Aug 7, 2013
Executives
T. Wilson Eglin – President, CEO & COO E.
Robert Roskind – Chairman of the Board of Trustees Richard J. Rouse – Vice Chairman & CIO Patrick Carroll – EVP, CFO & Treasurer
Analysts
Sheila McGrath – Evercore Craig Mailman - Keybanc Capital Markets Anthony Paolone – JP Morgan John Guinee - Stifel Todd Stender – Wells Fargo Dan Donlan – Ladenberg Thalmann Jamie Feldman – Bank of America Merrill Lynch
Operator
Please standby we are about to begin. Good morning and welcome to the Lexington Realty Trust Second Quarter 2013 Earnings Conference Call.
At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. Today’s conference is being recorded.
It is now my pleasure to turn the floor over to your host Gabby Reyes, Investor Relations for Lexington Realty Trust. Please go ahead, ma’am.
Gabriela Reyes
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 and supplemental disclosure package, Lexington has reconciled all historical non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg-G requirements. If you did not receive a copy, these documents are available on Lexington’s website 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, I would like 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 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 statements. Joining me today from management are Will Eglin, Chief Executive Officer; Robert Roskind, Chairman; Rick Rouse, Chief Investment Officer; Patrick Carroll, Chief Financial Officer and other members of management.
T. Wilson Eglin
Thank you Gabby, and welcome to everyone and thank you for joining the call today. As always, I would like to begin by discussing our operating results and accomplishments for the quarter.
For the second quarter, our company funds from operations as adjusted were $0.25 per share as we continued executing very well in all areas that impact our business. The quarter was characterized by strong leasing activity of 2.1 million square feet of new and renewal leases signed, leading to an overall portfolio occupancy rate of approximately 97.9% at quarter end, and we completed an additional 2.5 million square feet of leases subsequent to quarter end.
In addition, we had solid execution on the investment front with property investments closed totaling $47.1 million. We funded an additional $7.7 million in our current build-to-suit projects, and we placed two new build-to-suit projects under contract for $37 million.
We believe our pipeline of similar opportunities remains robust and we currently expect to fund investments of at least $350 million to $400 million in 2013, our initial average yield in excess of 7.8%. We also made progress on capital recycling trimming $72.8 million of non-core assets from the portfolio.
Further, we continue to improve our balance sheet and lower our cost of capital, obtaining credit ratings from both Moody's and Standard & Poor's and successfully completing our first unsecured investment grade rated senior notes offering earlier than planned. In the quarter we retired $219.4 million of secured debt at a weighted average interest rate of 6.1%.
With respect to leasing we continued to achieve a strong pace of activity. In the second quarter of 2013, we executed a total of 2.1 million square feet of new leases and lease extensions that this total 1.8 million square feet were related to this property including six ten-year leases totaling 783,000 square feet.
During the quarter we had two leases totaling 87,000 square feet which expired and were not renewed. Overall in the quarter we extended 17 leases with annual GAAP rent of $22 million which represented a decrease of $400,000 compared to the previous rents.
Looking ahead we currently have 3.9 million square feet of space subject to leases that expire through 2014 or which are currently vacant. We believe that through the end of next year, we can address roughly half of such expiring or vacant square footage through extensions and dispositions.
And overall, we’re presently negotiating leases for approximately 2.5 million square feet. As a result of our leasing activity and new investments we now generate more than 30% of our revenue from leases of ten years and longer compared to approximately 17% a year ago.
Overtime, our goal continues to be to derive at least half of our revenue from leases ten years or longer providing additional cash flow visibility. Further, our single tenant lease rollover through 2017 has been reduced to 31.7% of revenue from 42.4% at quarter end a year ago.
By any measure, we believe we are making good progress and managing down our exposure to shorter term leases and expanding our weighted average lease term which was 7.7 years quarter end compared to the 6.5 years last year. Each of these metrics is an important measure of cash flow stability and we will continue to be focused on further improvement.
Supplementing our leasing and capital market success, we continue to add value to accretive of acquisitions of property subject to launch our net leases. We closed on two investments in the second quarter for $47.1 million at an average going in cap rate of 8.9%.
