisors
Operator
Greetings and welcome to the Lexington Realty Trust Second Quarter Earnings Conference Call. At this time all participants are in listen-only mode.
(Operator instructions) It is now my pleasure to introduce your host, Lisa Soares. Thank you.
You may begin.
Lisa Soares
Thanks, Brian. Hello and welcome to the Lexington Realty Trust second quarter conference call.
The earnings press release was distributed over the wire this morning and the release and supplemental disclosure package will be furnished on a Form 8-K. In the press release in supplemental disclosure package, Lexington has reconciled all non-GAAP financial measure to the most directly comparable GAAP measure in accordance with Regulation G requirements.
If you do not receive a copy, these documents are available on Lexington's Web site at www.lxp.com in the Investor Relations section. Additionally, we are hosting a live webcast of today's call which you can access in the same section.
At this time, management would like me to inform you that certain statements made during this conference call which are not historical may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Lexington believes that expectations reflected in any forward-looking statements are based on reasonable assumptions, Lexington can give no assurance that its expectations will be attained.
Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in today's press release and from time to time in Lexington's filings with the SEC. Lexington does not undertake a duty to update any forward-looking statement.
With us today from management are Will Eglin, CEO and President, Patrick Carroll, Chief Financial Officer, Natasha Roberts, Executive Vice President and Director of Real Estate Operations, and other members of management. I'd like to turn the call over to Will for his opening remarks.
Will Eglin
Thanks, Lisa, and welcome to all of you. Thank you for listening in to our second quarter conference call.
We are pleased to report that our results for the second quarter of 2008 showed good progress on a number of our key initiatives during a time of continuing uncertainty in the capital markets. For the quarter, our reported funds from operations were $0.73 per share.
However, we believe it is more appropriate to focus on the adjusted funds from operations per share of $0.40, which excludes about $0.33 per diluted share of one-time items. These items are detailed in the earnings release, and Pat Carroll, our CFO will walk through them in detail in his remarks.
From an investment standpoint, it was a quiet quarter, with activity limited to capitalizing on conditions in the debt markets by repurchasing $121 million face value of our senior securities at a 28.8% discount. That being said, we see some good opportunities in our acquisition pipeline compared to last quarter and believe that attractive investment opportunities will continue to arise over the balance of the year.
We hope to capitalize on these opportunities by selectively growing our portfolio and leveraging our capital through joint venture, including our existing co-investment program with Inland and two other joint venture programs that we are working on. Last month we completed the sale leaseback of the newly constructed headquarters of Applebee's restaurants at roughly a 9% cap rate on a 15-year lease with annual 1.5% escalation.
And we have two other transactions in our pipeline totaling about $67 million at cap rate north of 8.5%, each with escalations of 2% to 3% per year. But we can give no assurance that we will complete either of these transactions.
We continue to improve the company's financial flexibility, as we reduced overall leverage by $146 million and ended the quarter with $177 million of cash, and our $200 million bank line continues to be fully available. As part of our diversified portfolio of business line, we continue to expect that our investment in Concord Debt Holdings, which invests in real estate loan assets and debt securities to yield about 10% this year, excluding impairments.
Earlier this month, Concord announced that it completed a detailed review of its portfolio and was taking a charge in the second quarter of $52.6 million, about half of which impacted our results. Concord also announced that Inland American had committed $100 million of capital to make new investments.
This is a very positive development as it provides Concord with growth capital while allowing Lexington to reduce its capital investment to $100 million over time as loans in that portfolio mature. As a result, we are executing on our strategy of enhancing our return on equity in Concord while lowering our exposure.
And earlier this week, we received $10 million capital distribution from Concord toward this objective. Moving on to our joint venture programs, in the second quarter of 2008, we had our final closing on the initial assets for our co-investment program with Inland, and we remain very optimistic about our opportunities to grow this program.
We and Inland have committed an aggregate of an additional $150 million of capital to make new investments, and assuming 60% leverage this equates to approximately $400 million of buying power. We also believe that as part of our strategy to enhance value, pursuing and executing well on our divestiture program and related capital recycling is very important.
To that end, during the second quarter we completed five asset sales for $46.1 million at a cap rate of 7.4%. We continue to be highly disciplined from a pricing perspective, and as we expected, disposition activity is slowing down and is likely to be modest over the balance of the year.