And, we now have four build-to-suit projects underway and one forward purchase contract for total commitment of $137.7 million of which $25.2 million has been invested through June 30, 2013. The property investments underlying these five projects have initial yield of 8% and GAAP yield of 9.4%, and our supplemental reporting package contains an estimated funding schedule for these projects.
The addition to our portfolio of long-term leases with escalating rents continues to be a priority for us in order to further strengthen our cash flows, extend our weighted average lease term, reduce the average age of our portfolio and support our dividend growth objectives. Based on our investment pipeline, we continue to anticipate stronger volume compared to last year.
Although, the pace of capital deployment has been a little slower than we expected. Furthermore, we are already building our pipeline for 2014 and 2015.
We believe that this increase in investment activity will contribute meaningfully to our company, fund some operations in 2014 and beyond. The opportunities we are currently working on are supported by long-term net leases at going in cap rates of between 6% and 9% typically with annual escalation of 2% to 3%.
Currently, we expect the build-to-suits, we’ll represent the largest allocation of capital for the balance of 2013, but we believe there are also attractive opportunities in sale/leaseback transactions, first mortgage lending on single-tenant properties and ground lease investments. Our successful asset recycling program has continued to help us drive down our cost of capital and generate proceeds for accretive acquisitions and debt repayments.
We continue to look at opportunities recycle capital with a focus on capturing the value of our multi-tenant and retail properties. In the second quarter of 2013, we disposed $72.8 million of non-core assets bringing our total for the year to $98 million and we will continue to look the capital recycling opportunities as part of the ongoing effort to further transform our portfolio.
The composition of our balance sheet improved dramatically in the quarter and we have included details in our supplemental disclosure package on pages 38 and 39 showing our credit metrics. In summary, we issued our first tranche of investment grade rated notes using the proceeds to retired debt due to mature in 2013 and 2014 extending our maturities, locking in 10 year fixed rate financing on attractive terms and executing on our stated goals to increase our sources of available capital.
These efforts continue to drive down our cost to capital. In the first six months of 2013, we obtained $354 million of fixed rate financing, but a current weighted average interest rate of 3.8% and a weighted average maturity of 9.5 years while reducing our leverage considerably.
As a result, we believe the company has substantial financial flexibility with $578 million of availability under its lending facilities. Our weighted average cost to debt been reduced to under 5% this year and our weighted average maturity has increased to 6.7 years from 5.4 years.
During the quarter we retired 219.4 million of secure debt which had a weighted average interest rate of 6.1% and we continue to unencumbered asset and reduce our secured debt. Our debt was 38.3% of our growth asset value at quarter end.
In addition to quarter end, $410.6 million over mortgages mature through 2015 at a weighted average interest rate of 5.4%. We expect these maturities to be addressed through a combination of additional asset dispositions and refinancing, which provide us significant opportunity to further lower our financing costs and unencumbered asset which we expect will improve our cash flow and financial flexibility.
While, we continue to unencumbered assets from time-to-time we may access the secured financing market when we believe it’s advantageous to do so particularly if 15 to 20 year fixed rate financing is available. In our supplemental on pages 38 and 39, we have provided financial disclosure which should be of continuing interest to fixed income investors.
Now, I’ll turn the call over to Pat, who will take you through our results in more detail.
Patrick Carroll
Thanks Will. During the quarter Lexington net gross revenues of $99.4 million, comprised primarily of lease rents and tenant reimbursements.
The increase compared to the second quarter 2012 of $18.6 million relates primarily to acquisitions and build-to-suit projects coming online, the acquisition of the NOS portfolio in the third quarter of 2012 and an increase in occupancy. In the quarter, GAAP rents were in excess of cash rents by approximately $9 million, including the effect of above and below market leases.
For the six months ended June 30th, 2013 GAAP rents were in excess of cash rents by approximately $2.5 million. We have a few leases that have uneven schedule rent payments whereby rent is paid annually and semiannually with larger payments being made in the first quarter compared to the remainder of the year.
On page 40 of the supplement, we have included our estimates of both cash and GAAP rents for the remainder of 2013 through 2017 for leases in place at June 30, 2013. We’ve also included same store and allied data and the weighted average lease term of our portfolio as of June 30, 2013 and 2012.
Property operating expenses increased primarily due to the NOS acquisition, plus increased use in occupancy in multitenant and properties with base year core structures. In the second quarter of 2013, we recorded $1.4 million in impairment of properties, $12.8 million in gains on sales of properties, and $30 million in net debt satisfaction charges relating to mortgages repaid prior to maturity, offset by gains recognized on mortgages satisfied through properties being transferred by a foreclosure in (inaudible).
On page 36 of the supplement, we have disclosed selected income statement data for our consolidated but non-wholly-owned properties and our joint venture investments. We have also included net non-cash income and expense recognized in the six months ended June 30, 2013, on Page 37 of the supplement.
For the six months ended June 30, 2013, our interest coverage was approximately 3.4 times and net debt-to-EBITDA was approximately 5.8 times. In 2011 and 2010, Lexington advanced money under a first mortgage loan secured by a property in Schaumburg, Illinois leased to Career Education Corporation, through December 2022.
Nupur (ph) interest at 15% and was scheduled to mature in January 2012, however, the borrower had to forfeit. Lexington ceased recognizing interest income on the loan, effective April 1, 2012, and is currently owed $26.2 million under the loan, including accrued interest.
We have reserved $4.6 million against this balance so far from a GAAP standpoint. So, our balance at June 30, 2013, was $21.6 million and no earnings have been recognized since the first quarter of 2012.
We have commenced foreclosure procedures and expect to gain control of the property that’s underlying our loan later on this year. We may also be obligated upon foreclosure, to fund a tenant improvement allowance of approximately $8.5 million.
The lease of the tenant is a net lease and provides for current annual base rent of approximately $4.2 million and annual GAAP-rent of approximately $4.5 million. Equity and earnings from joint ventures decreased by $10 million primarily due to our acquisition of our partners’ interest in NOS in the third quarter of 2012.
Turning to the balance sheet, we believe our balance sheet strong and we continue to increase our financial flexibility capacity. We had $94.8 million of cash at quarter end including cash classified as restricted.
Restricted cash balances relate primarily to money held with lenders as escrow deposits on our mortgages. At quarter end, we had about $1.8 billion of consolidated debt outstanding, with a weighted average interest rate of 5.4%, almost all of which is at fixed rates.
We have vented in LIBOR swaps and built $255 million outstanding on our term loan which matures in 2019 and $64 million outstanding on our term loan which matures in 2018. The current spread components on our 2019 term loan can range from 1.5% to 2.25% and our current spread interest rate is 1.75% and on the 2018 term loan, the spreads can range from 1.1% to 2.1% and we are currently at 1.35%.
During the quarter ended June 30, 2013, we satisfied $219.4 million in secured mortgage debt with a weighted average interest rate of 6.1%. We also issued $215 million tenure on secured bond at a coupon of four in a quarter.
Our obtaining investment grade bond rating also allowed us to reduce the spread in our term loans by 35 to 50 basis points and our credit facility by 60 basis point therefore reducing our interest cost. The significant components of other assets and liabilities are included on page 37 of the supplement.
During the quarter ended June 30, 2013, we paid approximately $2.1 million lease costs and approximately $13.5 million in tenant improvements. In our press release, we have a reconciliation of GAAP net income attributable to Lexington shareholders, the company FFO and company FFO to company FAD.
For the remainder of 2013, we project expected tenant improvement in lease costs to be approximately $20.7 million or $0.09 per share. This should bring our total occupancy related expenditure to 53.7 million for the year.
We expect these expenses to decline considerably next year due to the early expansion of post 2013 lease maturities and occupancy gains we had in 2013. Starting on pages 28 and page 32 of the supplement, we disclosed the details of all consolidated mortgages maturing through 2017, we have also included on page 15 of the supplement, the funding projections for our four current build-to-suit projects and one forward commitment.
Now, I would like to turn the call back over to Will.
T. Wilson Eglin
Thanks, Pat. In summary, we had another great quarter.
Occupancies continued to be strong and we have made good progress addressing leases expiring in 2014 and 2015. While the increase in interest rates in the second quarter suggest to us the transaction activity should temporarily moderate as buyers and sellers adjust the higher financing costs.
Our acquisition pipeline continues to be promising and we believe the company such as Lexington with access to multiple sources of capital and available capacity are well positioned to act on opportunities as they arrive. We expect to continue to execute proactively on leasing opportunities in order to maintain high levels of occupancy and address lease rollover risk, realize values on non-core properties and certain fully-valued properties, with a bias towards reducing our suburban office exposure, given improving pricing in this segment.