We've had two small sales totaling $9 million in the third quarter at a cap rate of about 5.6%, and we have $13.6 million of property under contract, and all of these sales are retail properties. On the leasing front, we had a highly successful quarter with 37 leases executed for 1.5 million square feet, and we are presently working on about 1.1 million square feet of leases, which is a modest decline from last quarter and last year that reflects both our success in addressing near-term lease rollovers and also a slower economy.
But so far we've executed about 365,000 square feet of leases in the third quarter. Now I'll turn the call over to Pat Carroll who will take you through our results in more detail.
Patrick Carroll
Thanks Will. The results of operations in the second quarter of '08 include the impact of the acquisition of our four co-investment programs in the second quarter of '07 and the formation of our co-investment program with Inland in the fourth quarter of '07.
These are significant drivers of fluctuations between comparable periods. During the quarter, Lexington had gross revenues of $128.7 million, comprised primarily of base primes and tenant reimbursements.
The increase in rental revenue in the second quarter of '08 over second quarter of '07 in addition to the acquisition of our former co-investment programs, the establishing of Inland's co-investment program, relates to the receipt of $28.7 million in lease termination payments, offset by $4.1 million accelerated amortization of above and below market leases and deferred rent receivables in the second quarter of '08 relating to two terminated leases. Reduction in advisory fees relates to incentive fees earned in the second quarter of '07, relating to the acquisition of two co-investment programs.
Non-operating income increased $16.3 million in the second quarter of '08, compared with the second quarter of '07, relating primarily to the receipt of land in connection with our lease termination in Baltimore, Maryland. Debt satisfaction gains of $27 million related to satisfying a portion of our exchangeable notes and our trust-preferred securities at a discount to the original principal.
Gains on sales of affiliates of $8.6 million is a gain we've recognized on the sale of an asset to our newly formed Inland co-investment program. Equity in earnings of loss of non-consolidated entities was a loss of $27.2 million in the second quarter of '08, which relates primarily to our share of the impairment charge reported by Concord.
The income of $38.4 million in the second quarter of '07 related primarily to the gain realized at the joint venture level on the sale of certain properties. Under GAAP, we are required to recognize revenue on a straight line basis over the non-cancelable lease term with any periods covered by a bargain renewal option.
In addition, the amortization of above and below market leases are included directly in rental revenue. In the quarter, cash rents were in excess of GAAP rents by about $9.5 million, including the effect of above and below market leases.
We have also included in the supplement on Page 41 our estimates of both cash and GAAP rents for the remainder of 2008 through 2012. Quarterly G&A decreased by about $5 million compared to the same quarter last year.
The primary driver for this decrease was a $4.5 million severance charge incurred in the second quarter of '07. Now turning to the balance sheet, we believe our balance sheet continues to be in good shape and provides us the financial flexibility to take advantage of any compelling investment opportunities.
We had $177 million of cash at quarter-end including cash classified as restricted. Restricted cash balances relate to money held with qualified intermediaries to complete tax free exchanges.
At quarter end, we had about $2.5 billion of debt outstanding, including $5.6 million in debt on properties held for sale together we had a weighted average interest rate of about 5.6%. Included in intangibles is the allocation of the purchase price of properties related to in-place above market leases and customer relationships in accordance with FAS 141.
Also we have approximately $170 million in below market lease liabilities. Included in properties held for sale is one property that met the accounting definition of held for sale, and the liabilities in discontinued operations of $7.1 million is primarily bank debt.
Significant components of other assets and liabilities are included on Page 32 of our supplement. During the quarter ended June 30, '08, the company capitalized $1.1 million in lease costs, mainly commissions, and $6.4 million in CapEx costs, relating primarily to the build out of space in our property in Las Quintas and Beaumont, Texas, the new tenants we signed at the end of '07 and in the first six months of '08.
Also, as of June 30, '08, we have only $6.1 million in mortgages maturing during the remainder of '08 at a weighted average interest rate of 7.3%. In 2009, we have mortgages maturing of $68.8 million at a weighted average interest rate of 5.9%, and $197.9 million term loan that is supported by 39 properties at annual EBITDA of $49 million.