Capitalize on refinancing opportunities and finally invest in build-to-suit properties and other accretive investment opportunities. Today, we affirm guidance for 2013, and company funds from operations as adjusted within a range of $1.01 to $1.04 per share, reflecting good growth compared to 2012 and with a less-leveraged balance sheet then we had when the year began.
Our guidance is forward-looking and reflects the comments that we have made on today’s call and a diluted share count of roughly 228 million shares which includes 4.2 million shares underlying our 6% convertible guaranteed notes. We believe our company remains well positioned with an attractive dividend yield and a conservative payout ratio and the opportunity to continue to execute strategies which improve our cash flow, upgrade the quality of our portfolio, and provide ongoing value creation for our shareholders.
Operator, I have no further comments at this time, so we are ready for you to conduct the question and answer portion of the call.
Operator
Thank you. (Operator Instructions) And we will take our first question from Sheila McGrath with Evercore.
Sheila McGrath – Evercore
Yes, good morning. Will, I was wondering if you could comment on cap rate trends, but more specifically on the wide disparity of cap rates on the transactions that you closed this quarter.
I think there was one transaction over 10 and another just over 7?
T. Wilson Eglin
Yeah. With respect to the cap rates in our transactions, it’s typically a function of length of lease, and credit, and property tax.
So, generally, what you see, for longer leases is lower cap rates and for shorter leases, on new construction, higher cap rates. That simply reflects that with construction costs fairly high, you have a short lease, you need more rent to amortize your cast down to sensible residual exposure.
With respect to cap rates in general and this sector has absorbed in second-quarter roughly a 100 basis point increase in the 10-year yield on treasuries. That’s created in our minds during the last 60 days or so, a little bit of a slowdown in being able to make transactions work from a buyer and seller standpoint.
We think that that process is coming to an end. We’re more optimistic I would say about our acquisition pipeline this week, compared to last week.
Maybe it’s meant that in some cases cap rates have moved up 25 basis points or so, but it largely depends on the transaction. I still think for really high-quality projects there hasn’t been that much of a move in cap rates, at least in the auction market.
Sheila McGrath – Evercore
Okay.
T. Wilson Eglin
So, for most of what we’re looking at is sort of in the 7 to 7.5 cap area, with some cases higher.
Sheila McGrath – Evercore
Okay, and then if you could just give us an update, I know, like last quarter there was commentary about portfolios in the market, and we’ve seen some trade. I was just wondering, you know, your sense of other portfolio transactions on the horizon in that lease?
T. Wilson Eglin
Yeah, there has been quite a bit of portfolio activity in the net lease sector this year, probably more than in any other year. So, there are I think at least a couple of floating around right now.
In our minds, it’s better value for us to focus in the build-to-suit area. One of the things that’s driving the portfolio activity in the market is that there is a fairly significant premium associated with portfolio trade.
So, we’re more oriented towards the value that we can generate for shareholders in the build-to-suit market.
Sheila McGrath – Evercore
Okay, thank you.
Operator
And we will now go to David Sanus (ph) with Jefferies.
Unidentified Analyst
Great, good morning guys. You mentioned a few times about the pace of transactions being slower than you expected.
Just wondering, we can drill down a little bit into that. Is that really a result of less assets being placed on the market, or pricing just being a little bit too competitive for some assets, and then, lastly, are you seeing any differences between office, industrial, and retail with respect to transaction volumes and pricing?
Patrick Carroll
It’s a process. After the interest rates spiked as they have for buyers and sellers to rediscover the market when the transactions clear.
I don’t think that, that diminishes the volume of transaction activity, but we certainly had a couple of transactions in the second quarter that have taken longer to put under contract, simply because there’s, right, financing costs have increased and like I said, buyers and sellers had, I guess, different expectations. I view that as a temporary slowdown.
As I said earlier, this week we’re sort of more optimistic about transaction volume over the balance of the year. I think we feel like we’ve got pretty good visibility on about $250 million of new contracts, but I don’t think in – you know, it’s still – with respect to whether it’s office, industrial, and retail, I would say it’s not much change compared to a quarter ago.
Unidentified Analyst
Great, thanks. Then, just on the 2.5 million square feet that you leased subsequent to quarter end what were the leasing spread on that and were there any significant TIs?
T. Wilson Eglin
It was mainly industrial. So there is very limited TI and one of the lease we actually had pretty healthy increase in the rent, so that's positive.
You know what we have said about our portfolio is that are our industrial rents have been pretty much at market or chart below mentioning that 1-K but we still are in the process on office where we have been marketing rent down to market.
Unidentified Analyst
Okay. Fair enough.
And then Pat, just can you give us an update on how many mortgages are pre-payable at this point for 2014 and 2015 stuffs that’s coming due?
Patrick Carroll
Well anything in 2015 would be subject to your maintenance penalties currently. So everything is pretty payable just with regard.
You are not blocked out from paying. You just have to pay the old maintenance so you know, we pay the ones and fourteen we encourage those prepayment values 2015 one would be subject to prepayment on yield maintenance penalties, still we costly monitor that.
Unidentified Analyst
So, with given one of those prepayment penalties, how do you think it makes sense at this point to prepaid those?
Patrick Carroll
Not right now, no.
Unidentified Analyst
Okay. Great.
Thank a lot guys.
Operator
We will now go to Craig Mailman with Keybanc.
Craig Mailman - Keybanc Capital Markets
Hey guys! Just follow up on the commentary on slower transactions.
Have you guys tried to recreate anyone and maybe lost a couple of deals in the second quarter or on the offsite disposition, have you guys been re-traded and had to slow disposition at all?
T. Wilson Eglin
No, I don't think we have lost the transaction due to retreading. I think my outlook for acquisition volume is not diminished it's just is taking a little bit longer to put some transactions under contract.
And on the disposition side, no, there were no retreading due to the move.
Craig Mailman - Keybanc Capital Markets
Then I just want to clarify, well on your prepared remarks you talked about two-and-half subsequent quarter end then you said something about another 2.5 million under negotiations did I hear that correctly?
T. Wilson Eglin
Yes.
Craig Mailman - Keybanc Capital Markets
Okay. Alright, perfect.
T. Wilson Eglin
We are continuing to make that steady progress on lease rollover, obviously what we did in the last four months was a gigantic amount of leasing that the pay should be steady but slower going forward for the next couple of quarters.
Craig Mailman - Keybanc Capital Markets
Okay. So a lot of that additional 2.5 million 2014 are you guys able to go out to 2015 at all at this point or is it still kind of limited?
T. Wilson Eglin
We are working actively on 2015 rollover right now.
Craig Mailman - Keybanc Capital Markets
Alright. Then just lastly on the JP Morgan I saw you guys did one extension in South Carolina, but then it looks like what was the non renewal in South Carolina that same building with JP Morgan?
T. Wilson Eglin
Yes. The lease was scheduled to expire in October, they wanted to contract some space, we found a second plant to take up a large portion of the space they wanted to contract, so they get that second tenant in we allowed JP Morgan to contract the space a couple of months early.
Craig Mailman - Keybanc Capital Markets
Okay. Are you guys expecting they just give back the rest of the space next October?
T. Wilson Eglin
No, it’s vacant right now; they contracted effective, you know, it’s contracted as of June.
Craig Mailman - Keybanc Capital Markets
Okay. So, all this they can, they were just able to use kind for portion of it?
T. Wilson Eglin
We found this kind of proportion of that to get back and part of it is still vacant, that’s correct.
Craig Mailman - Keybanc Capital Markets
Alright, great. Thank you.
Operator
And, we will now go to Anthony Paolone with JP Morgan.
Anthony Paolone – JP Morgan
Alright, thanks. Are you guys seeing some of the other larger net lease companies being competitive in your product types as some of those have moved outside of their historical, you know, type products?
Patrick Carroll
Yeah, there are, I think there is more competition in build-to-suit, it’s also I think a more active market with the economy continuing to grow. But yeah, there is – a lot of net lease companies in the market now and certainly it’s a deeper market on the competition side.
Anthony Paolone – JP Morgan
I mean, if you look at, like your build-to-suit starts in the new activity announced, I mean, it’s just to deals, but if we blend that, yield it’s, you know, I think 7.6% we came up with, you know, how would that have compared to maybe a couple of years ago, and it just seems like it’s a little bit lower than sort of 8 to 9 range your prior deals that you’ve added into have been, so I’m wondering if you go down a little bit in yield get a little bit more lease term a little more credit quality, like do you have like, at what point do you start to pick up just volume, I get to do, you know, double that volume or something if you wanted to?