In addition, we have unencumbered asset-based that generated approximately $36 million of revenue that we can use to facilitate refinancing. While our term loan and undrawn $200 million credit facility expire in 2009, we believe it's premature to lock in anything at this juncture, but are reviewing our alternatives with our bankers and financial advisors in order to find the most attractive options.
Now I'd like to talk about FFO for the quarter and for the six months. Company FFO as reported was $77.7 million.
That does, though include many – as Will mentioned, many nonrecurring items, and I'd like just to walk through them now. The first one was lease termination payments, including the write-off of above and below market leases of $34.9 million.
We also had debt satisfaction gains of $28 million. Those two did increase the reported FFO.
Our reported FFO was also reduced by $27.3 million impairment charge related primarily to Concord, and about $200,000 in costs related to the formation of Inland that we were required to expense. When you take those four items out of the $77.7 million, it comes down to a FFO of $42.3 million, or $0.40 per share compared to the $0.73 that we did report.
Looking at the six months, very similar categories, reported FFO was $122 million, or $1.15 per share. Again, the nonrecurring items in the six months were lease terminations of $34.9 million, debt satisfaction gains of $40.2 million.
Those two items had the effect of increasing reported FFO, but we also had impairment charges of $32.7 million, mainly Concord and our investment in Wells. Also, we had about $2 million in severance costs during the six months, and we incurred about $1.1 million in costs related to the formation of the Inland joint venture.
When you take all those nonrecurring items together and take it away from reported FFO of $122 million, you come to what I would consider a recurring FFO of $82.7 million, or $0.78 per share. Now I'd like to turn the call over to Natasha Roberts, our Executive Vice President, Director of Real Estate Operations to discuss our leasing and expansion activity.
Natasha?
Natasha Roberts
Thanks, Pat. As of June 30, 2008, after selling five properties at $46.1 million during the second quarter, and including the 47 properties that are held in joint ventures, our portfolio totaled approximately 49 million square feet.
37 leases were either executed or extended in the second quarter. This led to an occupancy level of approximately 95% at quarter end, and tenant interest in renewing expiring leases remains solid and is largely unchanged from last quarter.
We expect to remain at or above our current occupancy level through year-end. Let me now provide some additional detail on the 37 leases we signed in the second quarter, representing approximately 1.5 million square feet.
Out of the 37 leases, 14 were new and accounted for about 450,000 square feet. 23 were renewals or extensions which accounted for about 1.1 million square feet.
We lost approximately 8,000 square feet of occupancy due to lease expirations during the quarter, and 25,000 square feet of occupancy due to the termination of the Citigroup lease for Irvine, California. Subsequent to the close of the quarter on June 30, 2008, we executed four leases totaling approximately 365,000 square feet and are currently negotiating ten new leases and three lease extensions totaling approximately 1.1 million square feet.
We are currently working on expansion totaling approximately 145,000 square feet at three locations, and we have one other potential expansion project in discussion, estimated at 60,000 square feet. During the quarter, we terminated our lease with Citigroup in the Associates First Building in Irvine, California.
We have a 64% limited partnership interest in the building. The Citigroup lease was to expire September 8, 2008.
This 136,000 square foot office and data center was mostly subleased, and we've been able to negotiate direct deals in approximately 50% of the building. In the fourth quarter, our leases with Raytheon on a 480,000 square foot office building and a 200,000 square foot industrial building in Long Beach, California will expire.
The office building is also largely subleased. And we have been able to negotiate lease extensions with some of the subtenants.
As of today, it is expected that at expiration of the Raytheon lease, the office building will be approximately 65% leased. We continue to remain optimistic that we will be able to fully lease these properties.
Our tenant improvement allowances for office space have remained unchanged from the last quarter and have ranged from $0 per square foot to $15 per square foot for renewing tenants to $20 per square foot to $40 per square foot for a new tenant. Tenant improvement allowances for industrial space have ranged from $0 per square foot to $1.50 per square foot for renewing tenants and $1.00 per square foot to $3.00 per square foot for new tenants.
Leasing commissions could range from 0% to 4.5% for a renewing lease and 4.5% to 6.75% for a new lease. We have budgeted $6 million in tenant improvement and leasing costs for the balance of 2008, $28 million for 2009, and $31 million for 2010.
With regard to 100 Light Street, we have agreed on a plan for the renovation of the building lobby and redesign of the plaza surrounding the building. Under the plan, we will be spending approximately $22 million of the $27.1 million lease termination payment we received last quarter.