T. Wilson Eglin
Well, we are bidding a lot of transactions right now as I mentioned between sort of 7 and 7.5, if we were well below 7, we could certainly pickup lots more volume, you know, two years ago it was probably 8.5% to 9% market that reflects, you know, market conditions coming out of the financial crisis, but you know, it also reflects the fact that cap rates have come down, the financing cost have down a lot, our financing cost have come down, you know, very quickly over the last few years. So, there is very – there is still very healthy margin Tony compared to where we can finance, where we can originate build-to-suit, but our approach to investing in the space is not just to measure accretion by the spread we can earn, but to also take into account residual value and you know, obviously the accretion of any one of these transactions can’t be known until residual value is understood.
So, we tend to be a little bit more conservative than others, I think that’s really the driving for us behind our volume, you know, if we wanted to be more aggressive about residual value underwriting, we could do a lot more business, but you know, we still want to maintain our value oriented investments battle.
Anthony Paolone – JP Morgan
Okay. And then, can you just maybe hit on a few of the larger expirations for reminder of this year and into next or so like Honeywell progress, Siemens, some doesn’t, how they might be shaping out?
T. Wilson Eglin
With respect to this year, we just get to the lease expiration sheet. I think our prospects for, you know, tenant retention that at least for part of all of these buildings is, you know, fairly high, I would say the progress energy building in North Carolina is one that is going to be vacant.
We do have some vacant space remaining on the AT&T Services Building in Harrisburg because AT&A stayed in that building for substantial portion. We do think that Northrup Grauman will stay for 100% occupancy in [inaudible].
Honeywell were in negotiations with right now on a three year extension, but we are not certain about the outcome, but we think they do want to stand the building for a few years. Next year, you know, we do have some known vacancy coming, I think in Arlington Texas, the Siemens building we feel pretty optimistic they will have most of that building lease to a new tenant prior to now Siemens moving out.
The draft FCB building in Chicago, we think we can sale for more than mortgage balance and then, I guess, the other sort of barely sizeable known move out next year’s space labs in Washington and that one we have very high per square foot financing, which is non-recourse, so that’s likely to go back to the lender. In Rochester New York and other big rollover we think that the tenant there want to stay in a portion of the space and we have, I think an opportunity to lease a pretty good chunk of a balance to another tenant.
Anthony Paolone – JP Morgan
Okay. Thank you, very helpful.
Operator
And, we will now go to John Guinee with Stifel.
John Guinee - Stifel
I think Anthony Paolone asked a great question and so I have no questions. Thank you.
T. Wilson Eglin
Well done, Anthony.
Operator
And, we will now go to Todd Stender with Wells Fargo.
Todd Stender – Wells Fargo
Just to understand that theme, you renewed the two Michelin leases already in the third quarter that don’t expire till 2015. Can you just share with the leases were renewed at just one of them was a million plus square feet?
T. Wilson Eglin
The rents were roughly flat with where they were before and the one in Moody Alabama was one where we had a pretty decent increase in rental rate.
Todd Stender – Wells Fargo
Okay, thanks. And, what are you marketing for sale right now, any details you can provide and what’s currently marketed?
T. Wilson Eglin
Well, we have some of our smaller retail facilities being marketed; we are marketing our multi-tenant property in Richmond, which is just that capital one in that space that’s on the market. So that’s, you know, consistent with our strategy of trying to monetize multi-tenant assets after they have been leased up and that building, you know, sort of has, sort of 67% or so loan-to-value mortgage on it, so that would also reduce our secured debt and there is a few other transactions that we are marketing as well.
Todd Stender – Wells Fargo
And, capital one stuff, what do you think the cap rates will go at and is it going to be aided by having an assumable mortgage on?
T. Wilson Eglin
Well, since we are in sort of the best and final round of negotiating with bidders, we don’t want to discuss pricing, but arguably since the mortgage on that building only has a couple of years to run, it’s not adding, you know, I don’t think it’s adding to the value the building.
Todd Stender – Wells Fargo
Okay, thanks. Your average lease term is now getting close to eight years, if you just look at the announced build-to-suits that are expected to be completed over the next couple of quarters and then year plan disposition, what do you think the net least, what do you think the average lease term will look like, call it 12 months from now…?
T. Wilson Eglin
Well, we certainly hope to have it over 8, not 12 months from now, but some of that – a fair portion of that will be derivative of how much new volume comes online.
Todd Stender – Wells Fargo
Okay, thank you.
Operator
And, we will now go to Dan Donlan with Ladenberg Thalmann.
Dan Donlan – Ladenberg Thalmann
Thank you, good morning. Well, it looks like the Gander Mountain stuff that you guys sold in the quarter, you also developed that as well, you know, less than a year ago, is there any talk about why you decided to sell them?
T. Wilson Eglin
Sure, I mean, sometimes when we go into build-to-suit, you know, it’s with the intention of seeing whether we can flip the project and make again. We like the company, Gander is doing very well and our plan is to hold on to some Gander Mountain stores that we are building, but we felt like just to maintain the right portfolio allocation exposure that seeing if we could develop some and flip them into the market and generate again, you know, with sensible of course.
Dan Donlan – Ladenberg Thalmann
Okay. And then, the office leases, you know, the GAAP rents it looks like they were down, you know, 2% or so…
T. Wilson Eglin
2%, yeah.
Dan Donlan – Ladenberg Thalmann
I mean, I thought, you know, you guys had guided to kind of, you know, maybe high single digits, low double digits, why is this better than you guys expected, do you think that, you know, maybe you’re too pessimistic in the past?
T. Wilson Eglin
Well, no, I don’t think we are too pessimistic I think, you know, what was different about this quarter than many quarters over the last three to five years is how much 10 year office leases we did. So, we’ve sort of, our expectation has been that most tenants want to stay for five years and when you have 10 years of term, you’re getting a greater straight line a fact from the escalation.
So, I think that’s probably, you know, probably the biggest, biggest difference and why the gap spread were as narrow as they were this quarter.
Dan Donlan – Ladenberg Thalmann
Well, I was trying to get out of this, do you think this is a trend that we should expect or you know, should we maybe continue to expect kind of high single digits, low double digits on the…
T. Wilson Eglin
No, I mean, our overall expectation really isn’t materially different than it was a quarter ago.
Dan Donlan – Ladenberg Thalmann
Okay.
T. Wilson Eglin
I think the result this quarter reflect the assets that we did renewals on and it’s you know, unfortunately it’s hard to say there is a trend just because every asset is different in every quarter, the composition of renewals is different as well, you know, we did more leasing in the last 120 days than we thought, we would have if you ask me six months ago, so we’ve now arguably done more leases and more lease renewals than we thought we would have achieved in the course of the whole year. So, from the standpoint of early renewals and addressing rollover and extending term we are doing quite well.
But in suburban office, we still, you know, it’s still in our mind the slogging to 2015 with respect to resetting rents.
Dan Donlan – Ladenberg Thalmann
Okay, understood. And then, just going back from the other questions on the lease expirations, I don’t know if you have this kind of detail, but you know, at the end of the quarter through 15% and 18% of your debt rents expire, when you include the stuff that you’ve already closed on post the quarter, how much of that stuff expected in ‘13 and ‘14 and ‘15, I mean, is that number, you know, close to 16%,15% or…?
T. Wilson Eglin
Well, the leases that we extended subsequent to quarter end were 2015, 2015 and one 2014 are renewals. So, 2014, we pushed out I believe four years and 2015 we pushed out I believe in 2016 and 2017.
So, it puts and the rents were relatively flat, it could be exception as well said to Moody’s rent, which is a 2014 lease. So, you know, it’ll push out a little bit, but it’ll still be within the 30 cases, it’ll still be within, you know, through 2017.
Dan Donlan – Ladenberg Thalmann
Okay. And then, I just had a curiosity; how come you could not extended out for, you know, longer than a couple of years in some of those cases.
T. Wilson Eglin
Well, Moody’s last four years and it just comes down from market on what he tenant is willing to do.
Dan Donlan – Ladenberg Thalmann
Okay, okay. And then, the CapEx you said $53.7 million for the year that surpasses 42 and that’s just the function of basically what you just talked about in a just lot more reasonable?