This money will be spent on the building in the plaza over the next 36 months. Of the $22 million, approximately $14 million will be spent on necessary improvements for the building facade, roof, plaza, and HVAC systems, including new chillers and a new cooling tower.
The balance will be spent on building renovations, a lobby upgrade, perimeter lighting, new elevator cabs, and plaza landscaping. As previously disclosed, an additional $22 million had been budgeted in 2008 for the construction of the new 10 story parking garage, scheduled for completion at year-end.
We are considering bringing this property to market, and preliminary estimates of value are in excess of $70 million. Upon the late lease and lease expiration in 2009, the property is expected to be 23% leased, assuming no additional leasing prior to expiration.
There has been interest in the building, and we still believe that we can get the building to at least 50% leased prior to the end of next year. Now I'll turn the call back over to Will.
Will Eglin
Thanks, Natasha. Overall, we believe Lexington is well-positioned strategically and from a capital perspective.
Leasing continues to be our greatest area of focus, and we are making good progress each quarter. We believe that our balance sheet is solid with acceptable leverage, limited near-term refinancing exposure, and sufficient liquidity, and we also have a strong financial capacity to act on investment opportunities which consists of our cash balances, our uncapped $200 million credit facility, our joint venture equity commitment from Inland, sales in our retail property portfolio, and we are amortizing about $170 million of mortgage debt over the next four to five years, which will help us deleverage the balance sheet.
Over the balance of the year, we expect to become a more active acquirer of properties mainly through joint ventures. We believe our joint venture capital and our own financial resources puts us in a strong position relative to our competition.
We have an established joint venture with Inland and are optimistic that we can begin another program later this year with another institutional investor. Our current expectation on guidance is for funds from operations per share to be in the range of $1.56 to $1.64 in 2008, and this is unchanged from last quarter and from the beginning of the year when we gave our guidance.
This range does not include items that should be considered nonrecurring, such as lease termination revenue and gains on discharge of indebtedness as detailed in today's press release. Operator, that concludes our formal remarks, and we'll turn it over to you to conduct the question-and-answer session.
Operator
(Operator instructions) Our first question comes from the line of John Guinee with Stifel Nicolaus.
John Guinee – Stifel Nicolaus
John Guinee here. Pat, just to clarify, looks to me like you've got $28 million of lease termination offset by $4.1 million of accelerated amortization so that gives you a net of $24.6 million.
What's the rest of difference to get to $34.9 million?
Patrick Carroll
John, you're cutting in and out. I can't hear you.
John Guinee – Stifel Nicolaus
Your lease termination and amortization of above market leases shows up as $34.9 million. But then on the previous page it looks to us as if its $28.7 million with a $4.1 million offset, for $24.6 million, which leaves about a $10 million gap.
Patrick Carroll
That was deferred rent receivables.
John Guinee – Stifel Nicolaus
On your equity and earnings from joint venture, you went from 5.5 positive in the first quarter to 27.2 negative in the second quarter. 16.9 of that negative was Concord.
What was the rest of the $32.2 million swing?
Patrick Carroll
The second quarter impairment charge was – our share of it was $27.3 million. That's our share of Concord and a small write-off on the Lex-Win investment.
And the NLS joint venture due to depreciation generate losses at that level. We have to pick up our share of those losses.
John Guinee – Stifel Nicolaus
So what's left in Lex-Win?
Patrick Carroll
Lex-Win, they sold their investment in Wells and it's winding down. There'll be nothing left in Lex-Win by this quarter, third quarter.
John Guinee – Stifel Nicolaus
Where does Lex-Win show up on your balance sheet?
Patrick Carroll
Investment and joint ventures. Investments and non-consolidated entities.
John Guinee – Stifel Nicolaus
So the $227 million investment in non-consolidated entities?
Patrick Carroll
It's in there.
John Guinee – Stifel Nicolaus
It shows here on Page 32 – it shows investment in the debt platform of $143 million and investment in net leased partnerships of $83 [ph] million.
Patrick Carroll
83.
John Guinee – Stifel Nicolaus
In one of those two numbers?
Patrick Carroll
It's like $9 million of the $80 million.
John Guinee – Stifel Nicolaus
And then where does the Inland JV show up?