T. Wilson Eglin
In essence it’s pushing 2014 CapEx and TI and leasing cost into 2013 because of the additional extension we’ve gotten into.
Dan Donlan – Ladenberg Thalmann
Okay. And then, last thing, well, given the comments on kind of the timing of acquisitions and, you know, there being a kind of brief pause here, you know, your guidance didn’t change, but do you feel like because of that, you know, maybe we should be thinking, you know, more towards the lower end or do you still fine with kind of the range you’ve given us far?
T. Wilson Eglin
Well, we feel fine with the range we’ve given obviously, but there has been a little bit of a drag, but not anything, I don’t know, overly meaningful, I guess.
Dan Donlan – Ladenberg Thalmann
Okay, alright. Thank you.
Operator
And, we’ll take our next question from Jamie Feldman with Bank of America Merrill Lynch.
Jamie Feldman – Bank of America Merrill Lynch
Great, thanks. I guess, first, thinking about some of the leasing activity in the quarter and after the quarter, are you seeing any change just in some of the regions or kind of what’s the pickup in leasing activity telling you about, maybe how the economy is trying in some of these markets over the past couple of quarters?
T. Wilson Eglin
Well, we haven’t had enough renewal activity in any one market, I think be able to draw, you know, to draw any conclusion of that specific market, I definitely think that the economy is fine, it's not a fast growing economy but the facts that we can do so many ten year renewals on office buildings compared to six months ago or a year ago or two years ago, I think is hardening and it does mean that our tenants in many cases have greater confidence and greater visibility on the need for our properties. So, a thought from that stand point it was a real positive.
Jamie Feldman – Bank of America Merrill Lynch
And what kind of response do you guys are getting?
T. Wilson Eglin
We are usually getting 2% a year in most renewals and in the BFA at least we have two and three quarters but it's mainly 2% escalator.
Jamie Feldman – Bank of America Merrill Lynch
Okay. And going back to your comment before on your maintaining margins and lease margins by coming down as much as cap rate.
Can you talk a little bit more about that like how do you guys, what you think is your current cost to capital versus where you can provide to work and what was this historically?
T. Wilson Eglin
Well we are – I guess our tenure financing is probably in the sort of four and three quarters range today. I guess historically one question how far back you want to go, when we have seen you know I would say the margin in, sort of 2006, 2007 might have been 150 basis points versus in many cases, sort of, 250 today which is still healthy.
I have worked long enough to remember when leverage was negative earlier in my career. So, still I think pretty healthy margin.
You just have – the big thing is that you got to be careful about is using an expensive financing to pay few higher price per foot I think that's still the main governor on our acquisition activity.
Jamie Feldman – Bank of America Merrill Lynch
Okay. And I am sorry but I missed, did you say what you current pipeline looks like now for both build-to-suit and acquisition?
T. Wilson Eglin
Well we specified what's real, in other words what's under contract and what’s being funded and I would say we have got pretty good visibility on adding another 250 million to the pipeline between now and year end.
Jamie Feldman – Bank of America Merrill Lynch
And that would be build-to-suit and acquisition?
T. Wilson Eglin
That would be build-to-suit and acquisitions but still predominant with build-to-suit.
Jamie Feldman – Bank of America Merrill Lynch
Okay. And then taken about your same store, I think you were down to 2.5% in the first half, based on some of the comments you made about move outs.
What do you guys think you end up with for the four year, or at least what you think maybe year in occupancy end based on what you know is moving out?
T. Wilson Eglin
I think when we look at projecting going out, you know decline is where we expect and we would expect by year end occupancy to remain relatively flat from where it is today.
Jamie Feldman – Bank of America Merrill Lynch
Alright, great, thank you.
T. Wilson Eglin
Thanks.
Operator
And that concludes today’s question and answer session. Mr.
Eglin, I would like to turn the conference back to you for any additional or closing remarks.
T. Wilson Eglin
Well again, thank you for joining us this morning. We’re very excited about our prospects for the balance of this year and beyond and as always we appreciate your participation and support.
If you would like to receive our quarterly supplemental package please contact Gabriela Reyes where you can find additional information on the company on our website at www.lxp.com. In addition you may contact me or the other members of senior management with any questions.
Thanks again.
Operator
Ladies and gentlemen, this concludes today’s conference, we thank you for your participation.