Patrick Carroll
It shows up in the $80 million also.
John Guinee – Stifel Nicolaus
Looks like asset sales – I just looked at a few of these Carteret, New Jersey, Garwood, Walnut Creek. Carteret was a basis of $20.5 million and sold it for $14.3 million basis but well before depreciation.
Garwood, $12 million…
Patrick Carroll
John, you're breaking in and out. We can't hear you.
John Guinee – Stifel Nicolaus
Three of the five asset sales I could look up. And Carteret at a $20.5 million acquisition cost that you sold for $14.3 million, Garwood at a $12 million acquisition cost that you sold for $4.8 million, and Walnut Creek at an $18 million acquisition cost at you sold at $15 million.
Is that an accurate way to look at them?
Patrick Carroll
Assuming that you've checked the reported sale prices against the basis numbers, I don't have those in front of me. But the numbers that we sold them at are absolutely right, yes.
John Guinee – Stifel Nicolaus
Going back to the MLP fund, what's your preferred equity account in there now? As of 3/31, it was about $141 million.
What's your preferred equity now?
Patrick Carroll
It is a few million dollars more because of the last funding. I don't have my 10-Q in front of me, but it went up a couple of million dollars.
John Guinee – Stifel Nicolaus
It looks like you did something with your preferred C convertible.
Patrick Carroll
We repurchased 500 – we redeemed 501,000 shares of preferred C through the issuance of some common shares and some cash, and it generated about a 5.7 – we retired it at about $5.7 million less than what we sold it at. The preferred equity, John, as of the year end is at $162.5 million.
John Guinee – Stifel Nicolaus
Preferred C, you're giving your FFO number for the second quarter and guidance for the year. That gain is about $0.05, $0.055 a share.
Patrick Carroll
That gain's not in our FFO, John.
John Guinee – Stifel Nicolaus
Back out your preferred C.
Patrick Carroll
Preferred C is not in our FFO. It's treated as it's converted, so it's not in our FFO numbers at all.
John Guinee – Stifel Nicolaus
Looking at your GAAP rental number of $118 million in the second quarter, help us what's a good number for the rest of the year for your GAAP rental?
Patrick Carroll
Go to the Page 41 of the supplement and you have the GAAP rental for the remainder of '08.
John Guinee – Stifel Nicolaus
Got you.
Patrick Carroll
Anything else?
John Guinee – Stifel Nicolaus
How about straight line rent? It sounds like you had reverse straight line rent in the second quarter?
Patrick Carroll
We had cash in excess of GAAP of $9.5 million. The streamline rents were pretty much flat.
It was mostly the difference between above and below market leases, but we collected $9.5 million more in cash than we booked as revenue.
John Guinee – Stifel Nicolaus
Right. And you're expecting those reverse are to go to regular straight line rents for the rest of the year?
Patrick Carroll
Yes. If you look on the last page of the supplement, you'll see that.
Yes.
John Guinee – Stifel Nicolaus
CapEx in TI's and LC's for the second quarter were?
Patrick Carroll
As I said on the call, the leasing was $1.1 million, and the CapEx was $6.4 million.
John Guinee – Stifel Nicolaus
That last question on 100 Light Street, you came up with a value of about $70 million. Is that as of today, or does that include the garage at its completed state?
Patrick Carroll
No, that (inaudible) spending any more money as of today.
John Guinee – Stifel Nicolaus
So, safe to assume – okay. As is where is today.
All right. Thanks a lot.
Operator
(Operator instructions) Our next question comes from the line of Sabina Bhatia with Basso Capital.
Sabina Bhatia – Basso Capital
Hi, this is Sabina Bhatia from Basso Capital. A question about the secure term loan you have at KeyBanc.
You have $202.419 million outstanding which is due 06/2009. Is that correct?
Will Eglin
Yes, that's correct. We do have a six-month extension option on that term loan, so we can quickly–
Sabina Bhatia – Basso Capital
And is that your option?
Will Eglin
Yes.
Sabina Bhatia – Basso Capital
So there are no restrictions on that. But otherwise, the $202 million is due 06/09, right?
Will Eglin
That's right.
Sabina Bhatia – Basso Capital
And your credit facility, does that also have a one-year extension option?
Will Eglin
We've exercised that one-year extension option so that matures in June. But we don't presently have any outstanding under the credit line.
Sabina Bhatia – Basso Capital
Any plans as far as the secure line is concerned? Are you guys going to try and renegotiate it?
Anything on that end?
Will Eglin
It's something that we'll start working on. As Pat mentioned, that loan is supported by a collateral pool with EBITDA of about $49 million.
Sabina Bhatia – Basso Capital
Yes.
Will Eglin
We think we have a lot of collateral there, and we have other collateral that Pat went through as well that facilitate any refinancing. So we think it's a quite thoroughly collateralized loan.
We're always interested in refinancing and extending maturities whenever we can especially in the times that we're in right now. But we don't necessarily think that right now is the best time to go out to the market to try to refinance that.
Sabina Bhatia – Basso Capital
What sort of rates are you seeing right now in the market? I'm sure you have some kind of color from banks, so you kind of feedback from banks?
Will Eglin
Well, I will say that that loan, we timed the market very well and locked in to a LIBOR plus 60 basis point spread. If I were guessing the term loan market spread, they're probably wide and closer to like L plus 200 or so.
In the mortgage market, we're sort of modeling expected ten year fixed rates of about 6.5% right now. Yes, 6.5% to 7%, which is certainly a big change compared to a year, year and a half ago from a spread standpoint.
Sabina Bhatia – Basso Capital
Of course. Yes.
I'll just take a look out – keep a look out for this one. Okay.
Thanks a lot.
Operator
Our next question comes from the line of Anthony Paolone with JP Morgan Chase.
Anthony Paolone – JP Morgan Chase
Hi, thanks. Good morning.
Will, can you talk a little bit about just cap rates? And a few quarters ago it seemed like you thought they would still have room to move up, and now it sounds like maybe you're ready to make some acquisitions.
So can you give a sense as to where you're at the moment that makes sense here?
Will Eglin
Yes. There is a handful of situations.
One that we moved on quickly, and a couple of others. Everything that sort of interest to us is in the 8.5% to 9% area, and 18 months ago that was probably at least 100 basis points lower, probably 150.
So we expected the cap rates would move up, and there are a handful of transactions that we think are worth doing. There's not a whole lot of volume of opportunities on the market.
But we do think that the market is actually becoming quite inefficient. And if there are opportunities for us to sell assets like we have in second quarter of roughly 7.5% cap, and make a spread on recycling the capital, we think we're in that kind of market environment now.
Anthony Paolone – JP Morgan Chase
And the deals that you had 8.5% to 9%, these will be financed I think you mentioned in a prior question, like in the 6.5% to 7% range? Is that where mortgage financing is for this type of stuff?
Will Eglin
That's correct.
Anthony Paolone – JP Morgan Chase
And what kind of LTV do you think you can get on that?
Will Eglin
60 is what we're modeling currently.
Anthony Paolone – JP Morgan Chase
All right. And then on Concord, in terms of Inland's investment there, is it fair to assume with where you're at, so they're just another equity investor in the mix, or is it in a different part of the capital stock?
Will Eglin
No. On operating cash flow, they have a priority above us and Winthrop, but on a return to capital, we have the priority over them.
And probably get down to the $100 million threshold of our investment.
Anthony Paolone – JP Morgan Chase
And your $100 million, is that based on originally contributed capital or–?
Will Eglin
Yes. Yes.
Anthony Paolone – JP Morgan Chase
And are there any – can you give us a bit of a picture as to within Concord what might – did it have any lines of credit, covenants, networks, requirements, anything that can cause, like a liquidity issue in the near-term?
Will Eglin
I mean, they do have warehouse facilities. There are covenants in each one of them.
They are currently in compliance with the covenants and looking at the pro forma before the Inland deal, we got comfortable that there would be continuing compliance during the term.
Anthony Paolone – JP Morgan Chase
And once you get to $100 million, say, what happens then? Do you see yourselves wanting to still have the $100 million in there, or would you look to further reduce that as well in some way?
Will Eglin
I think when we get to that moment, we'll consider our options, and we're hopeful that Concord has continued to be a successful platform for this type of investing. We would have an interest perhaps in selling our position to another investor either in whole or in part at that time.
So we'll cross that bridge when we come to it based upon market conditions at the time.
Anthony Paolone – JP Morgan Chase
And then, Pat, on Northwest pipeline – well, I guess first question – on Northwest pipeline, I think it's an '09 expiration. What is the prospect of them renewing versus leaving that space?
Patrick Carroll
Northwest exercised their renewal option. And that was in the 365,000 square feet that we've extended this quarter.
Anthony Paolone – JP Morgan Chase
All right. And their renewal option in the dropdown there, will that reduce rent flow through FFO?
I think that was probably even before Newkirk so the accounting might be different?
Patrick Carroll
No. I mean, it'll be less rent, Tony, but the debt will be burned off, so the cash flow is really not a significant change.
Anthony Paolone – JP Morgan Chase
All right, that's all I have. Thanks.
Operator
(Operator instructions) Our next question comes from the line of Bob Hodakowski with Beacon Hill Advisors.
Bob Hodakowski – Beacon Hill Advisors
Yes. Question is with regard to your recent common equity offering, could you give us your thinking behind a capital raise at this point in time, please?
Will Eglin
Yes. We felt like we had a unique opportunity to retire big chunk of our debt at a significant discount.
We were not happy with the price that we sold equity at, but we had an opportunity to deleverage the balance sheet significantly and earn an unleveraged return of about 11%, which is far above what we can earn when we buy real estate. So we felt like it was a unique opportunity to capitalize on the trouble in the debt market versus being penalized or suffering from it.
And we do think that if the company can deleverage and earn a high rate of return – most times when companies deleverage it's dilutive, and in this case it wasn't. So that was a unique situation, and we did sell a small amount of equity to take advantage of that.
And that also allowed us to preserve all the cash in our balance sheet to maintain our financial flexibility.
Bob Hodakowski – Beacon Hill Advisors
Thank you.
Operator
We have a follow-up question from the line of John Guinee with Stifel Nicolaus.
John Guinee – Stifel Nicolaus
Yes, one more question. Of the $157 million of cash and $20 million of restricted cash, how much of that pretty much has to go into acquisitions to avoid any taxable gains?
And then how much is available for TI's, commissions, et cetera?
Will Eglin
It's just a restricted cash account, John.
Patrick Carroll
The restricted cash is what's sitting in the 1031 account, like $19 million. That's the one that we're obligated to buy property for to defer the tax gains.
John Guinee – Stifel Nicolaus
Where would you expect the $157 million to go between now and the end of the year? Share buyback, new acquisitions–
Will Eglin
No, not a share buyback. We bought back a lot of stock last year and de-equitized the balance sheet enough for this environment, John.
Yes, we'll look opportunistically at other areas of the capital stack to see if there's more opportunity there. There's a couple of acquisitions that we're working on, obviously, and we have some CapEx and leasing costs coming up.
So, if I were to hazard a guess right now without thinking that investment activity is going to be too heavy, maybe that number works down to, say, $100 million at the end of the year.
John Guinee – Stifel Nicolaus
It seems a little counterintuitive to be not happy with the price you got when you raised common and then still have $157 million of cash later.
Will Eglin
Well, we weren't – yes, we weren't particularly happy with the issue price, but we were very, very happy with the price that we bought the debt at, and that was really the trade. So overall, like I said, we earned a high rate of return; we got to wipe out $67 million of debt by writing a check for $42 million.
So that was one we quickly wanted to capitalize on.
John Guinee – Stifel Nicolaus
But why write a check for $42 million? Why issue 40-odd million of common at a price you don't like when you've got $157 million of cash on your balance sheet?
Will Eglin
Well, we still have the same cash that we had before, and I guess the question about looking at the future, John, is it can always get worse and it can always get better. If our share price were higher down the road, that would be fantastic, but that doesn't necessarily mean that the same opportunity would be there to retire the liability.
So that was our thinking. I think there's a value to maintaining financial flexibility right now.
John Guinee – Stifel Nicolaus
Thanks.
Operator
Seeing as there are no further questions, I'd like to turn the call back to management for any concluding remarks.
Will Eglin
Thank you all again for joining us this morning. We're very excited about our prospects for 2008, and as always, we appreciate your participation and support.
If you would like to receive our quarterly supplemental package, please contact Lisa Soares or you can find additional information on our company on our Web site, www.lxp.com. And in addition, as always, you may contact me or any of the other members of senior management with any questions that you may have.
Thank you, and good day, everyone.
Operator
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.